Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 158946
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of the GST/HST to Transactions where Product is Provided in Exchange for Advertising Services
Thank you for your letter concerning the application of the Goods and Services Tax (GST) / Harmonized Sales Tax (HST) to transactions where product of the customer is provided in exchange for an advertising service. We apologize for the delay in confirming our response in writing.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
1. Your client (the Publisher), a corporation located in Canada, a registrant for GST/HST purposes, publishes a magazine that is sold by way of newsstands, subscriptions, and through various industry groups and is partly circulated in Canada.
2. Companies (customers) throughout Canada and the United States (US) purchase advertising in the magazine from the Publisher.
3. The Publisher issues to a customer a document referred to as an “insertion order” which represents an invoice for the advertising service provided to the customer. The insertion order clearly identifies the monetary value of the advertising service.
4. In lieu of paying by cash or cheque, the customer has the option of acknowledging the payment due for the advertising service and agreeing to provide equal value of its products and/or services in exchange for the advertising service.
5. You have submitted a sample copy of an insertion order […] dated [mm/dd/yyyy], which reflects the charges for the advertising services and the HST charged. At the bottom of this document (under the title “Notes”) it states the following:
[…] In exchange for selling you this advertising, you agree to sell us a credit note of equal value redeemable for your product, F.O.B. [City 1, Province A] . […]
6. When the customer agrees to provide its products and/or services in exchange for the advertising, the customer signs the insertion order and the insertion order is treated as the “credit note” which serves as evidence of the Publisher’s right to obtain the products and/or services from the customer at a later date. The monetary value of the “credit note” is equal to the monetary value of the advertising service provided by the Publisher.
7. The “credit note” can be utilized to obtain products and/or services of the customer by any holder of the “credit note” and not just the Publisher.
8. The Publisher utilizes these “credit notes” as follows:
a. transfers the “credit notes” to its suppliers as payment for the acquisition of supplies associated with its operations;
b. delivers the “credit notes” to its employees as bonus payments; and
c. on occasion, sells the “credit notes” to third parties for cash.
9. The Publisher maintains an inventory of the “credit notes”.
10. Where a “credit note” is sold to a third party, the Publisher sends an email to the customer stating that the “credit note” has been sold to a third-party and identifies that third party. The customer, i.e., the provider of the underlying products and/or services, would then be liable to provide the products and/or services to the third party. The third party would also receive an email as evidence of the right to obtain the underlying products and/or services.
INTERPRETATION REQUESTED
You would like to know whether:
1. The GST/HST has to be collected on the value of the advertising services where the Publisher receives payment by way of “credit notes” from Canadian customers;
2. The GST/HST has to be collected on the value of the advertising services where the Publisher receives payment by way of “credit notes” from US customers;
3. The Publisher is entitled to claim input tax credits (ITCs) when it acquires “credit notes” from Canadian customers and puts them in inventory;
4. The Publisher is entitled to claim ITCs when it acquires “credit notes” from US customers and puts them in inventory;
5. The GST/HST has to be collected on the value of the “credit notes” that are sold for cash or used to pay for goods and services acquired by the Publisher; and
6. The Publisher is entitled to claim ITCs for the goods and services it acquires and pays for by way of “credit notes”.
INTERPRETATION GIVEN
The following are brief responses to each of the questions posed. More detailed information that further explains the application of the GST/HST is provided later in this letter.
1. The Publisher is required to collect GST/HST at the applicable rate calculated on the consideration payable for the taxable advertising service supplied in Canada to a Canadian customer, even if the customer agrees to provide its products and/or services of equal value in exchange for the advertising service.
2. The Publisher is required to collect GST/HST at the applicable rate calculated on the consideration payable for the taxable advertising service supplied in Canada to a US customer, even if the customer agrees to provide its products and/or services of equal value in exchange for the advertising service. The supply of the advertising service may be zero-rated and, as such, be taxable at the rate of 0%.
