doc 1242
May 12, 1994
Dear XXXXX
We are writing in reply to your request for an interpretation on how the provisions of the Excise Tax Act will affect bingo associations inXXXXX addressing, in particular, the issue of whether bingo associations act as agents of their member clubs and whether the reimbursements and other compensation received from member clubs are subject to the GST.
The following interpretations are based upon our current understanding of the Excise Tax Act ("the ETA") and its Regulations, including Bill C-112 which received Royal Assent on June 10, 1993. The following interpretations do not take into account the effects of any proposed or future amendments to the ETA or future changes in interpretation.
Our understanding of the facts upon which the following interpretations are based is as follows.
Statement of Facts
XXXXX
1. The authority for the regulation of bingos is found under section 207 of the Criminal Code of Canada.
XXXXX
2. Pursuant to paragraph 207(1)(b) of the Criminal Code of Canada, "... it is lawful for a charitable or religious organization ... to conduct and manage a lottery scheme (which, by definition, includes bingos) ... if the proceeds ... are used for a charitable or religious purpose.
3. Pursuant to subsection 207(2) of the Criminal Code, "... a licence issued XXXXX.may contain such terms and conditions relating to the conduct, management and operation of or participation in the lottery scheme to which the licence relates. ..."
4. The Commission, in its publications XXXXX sets out the provincial policy governing the operation of bingos. These publications outline the terms and conditions applying to both the organizations licensed to conduct bingo events, and their respective bingo associations.
5. XXXXX controls licence applications and enforcement of the licences' terms and conditions.
6. As described in the above-noted publications, only charitable and religious organizations may be licensed to conduct bingos. Furthermore, if these organizations wish to conduct bingo events in a commercial gaming venue, they are required to be a member of a bingo association.
7. A bingo association is an association incorporated for the purpose of conducting bingos on behalf of its member clubs, based upon a common program and within a facility used primarily for bingos. This description of a bingo association is found in XXXXX[.]
8. In the XXXXX, the Commission has published detailed guidelines governing the formation of bingo associations and the operation of bingos in XXXXX and the XXXXX describes the following functions of a bingo association:
• to negotiate and sign a lease agreement for a facility, procure supplies, and hire personnel, and other items of common interest to member organizations;
• to establish a common bingo program which includes: game format, expenses, hours of operation, price of cards, prize-layout, and rules of play in addition to and consistent with those in the terms and conditions of a Bingo License;
• to schedule bingo events and allocate those events to member organizations;
• to maintain proper financial/inventory controls regarding services provided to member organizations; provide members with daily event summaries, and provide members with an audited financial statement at the end of the bingo association's fiscal year.
9. With regard to financial/inventory control, bingo associations are subject to strict guidelines with respect to handling of cash at the events, inventory control for bingo supplies, and accounting of all bingo expenses. Transaction reports must be completed for each event. Sample forms are provided by the Commission. The forms actually used may vary, so long as they conform with the terms of the XXXXX[.]
10. Other than the requirement to conform with the terms of the XXXXX, there are no stipulations regarding how an association is to be reimbursed by the member club with respect to expenses related to a particular event. We have been informed that, in respect of some purchases, the association may be directly reimbursed for its costs, in respect of others it may charge a mark-up to cover overhead, or it may charge a percentage mark-up on all purchases. Hereafter, we refer to this compensation received by the bingo associations as "reimbursements or similar compensation". An association may also receive cash advances from member clubs.
11. Distribution of surplus funds to member clubs will be made on a pro rata basis at the end of each fiscal year, in accordance with the XXXXX. The distribution may, for example, be calculated according to the number of bingo events that the member has conducted in relation to the total number of bingo events conducted by all members during the fiscal year.
12. A bingo association may purchase or lease facilities, purchase insurance, acquire utilities, purchase bingo supplies, stationary etc. with respect to the management of bingos. With respect to such purchases, it is able to enter agreements in its own name without binding the member club in respect of which an event is conducted. That is, XXXXX do not require the member club to be a party to any contracts that the association enters for the above purchases.
13. The "gross revenues" from bingo card sales and admissions, according to the XXXXX, "after payment of prizes, shall be deposited into (the member's) account as specified on application."
14. "Gaming revenues" of a bingo association are defined in the XXXXX as "funds paid to the association by its member organization, whether on a fixed fee or percentage basis, which are derived from admission and bingo card sales. ..." (i.e. payments to the association by the member club from the "gross revenues" referred to above). Bingo cash prizes are paid directly from the sale of bingo cards.
15. Non-gaming revenue of a bingo association is defined in the above handout as "other forms of income such as sale of merchandise, food and beverage sales, or commissions therefrom ... and membership fees."
16. XXXXX provides that "expenses eligible to be paid from gaming revenue must be directly related to the conduct and management of bingo and include, but are not limited to ... rental for equipment or premises, ... payment to hired staff, ... purchase of bingo cards/paper, advertising. ..."
17. Bingo associations are incorporated as non-profit organizations under the XXXXX[.] At present they are treated as non-profit organizations for the purposes of the GST.
Bingo Licences
18. The publication "XXXXX indicates that the licensed organizations are "required to form an association of charitable/religious organizations whose purpose is co-ordinating its members' bingo events."
