GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX K1A 0L5
XXXXX
XXXXX
XXXXX Case: HQR0001070
XXXXX File: 11755-2
August 12, 1998
Dear XXXXX
Thank you for your letter of February 4, 1998 regarding the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to barter transactions in the forestry industry.
I understand that you are currently conducting an audit of a large group of companies in the forestry industry. XXXXX companies are involved in barter arrangements and are registered for purposes of the GST. The companies, for discussion purposes, are referred to as Company A, Company B and Company C. Company A is a company that cuts and sells wood to various sawmills and pulp and paper mills in the area. Company B is a sawmill and is closely related to Company A. Company C is a pulp and paper company that is not closely related to either Company A or Company B.
For purposes of the barter transactions, you explained that the term "logs" refers to 8' and 16' logs that have had their branches cut off and they have been cut to length. These logs are suitable for lumber production and they can be different species of wood (i.e. spruce, poplar, birch, etc). "Pulpwood" are 8' logs that are not suitable for lumber production and are only suitable for use by the pulp and paper mill in the manufacture of paper and other wood products such as chip board. The term "chips" refers to wood chips that have been produced from scraps of wood or pulpwood. In order to manufacture chips, the pulpwoodwood must be debarked and fed through a machine which cuts the pulpwoodwood into chips. In some cases, the chips are dried in order to reduce their moisture content.
In your letter, you identify two barter situations. Based on the information in your letter, we understand the transactions as follows:
Barter Situation 1 - Logs for Pulpwood
Company A has an inventory of pulpwood that it wants to sell to Company C. Company C has logs which it wants to sell to Company B. To effect the transaction, Company A supplies pulpwood to Company C. In exchange for the pulpwood Company C ships logs to Company B and pays Company A a sum of money. Company B pays Company A for the logs that it received from Company C. Company A did not charge the GST for the supply of the logs to Company B since they are closely related companies for which an election pursuant to subsection 156(2) is in effect. The quantum of the transaction is as follows:
Total Value of Bartered Pulpwood Company A sold to Company C XXXXX
Total Value of Bartered Logs Company C sold to Company A and shipped to Company B XXXXX
Difference, paid by cheque to Company A by Company C $ XXXXX
The GST was charged only on the difference of XXXXX
Barter Situation 2 - Logs for Chips
Company B supplies chips, that it has produced in its sawmill operations, to Company C who uses the chips to make paper. Company C in turn supplies logs to company B who uses the logs to make lumber. The barter arrangement is an even exchange and no GST has been charged by either company.
Issue
Whether the two barter situations outlined above fall within subsection 153(3) of the Excise Tax Act.
Response
The two barter situations do not fall within subsection 153(3) of the Excise Tax Act.
Analysis
Subsection 153(3) of the Excise Tax Act reads:
Barters between registrants - Where
(a) the consideration or a part of the consideration for a supply of property of a particular class or kind is property of that class or kind,
(b) both the supplier and the recipient are registrants, and
(c) the property is acquired by the recipient and the consideration or that part thereof is acquired by the supplier as inventory for use exclusively in commercial activities of the recipient or supplier, as the case may be, the value of the consideration or that part thereof shall be deemed to be nil.
With respect to the exchange of property between two GST/HST registrants (barter transactions), properties are considered to be of the same class or kind where all of the following criteria are met:
• the properties are similar in their constituent materials and general appearance;
• the properties have the same primary end-use;
• the properties have been subject to the similar level of processing or refining, where applicable, and
• the properties are capable of performing the same primary functions.
With respect to Barter Situation 1, the exchange of pulpwood for logs would not fall within subsection 153(3) of the Excise Tax Act. Pulpwood and logs cannot be considered to have the same primary end-use. Pulpwood are logs that are not suitable for lumber production whereas logs are suitable for lumber production. Each property possesses a characteristic (i.e. grade or quality) which distinguishes them from each other and their primary end-use.
Likewise, with respect to Barter Situation 2, the exchange of logs for chips would not fall within subsection 153(3) of the Excise Tax Act. Logs and chips have not been subjected to the similar level of processing given that in order to produce chips, pulpwood or scraps of wood must first be debarked and then cut into chips. These actions would be considered further processing. In addition, logs and chips are not similar in general appearance nor do they have the same primary end-use.
As neither transaction falls within subsection 153(3), GST applies as follows:
Barter Transaction 1 - Logs for Pulpwood
Company A supplied pulpwood to Company C and received as consideration logs valued at XXXXX and cash in the amount of XXXXX[.] Pursuant to subsection 153(1) the value of consideration for the pulpwood is the total of these two amounts. Pursuant to subsection 165(1), the GST is calculated at the rate of 7% on the value of the consideration for the supply.
Company C supplied logs and money to Company A and received as consideration pulpwood valued at XXXXX[.] As the supply of money is excluded from the definition of property in subsection 123(1) of the Excise Tax Act, only XXXXX of the XXXXX received would represent consideration for a taxable supply. Pursuant to subsection 165(1), the GST is calculated at the rate of 7% on the value of the consideration attributed to the supply of the logs (i.e. XXXXX[).]
Barter Transaction 2 - Logs for Chips
Company B supplies chips to Company C and received logs as consideration. Company C supplies logs to Company B and received chips as consideration. Although the value of this transaction has not been quantified, it is considered to be an even exchange (i.e. the chips and the logs have the same value).
Pursuant to subsection 153(1) the value of the consideration for the chips supplied by Company B to Company C is the fair market value of the logs. Pursuant to subsection 165(1), the GST is calculated at the rate of 7% on the value of consideration. Conversely, pursuant to subsection 153(1) the value of the consideration for the logs supplied by Company C to Company B is the fair market value of the chips. Pursuant to subsection 165(1), the GST is calculated at the rate of 7% on the value of the consideration.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8222.
Yours truly,
Tim A. Krawchuk
Rulings Officer
Financial Institutions Unit
Financial Institutions & Real Property Division
GST/HST Rulings and Interpretations Directorate
Legislative References: ss. 153(1); 153(3); 165(1)
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