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
April 11, 2011
Case Number: 107248r
Business Number: [...]
Dear [Client]:
Subject:
GST/HST INTERPRETATION - REVISED LETTER
Direct sellers and host gifts
We are writing in response to your fax of February 2, 2011, in which you clarified certain facts relating to your company's host gift transactions. We had previously set out the facts, as we understood them, in our Goods and Services Tax (GST)/Harmonized Sales Tax (HST) interpretation letter of January 12, 2011.
As discussed with [...] and yourself on February 11, 2011, this letter revises our interpretation letter of January 12, 2011, because of the changes to the facts that were clarified in your fax and confirmed during this phone call.
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
Based on your faxes of August 4, 2008, and February 2, 2011, and our telephone conversations of [...], we understand that:
• [...] (the Company) is incorporated under the laws and jurisdiction of [...] [Province X] and is located in [...] [City 1, Province Y]. 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, directly to the host. The Company does not supply the host gifts to the Contractors for supply to the hosts.
• The current practice of the Company is to charge GST/HST to the host, calculated on the suggested retail price (the Price) of the host gift, which the Contractor collects from the host on the Company's behalf.
• For example, Host A has a party at Host A's home in [Participating Province Z] 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 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 with a Price of only $295 and Host A loses the remaining $5 host credit; or
3. a more expensive host gift with 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
Tax Accounting Using the Method:
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 product. 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 GST/HST 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.
Host Gifts Using the Method:
For purposes of the Method, 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 GST/HST 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.
Generally, 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, when the contractor supplies the exclusive product to the host as a host gift.
In your case, the rules for the application of GST/HST to supplies of host gifts under the Method, as described in the two preceding paragraphs, cannot be used since the Company supplies the host gifts directly to the hosts rather than to the Contractors for supply to the hosts (as would normally be the case when host gifts are accounted for under the Method). Instead, the normal GST/HST rules, as explained below, apply to supplies of host gifts made by the Company.
Host Gifts Using the Normal GST/HST Rules:
Generally, every recipient of a taxable supply (except a zero-rated supply) made in Canada must pay the GST/HST in respect of the supply calculated on the value of the consideration for the supply. A taxable supply is a supply made in a commercial activity which does not include exempt supplies. Exempt supplies are supplies listed in Schedule V. Zero-rated supplies are taxable supplies at the rate of 0% and are listed in Schedule VI.
For GST/HST purposes, a "supply" includes the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. In your case, the Company is making a supply of a host gift in exchange for a supply of a host service.
For GST/HST purposes, "consideration" includes any amount that is payable for a supply by operation of law. An 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. In your case, the consideration for the Company's supply of the host gift is the amount of any money payable by the host and the value, in terms of money, of the host's service.
According to section 153, the value of consideration, or any part of the consideration, for a supply is considered to be equal to:
(a) where the consideration or that part is expressed in money, the amount of the money; and
(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.
As mentioned, a direct seller who cannot use the Method to account for the GST/HST on the host gift is making a taxable supply of a host gift directly to the host for GST/HST purposes, and must use the normal rules to charge and account for tax on the supply. In the case where the direct seller does not charge and collect money from the host, then in accordance with subsection 153(1), the direct seller is making a taxable supply of a host gift for consideration, the value of which is equal to the fair market value of the host's service. As a result, the direct seller is required to charge and account for GST/HST on its taxable supply (except a zero-rated supply) of the host gift, calculated on the fair market value of the host's service.
In the case where the direct seller charges and collects money from the host, in addition to receiving the host's service, then in accordance with subsection 153(1), the direct seller is making a taxable supply of a host gift for a total consideration, the value of which is equal to:
(a) the amount of money payable by the host; and
(b) the fair market value of the host's service, determined at the time the host gift is supplied.
As a result, the direct seller is required to charge and account for GST/HST on its taxable supply (except a zero-rated supply) of the host gift, calculated on the total of the amount of money payable by the host and the fair market value of the host's service.
Similarly, the host is making a supply of a host service for consideration, the value of which is equal to the fair market value of the host gift. Note that if the host is a GST/HST registrant and supplying the host service in the course of a commercial activity, then the host is required to charge and account for GST/HST on its taxable supply of the host service, calculated on the fair market value of the host gift.
Scenario 1:
In this scenario, Host A has a party at his/her home in [Participating Province Z] 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 making a taxable supply of the host gift for consideration, the value of which pursuant to paragraph 153(1)(b), is equal to the fair market value of Host A's service of acting as a host at the party. Therefore, the Company is required to charge and account for the HST on its taxable supply of the host gift, calculated on consideration that is equal to the fair market value of Host A's service.
Host A is making a supply of a host service for consideration, the value of which is equal to the fair market value of the host gift. Therefore, if Host A is a GST/HST registrant and is supplying the host service in the course of a commercial activity, then Host A is required to charge and account for the HST on its taxable supply of its host service, calculated on consideration that is equal to the fair market value of the host gift.
Scenario 2:
In this scenario, Host A has a party at his/her home in [Participating Province Z] 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. Host A loses the remaining $5 host credit.
The Company is making a taxable supply of the host gift for consideration, the value of which pursuant to paragraph 153(1)(b), is equal to the fair market value of Host A's service of acting as a host at the party. Therefore, the Company is required to charge and account for the HST on its taxable supply of the host gift, calculated on consideration that is equal to the fair market value of Host A's service.
Host A is making a supply of a host service for consideration, the value of which is equal to the fair market value of the host gift. Therefore, if Host A is a GST/HST registrant and is supplying the host service in the course of a commercial activity, then Host A is required to charge and account for the HST on its taxable supply of its host service, calculated on consideration that is equal to the fair market value of the host gift.
Scenario 3:
In this scenario, Host A has a party at his/her home in [Participating Province Z] 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 Host A.
In this case, the Company is making a taxable supply of a host gift to Host A for a total consideration, the value of which in accordance with subsection 153(1), is equal to:
(a) the amount of money payable by Host A; and
(b) the fair market value of Host A's service of acting as a host at the party, determined at the time the host gift is supplied.
The Company is required to charge and account for the HST on its taxable supply of the host gift, calculated on consideration that is equal to the total of the amount of money payable by Host A and the fair market value of Host A's service.
Host A is making a supply of a host service for consideration, the value of which is equal to the fair market value of the host gift. Therefore, if Host A is a GST/HST registrant and is supplying the host service in the course of a commercial activity, then Host A is required to charge and account for the HST on its taxable supply of its host service, calculated on consideration that is equal to the fair market value of the host gift.
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 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 613-954-9700. 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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