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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 107248
Business Number: [...]
January 12, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
Direct sellers and host gifts
Thank you for your fax of August 4, 2008, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of [...] [(the products)] to your independent sales contractors who, in turn, supply the [products] to hosts as host gifts. Your request has been transferred to our office for reply. We apologize for the delay in responding to your enquiry.
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.
Statement of Facts
From your fax and our telephone conversations of December 11, 2008, December 23, 2008 and October 1, 2009, we understand that:
• [...] (the Company) is incorporated under the laws and jurisdiction of the province of [...] and is located in [....]. The Company is a direct seller for GST/HST purposes and is approved to use the alternate collection method (the Method) for direct sellers. The Company has not made a joint application with a distributor to use the Method.
• The Company sells its exclusive products [...] through independent sales contractors (the Contractors) who, in turn, sell the products to purchasers. The Contractors have entered into agreements with the Company, under which the Contractors have a contractual right to purchase the exclusive products from the Company.
• The Contractors solicit, negotiate and enter into contracts for the sale of the exclusive products at their private residences or through events held at the private residences of purchasers; the Contractors do not solicit, negotiate or enter into contracts for the sale of the exclusive products at a fixed place of business.
• The Contractors are not employees, agents, joint venturers, partners or any such legal representatives of the Company.
• The Company provides host gifts as incentives to persons who act as host at an event (e.g., a party) that is organized for the purpose of allowing a Contractor to promote or distribute the Company's exclusive products. Typically, the Company's exclusive products are provided as host gifts.
• The value of the host gift that the host is entitled to receive, which is referred to as the "host credit", is based on the amount of exclusive products sold at the host's party. The Company and the Contractor do not confirm in writing the value of the host credit or the amount of exclusive products sold at the host's party. The Contractor tells the host the value of the host credit and the host chooses a host gift at the end of the party or the next day. Then, the Contractor places an order on-line for the exclusive products selected by the host and the purchasers.
• The host gift, up to the value of the host credit, is supplied by the Company for no charge to the Contractor who, in turn, supplies the host gift free of charge to the host.
• The current practice of the Company is to charge GST/HST to the Contractor on the suggested retail price (the Price) of the host gift and, in turn, the Contractor collects tax from the host.
• For example, Host A has a party at Host A's home in [Participating Province X] and earns a host credit of $300 based on sales of exclusive products worth $1,000 made by the Contractor to purchasers at the party. At the end of the party, Host A may choose a free host gift from the Company's catalogue with a Price of $300.
Ruling Requested
You would like to know how to account for the HST in the example, if Host A chooses:
1. a host gift with a Price of exactly $300;
2. a host gift valued at a Price of only $295 and Host A loses the remaining $5 host credit; or
3. a more expensive host gift valued at a Price of $350 and Host A pays the difference of $50 (i.e., $350 less $300) to the Contractor.
Pursuant to GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) will issue a ruling only when the person requesting the ruling has provided all the relevant facts of a transaction or series of transactions. Refer to paragraph 32 of this memorandum for details on what information should be provided with the request for a ruling. GST/HST Memorandum 1.4 is available on the CRA's Website at:
http://www.cra-arc.gc.ca/formspubs/typ/menu-eng.html.
Interpretation Given
The Method - Tax Accounting:
The Method simplifies the operation of the GST/HST for direct sellers and their contractors. When a direct seller has approval to use the Method, the direct seller charges and accounts for GST/HST on the sale of its taxable (other than zero-rated) exclusive products to contractors on the suggested retail price of the exclusive [products]. Under the Method, it is as if the direct seller, and not the contractor, had made the sale to the purchaser. The direct seller accounts for the GST/HST (i.e., calculated on the suggested retail price of the exclusive product) in its net tax calculation for the reporting period in which the direct seller supplies the exclusive product to the contractor.
Even if the contractor is a registrant, the contractor cannot claim an input tax credit or a rebate for tax paid in error to recover the GST/HST paid to the direct seller. When the contractor sells the exclusive product to a purchaser, the contractor charges the GST/HST but does not account for the tax. By keeping the amount of tax, the contractor recovers the GST/HST paid to the direct seller on the initial purchase of the exclusive product.
The Method - Host Gifts:
A host gift is property supplied by a contractor to a person (i.e., a host) for the service of hosting an event organized for the promotion or distribution by the contractor of exclusive products of a direct seller to purchasers. The person is deemed not to have supplied a service to the contractor, and the service is deemed not to be consideration for a supply of the host gift by the contractor. Generally, this means that the host, if a registrant, is not required to charge and account for GST/HST on the value of the host gift received, and the contractor is not required to charge and account for GST/HST on the value of the service received from the host. Usually, the host gift is an exclusive product of the direct seller, although it may also be an item that is not an exclusive product.
