24 March 2005 GST/HST Interpretation 31539 - Temporary Importation of Amusement Rides

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:

The following is further to XXXXX letter and our latest telephone conversation of XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to an incentive card program. We apologize for the delay in replying to the request.

Background

USCo is a non-resident of Canada that is engaged in the business of providing incentive programs. USCo does not have any offices or employees in Canada.

USCo has a wholly owned Canadian subsidiary (Cansub) that is incorporated in and, therefore, resident in Canada. Cansub does not have any offices or employees in Canada.

For Canadian-based clients, Cansub enters into agreements with the clients to provide employee incentive programs. Pursuant to the agreements, Cansub services, invoices and collects payments from the clients. For clients based in the United States (US) who have employees in Canada, USCo enters into one contract covering both US and Canadian operations. However, the contract provides that the Canadian and US employees are serviced and invoiced separately. In this regard, Cansub services, invoices and collects payments from the Canadian operations and USCo services, invoices and collects payments from the US operations.

Cansub solicits sales to clients in Canada through USCo's US-based sales force. All contracts are approved in the US by a USCo employee who is also an officer and director of Cansub. Cansub may enter into an agreement directly with a client or Cansub may enter into an agreement with an authorized distributor (Dealerco) who is also resident in Canada and, in turn, enters into an agreement with the client.

Under an employee incentive program, Cansub provides cards that resemble credit cards to the client's employees. The cards are loaded with points equal to a dollar value that is determined under the agreement entered into by the client and Cansub. In addition to the points loaded on the cards, Cansub may, for re-loadable cards, subsequently increase the number of points on the card upon receiving instructions and payment from the client. For example, if an employee meets certain sales targets, the client may pay Cansub an amount to have points added to the employee's card.

The information concerning the number of points on a card, the addition of points, their redemption, etc. is stored on a card authorization system that is owned by a credit card issuer (Creditco). Creditco processes all of the information relating to the points in the US.

The client's employees may use the points to acquire goods or services at participating merchants. Before providing the goods or services, the merchant obtains an authorization from Creditco, verifying the value of the points on the card in order to complete the transaction. Where there are insufficient points on a card, the employee pays to the merchant the additional amount owing using cash or a credit card to acquire the goods or services.

The participating merchants have entered into contractual relationships with Cansub to accept the points. The goods and services acquired by the employees are not supplied directly by Cansub. Generally, the merchants pay a commission to Cansub for the right to participate in the program. Cansub invoices and collects the commission directly from the merchants.

Upon redeeming the points, the merchant is paid by Creditco an amount equal to the value of the points redeemed less the agreed upon Creditco discount. Cansub then settles the amount with Creditco by paying Creditco the full value of the points redeemed by the merchants. The funds used by Cansub to pay Creditco are held in a Canadian bank account. There is no inter-company cash flow between USCo and Cansub in respect of the points. The only inter-company supplies are the possible supplies of materials from USCo to Cansub.

The cards are transferable so that persons, other than the employees, may redeem the points contained on the cards for goods or services. Once the points are exhausted, the cards are of no value to the employees.

Cansub sells the re-loadable cards to the client for a price per card that is equal to the sum of the value of the points initially loaded on the card, a fixed amount per card (e.g., $5) and a percentage of the value of the points (e.g., 15%). For example, if the value of the points on a re-loadable card is $50, the total price of the card is $62.50, which is $12.50 in fees ($5 + $7.50 {15% of $50}) plus $50 (the value of the points). For the non-reloadable cards, Cansub charges a fixed fee per card (e.g., $1.50) plus the value of the points loaded on the card.

As indicated above, Cansub (or USCo) may enter into a contract with Dealerco who brings a client opportunity to Cansub. Dealerco is recruited by USCo's US-based sales force. In these cases, Dealerco enters into an agreement for the incentive program with the client. Even where USCo is the entity contracting with Dealerco, Cansub will invoice and collect any payments from Dealerco and its clients.