3. The Publisher is required to pay GST/HST at the applicable rate in respect of the acquisition of a taxable supply made in Canada of a right to receive products and/or services from a Canadian customer who is a GST/HST registrant. The Publisher is entitled to claim an ITC in respect of any GST/HST payable, or paid without having become payable, in respect of the right to receive products and/or services from the Canadian customer to the extent that the right is acquired for consumption, use or supply in the course of the Publisher’s commercial activities and the conditions and restrictions in the ETA for claiming ITCs are met.
4. A US customer is not required to charge the Publisher GST/HST in respect of the sale of a right to receive products and/or services where the supply of the right is made outside Canada. However, where the supply of the right is made outside Canada, the Publisher may be required to self-assess the GST/HST. The Publisher may be entitled to claim ITCs in respect of any GST/HST payable, or paid without having become payable, in respect of the right to receive products and/or services from the US customer.
5. The Publisher is required to collect GST/HST at the applicable rate calculated on the consideration payable for the taxable sale in Canada, to a third party, of the right to receive products and/or services. When the Publisher provides the right to receive products and/or services from a customer as payment for the acquisition of taxable goods and services from a third party, the Publisher is required to collect GST/HST from the third party at the applicable rate calculated on the consideration payable for the sale of the right to receive products and/or services.
6. When the Publisher acquires taxable goods or services in Canada from a third party and provides the right to receive products and/or services from a customer as payment for those goods and services, the Publisher is entitled to claim ITCs in respect of any GST/HST payable, or paid without having become payable, in respect of the goods or services to the extent that they are acquired for consumption, use or supply in the course of the Publisher’s commercial activities and the conditions and restrictions in the ETA for claiming ITCs are met.
When the Publisher, or third party, exercises the right to receive the products and/or services, no additional GST/HST is payable at that time, and no ITCs will be available as this would not constitute a supply for GST/HST purposes.
For the purposes of the ETA, we do not consider the provision of the right to receive products and services as described in the insertion order and referred to as a “credit note” to fall within the ordinary or common meaning of the term “gift certificate”, “coupon” or “credit note”.
The provision of the advertising service in exchange for the right to receive products and services is a barter transaction for GST/HST purposes. However, subsection 153(3) does not apply to these barter transactions as the condition of paragraph 153(3)(a) is not met, i.e., the property and services exchanged between the parties are not of the same class or kind. Similarly, where the Publisher provides the right to a third party in exchange for goods and/or services, this is another barter transaction for GST/HST purposes where subsection 153(3) does not apply.
Advertising Services
Paragraph 142(1)(g) deems a supply of a service to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Pursuant to paragraph 142(2)(g), a supply of a service is deemed to be made outside Canada if the service is, or is to be, performed wholly outside Canada.
An advertising service is generally considered to be a service of creating a message oriented towards soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement or other similar communication by any means, including oral, written, or graphic statements and representations disseminated by any means. A service directly related to the communication of such a message (e.g., air time on a broadcasting service, space in a publication) is generally considered to be an advertising service where the communication service is supplied as part of the supply of a message, or the person providing the communication service can demonstrate that, at the time the supply is made, the service is in relation to the supply of a message.
There are circumstances where the person broadcasting or communicating a message is not the same person that is supplying the message (i.e., the creative aspect). Where this is the case, generally, the person supplying the broadcast or communication service will be in possession of the message or will have received sufficient information as to the content of the message prior to the supply of the service to know that the message is in the nature of advertising. In these situations, the supply of the broadcast or communication service will be considered to be a supply of an advertising service.
The provision of advertising space in the magazine is considered to be a service of communicating the message and, therefore, a supply of an advertising service. As the magazines are circulated in part to newsstands and subscribers in Canada, the taxable supply of the advertising service is deemed to be made in Canada under paragraph 142(1)(g).
