This in response to your letter of November 2, 1993 regarding the taxable status of supplies made by the above-mentioned registrant. I apologize for the delay in responding to your letter.
Facts
According to the information provided with your letter and telephone conversations between yourself and Serge Bernier of my staff, we understand the facts to be as follows.
1. XXXXX, hereafter referred to as XXXXX enters into agreements with customers for the provision of water coolers and jugs of water.
2. XXXXX does not charge their customers a separate consideration in respect of the lease of the water coolers where it provides the coolers together with jugs of water.
3. XXXXX charges an amount in respect of the jugs of water provided to the customers. The amount charged per jug of water varies depending on the number of jugs ordered by a customer during a particular month. For instance, where a customer orders 1 or 2 jugs during a month, XXXXX charges this customer XXXXX for each jug of water.
4. Where the customer picks up jugs of water at XXXXX premises, XXXXX charges XXXXX less per jug to the customer.
5. In addition to the amount charged in respect of the water itself, XXXXX charges their customers a $ XXXXX deposit for each jug of water that is in the possession of the customer. This deposit is refunded to the customer when the contract between XXXXX and the customer is terminated, if the customer has possession of any jug at this time.
6. A customer may acquire a water cooler without acquiring water, or may acquire jugs of water without acquiring a water cooler.
7. Where a customer leases a water cooler, buys water from time to time from XXXXX, but does not buy any water during a particular month, XXXXX charges the customer $ XXXXX during that particular month.
8. Similarly, XXXXX charges $ XXXXX a month to a customer who only leases a water cooler without having any intention of buying jugs of water from XXXXX[.]
9. Where a customer leases a water cooler, XXXXX charges the same amount for the jugs of water purchased by this customer as the amount charged to a customer purchasing only jugs of water.
Questions
1) Is the additional $ XXXXX paid by the customer for delivered water considered to be a delivery charge taxable at 7%, or is it part of the consideration charged in respect of the zero-rated jugs of water and not subject to tax?
2) Is the amount charged to a customer who does not buy water during a particular month considered to be a rental of the water cooler and therefore taxable at the rate of 7%, or is it considered to be a charge for zero-rated water.
3) Is the deposit charged for each water jug considered a damage deposit and no tax applies until the deposit is applied to actual damage, or is it considered to be a deposit on a returnable container and be subject to tax?
Answer
Question 1
Where a customer buys a jug of water and XXXXX is delivering the jug to the customer's home, XXXXX is not providing a delivery service to the customer. Rather, XXXXX is making a single supply of water delivered to the customer's home, given that title passes only when the customers take possession of the jugs at their home. Where a customer picks up the jugs of water at XXXXX premises, the customer is entering into a transaction of a different nature in respect of which XXXXX charges a different price.
Therefore, the additional dollar charged by XXXXX for delivered water is not an amount charged in respect of a separate supply of a delivery service, but is part of the consideration charged for the water (or for the water and the water cooler provided by XXXXX to the customer).
Question 2
XXXXX enters into two different types of agreements with its customers who intend to lease a water cooler and to purchase jugs of water from XXXXX[.]
The first agreement is in respect of the lease of the water cooler only and the consideration payable in respect of that supply is the $ XXXXX charged by XXXXX during the months the customers do not buy any water. This amount is charged in respect of a taxable supply that is not zero-rated and is therefore subject to tax at the rate of 7%. The fact that XXXXX indicates that the minimum charge is in respect of water does not modify the reality of the transaction; during those particular months, XXXXX is only making a supply of the water cooler and is not making a supply of water.
In addition, from time to time, XXXXX and their customers enter into agreements providing that XXXXX will supply a specific number of jugs of water to the customers at a particular time. These agreements are separate from the agreement entered into in respect of the lease of the water cooler. Where a customer orders water, XXXXX is providing the water cooler and the jugs of water together and charges a single amount in respect of both properties, based on the numbers of jugs provided to that customer.
Given that these two properties are provided together, it is necessary to determine whether each constitute a separate supply or whether both properties are part of the same single supply. However, the written agreements entered into by XXXXX and their customers do not themselves allow one to conclude whether the water cooler and the jugs of water are part of the same supply or constitute separate supplies. To make this determination we can use the three following questions included in the policy on single and multiple supplies.
1. If the customer did not receive all of the elements, would each, in itself, be, in the context of this transaction, of any use to the customer? [if yes, likely multiple supplies, if no, a single supply]
Yes. If XXXXX did not provide jugs of water to the customer, the water cooler would be of some use to the customer, given that the latter might acquire jugs of water from another supplier. In fact, XXXXX charges a minimum amount to their customers who do not order any water from them during a particular month to discourage a customer from obtaining jugs of water from another supplier and using XXXXX's water coolers to cool this water. This supports the argument that XXXXX coolers can be used to cool water obtained from other suppliers and have, therefore, a separate use. Given that one property has a separate use, both properties are considered to have a separate use.
The answer to this question indicates that the water cooler and the jugs of water may be considered as separate supplies.
2. Is the provision of a particular element contingent on the provision of another element? [if yes, likely a single supply, if no, multiple supplies]
No. A customer may lease a water cooler without purchasing water from XXXXX and may purchase jugs of water without leasing a cooler.
The answer to this question indicates that the water cooler and the water may constitute separate supplies.
3. Is the customer made aware of the specific elements (in detail) that are part of the package? [if yes, likely multiple supplies, if no, single supply]
Yes. The lease agreement indicates the water cooler model number, its color and its serial number. The customer is also aware of the number of jugs he/she is acquiring, as well as the quantity of water contained in each jug. This indicates that the customer is made aware in detail of both the water cooler and the jugs of water.
The answer to this question indicates that each property may constitute a separate supply.
Based on the answers to the three above questions, it may be considered that the water cooler and the jugs of water constitute separate supplies.
Where XXXXX leases a water cooler to a customer and enters into an agreement to provide water to that customer during a particular month, the amount charged by XXXXX in respect of the jugs of water, i.e. XXXXX per jug of water, constitutes in fact a single consideration charged in respect of the water cooler and the jugs of water. Given that two properties are provided together for a single consideration, it is necessary to determine whether the provision of one property may reasonably be regarded as incidental to the provision of a particular property and be deemed to be part of the latter property pursuant to section 138. To make this determination, we may use the two following questions.
1) In the context of this particular transaction, is it reasonable to conclude that XXXXX primary objective is to supply the water or is XXXXX objective to supply both the water coolers and the jugs of water?
In the context of these transactions, it is reasonable to conclude that XXXXX primary objective is to supply the jugs of water and not to supply both the water cooler and the jugs of water. XXXXX pricing structure provides an incentive to their customers to buy at least one jug of water per month from XXXXX, to the extent that it is more expensive to lease the water cooler without obtaining a jug of water (i.e. XXXXX than to obtain both a water cooler and a jug of water (i.e. XXXXX[)]. This indicates that XXXXX primary objective is to supply jugs of water and not to supply water coolers.
2) Is the consideration charged in respect of both properties being supplied together the same or marginally different from the one XXXXX would charge if only a particular property was provided?
XXXXX charges their customers the same amount in respect of a jug of water, whether a customer acquires jugs of water without leasing a water cooler, or leases a water cooler and purchases jugs of water.
The answers to the two above questions indicate that the provision of the water cooler may reasonably be regarded as incidental to the provision of the jugs of water. Therefore, during the months that XXXXX supplies to a customer a water cooler together with jugs of water for a single consideration, the water cooler is deemed to be part of the jugs of water pursuant to section 138 of the ETA.
The amount charged by XXXXX to customers to whom it supplies both a water cooler and jugs of water during a particular month is an amount paid in respect of the jugs of water, and is not subject to tax, given that the cooler is deemed to be part of the jugs of water pursuant to section 138.
Question 3
The jugs are a usual container for water and therefore, pursuant to section 137 of the ETA, are deemed to be part of the water supplied by XXXXX. Given that the water is zero-rated pursuant to section 1 of Part III of Schedule VI of the ETA, an amount charged in respect of the jugs of water is not subject to tax. In addition, subsection 226(1) provides that: "returnable container" means a beverage container (other than a usual container for a beverage the supply of which is included in Part III of Schedule VI) of a class that .... Therefore, section 226 does not apply to water jugs and the latter are not deemed to be a separate supply pursuant to this section.
Given that the water jug is a usual container for water and is deemed to be part of the supply of water, the $ xx deposit charged by XXXXX for the water jugs is consequently part of the consideration charged in respect of the water and is zero-rated.
Please note that the deposit paid in respect of the water jugs appears to be different from the security deposit referred to in section 9 of the terms and conditions of the agreement. In addition, the copies of the agreements attached to your letter indicate that no security deposit was collected from these customers.
I hope that the above information will be useful to you. Should you wish to discuss this issue further, please do not hesitate to contact Mr. Serge Bernier at (613) 952-9580.
H.L. Jones
Director
General Tax Policy
Excise/GST GTP: XXXXX
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Imposition team
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