18 October 2004 General Information Letter 46388 - GENERAL INFORMATION LETTER Fees for automated banking services (ATM)

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.

Excise and GST/HST Rulings Directorate Place de Ville, Tower A, 15th floor 320 Queen Street Ottawa ON K1A 0L5
XXXXX XXXXX XXXXX	Case Number: 46388
XXXXX XXXXX	October 18, 2004

Subject:

GST/HST INTERPRETATION ITC Entitlement related to reimbursed amounts by a non-resident

Dear XXXXX:

Thank you for your letter XXXXX, the fax XXXXX and various email correspondence concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the reimbursement of expenses related to your client's activities. We apologize for the delay in responding.

The following information was taken from your letter, fax and emails:

1. Your client, XXXXX, is located in the province of XXXXX and is a GST/HST registrant XXXXX.

2. XXXXX is fully owned by XXXXX. XXXXX is a non-resident and not registered for the GST/HST.

3. XXXXX produces and sells machinery as well as moulds for the XXXXX industry around the world.

4. XXXXX has full time sales representatives located in Canada actively promoting XXXXX products. Products sold by XXXXX to Canadian customers are shipped from the US to Canada and attract the GST/HST on importation.

5. XXXXX produces and sells moulds, mould replacement parts, and machine parts for XXXXX machines.

6. XXXXX has its own sales staff working promoting XXXXX products.

7. XXXXX processes the payment of legal invoices, sales related expenses related to the activities of XXXXX sales staff, and import transactions fees connected to the supply and importation of machines by XXXXX. The legal expenses relate to a matter between XXXXX and one of their salespersons XXXXX. The benefit of the supplies giving rise to the various expenses is enjoyed completely by XXXXX.

8. The amounts are charged to XXXXX through an XXXXX and the amounts, including the GST/HST, are entirely reimbursed to XXXXX.

Interpretation Requested

1. Whether XXXXX is entitled to an input tax credit (ITC) for the tax paid on the legal, sales and import expenses.

2. Whether the reimbursement of the amounts is zero-rated.

Interpretation Given

As explained below based on the information provided, XXXXX would not be entitled to an ITC for the tax paid on the expenses in question. Furthermore, XXXXX would not be required to collect GST/HST on the reimbursement of the expenses where it is established that the expenses were either incurred by XXXXX as an agent of XXXXX or they represent consideration for zero-rated services.

1. ITC Entitlement

Pursuant to subsection 169(1) of the Excise Tax Act (the "ETA"), where a person acquires or imports property or a service for consumption, use or supply in the course of its commercial activities, the person is entitled to an ITC for the tax payable by the person as a registrant in respect of the supply or importation.

Pursuant to section 165 of the ETA, every recipient of a taxable (other than a zero-rated) supply made in Canada is required to pay the GST on the supply at a rate of 7% or HST at a rate of 15% where the supply is made in the participating province of New Brunswick, Nova Scotia or Newfoundland. Generally, the "recipient" of a supply is defined under subsection 123(1) of the ETA as the person who is liable to pay the consideration for the supply.

In determining who the recipient of a supply is, and who may therefore be entitled to an ITC for any tax payable on the supply, it is necessary to determine whether the supply is acquired by a person on its own behalf or as an agent on behalf of another person (a "principal"). If an expense is incurred as an agent on behalf of a principal, it is the principal who is considered to be the recipient and to have incurred the expense. The agent in this case is not entitled to an ITC for the tax on the expense.

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. Agency exists where the principal authorizes the agent to represent it and take certain actions on its behalf. The authority granted by the principal may be expressed or implied. In other words, an agency relationship may be created where one person explicitly consents to having another act on its behalf or behaves in such a way that consent is implied. Situations may arise where the agent does not disclose that it is acting as agent at all. The law does not require a person who is acting as an agent to disclose this fact to a third party. An agency relationship may be found to exist even where the third party is not aware of the identity of the principal or that there even is a principal.

The CRA's understanding of the application of the law that applies in determining whether an agency relationship exists, is further outlined in the enclosed Policy Statement P-182R, Agency. In particular, the policy sets out the "essential qualities of agency" that may be used to help determine whether a transaction is made by an agent on behalf of a principal. As further explained in the policy, these qualities relate to the consent of the parties, the agent's authority and the principal's control.

If XXXXX acquires supplies as XXXXX agent, these supplies would be considered made to XXXXX and not XXXXX. XXXXX would not be entitled to an ITC for the tax paid on such expenses as XXXXX would not be the recipient of the supplies.

If XXXXX acquires supplies or imports property otherwise than as XXXXX agent, XXXXX would only be entitled to an ITC for the tax in respect of the supplies or importation of the property if the supplies are acquired or the property is imported for consumption, use or supply in the course of XXXXX commercial activities. Based on the information provided, the supplies giving rise to the expenses in question were not acquired by XXXXX for consumption, use or supply in the course of its commercial activities but rather in the course of the commercial activities of XXXXX. XXXXX would consequently not be entitled to an ITC for the tax paid on the expenses in this case.

With respect to the tax paid on the importation of goods supplied by XXXXX, XXXXX would not be entitled to an ITC for that tax under subsection 169(1) of the ETA, as it is not considered to have imported the goods for consumption use or supply in the course of its commercial activities.

