Interpretation Letter AG-0006, November 2000

Thank you for your facsimile message of October 31, 2000 regarding the application of Ontario retail sales tax (RST) on gravel purchased by farmers.

Understanding of Facts

It is our understanding that Company A would like clarification regarding the purchase of gravel by farmers.

It is Company A's understanding that in the past, farmers were not exempt from RST on their purchase of gravel that was considered land improvement. For example, gravel incorporated into a barn would be exempt, however gravel used for the laneway around the barn and yard would not be exempt because it is considered land improvement.

Legislation and/or Administrative Policy

Paragraph 14 of subsection 7(1) of the Ontario Retail Sales Tax Act (Act) provides a conditional exemption for building materials purchased to build or modernize a structure or building used exclusively for farm purposes and states:

Tangible personal property incorporated into buildings or structures that are used exclusively in the business of farming by a person engaged in the business of farming. However, the exemption conferred by this paragraph does not apply to tangible personal property incorporated into residential premises, an office, a residential garage, a road, a sidewalk, a bridge or a building or structure prescribed by the Minister as not entitled to the exemption conferred by this paragraph;

Subsection 3(2) of Regulation 1013 of Act states:

"If a person purchases tangible personal property or a taxable service and does not submit a valid purchase exemption certificate to the vendor, the vendor shall collect tax from the person calculated on the price charged for the tangible personal property sold or the taxable service rendered."

There are two types of property for RST purposes, i.e., tangible personal property (TPP) and real property. TPP refers to free-standing items and real property means land and any items permanently attached to land. Fixtures are items which upon installation are permanently attached to real property. Permanently attached means bolted, lagged, or in some other fashion, permanently affixed.

Where a person supplies and installs items that remain free-standing TPP, the person must charge, collect, and remit RST on the total selling price of the items including charges for delivery and installation unless the customer is entitled to an exemption and provides a properly completed purchase exemption certificate.

Where a real property contractor supplies and installs items as fixtures to real property, the contractor is considered to be the end-user of the items and is liable for RST on the cost of the items. No RST should be charged to the customer. The RST paid by the contractor is an element of the total cost of the goods being supplied and should be considered when the contractor sets the selling price. The installation labour is not taxable.

Contractors may supply and install TPP for certain customers who are entitled to an exemption from RST on that TPP. The contractor may claim exemption on the purchase of the TPP provided it is bought for the use of the exempt customer. It is the contractors's responsibility to determine if the customer would be entitled to an exemption since it is the contractor's tax liability that will be affected.

Analysis

The May 2, 2000 Ontario Budget announced that the existing farmer's rebate program would be replaced with a point-of-sale exemption. The legislation has received proclamation making the point-of-sale exemption effective October 1, 2000. Eligible purchasers may claim the RST exemption at the time of sale by providing their supplier with a properly completed purchase exemption certificate (PEC) or a farmer's declaration statement when purchasing building supplies used to build or modernize structures used exclusively for farm purposes. Similarly, a contractor or other person purchasing building materials for farm structures would provide a PEC to their supplier in order to claim the exemption.

However, as stated in the Act, TPP such as gravel incorporated into a road or a sidewalk is taxable.

For Supply Only

It is the responsibility of the purchaser (farmer or his contractor) when they make declarations on the PEC to ensure that they meet the qualifications for the exemption. False statements and incorrect use of a PEC can be determined through audit of vendors and the purchaser may be held responsible for the RST and any penalties incurred by their actions. The vendor is not required to verify whether the goods purchased will ultimately be incorporated into a farm building. A copy of the PEC is to be kept with the vendor's permanent records.

If a person alleges that they are purchasing taxable goods for incorporation into a building used exclusively for farming, he or she must issue a properly completed PEC to the vendor/supplier of the taxable goods. If a properly completed PEC is not issued to the vendor/supplier of the taxable goods, the vendor/supplier is responsible for charging, collecting and remitting RST on their sales of the taxable goods.

For Supply and Install

Contractors may supply and install for certain customers who are entitled to an exemption from retail sales tax on the TPP (ie., gravel incorporated into a farm building or structure). The contractor may claim an exemption on the purchase of the TPP provided it is bought for the use of the exempt customer. It is the contractor's responsibility to determine if the customer would be entitled to an exemption since it is the contractor's tax liability that will be affected.

Conclusion

As stated under the Act, gravel incorporated into a road, or a sidewalk, etc. is taxable and does not qualify for the point-of-sale exemption available to farmers.

For Supply Only

Under a supply only contract, Company A is not responsible to verify whether the goods purchased will ultimately be incorporated into a farm building. It is the responsibility of Company A's customers when they make declarations on the PEC to ensure that they meeting the qualification for exemption.

In order for Company A to sell their merchandise to farmers or contractors without charging RST, the farmer or contractor must issue Company A a properly completed PEC. If the farmer or contractor does not issue a PEC, then Company A must charge, collect and remit RST on their sales.

For Supply and Install

A PEC cannot be issued where Company A supplies and installs the gravel. It is Company A's responsibility to verify that the gravel will be incorporated into a farm building or structure and therefore qualify for the exemption. If the gravel does not qualify for exemption, then Company A must pay RST on their cost of the gravel and any other materials incorporated into real property.

The enclosed Retail Sales Tax Guide # 204 - "Purchase Exemption Certificates" provides further information. Also enclosed is, Information Notice - 2000 Ontario Budget Announcement - Rebate Program for Farm Building Materials to Point-of-Sale Exemption.

If you have any further questions, please contact our office.

ISBN 0-7794-2507-3

© Queen's Printer for Ontario, 2002