Under the arrangement with Dealerco, Cansub sells the re-loadable cards to Dealerco for an amount equal to the sum of the value of the points initially loaded on the cards, a fixed wholesale amount per card (e.g., $3) plus a percentage of the value of the points (e.g., 5%). Dealerco will, in turn, sell the cards to its client for an amount equal to the sum of the value of the points initially loaded on the cards, a fixed retail price per card (e.g., $5) plus a percentage of the value of the points (e.g., 15%). Accordingly, Dealerco earns the spread between the retail and wholesale price. In some cases, Cansub invoices Dealerco's clients directly at the retail price and collects those payments. Cansub will then pay Dealerco the "spread". Alternatively, Dealerco may bill its client for the cards and remit the amount collected less its "spread" to Cansub. As with re-loadable cards, the amount of the fixed fee charged to Dealerco for the non-reloadable cards is less than the retail price so that Dealerco also has an opportunity to earn a "spread" for these cards.

Cardco, an unrelated non-resident, non-registered supplier sells the cards to Creditco. Creditco, in turn, sells the cards to Cansub. The terms of the sale of the cards to Cansub provide that the ownership of the cards transfers at the delivery destination. The value of the cards consists of the material value of the cards and the amount of points loaded onto the cards. The points are loaded onto the cards as soon as Cansub receives payment from its client.

Under the agreements with its clients, Cansub delivers or arranges for the delivery of the cards to their clients' employees. The cards are generally shipped directly from Cardco to Cansub's clients' employees in Canada. At the time the cards are sent from Cardco they are loaded with points. In some cases, the cards may be shipped in bulk to Dealerco. Creditco bills USCo for the cards that are for use by US employees and Cansub for cards that are for use by Canadian employees. Where the cards are imported in bulk, the importer of record is Cansub who will have its customs broker pay GST and applicable duties at the border.

At the time the cards are sent out, Cansub also supplies the client's employees with a card packet that contains a directory listing the merchants where the points may be redeemed and instructions on how to use the card. USCo purchases these materials and charges Cansub for their portion.

Creditco purchases summary report services from third party service providers, which it, in turn, supplies to USCo and Cansub. Periodic summary reports are sent to Cansub's clients and their clients' employees. All of the third party service providers are situated in the US and all of their services performed in respect of the program are performed in the US.

Cansub may create a Web site to provide information to Canadian clients and their employees. In the future, Cansub may sell goods and/or services through the Web site. Alternatively, USCo may set up the Web site.

Interpretations Requested

You have requested that we confirm the following statements:

1. USCo is not required to register and Cansub is required to register for the GST/HST.

2. The supply of cards and associated materials is not subject to GST/HST where mailed by Cardco directly to Cansub's client in Canada.

3. GST/HST is payable at the border on cards and materials imported in bulk on their physical value (i.e., not including their point value).

4. To the extent Cansub is engaged in commercial activities, it may recover any GST/HST paid in respect of the cards and materials. To the extent Cansub is not engaged in commercial activities, it is not required to self-assess GST/HST on the value of the cards and materials mailed directly to its clients in Canada.

5. Under the employee incentive program, Cansub is making taxable supplies of intangible personal property (IPP) i.e., the points, and separate supplies of the accompanying property and services i.e., the per card fee and percentage of points value fee.

6. There is no difference in the treatment of non-reloadable cards versus re-loadable cards.

7. The supply of the physical cards and materials is incidental to the supply of services provided in the course of administering the program such that the application of GST/HST to the fees charged are determined by the place of supply rules for services. Therefore, Cansub is not required to charge HST to clients in the HST provinces on the points nor the fees.

8. If the supply of points is considered to be the supply of money, the additional fees retain their taxable status because these fees relate to separate supplies made by Cansub. Cansub is entitled to claim input tax credits (ITCs) to the extent that it incurs expenses in respect to the provision of cards, materials and administrative services. As few expenses relate directly to the provision of points but rather relate to the accompanying property and services, Cansub may generally claim ITCs with a pro-ration to the extent expenses relate to both the provision of points and the property and services.

9. The supplies made by Dealerco are similar to those made directly by Cansub. The amount charged by Dealerco to Cansub in respect of the "spread" is also subject to GST/HST.