Although the supply of the advertising service by the Publisher is deemed to be made in Canada, the supply may qualify for zero-rating where the supply is made to a non-resident, such as a US customer. Specifically, section 8 of Part V of Schedule VI zero-rates a supply of an advertising service that is made to a non-resident person who is not registered for GST/HST purposes at the time the service is performed. Also, a supply of an advertising service made to a registered non-resident person may be zero-rated under section 7 of Part V of Schedule VI provided that none of the exclusions of that provision apply. It is the supplier's responsibility to verify that the recipient is a non-resident and, as the case may be, not registered for GST/HST purposes. Appendix A of GST/HST Memorandum 4.5.1, Exports – Determining Residence Status, describes the documentation that the Canada Revenue Agency (CRA) will generally accept as proof that the recipient of the advertising service is not resident in Canada and Appendix B describes the documentation that will generally be accepted as proof that a person is a non-resident and not registered for GST/HST purposes. In addition, GST/HST Memorandum 4.5.3, Exports – Services and Intellectual Property, describes the exclusions for zero-rating under section 7 of Part V of Schedule VI.
Where the supply of the advertising service made to a US customer is not zero-rated, it must then be determined if the supply is made in a participating province. Under section 144.1, a supply that is made in Canada is also considered to be made in a province if it is determined to be made in the province under the place of supply rules in Schedule IX. In any other case, the supply is deemed to be made in a non-participating province.
Pursuant to section 3 of Part IX of Schedule IX, a supply of property or a service is deemed to be made in a province if the property or service is prescribed to be made in the province under the New Harmonized Value-Added Tax System Regulations (the "Regulations"). The place of supply rules that determine the province in which a supply is made are explained in GST/HST Technical Information Bulletin B-103 Place of supply rules for determining whether a supply is made in a province.
Supply of Intangible Personal Property
The taxable provision in Canada of a right to receive products and/or services is a supply of intangible personal property that is subject to GST/HST, at the applicable rate, at the time the right is provided in exchange for the advertising service. In addition, the taxable sale in Canada of the right to a third party would be subject to GST/HST at the applicable rate. As mentioned earlier, when the Publisher or third party exercises their right to receive the products and/or services, this is not a supply for GST/HST purposes.
Subparagraph 142(1)(c)(i) deems a supply of intangible personal property to be made in Canada if the property may be used in whole or in part in Canada. Pursuant to subparagraph 142(2)(c)(i), a supply of intangible personal property is deemed to be made outside Canada if the property may not be used in Canada.
Furthermore, where a US customer provides the right to the Publisher, generally, the supply of the right that may be used in Canada will be deemed to be made outside Canada under subsection 143(1) unless:
* the supply is made in the course of a business carried on by the US customer in Canada; or
* at the time the supply is made, the US customer is registered for the GST/HST.
Reference may be made to Memorandum GST/HST Memorandum 4.5.3, Place of Supply and, where the supply of the right is made in Canada, Technical Information Bulletin B-103, Place of supply rules for determining whether a supply is made in a province to determine the applicable GST/HST rate that applies to the supply of the right.
Where the supply of the right is made outside Canada, the Publisher will not be required to self-assess GST/HST in respect of the right provided that the right is acquired exclusively for consumption, use or supply in the course of the Publisher’s commercial activities.
Input Tax Credits (ITCs):
Generally, a GST/HST registrant is eligible to claim ITCs for the GST/HST payable, or paid without having become payable, on property and services acquired, imported, or brought into a participating province by the registrant to the extent the property or service is acquired, imported or brought in for consumption, use or supply in the registrant’s commercial activities. Where the right to receive products and/or services is acquired from a registrant and all of the conditions for claiming ITCs under section 169 have been met, the Publisher will be able to claim ITCs in respect of the GST/HST payable at the time of purchasing the right (i.e., at the time the right is exchanged for the supply of the advertising service). However, as no GST/HST will be applicable when the Publisher exercises its right and receives the products and/or services, no additional ITCs may be claimed on the acquisition of the products or services.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter, including any additional information, are not rulings and do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.
If you require further clarification with respect to the application of the GST/HST to barter transactions, please call John Smith at 905-721-5062. 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,
Siraj Patel, CPA, CGA
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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