Where the host gift is an exclusive product, the direct seller charges and accounts for the GST/HST on the supply of the exclusive product to contractors on the suggested retail price of the product, even if the direct seller supplies the host gift to the contractor for no consideration. Afterwards, the direct seller may deduct an amount in determining its net tax, as explained below, when the contractor supplies the exclusive product to the host as a host gift.
Contractor supplying an exclusive product as host gift for equal to, or less than, the host credit:
When a contractor supplies an exclusive product to a host as a host gift for equal to, or less than, the host credit, the direct seller may, in determining its net tax, deduct an amount equal to the difference between
• the GST/HST calculated on the suggested retail price of the exclusive product at the time the direct seller supplied the exclusive product to the contractor, and
• the GST/HST calculated on the consideration paid by the contractor
provided that the direct seller charged and accounted for GST/HST on the supply of the exclusive product to the contractor.
The direct seller may claim the deduction only if it pays or credits the same amount to the contractor. The direct seller must claim the deduction on line 107 of a GST/HST return filed within four years after the due date of the return for the reporting period in which the direct seller pays or credits the amount to the contractor. The direct seller has to keep documentary evidence that it paid or credited the amount to the contractor.
Scenario 1:
In this scenario, Host A has a party at his/her home in [Participating Province X] and earns a host credit of $300 based on sales of exclusive products worth $1,000 made by the Contractor to purchasers at the party. At the end of the party, Host A chooses a host gift with a Price of exactly $300 from the Company's catalogue of exclusive products.
The Company is required to charge and collect HST on the Price of $300 (i.e., 13% of $300 = $39 HST) for the exclusive product (i.e., host gift) that it supplied to the Contractor. The Contractor pays $39 HST to the Company who, in turn, accounts for that HST in its net tax calculation and reports the amount on line 103 of its GST/HST return for the reporting period in which it supplied the exclusive product to the Contractor.
When the Contractor supplies the exclusive product to Host A as a host gift for equal to the host credit, the Contractor does not collect HST from Host A. Since the Contractor has not recovered the HST it paid to the Company, the Company may choose to pay or credit an amount equal to an amount calculated by the formula below (i.e., the formula used to calculate the amount of the deduction). Where the Company does pay or credit the amount to the Contractor, the Company may then take a deduction for the amount equal to tax that it has paid or credited the Contractor in respect of the exclusive product supplied as a host gift to Host A for equal to the host credit.
The amount of the deduction is equal to the difference between the HST calculated on:
• the Price of the exclusive product at the time the Company supplied the exclusive product to the Contractor, (i.e., 13% of $300 = $39 HST); and
• the consideration paid by the Contractor (i.e., 13% of $0 = $0).
Therefore, the amount of the deduction is $39 (i.e., $39 - $0).
The Company may take a deduction in its net tax calculation and report the amount on line 107 of its GST/HST return for the particular reporting period in which the payment or credit is given, or in a return filed within four years after the day on or before which the return for the particular reporting period is required to be filed.
Scenario 2:
In this scenario, Host A has a party at his/her home in [Participating Province X] and earns a host credit of $300 based on sales of exclusive products worth $1,000 made by the Contractor to purchasers at the party. At the end of the party, Host A chooses a host gift with a Price of $295 from the Company's catalogue of exclusive products.
The Company is required to charge and collect HST on the Price of $295 (i.e., 13% of $295 = $38.35 HST) for the exclusive product (i.e., host gift) that it supplied to the Contractor. The Contractor pays $38.35 HST to the Company who, in turn, accounts for that HST in its net tax calculation and reports the amount on line 103 of its GST/HST return for the reporting period in which it supplied the exclusive product to the Contractor.
When the Contractor supplies the exclusive product to Host A as a host gift for less than the host credit, the Contractor does not collect HST from Host A. The $5 unused host credit lapses and there are no tax consequences.
Since the Contractor has not recovered the HST it paid to the Company, the Company may choose to pay or credit an amount equal to an amount calculated by the formula below (i.e., the formula used to calculate the amount of the deduction). Where the Company does pay or credit the amount to the Contractor, the Company may then take a deduction for the amount equal to tax that it has paid or credited the Contractor in respect of the exclusive product supplied as a host gift to Host A for less than the host credit.
The amount of the deduction is equal to the difference between the HST calculated on:
• the Price of the exclusive product at the time the Company supplied the exclusive product to the Contractor (i.e., 13% of $295 = $38.35 HST); and
• the consideration paid by the Contractor (i.e., 13% of $0 = $0).
Therefore, the amount of the deduction is $38.35 (i.e., $38.35 - $0).
The Company may take a deduction in its net tax calculation and report the amount on line 107 of its GST/HST return for the particular reporting period in which the payment or credit is given, or in a return filed within four years after the day on or before which the return for the particular reporting period is required to be filed.
Contractor supplying an exclusive product as host gift for more than the host credit:
When a contractor supplies an exclusive product to a host as a host gift for more than the host credit, the direct seller may, in determining its net tax, deduct an amount equal to the difference between
• the GST/HST calculated on the suggested retail price of the exclusive product at the time the direct seller supplied the exclusive product to the contractor, and
• the GST/HST calculated on the consideration paid by the host
provided that the direct seller charged and accounted for GST/HST on the supply of the exclusive product to the contractor.
The direct seller may deduct the amount only if it pays or credits the same amount to the contractor. The direct seller must claim the deduction on line 107 of a GST/HST return filed within four years after the due date of the return for the reporting period in which the direct seller pays or credits the amount to the contractor. The direct seller has to keep documentary evidence that it paid or credited the amount to the contractor.
Scenario 3:
In this scenario, Host A has a party at his/her home in [Participating Province X] and earns a host credit of $300 based on sales of exclusive products worth $1,000 made by the Contractor to purchasers at the party. At the end of the party, Host A chooses a host gift with a Price of $350 from the Company's catalogue of exclusive products.
Since Host A has chosen a host gift for a Price that is $50 more than the host credit ($350 - $300 = $50), the Company charges and collects $50 from the Contractor.
When the Company supplies the exclusive product (i.e., host gift) to the Contractor, the Company charges and collects $50 plus the HST of $45.50 (i.e., 13% of $350 = $45.50) for a total of $95.50. The Contractor pays $95.50 to the Company who, in turn, accounts for the $45.50 HST in its net tax calculation and reports the amount on line 103 of its GST/HST return for the reporting period in which it supplied the exclusive product to the Contractor.
When the Contractor supplies the exclusive product to Host A as a host gift for more than the host credit, the Contractor collects $50 plus HST of $6.50 (i.e., 13% of $50) for a total of $56.50. The Contractor keeps $56.50 to recover the $50 that it paid to the Company for the exclusive product and to recover $6.50 towards the $45.50 HST that it paid to the Company.
Since the Contractor has not recovered the full HST it paid to the Company, the Company may choose to pay or credit an amount equal to an amount calculated by the formula below (i.e., the formula used to calculate the amount of the deduction). Where the Company does pay or credit the amount to the Contractor, the Company may then take a deduction for the amount equal to tax that it has paid or credited the Contractor in respect of the exclusive product supplied as a host gift to Host A for more than the host credit.
The amount of the deduction is equal to the difference between the HST calculated on:
• the Price of the exclusive product at the time the Company supplied the exclusive product to the Contractor (i.e., 13% of $350 = $45.50 HST); and
• the consideration paid by the host (i.e., 13% of $50 = $6.50).
Therefore, the amount of the deduction is $39 (i.e., $45.50 - $6.50).
The Company may take a deduction in its net tax calculation and report the amount on line 107 of its GST/HST return for the particular reporting period in which the payment or credit is given, or in a return filed within four years after the day on or before which the return for the particular reporting period is required to be filed.
Paying or Crediting a Contractor
As discussed above, the Company is required to account for the GST/HST calculated on the Price of the exclusive product (i.e., host gift) supplied to the Contractor. However, the Company may take a deduction for an amount equal to tax that it has paid or credited the Contractor in respect of the exclusive product (i.e., host gift) supplied to the host.
Please note that the Company is not required to pay or credit the GST/HST charged or collected from the Contractor on the host gifts. It is at the Company's discretion whether to pay or credit the tax.
However, where the Company chooses to pay or credit the tax, it must report two transactions on its GST/HST return. For example, the Company includes the amount of GST/HST charged on the supply of the exclusive product to Contractors, calculated on the Price of the exclusive product, on line 103 of its return, and if the Company chooses to pay or credit an amount to the Contractor in respect of the subsequent supply of the exclusive product as a host gift, the Company may take a deduction for that amount on line 107 of its return. The Company must have documentary evidence to support the paying or crediting of tax.
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 CRA with respect to a particular situation. Future changes to the Excise Tax Act, 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 613-954-9700. 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,
Michèle Routhier
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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