25 September 2006 GST/HST Interpretation 78835 - Determination of Whether a Separate Supply Occurs upon the Exercise of a Lease Renewal Clause

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 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to herbal teas manufactured and sold by your company.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Effective July 1, 2006, the rate of the GST has been reduced from 7% to 6% and the rate of the HST from 15% to 14%. The new rates apply to supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date. Specific transitional rules apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to Reduction in the Rate of the GST/HST - Questions and Answers (http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html) on the CRA Web site.

Statement of Facts

We understand the facts to be as follows:

1. You are the manufacturer of various herbal teas.

2. You submitted photocopies of the labels of XXXXX particular products:

XXXXX

3. Each product is described as a XXXXX and a XXXXX.

4. Each product is aimed at providing a therapeutic benefit to the user, for example, XXXXX.

5. Each product has been assigned a Drug Identification Number (DIN) by Health Canada.

6. Each label contains information on the recommended use, recommended dose, medicinal ingredients, non-medicinal ingredients, cautions and contraindications.

7. The labels emphasize the quality of the ingredients.

8. The products come wrapped in tea bags with XXXXX bags to a box.

9. You state that since XXXXX, when you first received your drug product licence for XXXXX from Health Canada, it has been taxed in Canada along with all of your other licensed products with DINs.

10. You became aware of a ruling XXXXX wherein we ruled that two products (one of which was XXXXX were zero-rated as basic groceries pursuant to section 1 of Part III of Schedule VI to the ETA.

Ruling Requested

You would like to know the tax status of the XXXXX products identified above and how the ruling XXXXX may affect your entire range of comparable XXXXX.

Ruling Given

Based on the facts set out above, we rule that XXXXX are zero-rated.

With respect to how the ruling XXXXX may affect your entire range of comparable XXXXX, please see our comments in the Explanation portion of this letter.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Goods and Services Tax Rulings. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

The preamble to section 1 of Part III of Schedule VI to the ETA zero-rates the following:

"Supplies of food or beverages for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of such food or beverages), other than supplies of ..."

Paragraphs 1(a) to (r) contain the exclusions from zero-rating, but are not relevant in this case.

The words "food", "beverages" and "ingredients" are not defined in the ETA. Policy Statement P-240, Application of GST/HST to Products Commonly Described as Dietary Supplements, addresses the question of whether products commonly described as "dietary supplements" are zero-rated as foods, beverages or ingredients. The salient points contained in the policy statement with respect to food and beverages are:

•   a product will be a food or beverage if an average consumer would recognize and purchase the product as a food or beverage;

•   the determination is based on the views of average consumers and not of those with individual preferences or dislikes for certain products, or those wishing to supplement their regular diet for a special purpose (except where a specially formulated product replaces an ordinary diet because of a medical or other condition);

•   consumers usually consume food for enjoyment or to allay hunger, while beverages are usually consumed for enjoyment or to quench thirst - in general, food and beverages are consumed to sustain or maintain life, to allay hunger or thirst, or for enjoyment, rather than for therapeutic or preventative effects (e.g., to correct actual or perceived health problems) or to achieve specific beneficial effects related to performance or physique; and

•   products that are labelled or marketed as products to be consumed to facilitate the intake of certain ingredients (nutritive or otherwise) or which place an emphasis on claims relating to the benefits of the product, for example, therapeutic or preventive effects, or enhancing performance or physique, are not considered to be products that an average consumer would ordinarily purchase in the course of buying food or beverages (e.g., products in pill, tablet, or capsule format).

The policy then lays out more specific criteria for determining whether a product is a dietary supplement, based on the following sources:

•   labelling;

•   packaging/format; and

•   marketing.

You have stated that our ruling XXXXX appears to contradict our position on dietary supplements as set out in P-240, and in particular example #7. You also made reference to a statement from the Natural Health Products Directorate of Health Canada that stated, in part, that a DIN or a Natural Health Product number (NPN or DIN-HM) would "exclude a product from being considered a food (i.e. subject to GST/HST)".

One of the criteria in P-240 is the presence of a DIN or NPN. P-240 states that although not determinative in itself, the presence of a DIN or NPN may be an indication that the product is promoted and consumed for its beneficial effects. However, the absence of a DIN or NPN does not necessarily mean that a product is considered to be a food or beverage. The statement from Health Canada also goes on to say that the presence of a DIN, NPN or DIN-HM is not in itself determinative.

However, notwithstanding the presence of a DIN and the other criteria in P-240, the Canada Revenue Agency has taken a specific position when dealing with products that are labelled as tea, herbal tea, tisane, or ice tea (collectively referred to as "tea"). Supplies of tea, regardless of flavour or ingredients (i.e., whether real tea, herbal tea, or a mixture of both), are zero-rated. A product that is advertised or labelled as a tea and is prepared in a manner similar to traditional tea is zero-rated. This also applies to teas that are in powder format and prepared by mixing with water and ready-to-drink herbal teas and ice teas.

The word "tea" in the instructions by itself does not bring the product within our tea position. To be treated as a tea, the product should call itself a tea in the part of the label that provides the primary description of the product. The XXXXX products in question meet this requirement.

With regard to example #7 in P-240, the product was not labelled as a tea in the description.

You also inquired about how the ruling XXXXX would affect your other products. Although not part of our ruling, the following comments should be of assistance to you. Other products in your herbal tea line that follow the same labelling as the XXXXX products identified above would receive the same tax treatment (i.e., zero-rated). Products that are similar in nature, but that are not labelled as tea, herbal tea, etc., and any other products that might be dietary supplements, should be subjected to the criteria in P-240 to determine their tax status. We would be pleased to provide you with a ruling on any other specific products you care to submit.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Goods and Services Tax Rulings.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-7909.

Yours truly,

Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/09/27 — RITS 80091 — XXXXX Status as a Band-empowered Entity