15 June 2005 GST/HST Interpretation 54494 - Meaning of the Terms "Program" and "Recreational" for Purposes of 16/III/V to the Excise Tax Act

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, the copy of the franchise agreement and a sample letter from a manufacturer (Supplier) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Our understanding of the facts is as follows:

1. You are a franchisor (the Franchisor) XXXXX.

2. The Franchisor entered into XXXXX agreement with the Supplier who produces a zero-rated product (the product), which is purchased by Franchisees either directly from the Supplier or from a distributor who purchases the product from the Supplier.

3. The Franchisor is not a party to the product purchase transactions.

4. The Supplier pays an amount under a rebate structure, which, according to the letter from the Supplier to the Franchisor, is based on the number of kilograms of the product. It is stated in your letter XXXXX that the rebates are volume related and based on the aggregate purchases by the Franchisees. It is not clear from the documentation available to us whether the rebate is paid to the Franchisor or the Franchisee.

5. The Supplier views the rebate amounts as a price adjustment in the selling price of the product. As such, the Supplier believes the payments made under the rebate structure are not subject to tax since the product is zero-rated.

6. The Franchisor, on the other hand, is of the view that these amounts are consideration for a taxable supply of a service made by the Franchisor to the manufacturer/Supplier.

7. XXXXX the Franchise Agreement:

(i) requires the Franchisees to sell products approved or designated by the Franchisor;

(ii) requires the Franchisee to purchase products from the Franchisor or suppliers designated by the Franchisor; and

(iii) provides that, where the Franchisor designates sources of supply, the Franchisor may accept a management or rebate fee paid by a supplier. This fee is paid to the Franchisor for the responsibility it has assumed in ensuring that supplies are of maximum quality, for obtaining volume purchasing advantages, standardization and ready availability of supplies XXXXX.

8. XXXXX the Franchise Agreement allows the Franchisor to retain the whole amount of volume discounts or rebate fees received by the Franchisor from a designated supplier whether or not the discounts or rebates are paid on purchases made by the Franchisor on its own account or on purchases made by the Franchisees on their own accounts.

Interpretation Requested

Should the Franchisor, when receiving the amounts under the rebate structure, charge GST to the manufacturer/Supplier on these amounts?

Interpretation Given

As stated in the Supplier's letter to the Franchisor, the Supplier and the Franchisor have agreed to a rebate structure for the supply of the product, which will be purchased by the distributors or the Franchisees. The letter sets out a rebate structure that is based on the number of kilograms of product (presumably sold by the Supplier). An additional loyalty reward per kilogram is to be paid XXXXX. The letter does not state to whom the rebate will be paid.

The Supplier treats the rebate as a reduction in price of a zero-rated product with no GST consequences. The Franchisor considers the rebate to be consideration for a taxable supply made by the Franchisor to the Supplier. However, there is nothing in the letter from the Supplier to the Franchisor to indicate that the Supplier is receiving any property or services from the Franchisor for which the payments are being made.

In our view, the Franchisor is making a taxable supply of a service. However, based on the information and documentation provided, we are unable to conclude with certainty whether the supply is being made by the Franchisor to the Supplier or to the Franchisees. A copy of a sample agreement between the Franchisor and a Supplier was not available. However, the available information and documentation indicate that it is more likely the Franchisor is making a taxable supply of a service (for example, ensuring that supplies are of maximum quality, obtaining volume purchasing advantages standardization and ready availability of supplies, etc.) to the Franchisees.

The consideration the Franchisor receives for having supplied this service is the management or rebate fee referred to in XXXXX the Franchise Agreement. This subparagraph indicates that for having undertaken certain responsibilities, the Franchisor shall be entitled to any payment of these fees when made by Suppliers. This has led us to conclude that rebate fees as contemplated in XXXXX the Franchise Agreement XXXXX, which would normally be paid to the Franchisees, are to be redirected to the Franchisor in accordance with XXXXX.

The wording in the Franchise Agreement does not specifically state that the Franchisee is liable to pay the Franchisor for the rebate fees, but given that the Franchise Agreement specifies that the Franchisor may accept such fees when paid by the Supplier again leads us to conclude the recipient of the supply of the Franchisor's service is the Franchisee. The Franchisor would be required to charge GST to the Franchisees.

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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7931.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate.

2005/06/06 — RITS 54863 — Change in Input Tax Credit Methodology - ITC Restrictions - Subsection 225(3) of the Excise Tax Act (ETA)