16 June 2006 GST/HST Interpretation 47787 - Supply of Marketing/Promotion Campaign Services

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 services rendered by XXXXX to XXXXX based outside Canada. We apologise for the delay in replying.

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. 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 on the CRA Web site (http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html).

We understand that:

1. XXXXX (USCo) is a non-Canadian corporation that is not registered for the GST. USCo supplies XXXXX franchises.

2. XXXXX (CanCo), a GST registered, Canadian resident represents USCo in Canada for potential Canadian franchises in XXXXX.

3. CanCo is responsible for answering telephone inquiries relating to franchise opportunities, showing equipment and facilities, assisting new franchisees with start-up, and completing all paperwork transactions (quotations, agreements, etc.)

4. USCo compensates CanCo upon completion of a franchise sale as follows: XXXXX.

5. CanCo is responsible for providing Canadian dollar based cost quotations. USCo honours quotes made by CanCo for XXXXX days from the date of the quote.

6. CanCo agrees to abide by a non-compete and non-disclosure agreement whereby CanCo agrees not to own an interest in, conduct or operate, directly or indirectly, or be associated in any way with a competitive business for the duration of the agreement.

7. CanCo shall give USCo a written monthly update on potential and ongoing sales. Furthermore, CanCo shall contact USCO (telephone or e-mail) in respect of all prospects so they may be entered into USCo's tracking system.

8. CanCo maintains utilities in their name and all expenses (telephone, postal, copy, internet, etc.) are CanCo's responsibility.

Interpretation Requested

You would like to know the tax status of the supply of services made by CanCo to USCo.

Interpretation Given

Based on the information provided, CanCo is required to collect GST on the supply of its services to USCo.

A taxable supply that is made in Canada is subject to the GST at a rate of 7%, or HST at a rate of 15% where the supply is deemed to be made in the participating provinces of Nova Scotia, New Brunswick and Newfoundland and Labrador, unless the supply is zero-rated (taxed at 0%). Pursuant to subsection 142(1) of the ETA, the supply of the service made by CanCo is made in Canada as it is performed in whole or in part in Canada. The supply of a service such as in this case must be made to a non-resident in order to qualify for zero-rating as an export.

A non-resident person who has a permanent establishment in Canada is considered to be resident in Canada for GST/HST purposes in respect of the person's activities carried on through that establishment.

According to section 123 of the Excise Tax Act (ETA) a "permanent establishment" of a particular person is defined under paragraph (b) of the definition to mean:

(b) a fixed place of business of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the particular person and through whom the particular person makes supplies in the ordinary course of business;

The type of person referred to in paragraph (b) is commonly referred to as a dependent agent.

It is evident that USCo and CanCo have a written agreement to have CanCo act on behalf of USCo to facilitate the sale of USCo franchises, present USCo franchise opportunities to prospective franchisees, close sales of USCo franchises, assist in supporting the openings USCo franchises and provide follow-up communication.

CanCo is arranging transactions for USCo and is not making supplies on its own account.

According to Policy Statement P-208R, Meaning Of " Permanent Establishment" In Subsection 123(1) Of The Excise Tax Act, an agent will be considered to be dependent if the agent is both legally and economically dependent on the principal on whose behalf the agent is acting. The Policy Statement further states that the dependent agent is not necessarily required to have the authority to conclude contracts on behalf of the particular person.

The agreement indicates that USCo exerts control over CanCo's actions. The agreement allows USCo to amend or revoke the authority of CanCo to promote USCo franchises. CanCo is required to provide USCo with regular written reports. USCo determines the territory in which CanCo can operate. CanCo must make a covenant not to compete with USCo for the term of the agreement.

CanCo does not have absolute contracting authority as final approval of all sales rests with USCo. However CanCo has de facto authority where USCo routinely approves CanCo's recommendations.

CanCo assumes no risk (other than a reduction in remuneration) respecting the franchises; sales of USCo franchises are not accounted for on CanCo's books and records; CanCo is remunerated on the basis number of franchise sales made per month; CanCo at no time has a property interest in the franchises.

USCo is considered to be making supplies through CanCo, as the business activity that is carried on through CanCo is an essential and significant part of the particular overall business activity of USCo. There is a large degree of involvement through CanCo's fixed place of business in making or facilitating supplies by USCo.

The above discussion supports the conclusion that USCo has a permanent establishment through the fixed place of CanCo pursuant to part (b) of the definition of permanent establishment in section 123 of the ETA.

Having a permanent establishment in Canada means that USCo is considered a resident of Canada for GST/HST purposes with respect to activities of USCo carried on through that permanent establishment. This means that the zero-rating provisions of the ETA relating to exported services are not applicable to USCo with respect to activities carried on through that permanent establishment.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Goods and Services Tax Rulings and GST/HST Policy Statement P-208R, Meaning Of " Permanent Establishment" In Subsection 123(1) Of The Excise Tax Act.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 957-8220.

Yours truly,

Kevin W. Smith
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/05/26 — RITS 51850 — [Contracts Where a Joint Venture Election Has Been Made]