19 August 2002 GST/HST Interpretation 32634 - Eligibility for Rebates or Input Tax Credits of Subsidiaries of a Utility

Dear XXXXX:

Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to expenses incurred by your client, a utilities corporation (Corporation A) on behalf of its subsidiaries. Attached to your letter was a copy of the Consolidated Financial Statements of Corporation A for the years ended XXXXX[.] Please accept our apology for the delay in responding to your letter. All legislative references are to the Excise Tax Act (ETA) unless otherwise noted.

Although you have identified the particular parties involved and provided a detailed description of their relationships, the topics of your queries are general in nature. Accordingly, we have structured our response to address the issues without specifically referencing the entities you cite in your letter.

The following is our summary of the background to your queries.

We understand that you are concerned about the entitlements and obligations of an entity acting as agent for other persons. Your query places this issue within the context of a particular parent corporation (Corporation A) that you describe as a holding company and an agent for its various wholly owned subsidiary corporations.

Corporation A incurs expenses on behalf of its operating subsidiaries. Such expenses are allocated to the related subsidiary. Where Corporation A incurs expenses on behalf of more than one subsidiary, the expenses (and related GST/HST) are allocated to the various subsidiaries based on percentage allocation. We understand that such allocations are subject to review by a provincial body and form part of the regulatory requirements of the province. The expenses are not shown as expenses on Corporation A's financial statements but are recognized as an expense on the financial statements of the particular subsidiary. The subsidiary claims a municipal rebate or an input tax credit (ITC) in connection with the GST on the flow-through expenses. Corporation A claims a municipal rebate for GST related to expenses connected directly to its own operations, as reflected in its financial statements.

We also understand that Corporation A and its subsidiaries are registered for the GST. The parent corporation and several of its subsidiaries have been determined by the Canada Customs and Revenue Agency (CCRA) to be municipalities under subsection 123(1).

Ruling Requested

You have asked us to rule on the entitlement of Corporation A's subsidiaries to claim either rebates or ITCs. You state that this is contingent upon the CCRA accepting that Corporation A is incurring expenses as an agent of the subsidiaries.

We understand that the rebate to which you refer is the public service body (PSB) rebate provided by section 259.

Response Given

We regret that we are unable to provide you with the requested ruling, as the request calls for our office to make a determination of entitlement. Such determination is more appropriately made by the Compliance Programs Branch of the CCRA as part of its audit function. It is a question of fact whether an entity is entitled to either a rebate or an ITC in connection with a particular payment of GST/HST. Reference must be made to the requirements of relevant sections of the ETA, such as sections 169 and 170 for ITCs and section 259 for rebates to public service bodies.

More specifically, we note that at least one of the subsidiaries has been audited by the CCRA for certain past claim periods. May we suggest that any questions or concerns regarding this entity's entitlements or obligations during these periods be discussed with the office that performed the audits.

As you note in your letter, the CCRA will not rule on whether an agency relationship exists where the relationship in question is already established or ongoing, as is the situation described in your letter.

Although we are not in a position to issue a ruling, we are pleased to provide the following general comments regarding your questions about the current practices of a particular parent corporation concerning rebates and ITCs connected with expenses it incurs on behalf of its subsidiaries.

In your letter you refer to the documentary evidence that a parent corporation should produce or procure to substantiate the eligibility of its subsidiaries to a PSB rebate or ITCs. We are not in a position to confirm the precise documentation which would be sufficient to support a specific rebate or ITC claim, as this is a matter generally more properly determined by our Compliance Programs Branch.

Interpretations Given

Question of Agency

We understand that you have a current copy of our draft Policy Statement P-182 Determining the Meaning of "Agent" and "Agency", issued June 1995. The policy statement contains information on the essential qualities and indicators of an agency relationship. We will examine some of these components within the general context of your query.

It is the CCRA's position that a person will be considered and treated for GST/HST purposes as an agent based on fact and principles of law. Moreover, while a person may act as an agent for some matters, it cannot be concluded that that person is acting as an agent in all matters.

One indicator of agency is ownership of property. Generally speaking, an agent does not acquire any interest in the property obtained from a third party as ownership passes directly to or from the principal. However, it is possible for the principal and agent to agree that the agent will hold title to the property.

You indicate that in some cases where Corporation A has purchased materials, ownership of the materials passes from the seller to the subsidiary without affecting the parent. Additional details would be useful in applying the 'ownership of property' indicator to such cases. For example, if Corporation A has contracted for and paid for a good, by what means has ownership of the materials passed to the subsidiary? Has ownership of the property passed under some direction from Corporation A to the vendor, or by means of some contract between Corporation A and the subsidiary?

We understand from you that computer-licensing fees may allow a number of the subsidiaries, as well as Corporation A, use of the property. As discussed in draft Policy Statement P-182, the identity of the person who is licensed by a third party to use the property may be significant in determining whether or not an agency relationship exists. For example, if a particular person acquires computer software and the right to use the property in its own commercial activity, then that person is generally not acting as an agent relative to this supply. (Relevant example in draft Policy Statement P-182 reads "However, if in addition, A has also acquired the right to use the property in their own commercial activity, then A is not generally not acting as agent relative to this supply". Telecon author/HQ Services and Intangibles Unit May 1/02 confirms that sentence should contain only one 'not' - correct intent of sentence is that in such cases A is generally not acting as agent relative to the supply (all emphasis mine))

Another indicator of agency is liability of contract/liability for payment. In the case of acquisition of goods or services, one person may act on behalf of another who has a liability under the terms of contract or agreement. The intermediary stands between the supplier and the person who has the liability/obligation to pay for the goods/services acquired. This type of relationship could be viewed as one of agency.

In your letter, you comment that where Corporation A enters into contracts to acquire goods and/or services on behalf of its subsidiaries, it is not clear as to whether the subsidiaries are at legal risk. This is a question of fact that would need to be determined in order to apply this indicator to identify an agency relationship.

We would also point out that a regulatory scheme that imposes certain reporting requirements would not generally be seen as an indicator of agency.

Impact of Agency

Where an agency relationship exists, when goods and services are acquired by an agent on behalf of the principal, the agent will flow the tax on the principal's share of the expenses through to the principal, and the principal will claim applicable ITCs or rebates. Where an agency relationship does not exist and another person reimburses a particular person acquiring the goods or services, the particular person will charge the other person tax where applicable.

In the latter circumstances subsection 177(1.1) may apply. Except where an election is made under subsection 177(1.1), where an agent makes a supply on behalf of a principal who is required to collect tax in respect of the supply, the same rules apply as if the principal made the supply directly, whether or not the principal is disclosed to the recipient of the supply. The principal will be required to account for that tax in the principal's return, will pay tax on the agent's services (if those are taxable) and may claim the appropriate ITCs.

Subsection 177(1.1) permits an agent who makes a supply (otherwise than by auction) on behalf of a principal who is required to collect tax in respect of the supply (otherwise than as a consequence of the application of paragraph 177(1)(d).) to elect jointly with the principal to account for the tax collectible on the supply as if the tax were collectible by the agent. Accordingly, the agent is responsible for collecting, reporting and remitting the tax on the supply. However, the agent and the principal are jointly and severally liable for all obligations that arise upon or as a consequence of the tax becoming collectible or any failure to account for or remit the tax. The election has to be made in the prescribed form, i.e. on form GST 506, Election and Revocation of an Election Between Agent and Principal.

Input Tax Credits

Section 169 provides that, to the extent that a taxable input is used in a commercial activity, the tax paid or payable in respect of the input gives rise to an ITC. Pursuant to subsection 169(4), the Input Tax Credit Information (GST/HST) Regulations contain the documentary requirements that are required to substantiate a claim for ITCs.

Public Service Bodies' Rebate

Generally, section 259 provides for a public service body rebate in connection with tax paid or payable by the claimant during a particular period. For the purpose of determining a rebate payable to a municipality (other than a designated municipality) under section 259, the prescribed percentage is 57.14% (See Public Service Body Rebate (GST/HST) Regulations) of the non-creditable tax charged in respect of property or a service (other than a prescribed property or service) for the claim period. The term "non-creditable tax charged" is defined in subsection 259(1) and specifically refers to tax that became payable or that was paid by the person claiming the rebate.

Allocation of Inputs

Where a registrant makes taxable supplies in the course of its commercial activities as well as exempt supplies, some of its purchases may be used in both the exempt and taxable activities. In these circumstances, the organization must determine the percentage of the use of the purchase in commercial and exempt activities, in order to calculate and claim the appropriate ITCs and/or rebate. As indicated in subsection 141.01(5), the apportionment method chosen must be fair and reasonable and used consistently by the person throughout the fiscal year. In addition to sections 169 and 259, relevant provisions of the Excise Tax Act regarding the calculation of ITCs and the PSB rebate may include sections 170, 199 and 209.

The Excise Tax Act and its regulations provide the basic requirements for documenting and supporting claims to either ITCs or a PSB rebate.

Municipal Determination

In your letter, you refer to certain entities as having been determined to be municipalities and therefore considered "para-municipal organizations" as defined in section 1, Part VI, Schedule V to the ETA. It will be a question of fact whether or not the relationship between two persons meets the criteria established by the aforementioned section.

The impact of a para-municipal relationship is found at section 28 of Part VI of Schedule V. This section exempts certain supplies between municipalities and their para-municipal organizations. Paragraph 28(f) excludes from the exemption a supply of electricity, gas, steam or telecommunication services made by a para-municipal organization that acts as a public utility, or a branch or division of such an organization that acts in that capacity.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretations provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4280.

Yours truly,

(Mrs.) S.C. Cahill
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate