14 February 2008 GST/HST Interpretation 100388 - GST111, Schedule 1 - Financial Institution GST/HST Annual Information Schedule

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 XXXXX Shake XXXXX.

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

Effective January 1, 2008, the rate of the GST has been reduced from 6% to 5% and the rate of HST from 14% to 13%. The new rates apply to supplies for which the GST/HST is paid on or after January 1, 2008, 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 GST/HST Notice 226, GST/HST Rate Reduction in 2008 on the Canada Revenue Agency (CRA) Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX Shake (the Product) is a ready-to-drink shake that is sold in multiples of XXXXX pre-packaged by the manufacturer.

2. The Product is manufactured by XXXXX.

3. The Product ingredients are: XXXXX.

4. The Product comes in XXXXX.

5. The front Product label advertises the Product as XXXXX.

6. The front label also states:

XXXXX

7. According to the Company's website:

XXXXX

8. The Product is not labeled as a "nutritional supplement" or a "meal replacement".

9. The Company's website includes the following frequently asked questions (FAQs) concerning the Product's XXXXX:

XXXXX

Ruling Requested

You would like to know how the GST/HST applies to supplies of the Product.

Ruling Given

Based on the facts set out above, we rule that the supply of the Product is taxable at 5% GST or 13% HST, as applicable, pursuant to section 165.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are 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 5% on the value of the consideration for the supply (or 13% in the participating provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador) unless the supply is zero-rated. Zero-rated supplies are included in Schedule VI. The tax rate in respect of a zero-rated supply is 0%.

Under Part III of Schedule VI, certain supplies of basic groceries are zero-rated. Section 1 of Part III of Schedule VI zero-rates supplies of food or beverages for human consumption, including sweetening agents, seasonings and other ingredients mixed with or used in the preparation of such food or beverages, other than supplies included in paragraphs (a) to (r) of that section.

Products that qualify and are labeled as "nutritional supplements" or "meal replacements" pursuant to the Food and Drugs Act and Regulations (FDR) are considered food or beverages for purposes of Section 1 of Part III of Schedule VI to the ETA. Moreover, they are not subject to the exclusions under paragraphs 1(a) to 1(r) of Part III and, therefore, are zero-rated.

In addition, if a product is represented as being a meal replacement or nutritional supplement as evidenced by the label, the CRA will accept this information as fact in determining its tax status.

Based on the Product's Nutrition Facts the Product does not meet the requirements, outlined in the Food and Drug Regulations, to be considered either a meal replacement or a nutritional supplement. In addition, the Product's label does not advertise it as either a meal replacement or a nutritional supplement.

The terms "food" and "beverage" are not defined in the ETA. The CRA considers that a product is a food or a beverage if an average consumer would recognize and purchase the product as a food or beverage in the ordinary course of buying basic groceries. Put differently, products would be considered to be a food or a beverage if they would be consumed by an average consumer when food or beverages are typically consumed, such as at mealtimes or for a snack. Products that meet special dietary needs of certain segments of the population such as those with restricted or special purpose diets, high performance athletes and dieters may not necessarily be viewed by the average consumer as food or beverages. In addition, individual preferences for, or dislikes of, certain products would not alter general perceptions of food or beverages.

Memoranda Series Chapter 4.3 Basic Groceries addresses the question of whether products commonly described as "dietary supplements" are zero-rated as foods, beverages or ingredients. Paragraph 2 of Memorandum 4.3 states that the CRA considers a product to be a food or beverage if an average consumer would recognize and purchase the product as such in the ordinary course of buying basic groceries. Consumers usually consume food and beverages 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 benefits related to performance or physique.

Memorandum 4.3 lays out more specific criteria for determining whether a product is a dietary supplement in paragraphs 148 to 159 based on the following sources:

•   labelling;

•   packaging/format; and

•   marketing.

While some of the criteria in Memorandum 4.3 do not apply to the Product, the following criteria are applicable, which would indicate that the Product is not a food or beverage but a dietary supplement for GST/HST purposes:

1. Claims that the product has a therapeutic or preventative effect, enhances mental or physical performance, or enhances physique. The Product is marketed on the Company's website to help XXXXX, which indicates that the product is to be consumed for a purpose other than a food, beverage, or ingredient.

2. Emphasis on a particular nutrient(s) not commonly regarded by a consumer as an ingredient to basic groceries. The Product's label clearly highlights its XXXXX as does the Company's website XXXXX.

3. Pictorial representations or product names that would lead a consumer to conclude that the principal purpose for consuming the product is for a therapeutic or preventative effect, to enhance mental or physical performance or to promote weight loss. The Product's label and the pictorial representation on the Company's website would lead a consumer to conclude that the Product's principal purpose is for XXXXX.

4. Restrictions related to the amount to be consumed. The Company's website suggests that XXXXX.

5. Warnings as to who should not consume the product. The Company's website recommends that XXXXX.

6. A caution as how the product is to be "taken" or that is to be "taken as directed by a physician". The Company's website suggests that XXXXX.

7. Where the focus is on the benefits of the product, rather than the form per se, this is an indication that the product would be considered a dietary supplement rather than a food, beverage or ingredient. The Product's packaging mostly focuses on XXXXX benefits XXXXX, and the Product is sold in beverage form XXXXX.

8. A product is not available in grocery stores, markets, specialty food stores or in direct sales food catalogues. A product is available in specialty vitamin stores or nutrition centres or is placed among non-prescription drugs and/or cosmetics and not with commonly recognized food or beverages in health food stores, pharmacies or large department stores. While the Product is sold in large grocery stores, along with nutrition stores and pharmacies, it is sold along side other sports nutrition products XXXXX, in the pharmacy and health food sections where one would not commonly find foods, beverages or ingredients.

9. The advertising, whether through print or electronic media (e.g. the internet), or through information placed in stores, includes claims related to purported beneficial effects such as those mentioned in paragraph 156 of Memorandum 4.3. The Product's labelling and the Company's website emphasizes the Product's benefits to XXXXX as well as the Product's good taste and XXXXX.

As a result of the above, the CRA considers that the Product is not a food, beverage or ingredient and is therefore taxable at 5% GST or 13% HST, as applicable, pursuant to section 165.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-2560. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.

Yours truly,

Tim Myers
Technical Policy Advisor
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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