1 March 1996 GST/HST Interpretation 12005-1[1] - Commissions and Interlining of Airfares

                                                                        File: 12005-1

                                                                        Doc: 1180

I refer to your letter dated March 3, 1995, requesting a clarification of the letter of October 10, 1990, to XXXXX from myself on the issue of interlining transactions involving air carriers.

The situation you described is of an air carrier honouring the air ticket of another air carrier. Carrier B honours an air ticket or portion of an air ticket issued by Carrier A. Carrier B will seek to be reimbursed by Carrier A for the value of the air travel that Carrier B has supplied. Carrier A will reimburse Carrier B less a commission for the service of selling and processing the ticket. The commission is typically XXXXX of the amount reimbursed. I understand that the XXXXX XXXXX performs the settlement function. It is the application of the GST to that commission that is in dispute and for which you seek clarification.

I agree with your interpretation of the phrase "air fare distributions". The phrase "air fare distributions" refers to the entire supply of the air transportation service for which the air ticket was issued, other than to the extent the settlement includes an agent's fee for services. That is, the settlement of air fare distributions are not supplies because of the agency relationship but the services of acting as an agent are taxable supplies of selling and processing air tickets. I have consulted the Taxing Provisions Unit within General Tax Policy and they are in agreement with this position.

Furthermore, the issue of interline settlements was referred to the legal services of the Department of Finance, which, in October, 1990, concluded that an agency relationship does exist in fact and in law amongst the carriers. However, the opinion noted that the conditions of contract on the air tickets are indicative but not conclusive of the existence of an agency relationship. Therefore, if air carriers make their own bilateral agency relationships beyond the agreements made under the International Air Transportation Association (IATA), the specific agreement and arrangement must be evaluated to determine whether an agency relationship exists. The opinion did not give special consideration to bilateral agreements but they do seem to be covered by the general approach.

As stated in the letter of October 10, 1990, an agency relationship does exist amongst the carriers. It is normally a disclosed agency. It is difficult to envisage a non-chartered air transportation service where the passenger is not aware that an air carrier other than the issuing carrier is providing the air transportation. Under normal circumstances, there are many ways an air carrier can disclose in writing who is the actual principal, including signs at an airport show whose air service is being used.

However, subsection 177(1) of the Excise Tax Act has since been amended restricting the circumstances in which the treatment for GST follows a disclosed agency situation. As of January 1, 1993, a principal must show his GST registration number to the recipient in order for the relationship to be treated as disclosed. If the GST number is not revealed then the agent is treated as though the agent made the supply of the air transportation service itself. The result is that IATA air tickets are not likely to meet the requirements for treatment as a disclosed agent after 1992.

In the case of air carriers that are members of IATA, GST Rulings and Interpretations Directorate (formerly Policy and Legislation) informed the industry that the three-digit air carrier identification code used by IATA will be accepted as a proxy for the GST registration number only on the IATA ticket. Such air carriers must use their GST registration numbers in any other circumstances required by the Excise Tax Act.

If you have any comments or questions, please do not hesitate to contact Tom Alley at (613) 952-9218.

J.A. Venne
Director
Special Sectors
GST Rulings and Interpretations

References:                             ETA subsections 165(1), 165(2) and 177(1)

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