10. The redemption of the points is treated in the same manner as coupons. Accordingly, Cansub may claim ITCs equal to 7/107ths (15/115ths in the HST provinces) of the points redeemed as long as the goods and services acquired by the employees are not zero-rated. The merchants should apply GST/HST to the full price of the goods and services acquired by the employees before deducting the value of the points.

11. Cansub is required to charge and collect GST/HST on commissions earned from Canadian merchants.

12. The settlements between Creditco and the merchants and Creditco and USCo are financial services and are not subject to GST/HST. The settlements do not affect Cansub's ITC entitlement.

13. Please advise whether there are any implications if Cansub is the issuer of the cards versus USCo or Creditco.

Interpretations Given

In the absence of the documentation that we have requested, we are providing the following interpretation based on the limited information available. As a result, our comments may not be applicable to your client's specific fact situation.

1. Pursuant to subsection 240(1) of the Excise Tax Act (ETA), a non-resident person who does not carry on any business in Canada is not required to register for the GST/HST under that subsection. The determination of whether a non-resident person is carrying on business in Canada is a question of fact to be determined on a case-by-case basis by reference to all relevant facts. The Canada Revenue Agency's (CRA's) position is based on the consideration of various factors as described in the draft GST/HST Policy Statement P-051R2, Carrying on Business in Canada, which was released for public comment in September 2004.

USCo

Generally, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. Based on the limited information provided and the application of the factors in the draft version of P-051R2, USCo would likely not be considered to be carrying on business in Canada and consequently, not required to register for GST/HST purposes.

Cansub

Assuming that Cansub is not a small supplier for GST/HST purposes, Cansub is required to register pursuant to subsection 240(1) of the ETA if it is making taxable supplies in Canada in the course of its commercial activities in Canada.

2. The supplies of the cards and related materials by Cansub to its clients are taxable supplies made in Canada and subject to GST/HST pursuant to section 165 of the ETA. The fact that the cards are mailed to the client's employees in Canada by Cardco does not alter the tax status of the cards supplied by Cansub. Further information regarding the place of supply rules and the application of the GST/HST are provided under item #7 below.

3. Where Cansub imports, in bulk, cards that are loaded with points and Cansub is liable under the Customs Act to pay duty or would be so liable if the cards were subject to duty, Cansub is required to pay GST calculated at the rate of 7% of the value of the cards pursuant to section 212 of the ETA. Subsection 215(1) of the ETA provides that the value of the cards for GST/HST purposes is their value as would be determined under the Customs Act for purposes of calculating duties whether the cards are in fact subject to duty, and the amount of any duties and taxes payable under any law relating to customs. GST is payable on the importation regardless of whether they are imported in bulk or individually. Based on the information provided and consultations with officials from the Canada Border Services Agency (CBSA), the value for duty will be determined by the CBSA based on the transaction value method. For further information regarding the determination of the value of the cards using this method you may refer to the following CBSA publications: Memorandum D13[-]4-1, "Transaction Value" Method of Valuation (Customs Act, Section 48), and Memorandum D13-4-3, Customs Valuation: Price Paid or Payable (Customs Act, Section 48).

4. Subsection 169(1) of the ETA sets out the general rule for determining ITCs. Generally, where property or a service is acquired or imported for consumption, use or supply by a registrant, the registrant is entitled to claim an ITC equal to the fraction of the tax paid or payable on the acquisition or importation that represents the extent to which the property or service is for consumption, use or supply in a commercial activity of the registrant. Sections 141.1, 141.01, etc. also provide for a number of deeming and allocation rules. Cansub may claim ITCs for the GST/HST paid or payable in respect of the cards and related materials acquired or imported for supply only to the extent that all the requirements for claiming ITCs are met.

5. It is the CRA's position that, for GST/HST purposes, the determination of whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies is based on a determination of fact. The CRA uses the following principles to determine whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies.

i) Every supply should be regarded as distinct and independent.

ii) A supply that is a single supply from an economic point of view should not be artificially split.

iii) There is a single supply where one or more elements constitute the supply and any remaining elements serve only to enhance the supply.

