11755-20(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 17, 1995
Dear XXXXX
Further to a telephone conversation of September 15, 1994, between XXXXX of your office, 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 XXXXX . We apologize for the delay in our response.
Our comments are provided under headings which are the questions presented for our review. 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 XXXXX .
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) .44 cents per litre of motor fuel delivered pursuant to the XXXXX , payable monthly,
2) A Prepaid Amount of the .44 cents per litre credit, totalling XXXXX , and
3) .78 cents per litre of motor fuel delivered pursuant to the XXXXX , payable monthly.
4. If the dealer elects to carry out his own improvements, an amount termed a "Prepaid Amount" of $80,000 is paid. The Prepaid Amount must be repaid by applying the monthly payments of the .44 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 .44 cents 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. The .78 cents per litre calculation is paid directly to the dealer from the inception of the XXXXX
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 .44 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 44 cents/litre amount plus the .78 cents/litre amount) less the .44 cents/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
You have submitted the following questions for our comments:
1. Is the XXXXX advance payment made to the dealer subject to GST?
2. Is the repayment of the outstanding balance of the advance payment at the time the XXXXX expires or is terminated, subject to GST?
3. Is the interest calculated on the outstanding balance of the advance payment subject to GST?
4. Is the amount of .44 cents per litre of motor fuel subject to GST when paid to the dealer?
Discussion
1. Is the XXXXX Advance Payment Made to the Dealer Subject to GST?
It is a term of the XXXXX that if XXXXX 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 payment 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 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 January 5, 1989. The XXXXX prepaid amount to be made under the XXXXX is payable "upon completion on the premises of the improvements set out in Schedule "C" 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 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 of the prepaid amount at the time it was made.
4. Is the Amount of .44 cents per litre of Motor Fuel Subject to GST When Paid to the Dealer?
It is appropriate at this point in the discussion to address the last question raised by XXXXX
As previously discussed, the XXXXX prepaid amount received by the dealer is a prepayment of the .44 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 .44 cent per litre calculation as it is earned and applied against the $80,000 prepaid amount. 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 .44 cent per litre calculation continues to occur with the dealer actually receiving the amount. Tax must be accounted for on these payments in the same manner as tax is accounted for on the .78 cent per litre calculation. These payments represent 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.
2. Is the Repayment of the Outstanding Balance of the Advance Payment at the Time the XXXXX Expires or is Terminated, Subject to GST?
The correspondence from your office provided a summary of your interpretation of the XXXXX as well as the possible application of tax. You have interpreted the payment of the amount of Unearned Consideration to be paid by the dealer to XXXXX in the event of expiration or early termination of the XXXXX , to be the outstanding balance of the Prepaid Amount. As has been discussed in telephone conversations between XXXXX and Sara Nixon of my staff, it appears that the calculation of the Unearned Consideration at XXXXX effectively requires repayment of that portion of the Monetary Consideration which is the .78 cents per litre amount paid as well as the unpaid balance of the Prepaid Amount. If the entire prepaid Amount is repaid and the dealer is receiving the .44 cents per litre amount in addition to the .78 cents per litre amount, there is no repayment requirement of the .44 cent per litre calculation. As a consequence, it appears that the .78 cents per litre amount becomes repayable by the dealer in all circumstances.
Since any payment of Unearned Consideration is arising as a result of a termination or expiration of a written agreement, it must be determined whether the provisions of section 182 of the Act apply to these payments, or whether the payments are covered by the general provisions of the Act.
The application of GST to amounts paid as a result of a default or termination of an agreement is currently under discussion. Our comments as to the application of tax to these payments will be provided under separate cover when those discussions have been completed.
3. Is the Interest Calculated on the Outstanding Balance of the Advance Payment Subject to GST?
The application of GST to the payment of interest calculated on the outstanding balance of prepaid amount is currently being discussed. As soon as we have resolved this final matter, we will issue a second letter to you.
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: 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 XXXXX )
Mitch Bloom (signoff)
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Application Team XXXXX |
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