7 February 1995 GST/HST Interpretation 1995-02-07 - Supply of Service Maintenance Contracts

This is in reply to your referral of December 14, 1994 concerning the above noted ruling request.

Based on the information provided to us with your referral, our understanding of the relevant facts of the situation is as follows:

A - From XXXXX letter of October 18, 1994 to the D.O.:

•   XXXXX sells a service maintenance contract (referred to as the "Service Contract") together with an insurance portion (referred to the "Insurance Service") to its authorized distributors".

•   These authorized distributors in turn "resell" this Service Contract to their customers.

•   The insurance service portion in the Service Contract is provided by XXXXX (referred to as XXXXX while the product warranty service portion (referred to as the "Maintenance Service") is provided by Paymaster.

•   XXXXX prints the pre-numbered insurance policy forms on its computer system. The policies, once approved by XXXXX are sent directly to the customers by XXXXX

•   If there is a claim, XXXXX coordinates the claim process. The claims are settled by XXXXX

B - From the Distributor's Sample Invoice:

•   The sales invoice describes the Service Contract for a specific type of cheque writer and for the coverage of a specific period of time.

•   One single amount is invoiced for the supply of the Service Contract (including both the Insurance Service and the Maintenance Service).

•   The invoice is made by the distributor to the customer.

•   From the XXXXX Insurance Policy:

•   The policy is issued by XXXXX to the name of the customer.

•   The policy provides the Insurance Service (included in the Service Contract) to the customer.

•   From the XXXXX Agreement:

•   It provides, inter alia, "The present agreement does not constitute the sub-distributor as agent, legal representative, nor employee of XXXXX for any reason whatsoever."

E -  Telephone Conversation with XXXXX of Your Office XXXXX

•   The Maintenance Service is sold by XXXXX to the distributor who resells it to the customer with a mark-up amount included in the invoiced amount. The supply of the Insurance Service is made directly by XXXXX to the customers, and the insurance policy is issued by XXXXX to the customers.

Our Comments:

In your memo to us you seem to be concerned with the issue of "when is a person XXXXX acting as a salesperson for the person at risk XXXXX for the supply of an insurance policy" for purposes of paragraph (t) of the financial service definition under the Excise Tax Act (the "Act").

As discussed in our recent telephone conversation XXXXX , it is our understanding that XXXXX ruling request really concerns "the GST status of XXXXX services to the distributor and the distributor's service to their customers" (see XXXXX October 8, 1994 letter). It does not concern the service of XXXXX to XXXXX Therefore, your reply should be directed to the nature and the tax status of XXXXX service to the distributor (and the distributor's service to its customers). There is no need to consider if XXXXX is acting as a salesperson for anyone at risk. (If the issue was the tax status of XXXXX intermediary service to XXXXX of arranging for the provision of XXXXX to the customer, then it would be necessary to determine if XXXXX service can qualify as a financial service under paragraph (l) of the Act and whether paragraph (t) would disqualify the application because XXXXX was not a salesperson.)

As the Service Contract includes both the supply of the Insurance Service by XXXXX and the supply of the Maintenance Service by XXXXX to the customer for ONE AMOUNT, it is necessary to determine if the amount (or any part thereof) invoiced to the customer should be subject to GST. XXXXX expressed concern that its distributors always charge GST on the Service Contract (against their customers) while its competitor, the XXXXX , does NOT charge GST on its mechanical service contract.(See XXXXX letter of May 13, 1994).

It is our view that the supply of the Insurance Service is made by XXXXX directly to the customer (the insurance policy is issued by XXXXX who is an insurer). This supply hence would qualify as a financial service by virtue of paragraph (d) of the financial service definition in subsection 123(1) of the Act. Any consideration charged by XXXXX for the provision of this service will not be subject to tax.

The Maintenance Service supplied by XXXXX to the distributor (who resells it to the customer) relates to the warranty of the performance of the cheque writer machine. This service will not qualify as an insurance service under the Act since XXXXX is not an insurer and the definition of an "insurance policy" in subsection 123(1) of the Act specifically excludes a warranty in respect of the quality, fitness or performance of tangible property that is not issued by an insurer. Therefore, the supply of this Maintenance Service is a taxable supply.

However, as the distributor invoices the customer only ONE single amount for the supply of both the Insurance Service and the Maintenance Service, it is our view that tax should be applied on this single amount. Should the distributor be prepared to change this invoicing practice and charge a separate amount on the invoice that is the fair retail value of the consideration for the supply of the Maintenance Service, tax will be applied on this separate amount.

For your information, we enclose a copy of a letter submitted to us in 1991 by XXXXX This letter indicates that the actual retail value of the taxable product warranty service portion is approximately 10% of the value of the cheque writer machine. At that time, XXXXX requested our opinion as to whether or not XXXXX service (to XXXXX of arranging for the provision of the XXXXX Insurance Service to the customer would qualify as an exempt financial service under paragraph (l) of the financial service definition. We provided them with a qualified answer because we were not given any supporting documentation with their request.

In closing, we would also like to suggest that your office look into the XXXXX file to ensure that tax is properly collected on any taxable supplies made to its customers. The copy of the XXXXX invoice (as submitted by XXXXX seems to suggest that no tax is charged on its "Mechanical Service Contract".

Should your require further information or clarification on our comments, please do not hesitate to contact Phil Tang at (613) 954-1433 or Roy Osudar at (613) 952-9220.

J. Sitka
A/Director
Financial Institutions and Corporate
Re-organizations Division
GST Policy and Legislation