31 July 2003 GST/HST Interpretation 45570 - AND APPLICATION RULING [Consideration for Leased Facilities Where the Tenant is a Public Service Body Organizing a Games Event]

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5

XXXXX XXXXX XXXXX

Case Number: 45570

XXXXX

NCS Code(s): 11925-5, 11950-1, 11950-5

XXXXX General Manager

July 31, 2003

Subject:

GST/HST INTERPRETATION AND APPLICATION RULING

Dear XXXXX

Thank you for your letter XXXXX (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below.

All legislative references below are to the Excise Tax Act.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions are as follows:

1. The XXXXX [(]"Host Society") is organizing and hosting XXXXX Games in and around XXXXX. The Games are scheduled to be held from XXXXX[.]

2. The Host Society is registered for purposes of the GST. XXXXX. It is a non-profit organization for purposes of the GST/HST.

3. Most of the Host Society's revenues are derived from admissions, merchandise sales, and sponsorships. In addition, the Host Society has signed a multi-party funding agreement (Multi-party Agreement) whereby certain specified "Funding Parties" agree to provide cash funding for purposes relating to the XXXXX[.] The major contributions are from the Province XXXXX and the City XXXXX XXXXX.

4. Under the above Multi-party Agreement, the Funding Parties agree to XXXXX Venue Agreements

5. A copy of a template venue agreement between the Host Society and the City XXXXX was submitted for our review. It is expected that over XXXXX % of the venue agreements will involve City XXXXX venues, using this template.

6. With regards to other venues, whether this or other template agreements are used, you have submitted that such agreements will grant the Host Society the following rights:

(a) exclusive use of the facilities during a specified period XXXXX[.] This will include the use of certain facilities such as XXXXX but may except parts of the facility identified by the venue owner as reserved for its own use;

(b) reasonable access by staff and volunteers to the facility prior XXXXX in order to prepare for the Games;

(c) the right to erect reasonable signage;

(d) the right to install a merchandising concessionaire at selected venues costs not to be borne by the venue owner.

7. Whether this or other template agreements are used, the period of continuous possession by the Host Society under the agreement will be less than one month.

8. Whether this or other template agreements are used, you have submitted that the Host Society XXXXX. Such renovations and upgrades are not considered, you submit, to be XXXXX since the Funding Parties are obligated under the Multi-Party Agreement to provide the facilities at no cost.

9. Whether this or other template agreements are used, the supply of various municipal facilities will be made in the course of a business (as defined in subsection 123(1) (I.e., "business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.) by the City XXXXX Template Venue Agreement (City of XXXXX[).] It is expected that this template will be used for the various municipal facilities being provided to the Host Society. The relative terms follow:

10. XXXXX[.]

11. XXXXX[.]

12. XXXXX[.]

13. XXXXX[.]

14. XXXXX[.]

15. XXXXX[.]

16. XXXXX[.]

17. XXXXX[.]

18. XXXXX[.]

19. XXXXX XXXXX XXXXX XXXXX Facility Agreement (draft): XXXXX[.]

20. It is expected that the period of continuous possession of the facilities by the Host Society under the agreement will be less than one month.

21. It is expected that the supply of the various facilities will be made in the course of a business (as defined in subsection 123(1)) by the XXXXX[.]

22. The preamble of the Facility Agreement includes the following:

XXXXX

23. XXXXX[.]

24. XXXXX[.]

25. XXXXX[.]

26. XXXXX[.]

27. XXXXX[.]

28. XXXXX[.]

29. XXXXX[.]

30. XXXXX[.]

31. XXXXX[.]

Rulings Requested

Venue Facilities

1. The Host Society will not incur a GST liability for venues provided in kind.

2. In situations where the Host Society is required to pay cash to the venue owner for the specific use of the facility, the Host Society will incur a GST liability.

Athletes Village

3. The Host Society will not incur a GST liability for the Athletes Village provided in kind.

4. In situations where the Host Society is required to pay cash to the venue owner for the specific use of the facility, the Host Society will incur a GST liability.

Rulings/Interpretations Given

Venue Facilities

Please note that an application (or advance) ruling is issued in respect of specific transactions; for example, a ruling may be issued with respect of a specific agreement between two identified persons, and it would pertain only to that agreement. Our reply to the following requests concerning the Venue Facilities are based on the assumption that the terms of the final, executed agreements do not differ materially from the draft template venue agreement submitted.

1. Will the Host Society incur a GST liability for venues provided in kind?

The Host Society will incur a GST liability if and when both of the following circumstances are present:

(a) The supply of the facility from the City to the Host Society is a taxable supply; and

(b) There is consideration paid or payable by the Host Society for the supply of the facility.

While we are able to provide you a ruling regarding (a) above, based on our understanding of the facts, we are unable to conclusively determine the value of the consideration for the supply of the facility, consequently we will be providing you with an interpretation below, outlining our views regarding circumstance (b) referred to above.

1(a): Application of the GST to the supply of the venue facility provided in kind by the City to the Host Society

Ruling

The supply of the venue facility from the City to the Host Society is a taxable supply.

The ruling provided is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Pursuant to subsection 136(1), the supplies by the City to the Host Society of the "right to use" the respective facilities would be deemed to be a supply of real property. That is, this provision deems a supply "by way of lease, licence or similar arrangement, of the use or right to use real property ..." to be a supply of real property.

Under the Excise Tax Act, a supply of real property will be a taxable supply unless an exemption applies. Section 25 of Part VI to Schedule V sets out a general exemption for supplies of real property by a public service body (which includes a municipality), subject to certain exceptions. Pursuant to paragraph 25(f), there is an exception for a supply "by way of :

(i) lease, where the period throughout which continuous possession or use of the property is provided under the lease is less than one month, or

(ii) licence where the supply is made in the course of a business carried on by the body."

While it is difficult to determine with certainty, on the basis of the information at hand, whether the supply made by the City to Host Society is a supply by way of "lease" or "licence" (notwithstanding the template agreement refers to it as a lease) the distinction is not critical in this situation, since the period of continuous possession is to be less than one month and is being made in the course of a business by the City. That is, whether the supply is by way of lease or licence, based on our understanding of the facts outlined above, the supply will be "excepted" from the exemption under section 25, and thus would be a taxable supply as no other exempting provision under Schedule V applies.

1(b): Whether consideration is paid or payable by the Host Society for the supply of the venue facility provided in kind by the City

Interpretation Provided

Your submissions indicate that the Funding Parties (including the City) agreed to provide the use of venues to the Host Society XXXXX and the template agreement states that the facilities are provided XXXXX[.]

These references appear inconclusive as to whether there was any consideration paid or payable by the Host Society. In fact, the determination as to whether there is consideration payable by the Host Society should be based on whether, under the terms of the agreement, it promises or provides anything of value (i.e., "valuable consideration" in the form of tangible or intangible property, services or money) to the City in return for the use of the venue in question under the agreement.

In this connection, we should explain that the GST is applied to the "value of the consideration" for a taxable supply. The "value of the consideration" is defined under subsection 153(1) as "(a) where the consideration or that part (of the consideration) is expressed in money, the amount of the money; and (b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made."

Accordingly, if the Host Society promised or provided property or services under the agreement as consideration for the use of the venue in question, the fair market value of such property or services would be the "value of the consideration" (in addition to money promised, if any).

We would not view certain obligations of the Host Society under the Template Agreement to represent valuable consideration since these obligations would be of value to and would have otherwise been undertaken by the Host Society in the course of organizing and hosting a games event, and, assuming these obligations represent something provided to the City, they would appear to have, at best, nominal value. If this assumption is not correct, then the fair market value of these supplies would represent value of the consideration for the use of the facility. Examples of supplies that appear to have nominal or no value include:

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX ..."

There is a possibility that the use of Game Marks provided to the Owner under XXXXX of the template agreement represents valuable consideration unless, again, the fair market value of this right provided to the City is nominal.

We note that the Host Society XXXXX[.] Notwithstanding your comment that such projects are not considered to be XXXXX, any improvements made to a venue by a lessee (or licensee) such as the Host Society would represent consideration provided to the owner of the venue, assuming that the improvements revert to the owner upon the termination of the lease or licence.

It is our view, however, that where improvements to an owner's property are made by a non-profit organization such as the Host Society in the course of organizing and operating an event such as the Games, usually only a portion of the value of such improvements represents consideration for the lease (or licence). In these particular circumstances, the portion that represents consideration for the lease/licence would not exceed the rental value of comparable facilities for the same time period. This would be the "value of the consideration" paid to the City for the use of the facility, and thus would be the amount subject to tax (in addition to other consideration, if any).

The value of the improvements in excess of the amount above is viewed as an amount incurred by the Host Society on its own behalf that does not relate to consideration for the facility. This position is particular to a public service body such as the Host Society that is involved in organizing and operating an event such as the Games.

The template agreement indicates XXXXX. If it is the case that all improvements made by the Host Society are removed by it, so that no leasehold improvements revert to the City, then we would not view such improvements to represent consideration for the use of the venue.

2. In situations where the Host Society is required to pay cash to the venue owner for the specific use of the facility, will the Host Society incur a GST liability?

As noted above, whether the Host Society incurs a GST liability in respect of a particular supply will be based on whether the supply is taxable, and whether there is consideration paid or payable by the Host Society for that supply.

Ruling

The supply by the City of the right to use its facilities (whether by lease or licence) would be a taxable supply. If money was paid or payable for this supply, or indeed any taxable supply, such a payment would be subject to tax, assuming the supplier is a GST/HST registrant.

The ruling provided is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Additional Information

Also, it should be noted that in some situations the consideration for a supply might be in the form of both money and property or services in kind. For example, a tenant may pay rent to a landlord as well as make improvements to the landlord's property. Assuming that the improvements revert to the landlord at the end of the lease, the consideration for the supply of the leased facility would be the rent in money, plus the fair market value of the improvements at the time they are completed. As noted above, only a portion of the value of the improvements may be viewed as consideration for leased facilities where the tenant is a public service body organizing a games event.

Athletes Village

As previously noted, an application (or advance) ruling is issued in respect of specific transactions; for example, a ruling may be issued with respect of a specific agreement between two identified persons, and it would pertain only to that agreement. Our reply to the following requests concerning the Athletes Village are based on the assumption that the terms of the final, executed agreement do not differ materially from the draft agreement between the Host Society and XXXXX that you have submitted.

3. Will the Host Society incur a GST liability for the Athletes Village provided in kind?

As in the response provided with respect to question 1 above regarding the Venue Facilities, the Host Society will incur a GST liability if and when both of the following circumstances are present:

(a) The supply of the facilities from the XXXXX comprising the Athletes Village to the Host Society is a taxable supply; and

(b) There is consideration paid or payable by the Host Society for the supply of the facilities.

While we are able to provide you a ruling regarding (a) above, based on our understanding of the facts, we are unable to conclusively determine the value of the consideration for the supply of the facility, consequently we will be providing you with an interpretation below, outlining our views regarding circumstance (b) referred to above.

3(a): Application of the GST to the supply of the facilities comprising the Athletes Village provided in kind by the XXXXX to the Host Society

Ruling

The supply of the facilities comprising the Athletes Village from the XXXXX to the Host Society is a taxable supply. There will be tax payable by the Host Society calculated on the value of consideration, if any assuming that the XXXXX is a GST/HST registrant.

The ruling provided is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

The facilities supplied by the XXXXX comprising the Athletes Village are set out under the appendices to the draft agreement. Similar to the explanation set out above with regards to the supply of facilities from the City to the Host Society, the supply of the use of the facilities by the XXXXX:

-    is a supply of real property pursuant to subsection 136(1);

-    is described in the draft agreement as a "lease." From the terms of the draft agreement, the supply may well be a lease, although given the relatively short period of occupancy and limits on "exclusive use" it may also be a licence.

-    In any case, whether it is a lease or licence, the supply would be taxable for the same reasons set out above with respect to similar supplies by the City. The exemption under section 25 of Part VI to Schedule V would not apply since, pursuant to paragraph 25(f), supplies by way of a lease of less than a month (of continuous possession or use) or by way of licence will not be exempt under this provision if either of these supplies is made in the course of a business carried on by the City.

3(b): Whether consideration is paid or payable by the Host Society for the supply of the facilities comprising the Athletes Village provided in kind by the XXXXX

Interpretation Provided

As previously described, GST is applied to the "value of the consideration" for a taxable supply. The "value of the consideration" is defined under subsection 153(1) as "(a) where the consideration or that part (of the consideration) is expressed in money, the amount of the money; and (b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made.

Accordingly, if the Host Society promised or provided property or services under the agreement as consideration for the use of the facilities in question, the fair market value of such property or services would be the "value of the consideration" (in addition to money promised, if any). Where a taxable supply is concerned, the tax is calculated on the value of the consideration.

We would not view certain obligations of the Host Society under the draft agreement to represent taxable consideration since these obligations would be of value to and would have otherwise been undertaken by the Host Society in the course of organizing and hosting a games event, and, assuming these obligations represent something provided to the XXXXX, they would appear to have, at best, nominal value. If this assumption is not correct, then the fair market value of these supplies would represent value of the consideration for the use of the facility. Examples of supplies that appear to have nominal (or no) value include:

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX

-    XXXXX

The right to use Game Marks supplied by the Host Society to the Owner under XXXXX of the draft agreement represents valuable consideration and may be subject to tax as consideration for the use of the XXXXX facilities unless, again, the fair market value of this right is nominal. There is no information on hand regarding the fair market value of such rights.

Under XXXXX the Host Society XXXXX

Such improvements represent supplies made by the Host Society to the XXXXX, as well as consideration for the use of the XXXXX facilities. Assuming that the use of the facilities is a taxable supply and that the XXXXX is a GST/HST registrant, the Host Society will be liable for GST based on the value of the consideration; that is, the fair market value of XXXXX and XXXXX (in addition to any other valuable consideration payable under the agreement), subject to the following limitation.

As previously noted, it is our view that where improvements to an owner's property are made by a public service body such as the Host Society in the course of organizing and operating an event such as the Games, usually only a portion of the value of such improvements represents consideration for the lease (or licence). In our view, the portion that represents consideration for the lease/licence would not exceed the rental value of comparable facilities for the same time period. This would represent the "value of the consideration" paid to the XXXXX in this situation (i.e., where the tenant is a public service body organizing a games event) for the use of its facilities. The value of the improvements in excess of this amount is viewed as an amount incurred by the Host Society on its own behalf that does not relate to consideration for the use of the facilities.

While we have not been asked to rule on the matter, it should be noted that the XXXXX may also be liable for tax on the acquisition of the improvements described above, and the Host Society may be liable to collect and remit such tax. That is, since the Host Society is making a taxable supply of the improvements (there is no apparent exemption that would apply), it would be required to collect and remit tax on the value of consideration for the improvements which, in this case, would appear to be the fair market value of the right to use the facilities (i.e., the lease or licence) for the facility use period.

To illustrate by example, suppose Host Org B (a non-profit organization) is preparing for a provincial amateur games event. Owner A leases its venue to Host Org B for a three-week facility use period, and also pays cash of $100,000 to Host Org B to assist it in conducting the games. The lease is a taxable supply. A fair market rental for the three-week lease is $9000. Host Org B receives various donations and government grants, and constructs permanent track facilities valued at $200,000. These facilities revert to the Owner. Host Org B pays no other consideration to Owner A for the use of the venue.

In this situation, it would be our view that Host Org B pays taxable consideration of $9000 for the lease of the facility (a portion of the value of the improvements provided equal to the fair market value of the lease).

In this situation, Owner A has acquired a supply of leasehold improvements and assuming that this is a taxable supply made by Host Org B, then Host Org B should collect tax from Owner A on the value of the consideration for that supply. The value of the consideration for that supply would be the fair market value of the lease ($9000) plus the cash payment of $100,000.

4. In situations where the Host Society is required to pay cash to the venue owner for the specific use of the facility, will the Host Society incur a GST liability?

As noted above, whether the Host Society incurs a GST liability in respect of a particular supply will be based on whether the supply is taxable and whether there is consideration paid or payable by the Host Society for that supply.

Ruling

The supply by the XXXXX of the right to use its facilities (whether by lease or licence) would be a taxable supply. If money was paid or payable for this supply, or indeed any taxable supply, such a payment would be subject to tax, assuming the XXXXX is a GST/HST registrant.

The ruling provided is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

As noted above, whether the Host Society incurs a GST liability in respect of a particular supply will be based on whether the supply is taxable and whether there is consideration paid or payable by the Host Society for that supply.

As discussed above, the supply by the XXXXX of the right to use its facilities (whether by lease or licence) would be a taxable supply. We have not reviewed any documentary evidence that monies are payable by the Host Society to the XXXXX. However, if money was paid or payable for this supply, or indeed any taxable supply, such a payment would be subject to tax, assuming that the XXXXX is a GST/HST registrant.

Additional Information

Again, it should be noted that in some situations the consideration for a taxable supply (e.g., the right to use certain facilities) might be in the form of both money and property or services in kind. In this situation, the consideration for the supply would be the amount of money, plus the fair market value of the property or services in kind at the time they are completed. As noted above, only a portion of the value of the improvements may be viewed as consideration for leased facilities where the tenant is a public service body organizing a games event.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9587 or Costa Dimitrakopoulos at 954-8852.

Yours truly,

Michael Place
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate