31 August 2004 GST/HST Interpretation 50657 - Deferred Finance Mortgage Revenue

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 legal services supplied in Canada by your firm.

One of your clients is a manufacturer that is a non-registered non-resident person within the meaning of the Excise [T]ax Act (ETA).

Your firm has supplied in Canada, to your non-resident client the Non-Resident, legal services related to product liability claims with respect to diesel engines manufactured outside Canada by your client. Specifically, your firm has defended your client against such product liability claims.

Interpretation Requested

In referring to 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), you would like confirmation of whether legal services such as those supplied by your firm to non-residents in defending them against product liability claims are subject to GST or are zero-rated pursuant to section 23 of Part V of Schedule VI of the ETA.

If such services are zero-rated, you would like confirmation of how your firm may reimburse your non-resident client for the GST on the supply of the legal services.

Interpretation Given

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

Paragraph 142(1)(g) of the ETA 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 ETA, a service is deemed to be made outside Canada if the service is, or is to be, performed wholly outside Canada.

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 (TPP) 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.

As set out in GST/HST policy statement P-169R, for purposes of paragraph 23(c) of Part V of Schedule VI to the ETA, the CRA's position is that there must be more than a mere indirect or incidental connection between a service and the underlying TPP before the supply of the service will be considered to be "in respect of" TPP and consequently excluded from zero-rating. Whether the relationship between the service and the TPP is sufficiently direct to be "in respect of" the TPP will depend on the particular circumstances of each case.

As set out in the policy, the following guidelines will be applied to determine whether the connection between the service and the TPP is sufficiently direct for the service to be "in respect of" the TPP for purposes of paragraph 23(c) of Part V of Schedule VI to the ETA:

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

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

A service and TPP 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 TPP;

•   appraise or value the TPP;

•   physically protect or secure the TPP; or

•   enhance the value of the TPP.

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

Product liability claims against manufacturers generally arise as a result of injury caused to the plaintiff by the manufacturer's potentially defective product. To the extent that such claims arise as a result of the existence of a particular product, there can be a connection between the legal service and the product. However, legal services supplied to a manufacturer to defend against a product liability claim are not generally considered to be directly connected to the product, but rather directly connected to the manufacturer's objective of defending itself against the claim to minimize its potential legal liability. Therefore, the connection between the legal service and the product giving rise to the product liability claim would generally be indirect and would not be excluded from zero-rating under paragraph 23(c) of Part V of Schedule VI of the ETA on the basis of being a service in respect of TPP that is in Canada at the time the service is performed.

Where it is established that your firm has charged or collected GST on a zero-rated supply of legal services made to a non-resident person, subsection 232(1) of the ETA provides that where a person has charged or collected an excess amount as or on account of tax, the person may adjust, refund or credit the excess amount to the recipient within two years after the day the excess amount was so charged or collected. Where an amount is so adjusted, refunded or credited by a person subsection 232(3) of the ETA requires the person to issue within a reasonable time a credit note to the recipient for the amount of the refund or credit (unless the recipient issues a debit note) containing information prescribed under the Credit Note and Debit Note Information (GST/HST) Regulations. The amount of excess tax adjusted, refunded, or credited may be deducted in determining the net tax of the supplier for the reporting period in which the credit note is issued to the recipient, to the extent that the amount has been inclued in determining the net tax for the reporting period or a preceding reporting period.

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

2004/08/06 — RITS 50921 — Application of GST to Supply of Electricity Under Contract for Differences