Multiple supplies generally occur when one or more of the elements can sensibly or realistically be broken out. Conversely, two or more elements are part of a single supply when the elements are integral components; the elements are inextricably bound up with each other; the elements are so intertwined and interdependent that they must be supplied together; or one element of the transaction is so dominated by another element that the first element has lost any identity for fiscal purposes.

It is our view that in this situation, because the elements are so intertwined, the supply being made is a single supply of points. As such, Cansub is making taxable supplies of IPP. The per card fee and the percentage fee based on the value of the points loaded onto the card are part of the consideration payable for the supply of the points made by Cansub. The information packet is also an element that is part of the supply of the points.

6. The application of the GST/HST is based on a determination of fact. The non-reloadable and re-loadable cards are characterized as supplies of IPP. It is our view that there is no difference in the treatment of the re-loadable and non-reloadable cards at the time the supplies are made.

7. There are place of supply rules for determining whether a supply that is made in Canada is made in a participating province. If a taxable (other than zero-rated) supply is made in a participating province, tax at the HST rate of 15% must be collected on that supply.

Section 144.1 of the ETA provides that a supply is deemed to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX, made in the province. In any other case, the supply is deemed to be made outside of the province. A supply that is made in Canada and that is not made in a participating province is deemed to be made in a non-participating province.

The supply made by Cansub is a single supply of IPP based on the information provided. The relevant place of supply rules for supplies of IPP are in section 1 and paragraphs 2(d) and 3(d) of Part III of Schedule IX to the ETA.

Subparagraph 2(d)(i) of Part III of Schedule IX to the ETA states that a supply of IPP is considered to be made in a province if all or substantially all of the "Canadian rights" (that part of the IPP that may be used in Canada) in respect of the IPP may be used only in the province. Subparagraph 2(d)(ii) of Part III of Schedule IX to the ETA states that a supply of IPP will be considered to be made in a province if the "place of negotiation" of the supply is in the province, and the property may be used otherwise than exclusively outside the province. The "place of negotiation" is the location of the supplier's permanent establishment at which the individual principally involved in negotiating for the supplier the agreement for the supply ordinarily works or reports to in the performance of his or her duties relating to the supplier's activities in the course of which the supply is made and "negotiating" includes the making or acceptance of an offer.

Where there are no restrictions regarding the province in which the right can be used, it will always be the case that the right can be used otherwise than exclusively outside the province where the place of negotiation occurred. Therefore, where there are no restrictions regarding where the Canadian rights in respect of the IPP may be used and it is determined that the place of negotiation is outside Canada, the supply of the IPP that is made in Canada is considered to be made in a non-participating province.

8. "Money" is defined in subsection 123(1) of the ETA to include "any currency, cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument, whether Canadian or foreign, but does not include currency the fair market value of which exceeds its stated value as legal tender in the country of issuance or currency that is supplied or held for its numismatic value."

As indicated above, it is our view that the supply of the points is a supply of IPP and not the supply of money. The points in question are not currency as the points are not a medium of exchange issued by a country as legal tender. The points can only be redeemed with specified merchants. In addition, points are not considered cheques, promissory notes, letters of credit, drafts, traveller's cheques, bills of exchange, postal notes, money orders, postal remittances and other similar instruments, as these instruments are all issued for the purposes of paying a debt or to transfer funds upon the credit of the issuer.

Information regarding ITCs is included under item #4 above.

9. The supplies of the cards made by Dealerco are similar to those made directly by Cansub. Under the arrangement, these are taxable supplies of IPP made by Cansub to Dealerco, and taxable supplies of IPP made by Dealerco to their client (i.e., the resale of the cards). The GST/HST is calculated on the value of the consideration for those supplies, which may include the "spread" as described in the background information provided above. Where Cansub collects the amounts payable by Dealerco's clients on Dealerco's behalf, there is no GST/HST payable in respect of the amounts collected by Cansub that are paid by Cansub to Dealerco as these amounts are not consideration for a supply made by Dealerco to Cansub. Dealerco is required to pay GST/HST to Cansub in respect of all the cards acquired from Cansub for supply to Dealerco's clients.

