14 February 2006 GST/HST Ruling 77000 - Application of GST/HST to a certain supply of fresh fruit in a bowl

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, on behalf of your client, the XXXXX, concerning the XXXXX entitlement to claim Goods and Services Tax (GST)/Harmonized Sales Tax (HST) input tax credits in respect of isolated location allowances (also known as northern living allowances) paid to its employees.

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

You have provided us with the following facts:

1. The XXXXX was created as a for-profit federal Crown Corporation XXXXX. The XXXXX is accountable to the Parliament of Canada, reporting annually through the Minister of Heritage.

2. The XXXXX is financed through federally provided public funds supplemented by revenue from variable sources including advertising. For each fiscal year, the XXXXX overall operating budget includes an Operating Parliamentary Appropriation.

3. XXXXX.

4. XXXXX.

5. XXXXX, it is necessary that the XXXXX request employees to relocate to different northern regions. Various categories or types of allowances are paid to these employees including an isolated living allowance, commonly known as a northern living allowance (hereinafter called the "Allowance").

6. Under the XXXXX GL Chart of Account XXXXX - Northern Living Allowance, a copy of which you have provided, the Allowance is described as a XXXXX.

7. Furthermore, XXXXX Human Resources Policy XXXXX, a copy of which you have provided XXXXX

XXXXX

8. Moreover, those 'incremental costs' are acquisitions made in Canada by the XXXXX employee of taxable property or services. The RD Policy does not require a XXXXX employee who is in receipt of the Allowance to substantiate that the amount was expended in relation to living or environmental costs while living in an isolated location.

9. The RD Policy, specifically XXXXX (the "List"), designates and classifies the isolated locations (all Canadian regions) as well as limits and predetermines the effective rate of the non-accountable Allowance depending on the location.

10. For income tax purposes, the Allowance is taxable to the employee pursuant to section 6 of the Income Tax Act (ITA) and as such is included on the employee's T4 form. As well, the Allowance is deductible as an expense under the ITA.

11. For GST/HST purposes, the XXXXX makes taxable supplies in the course of commercial activities and, as such, is registered for the GST/HST. Moreover, the XXXXX claims input tax credits (ITCs) in respect of the GST/HST paid or payable on its purchases or importations relating to the making of such taxable supplies.

Interpretation Requested

On behalf of the XXXXX, you would like to know whether the XXXXX is entitled to an ITC under subsection 169(1) and section 174 of the ETA in respect of the Allowance paid to its employees.

It is your position that legislatively there is nothing in section 174 which refers to the inclusion of an allowance as taxable income other than the reasonability test for purposes of subparagraphs 6(1)(b)(v) to (vii.1) of the ITA. Thus, the Allowance, which is considered taxable for income tax purposes, still satisfies all the conditions listed in paragraphs 174(a) to (c). Consequently, under paragraph 174(d), the XXXXX is deemed to have received the supply of the property or services, under paragraph 174(e), to have consumed or used the property or services acquired by its employees, and to have paid the GST/HST determined by the formula in paragraph 174(f). Accordingly, the XXXXX is entitled to claim an ITC under subsection 169(1) in respect of the GST/HST deemed paid under the Allowance.

Interpretation Given

Based on the information provided, it is our position that the Allowance would not meet the requirements of section 174. Our policy paper P-075R, Allowances and Reimbursements, issued July 6, 2004, discusses our administrative position concerning allowances that are taxable benefits to individuals. It is our view that an allowance that results in a taxable benefit to an individual under the Income Tax Act is for the personal benefit of the individual and is in reality remuneration or income of the individual. As income, the payment is not subject to GST/HST, and is not the type of allowance for which we consider section 174 was intended to apply. Hence, this kind of allowance is not eligible for purposes of determining an input tax credit under the ETA.

Furthermore, it is our position that the Allowance would not meet the requirement under subparagraph 174(a)(iv) that it be paid for "supplies all or substantially all of which are taxable supplies (other than zero-rated supplies) of property or services ..." The Allowance is paid to employees " ... to defray the incremental cost of living at isolated locations, and to compensate for the environmental (climate, geography, access, etc.) factors related to isolated locations."

Not only is the Allowance intended to cover the employee's incremental costs, which could include supplies of taxable goods and services, the second part of the definition suggests that it is also paid to improve the quality of life; that is, to lessen the inconveniences arising out of having to move north and being subject to different living conditions. As well, given that XXXXX the XXXXX RD Policy, employees may also receive a "Fuel and Services Allowance" to cover the incremental costs for fuel and utilities, this indicates that the Allowance does not cover expenses all or substantially all of which would be supplies of property or services subject to GST at 7%, or HST at 15%.

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.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-8806.

Yours truly,

Patricia Taylor, CMA
General Operations Unit
General Operations & Border Issues Division
Excise and GST/HST Rulings Directorate

2006/02/07 — RITS 77859 — [ITC for Tax on Imported Goods]