Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
XXXXX:
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XXXXX
FROM:
Larry Springstead
Rulings Officer
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST Rulings
320 Queen St, 14th Floor
Ottawa, ON
K1A 0L5
CASE NUMBER:
104218
DATE:
January 6, 2009
SUBJECT:
_GST/HST Interpretation
XXXXX Trade credits
This refers to your XXXXX and the letter XXXXX, sent to you by XXXXX concerning the GST treatment of trade credits issued by XXXXX
You would like to know the application of the GST to XXXXX operations as described below. All legislative references are to the Excise Tax Act (ETA).
Facts
From a review of the above-mentioned letter from XXXXX, we have summarized the pertinent facts as follows:
1) XXXXX, a GST registrant, engages in corporate barter and the supply of media time. XXXXX receives supplies from various companies in exchange for "trade credits". The trade credits traded by XXXXX in these transactions are barter units. In this correspondence trade credits are referred to as barter units. Barter units are accepted by XXXXX as partial consideration, to a maximum of XXXXX%, of the consideration for the supply of media time sold by XXXXX or goods and services from other parties. They may also be exchanged with third parties who also participate in XXXXX barter exchange program for supplies of goods or services.
2) XXXXX operates this barter exchange network by creating an internal account in the name of the client, and recording in that account the barter units acquired and used by the client in transactions. XXXXX states that the entries are for tracking purposes only and not treated as accounting entries. They are not reflected in XXXXX financial statements.
3) The standard terms and conditions governing XXXXX supply of barter units in exchange for products and the client's exchange of the units in acquiring goods and services from XXXXX are as follows: In consideration for the purchase of products, barter units are supplied to a client for an amount equal to the purchase price of the products plus GST. The barter units are denominated in dollars. To illustrate, in XXXXX of XXXXX, a GST registrant, XXXXX acquires various food products. As full consideration for the products, XXXXX credits XXXXX $XXXXX barter units, inclusive of GST.
4) Notwithstanding the reference in #3 above to GST being included in the amount used to calculate the total barter unit value in a particular client transaction, XXXXX collects no GST on the supply of the barter units and no GST is collected by the client when surrendering inventory in exchange for the barter units. Further, where barter units are tendered by a client as partial payment for a supply, no GST is collected.
5) GST is, however, collected by XXXXX on its supply of media time based on the full consideration, including the value of trade credits tendered.
6) XXXXX has not been designated pursuant to section 181.3 of the Excise Tax Act as an administrator of a barter exchange network.
Comments
There are two barter transactions in this scenario. The first transaction is the supply of the trade credits by XXXXX in exchange for a supply of inventory by XXXXX client. The second transaction is the supply of advertising services by XXXXX in exchange for barter units and money from the client.
XXXXX position is that GST does not apply to the supply of barter units, and they should be considered as a gift certificate, money, a debt security or as coupons.
Whether Gift Certificates
Under section 181.2 the issuance or sale of a gift certificate is deemed not to be a supply and when given as consideration for a supply a gift certificate is deemed to be money.
Gift certificates are not defined in the ETA. However, the TCC stated that a gift certificate cannot have conditions placed on its use. For example, where a bearer has to spend an amount of money as a condition of use, the voucher is not a gift certificate.
In the case at hand, XXXXX limits the total percentage of the consideration that can be paid with trade credits to XXXXX% of the consideration for supplies of advertising services from XXXXX. The remaining XXXXX% of the consideration must be paid in cash. Trade credits worth $XXXXX cannot be used to acquire $XXXXX media time, but can only be used to acquire $XXXXX media time by paying $XXXXX in cash in addition to the trade credits. Consequently, the trade credits at issue do not qualify as gift certificates.
Further, it is our opinion that the legislators did not intend for barter units to be considered gift certificates under the ETA. This is evidenced by the amendment to the ETA, effective November 10, 1998, adding section 181.3 which created a legislative scheme to deal with barter exchange networks. If barter units were considered gift certificates, this amendment would not have been necessary.
Whether Money or a Financial Service
The taxpayer claims that trade credits could also be considered money. For GST purposes, money is defined in subsection 123(1) to include "any currency, cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument, whether Canadian or foreign, but does not include currency the fair market value of which exceeds its stated value as legal tender in the country of issuance or currency that is supplied or held for its numismatic value." Barter units do not fall within the above definition of "money".
The taxpayer argues further that the issuance of the barter units is the issuance of a financial instrument, the supply of which is a financial service, exempt under Part VII of Schedule V to the ETA. Debt security is defined in subsection 123(1) as a right to be paid money and includes a deposit of money, but does not include a lease, licence or similar arrangement for the use of, or the right to use, property other than a financial instrument. Subsection 181.3(6) deems the supply, receipt or redemption of a barter unit for purposes of Part IX not to be a financial service. Therefore, the supply of a barter unit is not considered a financial service.
Financial obligations representing a right to be paid money are by definition a debt security for GST/HST purposes. A debt security generally includes a deposit of money, debentures, notes, convertible notes, mortgages, treasury bills, bonds, etc. It also includes book debts and accounts receivable.
Barter units that can only be used as partial payment in a corporate barter transaction would not be characterized as money, a debt security or any other type of financial instrument as defined in the ETA.
Whether Coupons
The last argument of the taxpayer is that the barter units are non-reimbursable coupons under subsection 181(3). Under this position, at redemption, XXXXX would treat a barter unit as a coupon representing a partial cash payment that does not reduce the value of the consideration for the supply made by XXXXX, under subparagraph 181(3)(a)(ii). This would permit XXXXX to claim a notional input tax credit of the tax content of the value of the trade credits.
Section 181 defines a coupon to include a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit. Trade credits that are barter units are specifically excluded from being considered a coupon under section 181. Therefore the trade credits are not coupons.
Whether a Store Credit
Another possible treatment which requires addressing is whether the barter units are in fact merely the equivalent to a store credit. For this to be so would require XXXXX to maintain books and records which reflect that the trade credits held by clients are a financial liability.
XXXXX maintains records for the trade credit system which they state is for tracking purposes only. The trade credits are not reflected in XXXXX financial statements. Trade credits are valued in money and it would not be difficult to express the value of the trade credit liability monetarily for financial reporting purposes. The fact that XXXXX has chosen to not do so leads us to determine that the barter units are not store credits.
In addition, barter units can be tendered as consideration for a supply by another member when purchasing supplies from other members. If the barter units were the equivalent to a store credit, their use would have to be limited to transactions with XXXXX only. In short, the trade credits at issue are not considered to be store credits.
CRA Position
Based upon the information provided, XXXXX appears to be administering a barter exchange network. The network is not designated under section 181.3 of the ETA, and they have not applied for designation. We have been provided with invoices but were not provided with any written agreements between XXXXX and network members. If there are, in fact, no written agreements, the absence of written agreements may preclude a barter exchange network from being designated under the ETA. However, the absence of agreements does not preclude the existence of a network.
The consequences of being a non-designated barter exchange network are as follows:
(i) Supply of barter units in exchange for inventory
There are two transactions for which there are GST consequences, the supply of barter units by XXXXX when given as consideration for a supply of inventory and the supply of the inventory by the member. Barter units represent a right and are intangible personal property. The supply of the barter units is subject to the GST.
The supply of the inventory to XXXXX in exchange for barter units is also subject to the GST where the supply is made by a registrant. (Where the inventory is comprised of zero-rated goods, the consideration for the supply is taxable at 0%.) The transaction is a barter transaction and GST is payable and collectible by both parties if registrants based on the fair market value of the supply as explained below.
Where the consideration for a supply whether in whole or in part is other than money, paragraph 153(1)(b) of the ETA applies. That provision reads:
153(1) Value of consideration - Subject to this Division, the value of the consideration, or any part thereof, for a supply shall, for the purposes of this part, be deemed to be equal to ...
(b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made.
XXXXX must keep proper documentation in support of the determination of this fair market value.
On the assumption that the value of a trade credit is confirmed under audit to be one trade credit per one Canadian dollar, in the case of XXXXX between XXXXX and XXXXX:
(a) XXXXX would be required to remit to the crown $XXXXX x 7/107 = $XXXXX with its first return after XXXXX.
(b) XXXXX would also be required to remit to the crown the same amount of GST as tax paid by XXXXXon XXXXX supply of the inventory.
(ii) Supply of trade credits and cash by a member in exchange for media time
Where the barter units are supplied as a partial payment for media time supplied by XXXXX there is another barter transaction XXXXX charges and collects tax on the supply of advertising and the member, if a registrant, charges and collects tax on the supply of trade credits to XXXXX.
In the case of XXXXX, XXXXX uses the trade credits valued at $XXXXX plus $XXXXX to purchase media time of $XXXXX from XXXXX. XXXXX is required to collect GST calculated at 7% (a XXXXX transaction) from XXXXX. XXXXX is required to collect GST on the value of the trade credits at the same rate.
If you have questions on the foregoing, please contact me at (613) 952-9220.
Larry Springstead
Industry Sector Specialist
Specialty Tax Unit
Financial Institutions and Real Property Division
2009/01/14 - RITS 106371 - Sale of New House by XXXXX
UNCLASSIFIED
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