XXXXX
s. 142, 165, 221, Sch. VI/V/23
September 1, 1994
Dear XXXXX
I refer to your letter of April 11, 1994, addressed to the XXXXX, regarding the application of the Goods and Services Tax (GST) to certain supplies made by your firm to non-residents. You are requesting a review of the interpretations contained in the letters dated XXXXX[.] Please accept my apologies for the delay in responding to your letter.
Statement of Facts
1. XXXXX is a GST-registered resident. The majority shareholder of XXXXX is M XXXXX[.]
2. XXXXX is an unregistered resident. You are the sole shareholder of XXXXX[.]
3. XXXXX and XXXXX own all rights, title and interest to a process for producing sulphur dioxide, hydrogen and calcium sulphate products (XXXXX). This ownership includes the patent applied for.
4. XXXXX is an unregistered non- resident.
5. XXXXX and XXXXX entered into an agreement on XXXXX whereby XXXXX and XXXXX granted XXXXX certain rights to the XXXXX.
6. Article 5 of the agreement states that the day-to-day direction of the Stage I Work (for the development of the XXXXX shall be the responsibility of XXXXX[).] Such direction shall include the best efforts of XXXXX in consultation with the contractor, to achieve the agreed objectives. Article 10 of the agreement specifies, in part, that XXXXX will pay a direction fee of XXXXX (U.S.) monthly (with a minimum five months' fees) for the duration of the Stage I Work and the Stage II Work.
7. Article 9 of the agreement specifies that XXXXX agrees to pay an exclusivity fee of XXXXX (U.S.) to XXXXX[.] In return for this fee, XXXXX agrees to deal solely and exclusively with XXXXX in respect of the XXXXX during the Stage I Work and Stage II Work. [NOTE: In your facsimile message of XXXXX you state that the exclusivity fee is for a shared interest in future potential royalties coming into Canada for one of the processes XXXXX. However, this statement is not supported by the wording of Article 9.]
8. XXXXX entered into a project agreement on XXXXX with XXXXX, a GST-registered resident, to perform the Stage I Work. In your facsimile message of XXXXX you state that research and development activities were first performed at XXXXX and later at XXXXX[.]
Interpretation Given
A. Direction Fee
The monthly direction fee of XXXXX (U.S.) for the day-to-day direction of the development of the XXXXX is consideration for the supply of a service. As the service supplied by XXXXX to XXXXX is to be performed in whole or in part in Canada, the service is deemed to be made in Canada.
Schedule VI, Part V, section 23 to the Act zero-rates a supply of an advisory, professional or consulting service made to a non-resident person. A number of services are specifically excluded from this section, as follows:
(a) a service rendered to an individual in connection with criminal, civil or administrative litigation in Canada, other than a service rendered before the commencement of such litigation;
(b) a service in respect of real property situated in Canada;
(c) a service in respect of tangible personal property that is situated in Canada at the time the service is performed; or
(d) a service of acting as an agent of the person.
Enclosed is a copy of GST Memorandum 300-3-5 (Exports). Please refer to paragraph 92 of the memorandum for the department's interpretation of the terms "advisory" service, "consulting" service and "professional service". Provided the direction services your firm provides to the contractors during the Stage I Work and Stage II Work fall within the meaning of these terms, the services supplied by XXXXX to XXXXX may be zero-rated (i.e., subject to the GST at 0%).
B. Exclusivity Fee
The exclusivity fee of XXXXX (U.S.) received by your firm from XXXXX is consideration for a supply made by your firm to XXXXX[.] This supply, which is the exclusive right to XXXXX services relating to the XXXXX during Stage I and Stage II Work, is considered to be a supply of intangible personal property. Subparagraph 142(2)(c)(i) deems a supply of intangible personal property to be made outside Canada if the property may not be used in Canada. However, in this particular case, the right to use your firm's services may be used in Canada.
As the recipient of taxable supply made in Canada, subsection 165(1) of the Act requires XXXXX to pay tax equal to 7% of the value of the consideration for the supply. Subsection 221(1) of the Act requires XXXXX as the person making the supply to XXXXX collect the tax from XXXXX[.] The foregoing comments represent our general views with respect to the subject matter of your letters. Unannounced proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memorandum 300-3-5, do not bind the Department with respect to a particular fact situation.
If you have any questions or require further information, please contact XXXXX and his staff will be pleased to serve you.
Yours sincerely,
H.L. Jones
Director
General Tax Policy
Excise/GST
Policy and Legislation
Encl.
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