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: 155193
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Host rewards provided to sales representatives
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to host rewards provided by […] (“the Company”), to its sales representatives.
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%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
Based on your letter, the Company’s website ([…]), and the information you provided […], we understand:
1. The Company is […] [a] corporation that is establishing a direct selling business using sales representatives (“Representatives”) who earn commissions by arranging for sales of the Company’s products to consumers.
2. The Company is registered for the GST/HST (BN: […]).
3. The Company has received approval to operate pursuant to the Network Sellers Method (NSM) set out in section 178, effective [mm/dd/yyyy].
4. The Company’s Representatives are “sales representatives” and its products are “select products” as those terms are defined in subsection 178(1).
5. Under the Company’s marketing plan, a third party (who is not a Representative), that hosts a party for the purpose of a Representative promoting and arranging for the sale of the Company’s products, will be entitled to “Host Rewards” if certain sales and customer volumes are met at the party (this is then referred to as a […][the Party]). No Host Rewards are provided where the sales and number of customer levels are not met.
6. The Host Rewards are products from the Company’s line of select products, and the value of the Host Rewards will equal […]% of the value of the sales arranged at [the Party] (the percentage used to determine the value of the Host Rewards increases as the total sales value from the party increases).
7. Under the Company’s marketing plan, a Representative that hosts a party for the purpose of promoting and arranging for the sale of the Company’s select products by the Representative will earn the same type and value of Host Rewards as a third party host, provided the same sales and customer volumes are met at the party ([…]). No Host Rewards are earned where the sales levels and number of customers are not met.
8. You provided an excerpt from the Company’s Compensation Plan that outlines the […] Program: […]
9. You indicate that the reference to the GST/HST in the Company’s Compensation Plan will be revised depending on the outcome of this ruling request.
10. At our request, you also provided a complete copy of the Company’s Compensation Plan. The Cover of the Compensation Plan includes the following statements: […]
11. The introductory paragraph of the Compensation Plan lists [#] ways in which a Representative receives compensation: […]
12. Certain terms used in the Compensation Plan are defined in the first section, including the following: […]
13. The subsequent sections of the Compensation Plan outline the various ranks of Representatives, how business ranks and pay ranks are achieved, and the commissions a Representative earns at each rank. […].
14. The Compensation Plan also has a section on the “Company Rewards” that a Representative can earn, which can be used to purchase the Company’s products. […]. The excerpt describing the […] Program is included in this section of the Compensation Plan.
15. The final sections of the Compensation Plan outline when and how compensation is paid, and set out the Company’s Commission Rules and Policy.
RULING REQUESTED
You would like to know whether the select products provided as Host Rewards to a Representative under the Compensation Plan as indicated above will be:
(a) non-taxable under subsection 178(9) on the basis that the network seller is making a supply of property (i.e., select products provided as Host Rewards) to an individual as consideration for the supply by the individual of a service of acting as a host at an occasion that is organized for the purpose of allowing a sales representative of the network seller (in this case, the host […]) to promote or arrange the sale of the network seller’s select products; or
(b) non-taxable under subsection 178(7) on the basis that the select products provided as Host Rewards constitute “network commissions” as they are payment of an amount which became payable to the sales representative as a contractual right under an agreement with the network seller (i.e., the Compensation Plan) as consideration for the supply of a service of arranging for sales of the network seller’s select products.
RULING GIVEN
Based on the facts set out above, we rule that subsection 178(7) applies to deem the Representative’s service, which includes hosting a party for the purpose of promoting and arranging for the sale of the Company’s select products, not to be a supply, and GST/HST would not apply to any part of the consideration for the supply, including any select products provided as Host Rewards.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling given in this letter provided that: none of the issues discussed in the ruling are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
EXPLANATION
The Company was granted approval under subsection 178(5) to use the NSM effective [mm/dd/yyyy], and as such, meets the definition of a network seller in subsection 178(1).
Under subsection 178(7), if, at any time when an approval granted under subsection (5) in respect of a network seller and each of its sales representatives is in effect, a network commission becomes payable by the network seller to a sales representative of the network seller as consideration for a taxable supply (other than a zero-rated supply) of a service made in Canada by the sales representative, the taxable supply is deemed not to be a supply for GST/HST purposes.
In the scenario described, it is the service or services being provided by the Representative directly to the Company that is at issue. Therefore, it is the paragraph (a) part of the definition of “network commission” in subsection 178(1) that has to be met: “network commission” of a sales representative of a person means an amount that is payable by the person to the sales representative under an agreement between the person and the sales representative as consideration for a supply of a service, made by the sales representative, of arranging for the sale of a select product or a sales aid of the person.
As defined in subsection 123(1), “amount” means money, property or a service, expressed in terms of the amount of money or the value in terms of money of the property or service, while “property” means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money. The Host Rewards are property and may be expressed as an amount for GST/HST purposes.
To meet the paragraph (a) part of the definition of “network commission,” the Host Rewards have to be payable by the person to the sales representative under an agreement between the person and the sales representative. The […] Program, setting out the manner and value of Host Rewards that may be earned by a Representative, is outlined in the Compensation Plan, the written agreement between the Company and its Representatives that outlines the terms under which the Company compensates the Representatives for arranging for the sale of the Company’s select products. As such, this condition of the definition of network commission is met.
As well, the Host Rewards have to be consideration for a supply of a service, made by the sales representative, of arranging for the sale of a select product or a sales aid of the person to be a “network commission.” As defined in subsection 123(1), “consideration” includes any amount that is payable for a supply by operation of law, while a “service” means anything other than property, money, and anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person.
A single supply versus multiple supply analysis of a Representative’s activities, one of which is a service of acting as a host of a party under this scenario, using the criteria in GST/HST Policy Statement P-077R2, Single and Multiple Supplies, can help determine whether the Representative is providing a single supply of a service of arranging for the sale of the Company’s select products, or also providing a separate supply of a service of hosting the party to the Company. An analysis of the Representative’s activities would indicate that all of the activities performed by the Representative with respect to the Company’s select products and in accordance with the Compensation Plan, including hosting a party for the purpose of promoting or arranging for the sale of the Company’s select products at that party, are in respect of a single supply of a service of arranging for the sale of the Company’s select products.
Therefore, hosting a party as described in the facts set out above would be considered part of the Representative’s single supply of a service of arranging for the sale of select products of the Company, and all amounts provided as consideration, including the select products provided as Host Rewards, are “network commissions.” Subsection 178(7) deems the Representative’s service not to be a supply.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-7909. 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,
Jacqueline Russell, CGA
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
Email this Content