8 September 2005 Excise Interpretation 54085 - Application of Excise Tax on Repairs of Jewellery

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:

This is in reply to your letter XXXXX in which you asked us to clarify the application of the excise tax to repairs of jewellery and to servicing of customer owned jewellery. Our comments are set out below.

(Note: The Federal Budget of February 23, 2005, contained a measure which phases out the excise tax on jewellery by March 1, 2009. Effective February 24, 2005, the rate of tax dropped from 10% to 8% and will drop by 2% every March 1 thereafter, until the rate of tax is 0% on March 1, 2009.

It must be emphasized that this measure affects only the rate of excise tax on jewellery. There will be no change with respect to the structure or operation of this tax during the four-year phase out period. Licensees must comply fully with their obligations under the Excise Tax Act ("ETA"); that is, they must self-assess on their taxable sales, file returns regularly and remit tax, as required.

Accordingly, all references to the excise tax rate in this letter cover the period February 24, 2005 - March 1, 2006. The rate of tax in subsequent periods will follow the Budget measure, described above.)

Background

XXXXX is a retail jewellery store and does not have an excise tax licence. It either purchases finished jewellery from licensed suppliers or imports finished jewellery from overseas. In either case, XXXXX pays excise tax on the finished jewellery, as required.

As part of the services it offers to customers in it's retail operation, XXXXX undertakes to have repairs and other services performed on customer owned jewellery by third parties that are licensed for excise tax. The licensed third parties charge XXXXX excise tax on these operations and XXXXX asks whether they are, in fact, correct in charging the tax.

Scenario 1

XXXXX sends out customer owned jewellery (generally gold or silver) to licensed third parties to perform such typical repairs as

•   soldering broken chains or bracelets;

•   repairing, tightening or replacing clasps;

•   re-tipping, re-clawing; re-shanking or re-sizing rings;

•   polishing and cleaning of jewellery; and

•   other similar types of repairs on pre-existing jewellery.

What is the tax treatment of these operations?

Response

Pursuant to subsection 23(1) of the ETA, there is a 8% excise tax on the manufacture or production in Canada or importation into Canada of goods listed in Schedule I of the ETA. Goods listed in Schedule I include clocks and watches having a value of $50 or more, jewellery, precious and semi-precious stones and goldsmiths' and silversmiths' products. (Goldsmiths' and silversmiths' products exclude gold-plated and silver-plated ware for the preparation or serving of food or drink.)

Pursuant to subsection 23(2) of the ETA, the tax is payable by the manufacturer of the goods or by the importer of the goods.

The repairing of goods is not considered to be manufacture or production. "Repair" is meant to convey the concept that used goods, through the replacement of worn, damaged or inadequate parts, are restored to a serviceable condition. The goods remain essentially unchanged except that their useful life has been prolonged.

The operations on jewellery, described above, are repairs to jewellery. Therefore, since these are repairs and not manufacture or production, there would be no excise tax payable on them.

Scenario 2

Your customer brings in an item of jewellery (for example, a ring, pendant or bracelet), having lost or chipped one or more stones that were on the ring, etc. The customer wants the stone(s) replaced. He supplies you with similar or alternate stones taken from another old piece of his jewellery and the jewellery mounting and asks you to set the replacement stone(s). You have this work completed by a licensed third party.

Is this a non-taxable repair or does excise tax apply?

Response

(This response is based on the assumption that the setting and mounting is done in Canada.)

In this scenario, the licensed manufacturer is required to apply the 8% excise tax on the charge made under the contract for setting and mounting the stones.

Paragraph 23(11)(c) deems a person who, in Canada, has set or mounted one or more diamonds or other precious or semi-precious stones, real or imitation, in a ring, brooch or other article of jewellery, to have manufactured or produced the ring, brooch or other article of jewellery in Canada.

Subsection 23(1) indicates that the excise tax is payable on the sale price of jewellery manufactured or produced in Canada.

Subsection 23(3.1) indicates, essentially, that where a person, under a contract for labour, manufactures taxable goods from any article or material supplied to him by an unlicensed person, then the first person is deemed to have sold the goods to the unlicensed person at a sale price equal to the charge under the contract.

Therefore, in this scenario, pursuant to paragraph 23(11)(c), the licensed manufacturer who is performing the setting and mounting of the stones is deemed to have manufactured the item of jewellery. Further, pursuant to subsections 23(3.1) and 23(1), the licensed manufacturer is deemed to have sold the jewellery to you and he must charge 8% excise tax on his fee under the contract.

Scenario 3

The same facts apply as described in Scenario 2, above, except that you supply the replacement stone.

Is this a non-taxable repair or does excise tax apply?

Response

(This response is based on the assumption that the setting and mounting is done in Canada.)

All the legislative provisions described in Scenario 2, above, apply in Scenario 3 and the result is the same. Pursuant to paragraph 23(11)(c), the licensed manufacturer who is performing the setting and mounting of the stones is deemed to have manufactured the item of jewellery. Further, pursuant to subsections 23(3.1) and 23(1), the licensed manufacturer is deemed to have sold the jewellery to you and he must charge 8% excise tax on his fee under the contract.

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

If you have any further questions or require clarification of the above matter, please do not hesitate to contact me, at telephone number (613) 957-1140 XXXXX.

Yours truly,

Pauline Greenblatt
Rulings Officer
Excise Taxes
Excise Duties and Taxes Division
Excise and GST/HST Rulings Directorate

2005/09/22 — RITS 63685 — Exemption Request - Financial Guarantee Insurance