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: 109782
June 13, 2013
Dear [Client]:
Subject: GST/HST INTERPRETATION
Application of the GST/HST to a promotional contest.
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a promotional contest where a customer purchases a taxable product and included in the packaging is the chance of winning a cash prize. We apologize for the delay in our response.
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 (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
Your letter states:
"[...] [Pursuant to] GST Memorandum 1.4: Excise and GST/HST Rulings and Interpretations Service, [...] [ACo] request[s] a GST interpretation on [...] the application of subsection 188(1) of the Excise Tax Act (the "ETA") to prize winnings [...] [distributed] to customers who participate in a game of chance [...] [ACo]conducts on a periodic basis to promote the sale of GST taxable items. [...]
[ACo], who is a corporate registrant, [periodically] conducts a promotional contest where a customer, who has purchased a GST taxable product, is provided with the chance of winning a cash prize by participating in the promotional contest. The game of chance is conducted through having certain labels affixed to a product's packaging [...] or other similar means of distribution. If a customer purchases a product that contains the winning package, he/she wins a cash prize. The cash prize will be paid to the winning customer directly, [...].
The purpose of the promotional contest is to increase sales of GST taxable items and brand awareness. Sales have historically increased over the period in which the promotional contest is conducted in that consumer demand increases as a result of [ACo] providing its customers with the opportunity to win prizes. Substantially all of [ACo]'s sales are taxable supplies (there is a very small portion of sales that are zero-rated). [ACo] makes no exempt sales."
Interpretation Requested
You are requesting an interpretation as to whether subsection 188(1) of the ETA permits [ACo] to claim an input tax credit with respect to (i) the payment of the cash prizes awarded to persons playing the promotional contest; and (ii) [...].
Interpretation Given
Subsection 188(1) of the ETA states:
"If a commercial activity of a registrant (other than a registrant to whom subsection (5) applies) consists of taking bets or conducting games of chance and, in the course of that activity, the registrant pays an amount of money at any time in a reporting period as a prize or winnings to a bettor or a person playing or participating in the games, for the purpose of determining an input tax credit of the registrant, the registrant shall be deemed to have received at that time a taxable supply of a service for use exclusively in the activity and to have paid, at that time, tax in respect of the supply equal to the amount determined by the formula
(A/B) × C
where
A is
a) if the supply is made in a participating province, the total of the rate set out in subsection 165(1) and the tax rate for that province, and
b) in any other case, the rate set out in subsection 165(1),
B is the total of 100% and the percentage determined for A, and
C is the amount of money paid as the prize or winnings."
Subsection 188(1) deems a registrant in certain circumstances to have received a taxable supply of a service for use exclusively in a commercial activity of the registrant and to have paid tax in respect of the taxable supply equal to an amount determined by the given formula. An input tax credit is available for that deemed tax paid.
The certain circumstances mentioned above do not include registrants to whom subsection 188(5) applies, such as a prescribed provincial gaming or lottery corporation. There is no indication that [ACo] is a registrant to whom subsection 188(5) applies.
[...] [ACo] is a registrant that conducts a promotional contest and in the course of conducting that contest pays an amount of money as a prize to a person winning the contest. It must therefore be determined if a commercial activity [...] in this scenario consists of conducting games of chance. "Consists" is defined in Black's Law Dictionary to mean, "to be composed of or made up of".
Commercial activity is defined in subsection 123(1) of the ETA. It states:
"commercial activity" of a person means
a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person,
b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and
c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply;
[...] [ACo's] promotional contest [...] does not involve the making of a supply of real property therefore paragraph (c) of the definition of commercial activity is not relevant. It is your opinion that paragraph (b) of the definition of commercial activity would apply with respect to [ACo's] promotional contest [...]. Without a complete and comprehensive fact situation it is difficult to make a determination in this regard. However, paragraph 3 of Appendix C of GST/HST Memorandum 19.5 Land and Associated Real Property has some application in this situation despite its focus on supplies of real property. It states (in part),
"Generally, a sale made in the course of a business may be distinguished from a sale that constitutes an adventure or concern in the nature of trade by the amount of time, attention and resources devoted to the transaction or by the frequency or regularity of similar transactions. In this regard, a sale made as an adventure or concern in the nature of trade usually involves acquiring property on an isolated basis with the primary or secondary intention of resale at a profit and only passive or limited activities related to the resale (i.e., those necessary to facilitate the resale). Regular sales of property or sales made in a business-like manner as demonstrated by extensive marketing and advertising, or the devotion of extensive time, attention and resources to the sale of the property, would normally be considered as sales made in the course of a business."
The fact situation described in your letter would not support the conclusion that the promotional contest would be an adventure or concern in the nature of trade because there is no acquisition of property on an isolated basis for resale at a profit.
Given that paragraphs (b) and (c) of the definition of commercial activity do not apply, we are left to determine if paragraph (a) of the definition of commercial activity applies. Paragraph (a) of the definition of commercial activity refers to, "...a business carried on by the person...". In the fact situation described in your letter, you have discussed two [of ACo's] activities [...]:
1. retailing products that are taxable for purposes of the GST/HST, and
2. conducting a promotional contest.
We do not see these two activities as separate businesses, that is, separate commercial activities. The commercial activity of the registrant is predominantly composed of or made up of the activity of retailing products that are taxable for purposes of the GST/HST and to assist in that goal [ACo] engages in the related and complementary activity of the promotional contest. The activity of the promotional contest, on its own, would not meet the ETA definition of a business.
Business is defined in subsection 123(1) of the ETA. It states:
"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment;
GST/HST Policy Statement P-167R: Meaning of the First Part of the Definition of Business provides a conceptual framework and general guidelines to be used in determining whether a person is carrying on a business for GST/HST purposes. The policy statement discusses the extent to which the activities of a person should be examined separately in applying the definition of business. Given the broad scope of the definition of business and the variety of activities that could constitute a business, each situation must be looked at on an individual basis.
Policy Statement P-167R makes the following observations about the definition of business under the heading Activities:
"Before determining whether a person is engaged in a business, one must first decide whether all of what that person does will be subjected to the business test or whether that person's activities should be divided into separate parts and each part subjected to the business test. Put differently, does a person have one single or primary goal that characterizes the full extent to which the person is engaged in a business, or should the person's activities be viewed separately when considering whether those activities are part of, or separate from, the person's business(es).
Generally, the activities a person undertakes should not be isolated from each other, but rather, all of the activities should be viewed as being undertaken to achieve a single or primary goal. This is particularly true where the person in question is not an individual. The primary goal may be achieved through a variety of different activities and may be defined in terms of related subordinate goals, but ultimately, everything the person does (e.g., make supplies and acquire property or services) is directed at achieving that primary goal."
You have stated that the purpose of the promotional contest is to increase sales of GST/HST taxable items and brand awareness (which we would assume contributes to an increase in sales of "GST/HST taxable items"). Based on the information in Policy Statement P-167R it is difficult to separate these two activities and conclude that conducting the promotional contest is a business separate from the retail of products. The two activities are directed at achieving the primary goal of making supplies of "GST/HST taxable items".
Policy Statement P-167R goes on to state:
"The grouping of a person's activities is dependent upon the degree of interconnection, interlacing or interdependence embracing the various activities. The fact that the activities may differ in nature does not preclude them from being undertaken to achieve a single or primary goal if there is a sufficient interconnection, interlacing or interdependence between them.
When determining whether the activities of a person are undertaken to achieve a primary goal, factors to be considered include, but are not limited to:
1. the extent to which the activities have common factors (such as the same location, procedures, products, customers or clients, employees, equipment, etc.);
2. whether one activity exists primarily to support another;
3. whether the activities are accounted for and recorded in a single set of records throughout the year; and
4. whether the operations are treated as a whole for purposes other than the GST/HST (e.g., income tax purposes)."
Applying these factors to the fact situation in your letter, it is hard to ignore the high degree of interconnection and interdependence between the retailing of products that are taxable for purposes of the GST/HST and the promotional contest. The fact that [ACo] retails products that are taxable for purposes of the GST/HST [...] [in connection with the contest] suggests that the two activities share the same location, procedures, products, customers, employees, equipment, etc. Additionally, it is logical to conclude that the promotional contest exists primarily to support the retail activities of [ACo] as you have stated that the purpose of the promotional contest is to increase sales of GST/HST taxable items and brand awareness. It is not clear from the fact scenario presented how factors #3 and #4 would apply to [ACo] but the overall impression is that there is a high degree of interconnection and interdependence between the retailing of products that are taxable for purposes of the GST/HST and the promotional contest.
With this in mind it is difficult to conclude that a promotional contest delivered by way of the packaging on the supply of products that are taxable for purposes of the GST/HST would be a business separate from the retailing of those products. The promotional contest would not in and of itself be a business and therefore would not fall under paragraph (a) of the definition of commercial activity. A commercial activity would not consist of, that is, be composed or made up of, the promotional contest. As a result, subsection 188(1) of the ETA could not apply.
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 me directly at 613-952-0420. 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,
Trent MacDonald
Charities and Non-Profit Organizations Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate
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