3 September 2004 GST/HST Interpretation 48298 - Place of Supply of Services

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.

Dear XXXXX:

Thank you for your letter XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of services to a non-resident corporation. We apologize for the delay in replying.

The following information has been provided:

•   USco is a non-resident company incorporated in the United States and not incorporated or continued in Canada.

•   USco has a Canadian subsidiary, Canco, which is incorporated in Canada and is registered for GST/HST purposes.

•   Canco currently has XXXXX physical locations in Canada, none of which is located in the harmonized provinces. The services that are the subject of this case are performed at only one of Canco's locations.

•   USco's business consists of handling the consumer rebate and fulfillment process for its customers ("Vendorcos") who wish to outsource this aspect of their business. In general terms, USco receives and processes rebate applications, and mails out cheques and premiums, as the case may be. USco charges a fee to Vendorcos for performing this service.

•   Some of USco's services are in fact performed in Canada, by Canco, who charges a fee to USco.

•   The specifics of USco's services are as follows. USco enters into agreements with various Vendorcos, who are currently all U.S.-based companies. These Vendorcos manufacture and/or distribute a wide range of products in the U.S. and Canada, from personal care products to electronics and computer peripherals such as printers. Vendorcos frequently offer cash rebates and other incentives to purchasers, to promote sales of their particular product. These incentives may take the form of an actual rebate or refund of part of the purchase price of the good, or they may take the form of a gift, premium, or other item of tangible personal property. Purchases of Vendorcos' products may be made in either the U.S. or Canada.

•   Regardless of the type of incentive (cash or gift) offered, to obtain it, the purchaser of the product in question must complete a form with certain basic personal information, and provide proof of purchase of the particular item. Proof of purchase generally consists of part of the product packaging showing the bar code, and the receipt from the business from which the purchase was made.

•   The purchaser then mails the completed form and the proof of purchase to an address specified in the rebate/premium material, generally a post office box leased to USco and physically located in the U.S. Each Vendorco is assigned a unique post office box, so that any given post office box receives mail that relates to only one particular Vendorco.

•   Currently, the mail received by some of the U.S. post office boxes (i.e., relating to certain Vendorcos) is then forwarded to a Canco location in Canada. In the future, Canco may receive mail relating to certain Vendorcos directly, at Canadian post office boxes. In either case, Canco's role is to collect the mailings, open the envelopes, and review the information and proofs of purchase submitted to ensure that all of the requisite information has been provided.

XXXXX

•   USco maintains a database of all data relating to the rebate applications and applicants on USco's mainframe computer, which is located at its premises in the U.S. Canco accesses this database via a trunk line, which connects Canco to USco's mainframe computer, and enters into USco's database the information that purchasers have provided on their rebate or incentive application forms.

From its U.S. location, USco then proceeds to access the data that Canco has entered into USco's database, and performs final validation and processing functions. XXXXX.

•   USco then generates rebate cheques payable on behalf of the Vendorcos, and ships the premiums, which purchasers of Vendorcos' products have qualified to receive. USco packages the goods, generates mailing labels and any covering correspondence, and mails the rebate cheques and premiums to the recipients.

•   Once the customer data has been entered into the USco database from Canco's office, the original source documents are destroyed, typically after XXXXX days have elapsed.

Interpretation Requested

Whether the service supplied by Canco to USco is zero-rated pursuant to section 7 of Part V of Schedule VI to the Excise Tax Act (the "Act").

Interpretation Given

Based on the information provided, the supply made by Canco to USco is a taxable supply of a service made in Canada that is subject to GST at a rate of 7%.

A taxable supply of a service made in Canada is subject to GST at a rate of 7%, or HST at a rate of 15% if made in the participating province of Nova Scotia, New Brunswick or Newfoundland and Labrador) unless the supply is zero-rated.

Paragraph 142(1)(g) of the Act deems a supply of a service to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Pursuant to paragraph 142(2)(g) of the Act, a supply of a service is deemed to be made outside Canada if the service is, or is to be, performed wholly outside Canada. Based on the information provided, the supply of Canco's service is deemed to be made in Canada.

Section 7 of Part V of Schedule VI to the Act zero-rates a supply of a service when made to a non-resident person provided none of the exclusions of the provisions apply. In relation to this case, paragraph 7(e) of that same part and schedule excludes from zero-rating a service "in respect of" tangible personal property that is situated in Canada at the time the service is performed.

As set out in GST/HST policy statement P-169R (P-169R Meaning of "in respect of real property situated in Canada" and "in respect of tangible personal property that is situated in Canada at the time the service is performed", for purposes of Schedule VI, Part V, sections 7 and 23 to the Excise Tax Act), and GST/HST Memorandum Series, Section 4.5.3, Exports - Services and Intellectual Property, the CRA's position is that there must be more than a mere indirect or incidental connection between a service and the underlying tangible personal property before the supply of the service will be considered to be "in respect of" the property and consequently excluded from zero-rating. Whether the relationship between the service and the property is sufficiently direct to be "in respect of" the property will depend on the particular circumstances of each case.

The following guidelines will be applied to determine whether the connection between the service and the tangible personal property is sufficiently direct for the service to be "in respect of" the property for purposes of paragraph 7(e) of Part V of Schedule VI to the Act:

(a) Whether the service is designed, developed or undertaken to fulfil or serve a particular need or requirement arising from or relating to the tangible personal property, which involves determining the purpose or objective of the service.

(b) Whether the relationship between the purpose or objective of the service and the tangible personal property is direct rather than indirect. If some object comes between the service and the property, the connection becomes increasingly remote.

A service and tangible personal property would generally be regarded as being "in respect" of each other pursuant to the above guidelines if the purpose of a service is to:

•   physically count the property;

•   appraise or value the property;

•   physically protect or secure the property; or

•   enhance the value of the property.

Furthermore, if the service is aimed at effecting or dealing with the transfer of ownership of, claims on or rights to the tangible personal property, or determining title to the property, the service will generally be regarded as in respect of the property, and will therefore be excluded from zero-rating.

Based on the information provided, the service supplied by Canco to USco is directly related to the physical documentation (i.e. the application forms and proofs of purchase) that it receives and is therefore excluded from zero-rating under paragraph 7(e) of Part V of Schedule VI to the Act. The service to be supplied by Canco is undertaken to deal with a particular need directly relating to the documentation that is submitted. The service to be performed by Canco goes beyond the mere entry of data. The focus of the service in this case is the documentation. Specifically, the object of the service supplied by Canco is to verify the documents that product purchasers have submitted, which involves the performance of tasks such as XXXXX. The data to be entered into USco's database merely reflects the verification service supplied by Canco.

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) 952-8810.

Yours truly,

Patrick McKinnon
Manager
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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