20 October 1998 GST/HST Interpretation HQR0001221 - Egg Production Agreement

                                                                        GST/HST Rulings and Interpretations
 Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

This refers to your request for an interpretation regarding the application of the Goods and Services Tax (GST) to services performed to fulfill an Egg Production Agreement.

After having reviewed your submission and the Egg Production Agreement the following facts have been established:

•   XXXXX (to be referred to as the Hatchery) maintains title to the hens throughout the duration of the contract. The terms pullet(s), chicken(s), and hen(s) are used interchangeably in this interpretation.

•   XXXXX (to be referred to as the Producer) contracts to provide the service of caring for and maintaining the hens. The hens are housed on the Producer's farm.

•   Both XXXXX the Hatchery and the Producer are engaged in commercial activities and are registered for GST/HST purposes.

•   In accordance with the agreement, the Hatchery is responsible for the provision of feed for the hens at its expense. The feeding program is designed by the Hatchery and must be observed by the Producer.

•   The Hatchery pays the Producer an amount equal to XXXXX of the net egg proceeds in consideration for the Producer maintaining the flock.

•   In addition to the remuneration listed above the Producer may be entitled to a Feed Conversion Bonus (FCB) and/or a Production Bonus. Entitlement to the FCB and the Production Bonus is determined and calculated by the Hatchery. The FCB is calculated based on the kilograms of feed consumed per dozen saleable eggs, while the Production Bonus is based upon the volume of egg production per hen.

Interpretation Requested

1. Should the service of maintaining the flock for the Hatchery be subject to GST at 7%?

2. Should the supplementary payments in the form of a Feed Conversion Bonus and a Production Bonus be subject to GST at 7%?

3. Is it possible to have ownership of the eggs without having ownership of the hens?

Interpretation Given

Based on the information provided we are of the opinion that:

1. The Producer is providing a service of maintaining the flock on behalf of the Hatchery. This service is not zero-rated under Schedule VI to the Excise Tax Act and is a service that is subject to GST at 7%.

2. Pursuant to subsection 165(1) of the Excise Tax Act, every recipient of a taxable supply made in Canada must pay the GST on the value of consideration for the supply unless a specific provision applies to exempt or zero-rate it. As the Producer would receive the FCB and/or Production Bonus, if entitled, for the performance of a taxable service rendered in Canada, they would be subject to GST at 7%.

3. As this question is hypothetical in nature and not relevant to the situation at hand it will not be addressed at this time.

Explanation

Subsection 2(a) of the Egg Production Agreement specifically states that the Producer will be paid XXXXX of the net egg receipts in consideration for the service of maintaining the flock. This clearly allows us to conclude that the registrant is engaged in the provision of a service taxable at 7% rather than the supply of zero-rated eggs. Further, any consideration received that relates to the service provided such as the FCB and the Production Bonus will take on the tax status of the supply, taxable at 7%. Ownership of the eggs is of no relevance with respect to this interpretation as it has been determined that the Producer is in the business of providing a service rather than the sale of the eggs.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8532.

Yours truly,

J. Frobel
A/Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate