94/03/03
XXXXX File no. 1755-20(SB)
XXXXX 11640-3
XXXXX
This is in reply to a fax sent to Serge Bernier on May 20, 1993 in which you were inquiring as to whether various elements provided by an advertising agency to a non-resident customer constitute a single supply or separate supplies. I apologize for the delay in replying to your request.
Facts
1. Pursuant to article 1 of the agreement in writing you submitted, an advertising agency undertakes to provide consultancy services and to plan, design and conduct, advertising and promotion of a non-resident's liquor products marketed in Canada.
2. Article 2 details most of the elements provided by the agency:
• To provide a concept for advertising.
• To procure and prepare all information, data, concepts and advertising material.
• To implement the concept, based on various design formats and on a strategy.
• To provide consultancy services, including the presentation of the concept in advance and a main presentation.
• To determine, evaluate and process all market data.
• To compile coverage plans, timetables and cost accounts for insertions, film advertising, radio and television commercials, posters, etc., and place orders for such advertising.
• To develop and design new packaging and optimize existing packaging.
• To develop and design promotion activities and materials, such as store materials, printed matter, incentive programs, etc.
• To handle the storage of all the promotion material produced in Canada as well as the distribution of the promotion material to the customer's agents.
3. Pursuant to article 4 of the agreement, the customer will pay a fee of $ XXXXX per month for the elements included in article 2.
4. In addition, the agency will be entitled to a XXXXX commission on all net production charges, provided such charges are estimated in advance and approved in writing by the customer.
5. Article 6 of the agreement states that, at the request of the customer, the agency will also conduct market research with free market institutes, large-scale psychological studies, and public relations and product publicity activities.
6. The supplier will charge the customer separately for the services described in article 6 on the basis of duly approved costs.
7. Pursuant to article 7, all "services" rendered by the advertising agency, including drafts, design proposals, concepts and ideas together with the associated presentation material shall become the title and property of the non-resident customer together with any and all copyrights, rights of use and protection.
8. No specified amount is charged in respect of the acquisition of title and property described in article 7.
9. Article 5 specifies that the responsibilities set forth in article 2 includes the development of advertising aids and that the final drawings and artwork shall be charged to the customer in accordance with cost estimates agreed on in advance.
10. Before placing orders for services to be rendered by third-parties, the agency shall agree with the customer in writing on the scope, nature and price of such services.
11. Article 5 also specifies that orders for such services shall be placed on behalf and for the account of the non-resident customer.
12. The third parties invoice the advertising agency in its own name and not that of the non-resident.
13. The advertising agency enters as expenses in its books the amounts paid to third parties when acquiring goods or services pursuant to article 5.
14. Pursuant to article 5, travelling expenses and other expenses are deemed to be covered by the fee specified in article 4. Article 5 also specifies that the customer will reimburse special travel expenses incurred by the supplier, where these expenses are approved in advance by the customer.
15. Pursuant to article 2-f, advertising shall be placed on behalf and for the account of the agency. The agency shall be responsible for all financial accounts with the media and their settlement.
16. The customer will reimburse the agency amounts paid by the agency to media and other third parties, provided those amounts were previously approved by the customer.
17. The agency shall credit in full its non-resident customer any and all commissions, discounts, and bonuses granted by the media.
Answer
Based on the above information, it appears that the advertising agency may make up to three different categories of supplies to the non-resident customer.
First category
The first possible supply is referred to in Article 1 as consultancy services, advertising and promotion. Article 2 details most of the elements of that supply which can be said to [i]nclude the following elements: the provision of information, data, concepts and advertising material; the development and the implementation of an advertising concept; presentation of the advertising concept to the customer (consultancy services); the analysis of market data; the planning and ordering of advertising; the design of new packaging; the storage and distribution of the promotional material; the development of promotion activities and material, and the development of advertising aids. In our view, all of these elements constitute a single supply for the following reasons. Firstly, in the context of the particular transaction between the advertising agency and the non-resident, each element does not have a separate use. The customer's objective is to undertake an advertising campaign for their products. If the advertising agency provided any of the elements identified above separately, it is unlikely that the particular element would satisfy the needs of the customer who wants its product(s) to be advertised efficiently and effectively in the Canadian market. This is one indication that all the elements listed above may constitute a single supply.
