10 January 2007 GST/HST Ruling 82341 - Non-Resident Registration

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 XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the purchase and sale of XXXXX and related hedging transactions. We apologize for the delay in our response.

We have received Form RC59E Business Consent Form authorizing us to release confidential information about XXXXX to you. All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

We understand that XXXXX, a GST/HST registrant, is a trader in energy and commodity contracts. The commodities with respect to which the contracts relate are physically traded. XXXXX purchases XXXXX from XXXXX or from commodity exchanges and pays GST/HST. In addition, XXXXX pays GST/HST on the handling, storage and transportation of the XXXXX in the course of its commercial activity. XXXXX collects GST/HST on the sale of the XXXXX to its XXXXX customers.

You have advised us that XXXXX is not a financial institution as defined in subsection 123(1). XXXXX is considering trading contracts of a similar nature negotiated by cash settlement only, for financial hedging purposes. You have written that the contracts are financial swaps. You further indicate that, in your view, 'a swap transaction falls under the definition of "debt security" since the definition of debt security pursuant to subsection 123(1) includes a "right to be paid money"'.

Interpretation Requested

You would like to know the following:

1. Assuming all input tax credit (ITC) supporting information requirements provided under subsection 169(4) are met, would CRA agree that the financial hedging activity of XXXXX should not impact XXXXX eligibility to claim full ITCs for the GST/HST paid on its commodity purchases and other input costs directly attributable to the sale of the physical commodity?

2. For other input costs that are not directly attributable to XXXXX energy trading commercial activity, e.g. head office management support services, would apportionment of the ITCs be required because of the mix of commercial activity and exempt financial hedging activity?

Interpretation Given

You have stated that the contracts XXXXX will be trading meet the definition of "debt security" under subsection 123(1) of the ETA. As we have not reviewed these contracts we cannot confirm that these contracts are debt securities or that XXXXX will be making supplies of financial services for purposes of the ETA.

Pursuant to subsection 169(1), where a person acquires or imports property or a service, or brings it into a participating province and, during a reporting period of the person in which the person is a registrant, the GST/HST in respect of the property or service becomes payable by the person or is paid by the person without having become payable, that person may be eligible to claim an ITC in respect of the GST/HST to the extent (expressed as a percentage) it was acquired, imported or brought into a participating province for consumption, use or supply in the course of the person's commercial activities, provided all the other conditions of section 169 are met.

Subsection 141(1) to (4) are intended to reduce the number of instances where a registrant might otherwise be required, for the purposes of determining an input tax credit, to apportion the GST/HST the person pays on inputs that the person uses or intends to use partly in commercial activities and partly in activities that are not commercial activities. Where substantially all (generally, 90% or more) of a person's consumption or use, or intended consumption or use, of property or a service is in the course of the person's commercial activities, subsection 141(1) and (2) deem all of the person's consumption or use, or intended consumption or use, of the property or service to be in the course of those commercial activities. Where substantially all of the person's consumption or use, or intended consumption or use, of property or a service is in the course of activities of the person that are not commercial activities, such as the making of exempt supplies, subsection 141(3) and (4) deem all of the person's consumption or use, or intended consumption or use, of the property or service to be in the course of those other activities.

Where XXXXX is not a "financial institution", as defined under subsection 123(1) and it acquires or imports property or a service all or substantially all for consumption, use or supply in the course of its commercial activity of buying and selling XXXXX, it will be eligible to claim a full ITC with respect to the GST/HST paid on the inputs that it acquired, imported or brought into a participating province for consumption or use in making that commercial activity, provided all the requirements of section 169 have been met.

Where property or a service is consumed or used partly in the course of a person's commercial activities and partly in the course of its non-commercial activities (generally, less than 90%, but more than 10% in its commercial activities), the person must apportion the GST/HST for the property or service between these two activities. Specifically, the person may be eligible to claim an ITC for the portion of the GST/HST paid or payable for the property or service that relates to the consumption or use of the property or service in its commercial activities, provided all the conditions of section 169 have been met.

Where a person acquires or imports property or a service or brings it into a participating province for consumption or use in the course of its endeavour, to the extent that it does so for the purpose of making taxable supplies for consideration, subsection 141.01(2) deems the person to have acquired, imported or brought in the property or service for consumption or use in the course of its commercial activities. To the extent that a person acquires, imports or brings in property or a service for the purpose of making supplies that are not taxable supplies for consideration, or for a purpose other than making supplies in the course of its endeavour, subsection 141.01(2) deems the person to have acquired, imported or brought in the property or service for consumption or use otherwise than in the course of its commercial activities.

Generally, a registrant is not eligible to claim ITCs in respect of property or services it acquires, imports or brings into a participating province for consumption, use or supply in the course of making supplies of financial services. However, subsection 185(1) applies, in part, to registrants that are not financial institutions and that, in the course of their commercial activity, also supply related financial services. Subsection 185(1) provides, in part, that to the extent (determined in accordance with subsection 141.01(2)) that property or services are acquired, imported or brought into a participating province by a registrant for consumption, use or supply in the course of making supplies of financial services that relate to the registrant's commercial activities, the property or services are deemed to have been acquired, imported or brought into a participating province for consumption, use or supply in the course of those commercial activities, for purposes of determining an ITC. Accordingly, the registrant would be eligible to claim ITCs with respect to the GST/HST paid on the property or services, to the extent that those financial services relate to the registrant's commercial activities, provided all the conditions of section 169 have been met.

Corporations may undertake hedging transactions to mitigate risks related to fluctuations in various costs such as foreign exchange rates, interest rates and commodity prices. Hedging transactions can be engaged in by corporations to protect against risks that are related to their central business. Certain hedging transactions may be considered financial services for purposes of the ETA. Whether or not a hedging transaction that is a supply of a financial service is related to a registrant's commercial activities depends on the facts of a particular situation.

To the extent that XXXXX supplies financial services that are not related to its commercial activities and it acquires, imports or brings into a participating province property or services for consumption, use or supply in the course of making supplies of these financial services, it will not be eligible to claim ITCs with respect to the GST/HST. In addition, where it consumes or uses property or services that are partly for its commercial activity and partly for activity that is not commercial activity, it will be required to apportion its ITCs. Please refer to GST/HST Memoranda Series 8.1 General Eligibility Rules and Chapter 17, Special Sectors: Financial Institutions or more information on ITCs and financial institutions.

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) 952-9577.

Yours truly,

Kirk Moore
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2007/01/04 — RITS 83671 — Supplies of Various Medical Products Used in Surgery