10. Subsection 181(1) of the ETA defines "coupon" to include a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit (within the meaning of section 181.3). The CRA has taken the position that the definition of "coupon" is broad enough to encompass intangible devices that have the characteristics of a traditional paper coupon. Therefore, it is our view that the points (rather than the card upon which the points are loaded) are coupons for GST/HST purposes.

Acceptance of the "points" at Participating Merchants

When the points are presented and accepted at participating merchants in Canada, it is our view that the coupon rules found in section 181 of the ETA will apply at the time that a point is accepted by a registrant merchant.

The CRA has taken the view that where points are redeemed, subsection 181(4) of the ETA would generally apply. The rationale is that a point does not entitle the recipient of the supply to a reduction of the price of the property or service equal to a fixed dollar amount or a fixed percentage specified in the coupon. Therefore subsections 181(2) or 181(3) of the ETA cannot apply.

Subsection 181(4) of the ETA provides that where a registrant accepts, in full or partial consideration for a supply of property or a service, a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and paragraphs 181(2)(a) to (c) of the ETA do not apply in respect of the coupon, the value of the consideration for the supply shall be deemed to be the amount, if any, by which the value of the consideration for the supply as otherwise determined for the purposes of Part IX of the ETA exceeds the discount or exchange value of the coupon.

In other words, when a participating merchant, who is a registrant, accepts points (i.e., coupons) for property or services, subsection 181(4) of the ETA applies. Pursuant to this subsection, the consideration for the property or service is reduced by the value of the points before the GST/HST is applied. Furthermore, the merchant who accepts the points is not entitled to claim an ITC in respect of the value of the points, as there is no portion of the amount associated with the value of the points that includes GST/HST.

Redemption of the "points"

Subsection 181(5) of the ETA permits a registrant, who redeems a coupon from a registrant vendor who accepted it, to claim an ITC in respect of the tax amount included in the coupon value, when all the requirements of the provision are met.

For subsection 181(5) of the ETA to apply, a supplier who is a registrant, must have accepted, as full or partial consideration for a taxable supply of a property or a service, a coupon which was exchanged for the property or service or which entitled the recipient of the supply to a reduction of, or a discount on, the price of the property or service and a particular person at any time must have paid in the course of their commercial activity an amount to the supplier for the redemption of the coupon.

Since Cansub is not paying an amount to the participating merchant for the redemption of the points, subsection 181(5) of the ETA does not apply. Furthermore, if Cansub was paying an amount to the merchant for the redemption of the points, paragraph 181(5)(c) of the ETA would not apply as the coupon in question (i.e., the points) do not entitle the recipient to a reduction of the price of the property or service equal to a fixed dollar amount specified in the coupon. As a result, there are no ITCs available to Cansub under this provision.

11. Based on the information provided, and without a copy of any agreement between Cansub and a participating merchant, it appears that Cansub may be providing the Canadian merchants with a right to participate in the program. The amount payable by the merchant for the right to participate in the program is referred to as a commission and is based on the merchant's sales. As such, it appears that the Canadian merchants are the recipients of taxable supplies of IPP that are made in Canada and pursuant to section 221 of the ETA, Cansub is required to collect the GST/HST payable in respect of those supplies which is calculated on the value of the consideration for those supplies.

12. Without the applicable agreements, we are unable to comment on the settlements between Creditco and the merchants and Creditco and USCo. It is possible that the settlements between Creditco and USCo are outside the scope of the tax if the transactions are made outside Canada.

13. There may be GST/HST implications if Cansub is the issuer of the cards versus USCo or Creditco. However, this query is too general based on the information provided. We would require more information specific to the anticipated transactions in order to properly address these situations.

The foregoing comments represent our general views with respect to the subject matter. Proposed amendments to the ETA, 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 Chapter 1.4 of the GST/HST Memoranda Series, do not bind the CRA with respect to a particular situation.

We would be pleased to examine any agreements in detail to provide further information that may assist in the application of Part IX of the ETA. Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613)-954-7945.

Yours truly,

Susan Mills
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2005/03/09 — RITS 43546 — [Application of the GST/HST on Membership Fees and Other Transactions of a Non-profit Organization]