Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: The appropriate treatment, for capital tax purposes, of gold held by a jeweller pursuant to an agreement that has been characterized by the jeweller as a "consignment" agreement.
Position: The amount of gold "outstanding" under a particular subcontract is a loan or advance to the jeweller within the meaning of paragraph 181.2(3)(c) of the Act.
Reasons: The name ascribed to a contract by its parties does not determine its nature at law. In our view, the contract and subcontracts do not constitute together, or individually, consignment agreements at law. Instead, the contracts provide for two discrete types of transactions. First, they provide the terms upon which the jeweller may borrow gold from the bank on a revolving basis. Second, they provide the terms upon which the jeweller may purchase gold from the bank from time to time. At any given time, the amount of gold subject to a subcontract that has not been sold to the jeweller constitutes a loan or advance to the jeweller within the meaning of paragraph 181.2(3)(c) of the Act.
June 1, 2000
XXXXXXXXXX TSO HEADQUARTERS
R. Maley
Attention: XXXXXXXXXX (613) 957-9226
2000-000616
Large Corporations Tax - XXXXXXXXXX
This is in response to your memorandum of January 27, 2000 regarding the appropriate treatment, for capital tax purposes, of gold held by a jeweller pursuant to an agreement that has been characterized by the jeweller as a "consignment" agreement. We understand the relevant facts to be as follows.
The jeweller has entered into a "XXXXXXXXXX" ("the contract") with XXXXXXXXXX that ensures its supply of gold on a revolving basis. This Master Contract sets out the agreement by which the parties will enter into a series of "consignment agreements" (referred to in this memo as "the subcontracts"). Under the terms of the contract, XXXXXXXXXX undertakes to "deliver" the gold bullion that is the subject of each subcontract to the jeweller at the beginning of the term set out in each subcontract.1 The jeweller will redeliver all "outstanding bullion", being the same bullion or a similar quantity of replacement bullion, at the end of the term.2 The jeweller will pay a fee that is based upon the amount of bullion subject to the subcontract, a nominal rate per year, and the number of days in the term of the subcontract.3 The nominal rate per year will be determined under each subcontract and may be either a fixed or floating rate4. The delivery of bullion may be notional or physical depending on the terms of the subcontract5. The jeweller has the option to purchase any of the bullion subject to the subcontract at any point during the subcontract term6 or to redeliver any of the bullion to XXXXXXXXXX at any point during the subcontract term7. The jeweller bears the risk of damage or loss to the bullion during the subcontract term.8
The contract provides that the jeweller will provide security for the bullion subject to the subcontracts. First, the jeweller undertakes that it has the power to execute any "Credit Support Document" to which it is a party,9 that has taken all necessary action to authorize such execution, delivery and performance,10 and that it will be bound by any such Credit Support Document.11 "Credit Support Document" is defined in the contract as "XXXXXXXXXX".12 The jeweller further agrees that it will deliver, register and perfect all Credit Support Documents, legal opinions and other documentation as XXXXXXXXXX may require in respect of each subcontract.13 The expiration or termination of a Credit Support Document,14 its repudiation,15 or a misrepresentation in a Credit Support Document16 all constitute a default of the jeweller under the contract. In the event of a default, XXXXXXXXXX has the right to require the jeweller to purchase the bullion for cash,17 for an amount to be determined by the market value of the bullion held by the jeweller18 on the "required purchase date".19
It would appear from the terms of the contract that title in the bullion subject to any subcontract remains with XXXXXXXXXX until such time as the jeweller purchases the bullion, by exercising its option to do so, or upon being required to purchase the gold on default. Therefore, the value of the gold would be included in the jeweller's capital if it represented a "loan or advance" to the jeweller within the meaning of paragraph 181.2(3)(c) of the Act, or other indebtedness of the jeweller that has been outstanding for more than 365 days at year-end, within the meaning of paragraph 181.2(3)(f) of the Act.
The jeweller has submitted that the bullion does not form part of its capital, as it is held on consignment i.e. as agent for XXXXXXXXXX. In the alternative, the jeweller has submitted that, if the bullion does constitute indebtedness, that indebtedness constitutes short-term trade payables and should be excluded from its capital on the basis that each subcontract for bullion was outstanding less than 365 days at the relevant year-ends.
Conclusion
In our view, the contract and subcontracts do not constitute together, or individually, consignment agreements at law. Instead, the contracts provide for two discrete types of transactions. First, they provide the terms upon which the jeweller may borrow gold from XXXXXXXXXX on a revolving basis. Second, they provide the terms upon which the jeweller may purchase gold from XXXXXXXXXX from time to time. At any given time, the amount of bullion subject to a subcontract that has not been sold to the jeweller constitutes a loan or advance to the jeweller within the meaning of paragraph 181.2(3)(c) of the Act. (To be more precise, we think the amount constitutes a loan to the jeweller). That bullion which has been purchased by the jeweller, either by exercising its option to purchase, or upon being required to make a purchase by XXXXXXXXXX, forms part of the jeweller's assets as of the date title passes to the jeweller.
Analysis
The name ascribed to a contract by its parties does not determine its nature at law. For example, in Dresden Farm Equipment,20 the Federal Court of Appeal noted that
...calling a transfer of goods a consignment of the goods by the transferor to the transferee does not necessarily make it such. What the true arrangement is necessitates a review of all the circumstances.
It then cited the following definition with approval:
A consignment is the sending of goods to another. An arrangement whereby an owner sends goods to another on the understanding that such other will sell the goods to a third party and remit the proceeds to the owner after deducting his compensation for effecting the sale is an example of a consignment agreement.
Similarly, in Pardee Equipment Limited,21 that court defined a consignment as follows:
...a contractual arrangement whereby an owner delivers its goods to another party (the "consignee") on the understanding that the consignee will sell the goods to a third party. The proceeds of the sale are to be remitted to the owner, less some amount to compensate the consignee for effecting the sale.
It went on to define the seven factors which are "the primary idicia of a consignment relationship" to be
a) when the consignee sells each item, it should be required to account to the consignor for the proceeds of the sale
b) the consignee may establish the actual price of the goods and keep as its commission the difference between the sale price and the wholesale price established by the consignor
c) the consignee should have a right of return and the consignor should have a right to demand its return at any time
d) the risk of loss and transportation may be placed on either the consignee or consignor
e) separate accounts should be maintained by consignor and consignee
f) title to the goods is directly transferred from consignor to the retail purchaser through the consignee as agent, and
g) goods held on consignment should be capable of being specifically identifiable as inventory on consignment and the supplier should monitor the inventory on a regular basis.
In the present case, the jeweller does not appear to be an agent of the bank in its transactions with respect to the gold. Title passes (in the event of purchase) to the jeweller outright. The jeweller pays a fee based on the entire amount of gold subject to the subcontract and not only in respect of gold that is actually sold to a third party. The bank does not pay any fee to the jeweller as consideration for holding the gold as its agent. The jeweller has no obligation to account to the bank for any sales it makes subsequent to taking title in the gold.
Black's Law Dictionary, 6th Edition22 defines a loan as follows:
A lending. Delivery by one party to and receipt by another party of sum of money upon agreement, express or implied, to repay it with or without interest. Anything furnished for temporary use to a person at his request, on condition that is shall be returned, or its equivalent in kind, with or without compensation for its use. (emphasis added)
It goes on to define a "loan for consumption" as follows:
An agreement by which one person delivers to another a certain quantity of things which are consumed by the borrower, with the obligation to return as much of the same kind and quality.
These concepts have been adopted and affirmed by the Courts on numerous occasions. For example, see the recent case of McVey and McVey23 which discussed the definition of a loan and noted that the common law and civil code appear to ascribe the same meaning to that concept.
The provisions in the contract that provide for the delivery of bullion prior to any purchase by the jeweller seem to fall squarely within the definition of a loan. In particular, it may be noted that the jeweller has a legal obligation to return a like quantity of gold at the end of any subcontract term, and that the "fee" the jeweller pays for holding the bullion is based on the entire amount of the bullion advanced and not merely in respect of that bullion that is actually purchased.
The provisions of the contract reflect that the jeweller's interest in the bullion under the loan would merge in its ownership interest if it exercises its option to purchase the gold (in other words, the loan under any subcontract is extinguished at the time that gold is purchased to the extent of that purchase). For example, the fee the jeweller pays as compensation for the loan is calculated day to day, based on the amount of bullion subject to the subcontract other than any such bullion which the jeweller has purchased,24 and the jeweller is only obligated to return that bullion, at the end of the subcontract term, that it has not purchased.25
The "merger of rights" is defined in Black's (supra) as follows:
This term, as applied to rights, is equivalent to confusio in the Roman law, and indicates that where the qualities of debtor and creditor become united in the same individual, there arises a confusion of rights which extinguishes both qualities; whence, also, merger is often called "extinguishment".
Having concluded that the bullion subject to the contract is a loan to the jeweller, our opinion is that it cannot be "other indebtedness" within the meaning of paragraph 181.2(3)(f) of the Act. The drafting of that paragraph suggests that only amounts not otherwise included in capital would fall within that paragraph, and this Directorate has adopted that position (e.g. E9918425).
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
for Director
Financial Industries Division
Income Tax Rulings Directorate
ENDNOTES:
1 Subparagraph XXXXXXXXXX Master Agreement.
2 Ibid. Subparagraph XXXXXXXXXX.
3 Ibid. Subparagraph XXXXXXXXXX.
4 Ibid. Subparagraph XXXXXXXXXX.
5 Ibid. Paragraph XXXXXXXXXX.
6 Ibid. Subsection XXXXXXXXXX.
7 Ibid. Subsection XXXXXXXXXX.
8 Ibid. Section XXXXXXXXXX.
9 Ibid. Paragraph XXXXXXXXXX.
10 Ibid.
11 Ibid. Paragraph XXXXXXXXXX.
12 Ibid. Section XXXXXXXXXX.
13 Ibid. Subsection XXXXXXXXXX.
14 Ibid. Paragraph XXXXXXXXXX.
15 Ibid. Paragraph XXXXXXXXXX.
16 Ibid. Subsection XXXXXXXXXX.
17 Ibid. Section XXXXXXXXXX.
18 Ibid. Section XXXXXXXXXX, "Fixing" and "Purchase Price".
19 Ibid. Section XXXXXXXXXX.
20 89 DTC 5019 (FCA).
21 99 DTC 5012 (FCA).
22 1990:West Publishing Co.
23 96 DTC 1125 (TCC).
24 Under Subparagraph XXXXXXXXXX of the contract, the fee is based on the daily Bullion Value. Section XXXXXXXXXX of the contract defines the "Bullion Value" as the value of the Outstanding Bullion, and defines "Outstanding Bullion" to mean that bullion which has not yet been purchased.
25 By Subparagraph XXXXXXXXXX the jeweller must return the Outstanding Bullion which, by section XXXXXXXXXX means that bullion which has not been purchased.
5
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