Secondly, at the time the agreement was entered into, the customer did not know, in detail, the elements that were to be supplied by the agency. For instance, the customer did not know what would be the advertising concept, the number and the nature of the advertising aids or where the promotion material would be stored. This is another indication that all of these elements constitute a single supply. Finally, we may consider whether all of the elements are contingent on each other. Put differently, if the agency would not provide any of these elements separately to the non-resident customer, this would also indicate that the elements may constitute a single supply. In the context of this particular transaction, it is unclear whether all of the elements are contingent on each other. Nevertheless, it is reasonable to assume that the agency would supply some of the elements without providing all of the elements (this point could be confirmed with the agency). For instance, it is possible that the design of a new packaging was included in the agreement at the customer's request and that the agency would have provided the other elements without that design of the new packaging. This factor indicates that the elements might constitute separate supplies. On balance, we believe the three criteria used above indicate that the different elements described previously as being part of the supply described in article 1, constitute a single supply.
This supply qualifies as a zero-rated supply of a service of advertising made to a non-resident person who is not registered, pursuant to section 8 of Part V of Schedule VI. Where the advertising agency acquires property or service as agent on behalf of its non-resident customer as stated in article 5 of the agreement, those properties and services might be considered to be separate supplies made directly by the third-parties to the non-resident customer. However, based on the information provided, the advertising agency appears to acquire the properties or services provided by third-parties in its own name and not as agent of its customer. The fact that the third-parties invoice the advertising agency and that the latter enters the amounts invoiced by the third-parties as expenses in its own books, supports this conclusion. Therefore the properties and services provided by third-parties to the agency would simply be considered as inputs acquired by the agency in the course of making the supply of the advertising campaign and would not themselves be considered separate supplies. Based on the above information, you may wish to modify your proposed answer to indicate that the advertising agency is not acting as agent on behalf of the non-resident when acquiring goods and services to be used in supplying the advertising campaign. In addition, given that the advertising agency is acquiring all these goods and services in its own name, the agency is entitled to claim ITCs to the extent these goods and services are acquired for use in the course of its commercial activity. The consideration in respect of the supply noted in article 1, is comprised of the following amounts:
1. $ XXXXX a month (article 4);
2. the cost of drawings and artwork whether developed internally by the agency, or provided by third-parties to the advertising agency and billed to the customer pursuant to article 5 of the agreement;
3. a XXXXX commission calculated on the net production charges of the advertising material (whether produced internally by the agency or contracted out to third-parties) (article 4),
4. the cost of all advertising orders placed on behalf and for the account of the agency (article 2f), and
5. the travel costs reimbursed by the non- resident to the supplier (article 5).
The last sentence on page 6 of your proposed answer states:
"... if no agency relationship exists, then this will be treated as a re supply of expenses by [the supplier] to [the recipient], and if [the supplier] bills [the recipient] on an "at cost" basis, [the supplier] will charge [the recipient] said expenses net of the GST, as [the supplier] will be entitled to an input tax credit for the GST paid on these expenses."
It should be noted that the Department does not have the authority to instruct the supplier regarding how to determine the consideration charged in respect of its services. It is up to the supplier and to the recipient to agree on the consideration payable in respect of the supply. More specifically, the Department does not have the authority to prevent the supplier from including in the consideration an amount it paid on account of GST. Thus the supplier may take into account the GST paid on its inputs in establishing the consideration charged to the non-resident, even if it is entitled to claim ITCs in respect of the GST paid on those inputs.
