Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings
Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Attention: XXXXX
Case Number: 104002
November 12, 2008
Subject:
GST/HST INTERPRETATION
Host gifts
Dear XXXXX:
Thank you for your letter of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the provision of host gifts for no charge by a direct seller to its independent sales contractors (ISCs) who will, in turn, provide the host gifts to individuals who host sales events.
All legislative references are to the Excise Tax Act (ETA) and the regulations thereunder, unless otherwise specified.
We understand that:
• A GST/HST-registered direct seller, authorized to use the Alternate Collection Method (ACM), sells exclusive products through ISCs who sell the products to individual customers.
• The ISCs have entered into agreements with the direct seller to obtain the right to sell the exclusive products.
• The ISCs solicit, negotiate and enter into contracts for the sale of the products at their homes or through events held at the private residences of individuals; the ISCs do not solicit, negotiate nor enter into contracts for the sale of the products at a fixed place of business other than at private residences.
• After an ISC holds a sales event at the residence of an individual, the ISC will provide the individual with the opportunity to select a host gift.
• The host gift may be an exclusive product of the direct seller or another item that is not an exclusive product that the direct seller makes available (e.g., XXXXX).
• The direct seller does not make a separate order (i.e., from the manufacturer) for exclusive products for host gifts.
• The items available as host gifts are contained in a separate host gift catalogue. The individual selects an item from the host gift catalogue and places an order with the ISC, who orders it from the direct seller. The value of the host gifts that the individual will receive will depend upon the number of attendees at the sales event and the volume of sales made at the event.
• An exclusive product of the direct seller that is a host gift does not have a different item number in the host gift catalogue than in the regular catalogue. However, the direct seller is aware at the time the ISC orders the item, whether it is an exclusive product or other item, that it is for a host gift.
• The ISC places orders with the direct seller on-line using an on-line order form called a XXXXX. There is a separate category screen on the form where the ISC selects if the product is a host gift, etc.
• The direct seller does not charge the ISC for the host gift and the ISC does not charge the individual for the host gift. The direct seller will have documentary evidence to show that the items were supplied to the ISC for no charge for use as a host gift.
Interpretation Requested
You would like to know if the direct seller is required to add an amount to its net tax equal to the GST/HST calculated on the suggested retail price of an exclusive product when it supplies the product to an ISC at no charge for use by the ISC as a host gift.
You would also like to know if the direct seller is required to add an amount to its net tax in respect of an item that is not an exclusive product of the direct seller when it supplies the item to an ISC at no charge for use by the ISC as a host gift.
Interpretation Given
In our view, the direct seller must account for tax on the suggested retail price of an exclusive product at the time that it supplies the product to the ISC and may take a deduction for an amount equal to tax that it has paid or credited the ISC in respect of the product. The amount of the deduction is calculated in accordance with the formula set out in paragraph 178.3(4)(c) and may be taken in a reporting period within the timeframe indicated below.
It is our view that items, that are not exclusive products, that are provided by a direct seller to an ISC at no charge for use by an ISC as a host gift are sales aids and consequently are not subject to tax pursuant to subsection 178.5(5).
Exclusive products as host gifts
As you know, an exclusive product of a direct seller is defined in section 178.1 as personal property that is acquired, manufactured or produced by the direct seller for sale, in the ordinary course of a business of the direct seller, to an ISC of the direct seller, with the expectation that the property would be ultimately sold, otherwise than as used property, by an ISC of the direct seller, in the ordinary course of a business of the ISC, for consideration to a person other than another ISC of the direct seller.
It is our view that the products that the direct seller acquires, manufactures or produces as "exclusive products" and that are later used as host gifts, are still "exclusive products" by definition.
Also, as you know, subsection 178.3(1) provides that, under the ACM, when a direct seller makes a taxable supply in Canada by way of sale (other than a zero-rated supply) of an exclusive product to an ISC, the supply is deemed to have been made for consideration that is equal to the suggested retail price of the product at the time the supply is made. The direct seller adds to its net tax, for the reporting period that includes that time, an amount equal to tax calculated on the suggested retail price of the product at the time the supply is made.
Pursuant to subsection 178.5(7), when the ACM is in effect and an ISC makes a supply of property (i.e., a host gift) to a person as consideration for the supply by the person of a service of acting as a host at an occasion that is organized for the purpose of the promotion or distribution by the ISC of exclusive products of the direct seller, the person shall be deemed not to have made a supply of the service and the service shall be deemed not to be consideration for a supply.
Subsections 178.3(1) and 178.5(7), referenced above, do not apply to an ISC that is a distributor of the direct seller, in respect of whom there is a joint application to use the ACM in effect at that time or that becomes effective immediately after that time.
Furthermore, if a direct seller makes a supply of an exclusive product in circumstances where an amount equal to tax calculated on the suggested retail price of the product is required to be added to the direct seller's net tax and an ISC makes a supply of an exclusive product to a person other than another ISC for no consideration, such as where an ISC provides an exclusive product as a host gift, subsection 178.3(4) provides that the direct seller may deduct from its net tax an amount equal to tax that it has paid or credited the ISC. The amount that may be deducted is calculated according to the formula set out in paragraph 178.3(4)(c). The deduction can be taken in the reporting period in which the payment or credit is given or in a return filed within four years after the day on or before which the return for the reporting period is required to be filed.
Items that are not exclusive products as host gifts
As you are aware, a "sales aid" of a direct seller or an ISC is defined in section 178.1 as meaning:
(a) property (other than an exclusive product of the direct seller)
(i) that is a customized business form or a sample, demonstration kit, promotional or instructional item, catalogue or other personal property acquired, manufactured or produced by the person for sale to assist in the promotion, sale or distribution of exclusive products of the direct seller, and
(ii) that is neither sold nor held for sale by the person to an independent sales contractor of the direct seller who is acquiring the property for use as capital property, and
(b) the service of shipping or handling, or processing an order for, either property included in paragraph (a) or an exclusive product of the direct seller.
Subsection 178.5(5) provides that, under the ACM, where a direct seller or an ISC of the direct seller makes in Canada a taxable supply by way of sale of a sales aid of the direct seller or of the ISC, as the case may be, to an ISC of the direct seller, the supply shall be deemed not to be a supply. Therefore the direct seller is not required to charge GST/HST on the sale of a sales aid.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call Chris Lewis at 613-957-8224. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Carla Schur-Ellison
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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