16 June 2003 GST/HST Interpretation 42967 - Golf & Country Club

Dear XXXXX:

Thank you for your letter XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST) to contributions made by the members of theXXXXX Golf and Country Club. We apologize for the delay in responding.

Statement of Facts

Our understanding of the facts is as follows:

1. The XXXXX (Club) is a not for profit club that is registered for GST purposes.

2. XXXXX, the president of the Club wrote to members of the Club describing the proposed renovation project. The project involved the renovation of the Club House to improve the amenities available to members. These improvements included expanding the entertainment area to accommodate XXXXX people, improving the locker rooms and improving the kitchen facilities. The members of the club would finance the project.

3. XXXXX, the treasurer of the Club wrote to the members outlining the proposed method of financing for the project. It was proposed that, XXXXX[.]

4. An amortization schedule XXXXX XXXXX describes the method of repayment by XXXXX members (Members) using the instalment method. However, the amortization schedule does not indicate if the XXXXX makes this loan of XXXXX indirectly through the Club or directly to the Members. We have not been provided with a loan agreement between the Club or the XXXXX and the Members.

5. According to the XXXXX letter, "XXXXX["].

6. The XXXXX letter confirms that all new Members will be required to subscribe for the XXXXX debenture.

7. The Club held an information session XXXXX, to discuss the renovation project and the method of financing the project. The following comment was made in response to a question on the repayment of the loan, XXXXX[.]

8. During the course of the information session, in response to a question on the guarantee provided by the club if a Member leaves before the year XXXXX the Club confirmed that a General Security Agreement (GSA) would be signed between the Club and the treasurer as trustee for all of the XXXXX. The debt would also be registered under the Personal Property Security Act and the holders of the GSA will become secured creditors against the personal property of the Club.

9. XXXXX, the Club held a Special General Meeting of the shareholders and XXXXX % of the voting shareholders voted in favour of the Club House renovation project.

10. A letter from the General Manager of the Club to the Canada Customs and Revenue Agency (the CCRA) XXXXX, indicates that all Members holding class XXXXX shares were required to make a loan to the Club. However, we have not had the opportunity to review the Club's by-laws to properly assess the consequences if a Member refused to make the contribution.

11. A XXXXX Promissory Note from the XXXXX Golf and Country Club XXXXX, sets out the terms under which the $XXXXX contribution was made. The $XXXXX is repayable on demand on the occurrence of a XXXXX.

12. XXXXX the XXXXX Promissory Note describes the XXXXX as follows:

"XXXXX["]

13. In the absence of a XXXXX XXXXX the XXXXX Promissory Note indicates that the amount owing will be reduced at a rate of XXXXX % per year commencing on XXXXX.

14. XXXXX

Interpretation Requested

1. Is the $XXXXX "loan" by club members to the XXXXX Golf and Country Club a financial service or a taxable payment?

2. If the loan is a financial instrument, is the XXXXX % interest charged by the club when a member makes instalment payments taxable?

3. If the loan is a financial instrument, is the assessment by the club of $XXXXX from XXXXX taxable?

4. Is the transaction an avoidance transaction under section 274 of the ETA?

Interpretation Given

Based on the statement of facts and information provided,

1. Is the $XXXXX "loan" by club members to the XXXXX Golf and Country Club a financial service or a taxable payment?

The contribution of $XXXXX made by Members represents additional consideration for the continued use of the facilities provided by the Club. Therefore, in accordance with section 165 of the Excise Tax Act (ETA) the Club provides its Members with a taxable supply of the continued use of its facilities and receives XXXXX as additional consideration for this service. This payment does not qualify as a "financial service" as defined in subsection 123(1) of the ETA.

2. If the loan is a financial instrument, is the XXXXX % interest charged by the club when a member makes instalment payments taxable?

If the loan agreement from either the Club or the XXXXX to the Members helps to finance the $XXXXX contribution made by the members, this loan will qualify as a "financial instrument" as defined in paragraph (a) of the definition of "financial instrument" in subsection 123(1) of the ETA. The interest XXXXX %XXXXX paid on the loan will qualify as a "financial service" as defined in paragraph (f) of the definition of "financial service" in subsection 123(1) of the ETA. As section 1 of Part VII of Schedule V to the ETA exempts a supply of a "financial service" the Members are not required to pay GST on the interest XXXXX %XXXXX payments. However, as we have not reviewed the loan agreement we would recommend that you should review the loan agreement between the Members and the Club before making a determination on the characterization of this loan.

3. If the loan is a financial instrument, is the assessment by the club of $XXXXX from XXXXX taxable?

As we have concluded that the $XXXXX contribution made by Members is a taxable supply GST will apply to this payment when it is due.

4. Is the transaction an avoidance transaction under section 274 of the Excise Tax Act?

As we have concluded that the contribution is consideration for a taxable supply by the Club a discussion of section 274 of the ETA is unnecessary.

Analysis

1. Is the $XXXXX "loan" by club members to the XXXXX Golf and Country Club a financial service or a taxable payment?

As the "lending of money" is characterized as a "financial service" under paragraph (g) of the definition of "financial service" in subsection 123(1) of the ETA it is important to determine whether the contribution of $XXXXX made by the Members qualifies as a "lending of money". Chitty on Contracts defines a loan as "a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest. (Chitty on Contracts, Specific Contracts Volume 2, 28th ed.)"

As described in the definition referred to above, repayment is an essential part of any loan agreement. Members paying the $XXXXX realized that they would not be repaid unless a XXXXX occurred before XXXXX. Members realized that the repayment of the $XXXXX was conditional on a XXXXX occurring on or before XXXXX. If a XXXXX occurred after XXXXX and on or before XXXXX, the contribution would be forgiven at the rate of XXXXX % per year until XXXXX. The Members understood that their entitlement to any of the funds contributed was conditional on a XXXXX occurring on or before XXXXX. If a XXXXX does not occur before XXXXX, the loan will be unconditionally forgiven. Therefore, there is no expressed or implied repayment of the loan on or after XXXXX. The letter from the treasurer XXXXX, and the minutes of the meeting XXXXX, indicate that Members understood that they would not be repaid if they remained as Members until XXXXX[.] The XXXXX does not qualify as "an event which is bound to happen" as referred to in the definition of a loan. The conditional debtor creditor relationship between the Club and its Members ends after XXXXX. Therefore, if a Member remains a Member after XXXXX the member has no right of repayment.

The Members make an $XXXXX contribution to receive an improved and renovated Club House. As a Member is required to make the contribution, this payment represents consideration for the continued use of the Club's facilities. As indicated in the minutes of the meeting held on XXXXX the Members have enjoyed the benefits of the new Club House in return for the contribution made. Therefore, the contribution was never intended to be a loan that would be repaid. This payment is similar to a special levy by the Club and is considered to be additional consideration for a taxable supply of the use of the facilities provided by the Club. Furthermore, the treasurer's letter to the Members XXXXX XXXXX, indicates that new members are required to pay the additional XXXXX part of their membership fee. Therefore, it is evident that the $XXXXX was intended to be additional consideration for the continued use of the facilities provided by the Club.

The contribution of $XXXXX made by Members represents consideration for the continued use of the facilities provided by the Club. Therefore, in accordance with section 165 of the ETA the Club provides its Members with a taxable supply of the continued use of its facilities in return for consideration of $XXXXX paid by its Members. This payment does not qualify as a financial service as defined in paragraph (g) of the definition of "financial service" in subsection 123(1) of the ETA.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222.

Yours truly,

Manjula Vethanayagam
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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