4 July 2000 GST/HST Ruling 8392 - Application of the GST/HST to Licence Fees

Dear XXXXX:

Thank you for your letter of October 14, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the licence fee payable by XXXXX producers to the XXXXX Board.

Statement of Facts

Our understanding of the facts is as follows:

1. The XXXXX (Commission) is given the authority under the XXXXX to make regulations for the licensing of any and all individuals engaged in the production, marketing, or processing of a regulated product, and for the fixing of licence fees.

2. The Board is delegated such powers, determined by the Commission, as is necessary to regulate the production and marketing of XXXXX.

3. The Board has the authority delegated to it by the Commission under XXXXX XXXXX XXXXX, to be the exclusive seller of XXXXX in commercial markets. This includes XXXXX sales in the export market, the XXXXX and processing market, and commercial sales of XXXXX. XXXXX[.]

4. The Board has the authority delegated to it by the Commission to "make regulations with respect to XXXXX" including regulations pertaining to licensing requirements for persons engaged in the marketing of XXXXX, the fixing of licence fees, and the suspension, revocation and refusal to renew licences.

5. XXXXX requires that persons engaged in the production of XXXXX be licensed.

XXXXX[.] No person shall commence or continue to engage in the producing of XXXXX except under the authority of a licence.

6. XXXXX of that Regulation provides that producers must pay the licence fee to the board.

XXXXX[.] Every producer shall pay to the local board the licence fees fixed by the local board.

7. The Board is authorized by the Commission to use the licence fee for "the purpose of paying the expenses of the local board, carrying out and enforcing the Act and the regulations and carrying out the purposes of the plan" XXXXX[.]

8. The Board is authorized to establish a fund for the purpose of making payments associated with the above purpose.

9. The Board is also authorized to require that buyers deduct from the amount payable for XXXXX, an amount in respect of the licence fee, and to remit that amount to the Board.

10. In a previous request, the Board inquired about the tax status of the deduction of $1/XXXXX from the consideration payable by a buyer to a producer for the supply of XXXXX which is subsequently remitted to the Board by the buyer. It was our view that the $1/XXXXX was a fee for the licence required under XXXXX. In our letter of July 7, 1999, to the Board we indicated that the $1/XXXXX was consideration for an exempt supply of a licence in accordance with paragraph 20(c) of Part VI of Schedule V to the Excise Tax Act (ETA).

11. The Agricultural Products Act provides for the marketing of agricultural products in inter-provincial and export trade. Under this Act, the Governor in Council may, by order, grant to any board the right to fix, impose and collect levies or charges for persons engaged in the production of the whole or any part of any agricultural product, and to use the levies or charges for the purposes of the board.

12. Pursuant to the XXXXX made under the XXXXX XXXXX directly to an end-user in the export and domestic market without having to deliver the XXXXX to the Board. This is referred to as "direct marketing."

13. The total volume of XXXXX for all producers that may be approved for sale through direct marketing is 150,000 XXXXX[.]

14. A producer may apply to the Board XXXXX for an Exemption Certificate which authorizes the producer to sell or offer to sell a specified amount of XXXXX through direct marketing. Approval for the exemption will be made on a first-come, first-serve basis.

15. Once approved, producers will be issued an Exemption Certificate (XXXXX by the local Board. Producers are prohibited from transferring, selling, or assigning the exemption to other parties.

16. The Exemption Certificate will set out the producer's name and licence number, and the class, variety, and XXXXX to be sold by the producer.

17. A producer cannot sell XXXXX directly to a buyer unless the producer has been issued an Exemption Certificate.

18. For inter-provincial and export sales of XXXXX, producers must remit to the Board an amount in respect of a licence required under XXXXX. The fee must be paid to the Board within 30 days of sale.

19. For sales of XXXXX, buyers are required to deduct an amount in respect of a licence required under XXXXX from the amount payable to the producer as consideration for the supply of the XXXXX and to remit that amount to the Board on account of the producer.

Ruling Requested

The licence fee payable by the producers to the Board with respect to direct marketing, or that is deducted and remitted by buyers to the Board on account of the producers, is consideration for an exempt supply and therefore not subject to tax.

Ruling Given

Based on the facts set out above, we rule that the licence fee payable by the producer with respect to direct marketing, whether remitted by the producer directly or deducted and remitted by the buyer to the Board, is not subject to tax as it is consideration for an exempt supply of a licence in accordance with paragraph 20(c) of Part VI of Schedule V to the ETA.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Based on the above information, we understand that there are two scenarios under which XXXXX may be sold by producers and for which they are required to pay a licence fee.

Under the 1st scenario, XXXXX producers are prohibited from selling XXXXX directly to buyers in the commercial markets. Since the legislation provides that the Board is exclusive supplier of XXXXX in the commercial market, the producers supply their XXXXX to the Board (in most cases, to the agent of the Board). XXXXX requires that XXXXX producers pay an amount to the Board as a licence fee for engaging in the production of XXXXX. The buyer (i.e. the agent of the Board) deducts from the consideration payable to the producer, the licence fee and remits the fee to the Board on behalf of the Producer.

Under the 2nd scenario, XXXXX producers are provided the opportunity to directly market their XXXXX in the commercial market. The producers apply to the Board for an exemption certificate on a specified amount of XXXXX to be sold directly to buyers. XXXXX still requires that the producers pay an amount to the Board as a licence fee for engaging in the production of XXXXX. As in the above scenario, buyers are required to deduct from the consideration payable to the producers in respect of the supply of the XXXXX, a licence fee. This fee is submitted by the buyer to the Board on behalf of the producer. However, where the supply of the XXXXX is made to buyers outside the province, the producers are required to remit the licence fee directly to the Board.

In our previous ruling to the Board, we concluded that the licence fee described in scenario #1 above is exempt of tax in accordance with paragraph 20(c) of Part VI of Schedule V to the ETA. While the method in which producers market XXXXX has changed in the 2nd scenario, the licensing requirements have not. Therefore, it is our ruling that the fee described in scenario #2 is in respect of a supply of a licence issued by a body established by government and is similarly exempt of tax in accordance with paragraph 20(c) of Part VI of Schedule V to the ETA.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4206.

Yours truly,

Dwayne Moore
Charities, NPOs, and Educational Services Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate