19 December 1994 GST/HST Interpretation 11640-1[1] - Application of the GST to Sales Royalties Paid to Artists for Units Sold

I refer to a memorandum dated August 25, 1994 [(]XXXXX I-11720-1), written by XXXXX, concerning the application of the Goods and Services Tax (GST) to supplies made by XXXXX to various artists. A copy of XXXXX memorandum is attached. As requested by XXXXX, the memorandum has been reviewed.

The payment arrangement summaries outline that XXXXX will pay an amount (sales royalty) to the artists for each unit sold. The sales royalty varies with the type of unit sold, i.e., cassette, blister pack cassette or compact disc. The calculation of the sales royalty also differs if the unit is sold in Canada or the United States.

In the payment arrangement summary titled ["]XXXXX" there is no description of activities to be undertaken by XXXXX, other than reporting requirements.

The remaining two payment arrangement summaries, both titled "XXXXX" also do not describe activities to be undertaken by XXXXX other than reporting requirements. Both summaries do refer to expenses incurred by XXXXX in the production, manufacturing, marketing, promotion, sale and distribution of products. One summary states that XXXXX may recoup 75% of these expenses from XXXXX, whereas the second summary states that XXXXX may recoup 100% of these expenses from XXXXX (but limited to expenses incurred for products sold in Canada).

On the basis of the limited information provided, it appears that XXXXX is providing a service to certain artists for a fee equal to the expenses of production, manufacturing, marketing, promotion, sale and distribution of products. As this service is performed by XXXXX in whole or in part in Canada, paragraph 142(1)(g) of the Act deems the supply to be made in Canada. It does not appear that section 178 of the Excise Tax Act (Act), which deals with expenses incurred in the supply of a service, will apply in these circumstances.

I agree with XXXXX decision that these services are subject to the GST at 7% when supplied to residents or non-residents. The zero-rating provisions of Schedule VI, Part V, section 7 to the Act would not apply to the services supplied by TCGI to non-residents as the services would be considered to be primarily for consumption, use or enjoyment in Canada.

If you have any questions or require further information, please contact Mr. Garry Ryhorchuk of my staff at (613) 952-6743.

H.L. Jones
Director General
Tax Policy Excise/GST
Policy and Legislation

Att.