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: 142436
May 15, 2012
Dear [Client]:
Subject: GST/HST RULING
Implementation of Cost Sharing Arrangement
Thank you for your letter of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the proposed implementation of a cost sharing arrangement between related companies.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
From your incoming letter, your facsimile of [mm/dd/yyyy], and your telephone conversations with us, we understand the following:
1. […] (“Company A”) is a corporation resident in Canada, and is registered for GST/HST purposes.
2. […] (“Company B”) and […] (“Company C”) are wholly owned subsidiaries of Company A (“the Affiliates”). The Affiliates are Canadian resident corporations and are registered for GST/HST purposes.
3. Currently, each of Company A and the Affiliates employ, or will employ, certain employees who provide support to the companies in such areas as senior management, information technology, […].
4. […] the companies […] [may] establish a shared support arrangement to deal with the support provided by the Employees. In part, this arrangement would involve jointly employing the Employees, as opposed to each company having dedicated resources.
5. Currently, Company A and Company B are parties to an election under section 150 of the ETA (“the section 150 election”). As such and where applicable, no GST/HST applies to intercompany supplies between them in respect of property by way of lease, licence or similar arrangement, or of a service.
6. Except for the implications of the section 150 election, Company A is considered to be engaged exclusively in commercial activities for GST/HST purposes. In addition to the implications of the section 150 election, Company B is considered to be engaged partly in commercial activities and partly in exempt activities for GST/HST purposes. Company C is engaged exclusively in commercial activities for GST/HST purposes.
7. Company A and the Affiliates are proposing to establish a shared support arrangement (“the Cost Sharing Arrangement”), whereby the Employees would be expected to provide support benefitting Company A and the Affiliates as directed.
8. The purpose of the Cost Sharing Arrangement is to enhance operational efficiency by having support delivered by a centralized group, as opposed to individual companies within the corporate group having dedicated resources. The Cost Sharing Arrangement will also ensure that each member of the corporate group that benefits from an Employee’s support will be required to contribute a proportionate share of the Employee’s remuneration.
9. Under the Cost Sharing Arrangement, the existing Employees will be jointly employed by each of Company A, Company B and Company C. That is, each of these companies will be employers to the Employees. As well, any new Employees would be hired by Company A on behalf of Company A and the Affiliates.
10. Under the terms of the Cost Sharing Arrangement, each of Company A and the Affiliates that benefit from the support provided by the Employees will be required to contribute proportionally to the remuneration paid to those Employees.
11. In general, under the Cost Sharing Arrangement, Company A will be given discretion to hire, direct, dismiss and otherwise manage the Employees, on its behalf and on behalf of the Affiliates in an agency capacity. In particular, under the Cost Sharing Agreement:
(a) Company A will agree to deliver all remuneration to the Employees.
(b) The Employees will be under the discretionary direction and supervision of Company A.
(c) Company A will be responsible for paying the Employees, withholding taxes and other payroll related deductions, and enrolling and managing the Employees in relation to any benefit plans they are eligible to participate in.
(d) All remuneration will be paid through Company A’s Business Number and the Employees will receive a T4 from Company A. No T4 will be received from the Affiliates.
(e) Full CPP and EI contributions will be made by Company A.
12. The Cost Sharing Arrangement will neither enhance nor diminish the existing rights of the Employees.
13. While the Employees will have responsibilities to Company A and the Affiliates, the employment is interrelated owing to the relationship between the companies.
14. […]. The Employee will continue to be paid and directed by Company A, as outlined above.
15. Job offers to new Employees will indicate that the Employee will work for Company A and the Affiliates but will be paid and directed by Company A, as outlined above.
16. The companies […] [will obtain] a ruling request regarding the new employer-employee relationship to the CPP/EI Rulings Division of the Canada Revenue Agency (CRA).
17. Company A and Company B propose to revoke the section 150 election that currently exists for purposes of carrying out this Cost Sharing Arrangement.
RULING REQUESTED
You would like to know if, based on the facts and proposed transaction set out above, GST/HST will apply to amounts paid by Company B and Company C, for their respective shares of the remuneration that will be paid to the Employees by Company A, who acts as agent in remunerating the Employees on behalf of Company B and Company C. More specifically, in respect of the reimbursements of the Employees’ remuneration under the Cost Sharing Arrangement by Company B and Company C, you would like to know if:
* there are supplies for GST/HST purposes by Company A to Company B and by Company A to Company C;
* if there is any consideration for taxable supplies; and
* if GST/HST is applicable.
In considering this request, you believe that the GST/HST outcome with respect to the amounts paid by Company B and Company C for their respective shares of the remuneration that will be paid to the Employees by Company A on behalf of Company B and Company C should be the same as what is concluded by the CRA in scenario 4 (“Cost-sharing under an agency arrangement”) found in GST/HST Policy Statement P-238, Application of the GST/HST to Payments Made Between Parties Within a Medical Practice Organization.
RULING GIVEN
Based on the facts set out above, we rule that GST/HST will not apply to the amounts paid by Company B and Company C, for their respective shares of the remuneration that will be paid to the Employees by Company A, who acts as agent in remunerating the Employees on behalf of Company B and Company C. The reimbursements of the Employees’ remuneration under the Cost Sharing Arrangement by Company B and Company C will not be consideration for taxable supplies made by Company A to Company B and by Company A to Company C.
Please note that this ruling is dependent on the fact that the Employees will be jointly employed by each of Company A, Company B and Company C (see Fact #9). If a subsequent examination of the facts (e.g., by the CPP/EI Rulings Division or under audit – see Fact #16) determines that this fact does not describe the employee relationship correctly, then the reimbursements will be consideration for a taxable supply and subject to GST/HST.
This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
EXPLANATION
Section 165 states that every recipient of a taxable supply made in Canada shall pay GST/HST on the value of the consideration for the supply. As defined in subsection 123(1), “supply” means, in part, the provision of property or a service in any manner, and “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. As a result, the work provided by employees to their employers are not supplies for purposes of the ETA and therefore, no GST/HST applies to wages and salaries paid to employees.
The employment status of a person for GST/HST purposes is the same as for income tax purposes. The CPP/EI Rulings Division of the CRA has the responsibility for determining whether an employer-employee relationship exists between any two parties. Whether an employer-employee relationship exists between any two parties is a question of fact and is determined by the CPP/EI Rulings Division based on the facts of a particular situation. The Excise and GST/HST Rulings Directorate does not determine employer/employee relationships.
GST/HST Policy Statement P-238 clarifies the application of the GST/HST to payments made between parties within a particular medical practice organization with respect to the organization’s operating expenses, and outlines situations where medical practitioners operate their individual medical practices from a shared facility agree and agree to share common operating costs. In these situations, the medical practitioners are involved in a “principal/locum” or “principal/associate” relationship and are supplying exempt health care services. Policy Statement P-238 is intended to address a narrow context and as such does not illustrate the CRA’s general position on the tax status of employee transactions or cost-sharing arrangements.
The fourth situation outlined in Policy Statement P-238, which you identified in your letter, concerns cost-sharing where an agency relationship exists between medical practitioners who share a single office. This situation is merely illustrating, for convenience purposes, the outcome of a situation where an agency relationship has been previously established. The existence of an agency relationship is a question of fact and is determined with reference to GST/HST Policy Statement P-182R, Agency, and not with reference to Policy Statement P-238.
Policy Statement P-182R states that, in general terms, “agency” is a type of relationship where one person (the principal) uses another person (the agent) to perform certain tasks on its behalf. It is the CRA’s position that, for GST/HST purposes, a person is an agent with respect to a particular transaction if that person is an agent based on a determination of fact and an application of principles of law, which are described in Policy Statement P-182R. For the purpose of this ruling, the CRA accepts your assertion made in Fact #11 that Company A acts as agent in remunerating the Employees on behalf of Company B and Company C. This acceptance should not be construed as agreement by the CRA with the assertion, which is subject to verification under audit.
Where an agent remunerates a principal’s employee, the amount of money the principal pays the agent as a reimbursement for the employee’s wages is not consideration for a supply and therefore is not subject to tax. Therefore, since Company A acts as an agent of Company B and Company C in remunerating the Employees, the amount of money Company B and Company C pay Company A as the reimbursement for the Employees’ wages is not consideration for a supply and would not be subject to tax.
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
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