28 September 1998 GST/HST Interpretation HQR0000166 - Application of the GST to the Supply of Financial Assistance

                                                                        Case: HQR0000166

Dear XXXXX

Thank you for your letter concerning the application of the Goods and Services Tax (GST) to XXXXX activities. You asked us to confirm or clarify some of the responses that were given in our letter to XXXXX dated December 17, 1990. As agreed in our conversation of September 25, 1998 we are providing our response in English.

Issues and Comments

1. You asked us to confirm the Department's position that the non-repayable financial assistance granted by XXXXX to a producer is considered as being made in the course of XXXXX commercial activities, this despite the fact that it has been established that no supply was made in return for the financial assistance. This information was given in response to question 5 which was summarized as follows: What is the status of loans and advances which do not carry interest, and for which rights are not acquired, but 50% of the amount is seen as a loan and 50% does not have to be paid back?

Comment

In our previous letters to XXXXX, we said that XXXXX activities qualified as commercial activities, except the making of loans and advances which was determined to be an exempt supply. We said that the payment of grants by XXXXX was seen as being made in the course of a commercial activity which suggested that inputs used in the provision of grants could give rise to input tax credits (ITCs).

Since then however, the Excise Tax Act (ETA) has been amended with the introduction of section 141.01. Section 141.01 clarifies that an input is regarded as being for use in commercial activities only to the extent it is for use in making taxable supplies for consideration. As grants are not considered to be supplies for GST purposes, expenses incurred by XXXXX in relation to the provision of grants only are not viewed as being for use in commercial activity and they do not give rise to ITCs. However, as it was determined that XXXXX makes some taxable supplies of intangible personal property, XXXXX would be entitled to ITCs to the extent its expenses were incurred to make these taxable supplies.

2. You asked us to clarify the Department's response concerning the application of section 134 of the ETA with regard to the amounts advanced by XXXXX to XXXXX. This information was given in response to question 6 which was summarized as follows: What is the status of loans and advances which are initially given in relation to an acquisition of rights, but which rights cease after a period of time, and at which time the loan becomes refundable?

Comment

I believe there was a misinterpretation of the question that was asked by XXXXX XXXXX inquired about the GST status of loans and advances paid by XXXXX to a XXXXX. Under the loanadvance contract XXXXX is granted a right to revenues which right expires when the loanadvance is reimbursed by the producer. The Department ruled on the GST status of this right to revenues. It was determined that the supply of the right to revenues was a transfer of a security interest for the purpose of securing the payment of the loanadvance. Since such transfer is deemed not to be a supply pursuant to section 134, the letter went on to say that such transfer is part of XXXXX commercial activity because it is not included in the exempting schedule. However, that was not the question asked. The question asked was whether the providing of such loans and advances by XXXXX could be an exempt supply of a financial service XXXXX It was determined that the payment of a loan and advance XXXXX that is repayable on a conditional basis falls within the ambit of the phrase "the making of any advance" in paragraph (g) of the definition "financial service" in subsection 123(1) of the ETA. As the supply of a financial service (other than a supply included in Part IX of Schedule VI to the ETA) is an exempt supply, such loans and advances made by XXXXX would be considered to have been made otherwise than in the course of commercial activities.

3. You asked about financial assistance that only converts into a loan when a specific event occurs, that is, the assistance only becomes repayable for example if the XXXXX. Since the occurrence of the event is not certain, a problem arises with respect to the qualification of the advance (grant or loan) and if it is made as part of XXXXX commercial or tax-exempt activities or a mix of the two, in which case it becomes difficult to determine the applicable ITC.

Comment

As explained above, such payments that are repayable on a conditional basis fall within the ambit of the phrase "the making of any advance" in paragraph (g) of the definition "financial service" in subsection 123(1) of the ETA. As the supply of a financial service (other than a supply included in Part IX of Schedule VI to the ETA) is an exempt supply, such payments made by XXXXX would be considered to have been made otherwise than in the course of commercial activities.

4. You wanted to know if the expression "body established by a municipality" in section 20 of Part VI of Schedule V to the ETA includes para-municipal organizations, as defined in section 1 of Part VI of Schedule V to the ETA.

Comment

One of the criteria for an entity to qualify as a para-municipal organization for GST purposes is to have been established by a municipality or by a province on behalf of a municipality. Therefore, the expression "body established by a municipality" in section 20 of Part VI of Schedule V to the ETA includes entities that qualify as para-municipal organizations for GST purposes.

Should you require clarification on the above, please do not hesitate to contact me at 952-9589.

Yours truly,

Béatrice Mulinda
Governments Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate