10 August 2004 GST/HST Interpretation 46808 - Point-of-Sale Rebate for Certain Comic Books

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

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

Statement of Facts

Based on the information you provided, our understanding of the facts of the case is as follows:

1. XXXXX is a GST/HST registrant, and you have been authorized to act on its behalf for GST/HST issues. XXXXX is primarily involved in property development, but owns and operates XXXXX (the Club).

2. Information concerning the operation of the Club, membership rules and the payments of membership deposits is contained in a brochure entitled XXXXX, which is divided into three parts; XXXXX.

3. On page XXXXX of the XXXXX section of the brochure, the facilities of the Club are described as consisting of XXXXX. On page XXXXX, under the heading XXXXX, it is stated that:

XXXXX.

4. On page XXXXXof the XXXXX section, under the heading XXXXX, the following statements appear:

XXXXX.

XXXXX.

There are also references to the Club having the right but not the obligation to refund deposits prior to the final refund date.

5. On page XXXXX of the XXXXX section, under the heading XXXXX, the following information appears:

XXXXX.

6. On the same page, under the heading XXXXX, the following statement appears:

XXXXX.

7. On page XXXXX of the XXXXX section, the following statement appears:

XXXXX.

8. On page XXXXX of the XXXXX section of the brochure, under the title XXXXX, the following statement appears:

XXXXX.

9. XXXXX unaudited financial statements include a balance sheet that shows as liabilities refundable deposits of $XXXXX for the year ended XXXXX, and $XXXXX for the year ended XXXXX, with a reference to XXXXX of the financial statements. XXXXX states:

XXXXX.

Rulings Requested

1. Are the amounts at issue deposits that are, pursuant to subsection 168(9) of the ETA, not subject to GST unless and until they are applied as consideration?

2. Do the amounts at issue represent additional consideration for a membership in the XXXXX club?

3. Does section 140 of the ETA deem the amounts at issue not to be deposits, or deem them to be additional consideration for supplies of memberships? Or is section 140 merely intended to ensure that giving security for the repayment of the membership deposits does not cause XXXXX to make an exempt supply of a financial service?

Rulings Given

Based on the facts set out above, we rule that where the payment of an interest-free membership deposit is a condition of acquiring a membership in the Club, section 140 of the ETA deems the membership deposit to be additional consideration for the supply of the membership, and GST is payable at the rate of 7% on that membership deposit.

This ruling 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 is currently under audit, objection, or appeal, that there are no relevant changes in the future to the ETA or to our interpretative policy, and that you have fully described all necessary facts and transactions for which you requested a ruling.

Explanation

Regardless of whether subsection 168(9) operates to ensure that the membership deposits are not part of the consideration for the sale of the Club by XXXXX to the members unless and until such a sale takes place, section 140 deems the membership deposits to be part of the consideration for supplies of memberships in the Club that XXXXX owns.

You indicated that some persons are permitted to join the Club without paying membership deposits. However, the application of section 140 is not restricted to situations where every person who wishes to become a member is required to acquire a debt or equity security. It simply states that where a person makes a supply of a share, bond, debenture or other security (with certain exceptions) and ownership of the security by the recipient is a condition of the recipient's or another person's obtaining a membership or a right to acquire a membership, the supply of the security shall be deemed to be a supply of a membership, and not a supply of a financial service. Consequently, the amount paid in order to acquire that security would be consideration for a supply of a membership. In the case at issue, most potential members are required to pay a membership deposit in order to obtain a membership, so we would regard the acknowledgement of that payment to be an "other security" for purposes of section 140.

You requested clarification of the purpose of section 140. As stated on page 151 of the Explanatory Notes to the Excise Tax Act, the purpose of section 140 of the ETA is to ensure that the full value of a taxable supply of a membership in an organization such as a private recreational club is subject to tax, where the cost of obtaining the membership consists partly of the cost of acquiring otherwise exempt securities of the organization as a condition of obtaining the membership.

If you have any further questions, or if you require clarification concerning the above matter, please contact me at (613) 952-9211.

Yours truly,

Don Dawson
Corporate Reorganizations Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate

2004/07/27 — RITS 47723 — Transfer Payments Ruling Request