Based on the information provided, it would only be the recipient of the supply made by XXXXX, if a registrant, that would potentially be entitled to an ITC for the tax on the importation of the goods. Where the goods are delivered by XXXXX to a registrant recipient in Canada, section 180 of the ETA may apply to allow the recipient to claim an ITC for the tax. Generally, section 180 of the ETA provides that where an unregistered non-resident supplies goods to a registrant and delivers those goods to the recipient in Canada, the registrant is deemed to have paid the tax on a supply of the goods for ITC purposes provided the non-resident provides the registrant with satisfactory evidence that the tax has been paid. Please note that there are proposed GST/HST amendments, which were announced on October 3, 2003, in relation to the entitlement of persons to claim ITCs for the tax paid on goods supplied outside Canada and imported. These proposed amendments do not affect the application of section 180 of he ETA. For further information, please refer to the enclosed Department of Finance Press Release.

Where it is established that XXXXX is the recipient of a particular supply, it is important to note that certain supplies of services made to non-residents are zero-rated as exports pursuant to the provisions found in Part V of Schedule VI to the ETA.

Section 23 of Part V of Schedule VI to the ETA zero-rates a supply of an advisory, professional or consulting service made to a non-resident person, but not including a supply of

(a) a service rendered to an individual in connection with criminal, civil or administrative litigation in Canada, other than a service rendered before the commencement of such litigation;

(b) a service in respect of real property situated in Canada;

(c) a service in respect of tangible personal property that is situated in Canada at the time the service is performed; or

(d) a service of acting as an agent of the non-resident person or of arranging for, procuring or soliciting orders for supplies by or to the person.

A supply of legal services made to a non-resident person can qualify for zero-rating under this provision provided none of the exclusions in paragraphs 23(a) to (d) of Part V of Schedule VI to the ETA apply.

Section 5 of Part V of Schedule VI zero-rates a supply made to a non-resident person of a service of acting as an agent of the person or of arranging for, procuring or soliciting orders for supplies by or to the person, where the service is in respect of

(a) a supply to the non-resident person that is zero-rated as an export; or

(b) a supply made outside Canada by or to the non-resident person.

A supply of a sales representative service or a custom brokerage service made to a non-resident person supplied by an agent, such as a customs broker, would qualify for zero-rating where the conditions of section 5 of Part V of Schedule VI to the ETA are met. In this regard, it should be noted that subsection 143(1) of the ETA deems a supply of personal property or a service made in Canada by a non-resident person, who is also not required to register for the GST/HST, to be made outside Canada. This includes where the non-resident has made a supply of goods by way of sale that are delivered or made available to the recipient in Canada.

Section 7 of Part V of Schedule VI to the ETA zero-rates a supply of a service made to a non-resident person, but not including a supply of

(a) a service made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply;

(a.1) a service that is rendered to an individual while that individual is in Canada;

(b) an advisory, consulting or professional service;

(c) a postal service;

(d) a service in respect of real property situated in Canada;

(e) a service in respect of tangible personal property that is situated in Canada at the time the service is performed;

(f) a service of acting as an agent of the non-resident person or of arranging for, procuring or soliciting orders for supplies by or to the person;

(g) a transportation service; or

(h) a telecommunication service.

A supply of a service such as an administrative service made to a non-resident person can qualify for zero-rating under this provision provided that none of the exclusions in paragraphs 7(a) to (h) of Part V of Schedule VI to the ETA apply.

For further information on zero-rated supplies of services, please refer to the enclosed publication GST/HST Memoranda Series 4.5.3 Exports - Services and Intellectual Property.

If XXXXX acquires a particular supply of a service otherwise than as agent of XXXXX, that supply will not qualify for zero-rating, pursuant to the export provisions in Part V of Schedule VI of the ETA, as the supply is not considered made to a non-resident.

Under subsection 232(1) of the ETA, a supplier who has charged or collected an excess amount as or on account of tax may adjust, refund or credit the excess amount to the recipient within two years from the day on which the excess amount was charged or collected. Subsection 232(3) of the ETA provides that where a supplier adjusts, refunds or credits an amount in favour of, or to a recipient in accordance with subsection 232(1) of the ETA, the supplier shall, within a reasonable time, issue a credit note to the recipient containing prescribed information, for the amount of the adjustment, refund or credit. Alternatively, the recipient may issue a debit note to the supplier containing the prescribed information. The credit or debit note must contain the information required pursuant to the Credit Note and Debit Note Information (GST/HST) Regulations (copy enclosed). The amount of tax adjusted, refunded, or credited may be deducted in determining the net tax of the supplier for the reporting period of the suppler in which the credit note is issued to the recipient to the extent that the amount has been included in determining the net tax for the reporting period, or a preceding reporting period of the supplier.

If the supplier does not adjust, refund or credit the recipient the excess tax, the recipient may apply for a rebate of the excess amount. Section 261 of the Act provides in part, that where a person pays an amount as or on account of tax in error that is later found not to be payable, subject to certain restrictions, the person may apply for a rebate of that amount within two years from the day the amount was paid. The application form for this rebate is GST189, General Application for Rebate of Goods and Services Tax (GST)/Harmonized Sales Tax (HST).

2. Tax Status of the Reimbursement Amounts

The GST/HST does not apply to reimbursements made by a principal to its agent for amounts paid by the agent on the principal's behalf. Therefore, if XXXXX acquires a supply as an agent on behalf of XXXXX, the reimbursement of the expense incurred as an agent by XXXXX in relation to that supply is not subject to GST/HST.

Generally, where a person acquires a supply made in Canada otherwise than as agent, the reimbursement to the person of the amount of the expense incurred in relation to the supply is subject to the GST/HST. However, if it is established that the supply for which the reimbursement is made is zero-rated when resupplied to a non-resident, such as under the previously explained export provisions, the reimbursement of the amount will not be subject to tax.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-4294.

Yours truly,

Donato Licursi
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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