11755-20(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 21, 1995
Dear XXXXX
Further to a telephone conversation of January 28, 1994, between XXXXX and Ken Mathews of my staff and the forwarding of the information requested by Mr. Mathews, we have now been able to analyze the material provided. The following summarizes our understanding of the terms of XXXXX ). We apologize for the delay in our response.
As you are probably aware, XXXXX has entered into numerous XXXXX with its dealers. The XXXXX are not all identical in the terms and conditions they contain. Our comments refer to the specific agreement entered into with XXXXX and will not necessarily be applicable to other XXXXX
Background
1. The dealer operates an automotive service station and XXXXX has agreed to assist the dealer in improving the operation of the business by paying to the dealer an amount of money, subject to the terms and conditions of the XXXXX
2. If XXXXX and the dealer desire to enter into an XXXXX , they must concurrently enter into an XXXXX . Under this agreement, the dealer supplies to XXXXX the right of exclusive supply of all petroleum products for a specified number of years. The dealer and XXXXX entered into these two agreements on July 29, 1988.
3. As a result of entering into the XXXXX and the XXXXX , XXXXX agrees to pay the dealer various amounts termed "Monetary Consideration" summarized as follows:
1) .75 cents per litre of motor fuel delivered pursuant to the EDSA, payable monthly, and
2) A Prepaid Amount of the .75 cents per litre credit, totalling $50,000.
4. If the dealer elects to carry out his own improvements, an amount termed a "Prepaid Amount" of XXXXX is paid. The Prepaid Amount must be repaid by applying the monthly payments of the .75 cents per litre calculation to the balance of the Prepaid Amount until it is paid off. While there is a Prepaid Amount outstanding, the dealer does not receive his cheque in respect of the .75 cent per litre payment. The payment is applied directly to the Prepaid Amount by XXXXX Once the Prepaid Amount is paid off, the dealer will commence to receive the monthly amount directly.
5. If the dealer contracts with XXXXX to perform the work to complete the improvement, XXXXX credits the XXXXX to the costs incurred to perform the work and the .75 cents per litre credit is earned and paid, in the same manner.
6. If the XXXXX expires or is terminated early for any reason, the dealer is required to pay to XXXXX an amount called "Unearned Consideration". The calculation of this amount is a term of the XXXXX The "Unearned Consideration" is the total amount of the Monetary Consideration paid (the sum of the outstanding balance of the Prepaid Amount plus the .75 cents per litre amount) less the .75 cents per litre amount and any other amount due to the dealer and not already paid. Interest at a specified rate is also payable on the amount calculated to be the "Unearned Consideration". The interest is calculated from the day XXXXX paid the Monetary Consideration to the dealer to the day the "Unearned Consideration" is repaid to XXXXX
7. To secure the XXXXX prepaid amount, the dealer transfers an ownership interest in its capital assets to XXXXX
Questions
The following questions have been submitted for our comments:
1. Is the XXXXX Prepaid Amount paid to the dealer subject to GST?
2. Is the amount of .75 cents per litre of motor fuel subject to GST when paid to the dealer?
Discussion
It is a term of the XXXXX that if XXXx and the dealer wish to enter into an XXXXX , they must concurrently enter into an XXXXX . The XXXXX requires the dealer to make all of its petroleum purchases from XXXXX for a specified period of time.
When the dealer enters into an XXXXX , the transaction is very similar to a tenant entering into a lease. Landlords frequently offer to pay tenants amounts of money called inducements, if the tenant enters into a lease with the landlord. The receipt of the inducement by the tenant has been interpreted as being the receipt of consideration for the provision of a taxable supply. In this case, the dealer is receiving an inducement for entering into an XXXXX . That inducement is perhaps more complicated than the simple payment of money which occurs in the example of the transaction between the landlord and the tenant, but that complication does not change the substance of the transaction. In the case of the transaction between XXXXX and the dealer, the inducement must be seen as being consideration for the supply of the right of exclusive supply which is being provided by the dealer to XXXXX . The supply will be made over the entire period of time that the XXXXX is in force, and is used by XXXXX each time it sells fuel to the dealer. The most common form of a tenant inducement is the payment of cash. In the case of the transaction between XXXXX and the dealer, the inducement is paid under the terms of its own agreement, the XXXXX . Therefore, even though there are some complicating factors, the money received by the dealer from XXXXX must be regarded as the payment of consideration for a taxable supply of an inducement which takes the form of a right of exclusive supply. The money which is available to the dealer under the provisions of the XXXXX is only available when the dealer enters into the XXXXX
XXXXX uses the right of exclusive supply every time it sells fuel to the dealer and it pays the dealer for the use of that right, at a rate per litre of fuel purchased. However, to aid the dealer in financing improvements to its facilities, XXXXX prepays a certain amount of the consideration it is giving for the use of the right of exclusive supply. To the extent that XXXXX prepays consideration, it is not required to pay a rate per litre of fuel as the dealer makes its fuel purchases. This payments arrangement creates the impression that XXXXX has given the dealer a loan. XXXXX may take the position that it has made a loan to its dealer, but the only reason that the dealer has received this money is because it made a taxable supply of a right to XXXXX . XXXXX is therefore making a prepayment to the dealer and not a loan.
Paraphrased, section 133 states that where an agreement is entered into to provide property or a service, the entering into of the agreement is deemed to be a supply of the property or service made at the time the agreement is entered into and when it occurs, the actual provision of the property or service is deemed to be part of that initial supply and not a separate supply. The provisions of section 133 will therefore act to tax the prepayment made by XXXXX to the dealer at the time the prepayment occurs.
The particular XXXXX submitted for our review was entered into on July 29, 1988. The XXXXX prepaid amount to be made under the XXXXX is payable "upon completion on the premises of the improvements set out in Schedule "B" attached to the XXXXX in accordance with the standards, requirements and specifications of the Engineering Department of XXXXX . No information has been provided as to the specific date of that payment.
If the payment of the prepaid amount was made before August 1989, the transitional rules of the Excise Tax Act ("the Act") will not apply. Although the payment of the XXXXX is consideration for a taxable supply, the timing of that payment is such that GST would not be applicable. If the payment of the prepaid amount was made after
August 1989 and before September 1990, the dealer would be required to comply with the provisions of subsection 340(2) of the Act. If the payment of the prepaid amount is made after August of 1990, the dealer would be required to comply with the provisions of subsection 340(1) of the Act. If the prepayment occurred after 1990, the general provisions of the Act would apply to tax the payment at the time it was made.
As previously discussed, the XXXXX prepaid amount received by the dealer is a prepayment of the .75 cent per litre periodic credit and is subject to tax at the time it is paid. As a result, no tax is payable on the .75 cent per litre calculation as it is earned and applied as a reduction of the XXXXX prepayment. Correspondence from XXXXX treats the recording of this reduction of the XXXXX prepayment as a "bookkeeping entry", which is probably an accurate description in that tax should already have been accounted for at the time of the prepayment. However, once the XXXXX prepaid amount has been drawn down, the .75 cent per litre calculation continues to occur with the dealer actually receiving the amount. Tax must be accounted for on these payments in the basis that they are the settlement of XXXXX ongoing liability for payment of the consideration due to the dealer for XXXXX use of the right of exclusive supply every time it sells fuel to the dealer.
Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are: Lalith Kottachchi (613) 952-9588, Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931, and Sara Nixon (613) 954-4397
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations
739(REG)
Mitch Bloom (signoff)
c.c.: Application Team
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