13 July 2006 GST/HST Ruling 55690 - Application of GST/HST to XXXXX

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 response to the letter XXXXX signed by XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of certain products by XXXXX (the Company). We apologize for the delay in responding to your request.

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

The Minister of Finance announced in the Federal Budget of May 2, 2006, a proposal to reduce the rate of the GST and the federal portion of the HST by 1%, effective July 1, 2006. Bill C-13 was tabled in Parliament on May 2, 2006, and received royal assent on June 22, 2006. The general rule is that the rate of GST will be reduced from 7% to 6% and the rate of the HST from 15% to 14% on 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

Our understanding of the facts is as follows:

1. XXXXX (Product A): Product A is labelled as a XXXXX instant coffee beverage with XXXXX. The ingredients of Product A are coffee, XXXXX. The box states XXXXX. The Company's web site states XXXXX. The box contains XXXXX sachets; the directions indicate a sachet for a cup; pour in hot water and stir. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

2. XXXXX (Product B): The ingredients of Product B are coffee, cocoa, XXXXX. The box states Product B is XXXXX. The box contains XXXXX sachets; the directions indicate a sachet for a cup; pour in hot water and stir. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

3. XXXXX (Product C): Product C is labelled as a XXXXX instant cocoa beverage XXXXX. The ingredients of Product C are cocoa, XXXXX. The box states XXXXX. The Company's web site states XXXXX. The box contains XXXXX sachets; the directions indicate a sachet for a cup; pour in hot water and stir well. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

4. XXXXX (Product D): The ingredients of Product D are coffee XXXXX. The box states XXXXX. The box contains XXXXX sachets; the directions indicate a sachet for a cup; pour in hot water and stir; XXXXX. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

5. XXXXX (Product E): The ingredients of Product E are XXXXX tea XXXXX. The Company's web site states XXXXX. The box contains XXXXX teabags; the directions indicate a teabag for a cup; pour in fresh boiling water and soak the teabag for 2-3 minutes. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

6. XXXXX (Product F): The ingredients of Product F are coffee, XXXXX. The Company's web site states XXXXX. The box contains XXXXX sachets; the directions indicate a sachet for a cup; pour in hot water and stir. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

7. XXXXX (Product G): The ingredients of Product G are XXXXX, oats, XXXXX. The box states that Product G is XXXXX. The Company's web site states XXXXX. The box contains XXXXX sachets; the directions indicate a sachet for a cup; pour in hot water and stir. The box includes a Nutrition Facts table, listing the nutritional information per sachet.

8. The Company is XXXXX. The Company's products are sold through a network of direct sellers, and include XXXXX in addition to the products above.

9. The Company's web site provides information on XXXXX, the key ingredient in all of its products:

XXXXX:

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

Ruling Requested

You would like to know the tax status of the products.

Ruling Given

Based on the facts set out above, we rule that supplies of the products will be zero-rated under section 1 of Part III of Schedule VI to the ETA.

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

Generally, every recipient of a taxable supply made in Canada shall pay tax calculated at the rate of 6% on the value of the consideration for the supply (14% in the participating provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador) unless the supply is zero-rated, pursuant to section 165 of the ETA. The tax rate in respect of a zero-rated supply is 0%, where a zero-rated supply is a supply that is included in Schedule VI to the ETA.

Section 1 of Part III of Schedule VI to the ETA zero-rates 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 included in paragraphs (a) to (r) of that section.

The words "food", "beverages" and "ingredients" are not defined in the ETA. The CRA considers that a product will be a food or beverage if an average consumer would recognize and purchase the product as a food or beverage in the ordinary course of buying basic groceries. Consumers usually consume food for enjoyment or to allay hunger, while beverages are usually consumed for enjoyment or to quench thirst.

The CRA considers a product to be an ingredient if an average consumer would recognize the product as an ingredient into food or a beverage. Generally, it is the view of the CRA that an average consumer would consider a product to be an ingredient if the product added to the flavour, texture or appearance of the final product; that is, if it was integral to the final product. Moreover, in order to be regarded as an ingredient to a food or beverage, the final product, in and of itself, would have to be considered to be a food or beverage by the average consumer.

Policy Statement P-240, Application of GST/HST to Products Commonly Described as "Dietary Supplements", (copy enclosed), outlines the criteria that the CRA will consider in determining whether a product is a food, beverage, or ingredient for human consumption or a non-zero-rated dietary supplement. These criteria consider the labelling, packaging, and marketing of the product.

While the product labelling does emphasize XXXXX, none of the products is labelled as a supplement or dietary supplement. The products do not have Drug Identification Numbers or Natural Health Product numbers. There are no restrictions, warnings, or cautions regarding the consumption of the products, or claims on the labels that any of the products has therapeutic or preventive effects, enhance mental or physical performance, or enhance physique.

The packaging and format of the products are consistent with food and beverages. Products A, B, C, D and F are powders packaged in sachets, and added to hot water to make a beverage. Product E is packaged in tea bags and steeped in boiling water to make a beverage. Product G is packaged in sachets like instant oatmeal and added to hot water to make cereal.

The products are sold by direct sellers, and are listed in the XXXXX section of the Company's web site. The product descriptions on the Company's web site for Products A and E mention the beneficial effects of these products. The Company's web site indicates that Product A is XXXXX.

Overall, the labelling, packaging, and marketing of the products would indicate that they are ingredients to food or beverages for human consumption and not dietary supplements. As such, supplies of the products will be zero-rated under section 1 of Part III of Schedule VI to the ETA.

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) 957-8253.

Yours truly,

Jacqueline Russell
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/06/26 — RITS 57757 — Interpretation of Section 174 of the Excise Tax Act