Second category
In addition to the supply noted in article 1 and described in detail in article 2 and 5, article 6 of the agreement states that, at the request of the customer, the advertising agency may be required to provide market research, public relations and product publicity activities. This provision of the contract explicitly indicates that the market research, the public relations and the product publicity may constitute separate supplies from the supply noted in article 1 (and in fact may not be supplied at all). The supplier will charge the non-resident separate amounts for the "services" provided pursuant to article 6 of the contract. It is not possible to determine whether the elements provided under that provision of the contract will be taxable at 7%, or zero-rated, without knowing what elements, if any, were actually provided. If it is determined that some of those elements were provided, the taxable status of that element would depend, for instance, upon its nature (good or service) and whether it was a service that is primarily for consumption, use or enjoyment in or outside Canada.
Third category
Finally, pursuant to article 7 of the contract, the advertising agency agrees to provide to the non-resident customer all non-tangible properties developed within the agreement, including the drafts, design proposals, concepts and ideas, together with any and all copyrights, rights of use and protection. No additional amount is charged in respect of these elements. Based on the analysis used to determine if an element is a separate supply, the non-tangible properties provided by the advertising agency to the non-resident may constitute separate supplies or be part of the supply specified in article 1 of the agreement, as indicated hereafter.
Depending on the circumstances, non-tangible property provided by the advertising agency may have a separate use for the customer. In particular, article 7 of the agreement states that the customer is provided with the right of multiplying and copying, editing and redesigning the material, and to use it in different ways.
If this is, in fact, the case, this would indicate that this element can be considered to have a separate use from the supply noted in article 1, indicating that the non-tangible properties may be separate supplies. However, at the time the contract is entered into, the customer is not made aware in detail of the non-tangible properties that will be supplied by the advertising agency. This is an indication that the non-tangible properties might be part of a single supply described in article 1.
Finally, it is uncertain whether the provision of the non-tangible properties and the supply described in article 1 are contingent on each other. Such a determination would depend upon the manner in which the transaction is structured.
For instance, when the advertising agency entered into the agreement to provide the advertising campaign to the non-resident customer, we understand that the non-resident customer would not acquire the services described in article 1 of the agreement without receiving the non-tangible personal properties developed by the agency. Based on this assumption (that you may wish to confirm with the agency) we might consider that the non-tangible properties and the service described in article 1 of the agreement are contingent on each other, given that each would not be provided without the other. This is an indication that the non-tangible personal properties may be part of the supply of the service noted in article 1 of the agreement.
However, if the non-tangible properties would be supplied without the service noted in article 1, or vice-versa, this is an indication that the latter may be separate supplies.
If the provision of the non-tangible personal properties were considered to be contingent on the provision of the service described in article 1, the above factors, considered as a whole, would indicate that the properties are part of the single supply of the service. As indicated earlier in this memo, this supply qualifies as a zero-rated supply of a service of advertising made to a non-resident person who is not registered, pursuant to section 8 of Part V of Schedule VI. If the provision of the non-tangible properties were not considered as contingent on the provision of the service, the above factors would indicate that the non-tangible properties constitute separate supplies. Where provided to a non-resident who is not registered under Subdivision d of Division V of Part IX of the Excise Tax Act, those supplies may be zero- rated pursuant to section 10 of Part V of Schedule VI of the Act. In addition, the agreement provides that no additional amount is charged in respect of the supplies of the non-tangible properties. Should the latter not be zero-rated, no tax would be payable in respect of these supplies, given that the consideration is nil.
Finally, please note that the analysis conducted in this memo to determine the number of supplies is to be used within the Department only and is not to be provided to the registrant or its representatives. Should the Department communicate with the registrant, it will be sufficient to indicate that the Department considers the various elements to be part of a single supply or constitute separate supplies.
Should you wish to discuss that issue further, please do not hesitate to contact Serge Bernier at (613) 952-9580.
H.L. Jones
Director General Tax Policy
Policy and Legislation Excise/GST
GTP: XXXXX
| c.c.: |
R. Allwright
M. Bloom
S. Bernier |
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