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: 126511
Business Number: […]
July 27, 2012
Dear [Client]:
Subject: GST/HST INTERPRETATION
GST/HST Treatment of Retail Display Allowances
Thank you for your fax of July 8, 2010, and for your subsequent […] [correspondence] concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to payments made to retailers by your company, […] (“Marketer”), as retail display allowances (“Allowances”). We apologize for the delay in responding.
HST applies at the rate of 15% in Nova Scotia, 13% in New Brunswick, Newfoundland and Labrador, and Ontario, 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.
We understand the following facts:
1. […] (“Distributor”) and Marketer are GST/HST registrants;
2. Distributor and Marketer are affiliated companies with the same parent;
3. Distributor makes taxable supplies of magazines by way of sale to various wholesalers (“Wholesalers”), who subsequently resell the magazines to various retailers (“Retailers”). The Wholesalers acquire the magazines from Distributor exclusively for supply by way of sale for a price in money in the course of their commercial activities, and then resell the magazines to Retailers, who also acquire the magazines for supply by way of sale for a price in money;
4. Marketer and Distributor have entered into a distribution agreement whereby Marketer has agreed, on behalf of Distributor, to pay Retailers for activities undertaken by Retailers in relation to the magazines supplied by Distributor;
5. Retailers are paid an Allowance by Marketer in compensation for prominently displaying or positioning the magazines supplied by Distributor within Retailers’ stores. The Allowance is paid to Retailers by Marketer via the Wholesalers;
6. You are of the view that Marketer pays the Allowances as the agent of Distributor, and not on its own behalf;
7. You have not submitted the distribution agreement between Marketer and Distributor, but you have informed us that this agreement contains various provisions that relate to the legal relationship between Marketer and Distributor;
8. You have submitted sample contracts outlining the terms and conditions under which the Allowances are paid to Retailers by Marketer;
Sample Contract No. 1 – […]
9. The agreement provides that Distributor wants to maximize the sale of a certain magazine by having it prominently displayed in high traffic areas of retail outlets. The agreement also provides that each Retailer who wishes to participate in this Retail Display Program will be paid by Distributor, through the Retailer’s Wholesaler(s), to induce the Retailer to display magazines in a manner specified in the Program, and to compensate the Retailer for its effort and services in so displaying the certain magazine;
10. Retailer will, during the term of this agreement, display copies of each issue of the magazine sold by Distributor for the entire on-sale period of each issue as long as its supply lasts. Copies will be prominently displayed, with complete visibility, at all front-end checkouts, where magazines are sold in racks […];
11. Racks must be either those supplied by Distributor or other racks approved by Distributor or its national distributor, Marketer;
12. Distributor and/or Marketer and the Retailer’s servicing Wholesaler(s) will ascertain the number of copies of magazines actually sold by Retailer, and Retailer’s compliance with this agreement for each issue. Distributor payments due hereunder to Retailer will be reflected as an off-invoice allowance on the servicing Wholesaler(s) invoice;
13. Upon the request of Distributor or Marketer, Retailer shall provide, or cause Retailer’s servicing Wholesaler(s) to provide, sales data for magazines on a store-by-store basis either through the POS system or other records;
14. Payment shall be made at the rate of […]% of the cover price for each copy of magazines sold by Retailer, provided that Retailer maintains the agreed upon display standards. Retailer shall secure payments owed under the agreement from its servicing Wholesaler(s). The Retailer, and not the Wholesaler, is the person who is entitled to be paid the Allowance pursuant to the agreement, and the Wholesaler receives the Allowance from Distributor on behalf of the Retailer;
Sample Contract No. 2 – […]
15. Distributor wants to maximize the sale of its magazines by having them prominently displayed in high traffic areas of retail outlets. Each Retailer who wishes to participate in this Retail Display Program will be paid by Distributor, through the Retailer’s Wholesaler(s), to induce the Retailer to display the magazines in a manner specified in this Program, and to compensate the Retailer for its effort and services in so displaying the magazines;
16. Retailer will, during the term of this agreement, display copies of each issue of the magazines sold by Distributor, full cover, for the entire on-sale period of each issue as long as its supply lasts, in accordance with the agreed upon display methods at checkout;
17. Retailer will provide Distributor with written authorization for each location at which the above described required display will be maintained. If the display provided is for more than one location, one agreement may be executed between Distributor and Retailer, provided that a list of all such locations is attached;
18. Racks must be either those supplied by Distributor or other racks approved by Distributor or its national distributor, Marketer; and
19. Payment shall be made at the rate of […]% of the cover price for each copy of the magazines excluding […] (the other agreement discussed above), sold by Retailer, provided that Retailer maintains the agreed upon display standards during the relevant time period. Retailer shall secure payments owed under the agreement from its servicing Wholesaler(s). The Retailer, and not the Wholesaler, is the person who is entitled to be paid the Allowance pursuant to the agreement, and the Wholesaler receives the Allowance from Distributor on behalf of the Retailer.
INTERPRETATION REQUESTED
You would like to know if GST/HST is applicable to the payments of the Allowance made by Marketer to the Retailers.
INTERPRETATION GIVEN
We are unable to provide you with a ruling without reviewing the relevant agreements between Distributor and Marketer. Without these agreements, we cannot determine the nature of the legal relationship between Distributor and Marketer. Specifically, we cannot confirm whether Marketer pays the Allowances to the Retailers, via the Wholesalers, on its own behalf or as the agent of Distributor. However, we are pleased to offer you the following GST/HST interpretation.
The Allowances paid to Retailers would generally be viewed as consideration for taxable supplies in respect of which GST/HST would generally be applicable, pursuant to section 165. However, if the Allowances meet the requirements of section 232.1, then they would not be regarded as consideration for a supply, and GST/HST would not apply.
In order to qualify as a promotional allowance for purposes of section 232.1, a particular registrant must acquire tangible personal property exclusively for supply by way of sale for a price in money in the course of the particular registrant’s commercial activities, and another registrant, who has made taxable supplies of the property by way of sale to the particular registrant or to another person, must also pay or provide a credit or discount to the particular registrant of an amount in return for the promotion by the particular registrant of the tangible personal property. Section 232.1 therefore requires that the person who sells the tangible personal property must also be the same person who pays or provides the credit or discount. Section 232.1 also requires that the person who undertakes promotional activities in respect of that property must be the same person who is paid or credited the promotional allowance.
For the purposes of section 232.1, we view the term “promotion” to mean efforts, activities or actions that directly or indirectly inform, persuade and influence the acceptance, distribution and sale/purchase of a product. As you are aware, GST/HST Policy Statement P-243, Promotional Allowances, explains the CRA’s general position on the application of section 232.1 to promotional allowances. This policy statement assists in determining whether a particular activity may be considered “promotion” for the purposes of section 232.1, as well as whether an amount that has been paid, credited, or allowed as a discount by a supplier is an amount paid in return for the promotion of a product by a retailer for the purposes of section 232.1.
It is our view that the Retailers’ provision of services to Distributor and/or Marketer, as described in the sample agreements summarized above, would be considered to be “promotion” for the purposes of section 232.1. The Allowance is in the nature of a “retail display or space allowance” as described in Policy Statement P-243: it is an amount paid to prominently display products in stores (e.g. to place products in strategic locations such as by the cash registers).
However, even in circumstances where activities in the nature of promotion occur, section 232.1 will not apply if all of the requirements of that section are not met. In order to satisfy all of the conditions described in section 232.1, the same registrant who makes taxable supplies of property to the reseller, or to another person, must also pay, credit, or allow a discount to the reseller. Without reviewing the relevant agreements between Distributor and Marketer, it is not possible to determine whether Marketer pays the Allowance to the Retailer on behalf of Distributor (i.e., the person making taxable supplies of property).
In order to ascertain the capacity in which Marketer pays the Allowance to the Retailers, you may wish to consult GST/HST Policy Statement P-182R, Agency. This policy provides guidance concerning the criteria that the CRA will apply in determining whether an agency relationship exists.
ADDITIONAL INFORMATION
Section 232.1 also requires that a promotional allowance must be paid to or credited in favour of the same registrant who will engage in the promotion of the tangible personal property that it acquired by way of sale from another registrant. This means that, in order for all of the requirements of section 232.1 to be met, Distributor must pay or credit the Allowance to the Retailer, and not to any other person. It is our view that the Retailer, and not the Wholesaler, is paid or credited the Allowance by Distributor, as it is the Retailer, and not the Wholesaler, who has a contractual right to receive the Allowance from Distributor.
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. A copy of Memorandum 1.4 has been included for your reference. 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 613-957-8221. 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,
Kathryn Sigetich
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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