19. A bingo licence may be issued by the XXXXX to an organization for a single event or for a continuous series of events (e.g. XXXXX[).]
20. As indicated in the "XXXXX XXXXX", this licence provides that the "conduct and management of bingo is the sole responsibility of the licensed organization and cannot be delegated." That is, the licencee is responsible for ensuring that the bingo event is conducted in accordance with the terms of the bingo licence, summarized as follows.
21. The licence provides stipulations for the conduct of the bingo encompassing admissions, bingo card sales, prize structure, and rules of play.
22. The licence also provides stipulations concerning the treatment of revenues and expenses of a bingo event:
• gross revenues "shall be deposited into account specified on application"
• expenses will be those "directly related to the conduct and management of the event." Other than this, there are few limitations concerning the nature of expenses. However, expenses, excluding rental of premises, shall not exceed 10% of gross revenue.
• any amounts paid by a licenced organization to its bingo association in respect of expenses are "considered pre-paid expenses, and remain gaming revenues ... and any surplus remaining after payment of allowable expenses shall be reimbursed to association members on an equitable basis, on a frequency determined by association membership."
• net proceeds from an event are to be spent by the licensed organization on charitable or religious objectives specified in the approved application.
23. With regard to financial reports and records, the licensee "shall maintain financial/inventory control system at event level agreed to by the association, approved by the Commission and organized along the following lines ... (outlines controls regarding handling of cash and inventory, and recording of expenses. Terms regarding financial reporting to the Commission are also provided).
Staffing
24. We have been advised by Revenue Canada Taxation that the callers, cashiers and association representatives, who are paid for their services by the bingo associations, are employees of the associations, and accordingly, the associations withhold CPP, UIC and income tax deductions.
25. As indicated in its memo of June 30, 1992, to XXXXX XXXXX recognizes these workers as employees of the bingo associations for purposes of the Employment Standards Code.
26. Therefore, as an item of fact, we view the callers, cashiers and association representatives as employees of the bingo associations.
Interpretations Requested
Do bingo associations in XXXXX that
• operate in accordance with the provincial directives as set out in the documents described above, and
• are not subject to side agreements with their member clubs which affect the nature of their legal relationship with such clubs,
operate as agents of their member clubs, with the result that these associations are not required to collect and remit GST on the receipt of advances, reimbursements and similar compensation received from members for costs incurred by the associations in the operation of bingos, such as salaries, materials, rent and license fees?
Further, do bingo associations act as agents of their member clubs with respect to the receipt of gaming revenues (admissions and bingo cards) and payment of bingo prizes?
Interpretations Given
Agency
The determination as to whether a bingo association acts as an agent of its member clubs is one that must be made on a case-by-case basis. Furthermore, the determination must be made in respect of each transaction. That is, a person may act as an agent for another in respect of some transactions, but not for others.
The directives set out in XXXXX do not indicate that bingo associations in XXXXX are acting as agents of member clubs in respect of the payment of salaries and wages to bingo workers, nor, generally, for other purchases by the associations related to the bingo events. That is, it is apparent from these directives that the bingo associations have the capacity to make purchases in their own right, rather than as agents of the member clubs.
The only apparent exception to the above comments is in respect of the purchase of the bingo licence. An association may be authorized by a member club to purchase, as an agent, a bingo licence.
With respect to gaming revenues, it is our interpretation that the bingo associations do act as agents in collecting these revenues, and paying bingo prizes, on behalf of the member clubs.
Requirement to Collect and Remit GST
In the absence of side agreements with member clubs, and based on our review of the provincial directives, it is our interpretation that bingo associations in XXXXX supply taxable services to their member clubs, and that reimbursements or similar compensation received or receivable from these clubs to offset expenditures that are related to providing such services represent consideration for the supply of such services.
Accordingly, unless an association is an unregistered small supplier or unless, as a result of a side agreement, it is acting as an agent of the member club(s) in making the purchase for which it is reimbursed, it must collect and remit GST on these reimbursements or similar compensation.
With respect to advances, the amount of the advance from a member club that would be consideration for a supply would be limited to the amount that represents a reimbursement of expenses.
Reasons for Interpretations Given
1. On the Question of Agency
It should first be noted that the terms "agent" or "agency" are not defined under the provisions of the ETA. The meaning of these terms has developed through the common law, and the Department relies on common law principles in determining whether an agency relationship exists in respect of any particular transaction.
An integral characteristic of a principal and agent relationship is the ability of the agent to legally bind the principal in respect of the transaction in question. To elaborate, the agent must receive authority from the principal to represent the principal in carrying out a transaction and to affect the principal's legal position in respect of that transaction. The principal's legal rights and obligations are affected as though the principal, rather than the agent, had undertaken the transaction.
Although a number of other factors have also been considered by the courts in ascertaining whether an agency relationship exists, the ability of an agent to bind the principal is an essential one.
Since a bingo licence can only be issued to a member club, it is evident that the bingo association, where it purchases a licence in the name of the member club, is acting as an agent of the member club when it is authorized by the member club to purchase a bingo licence on its behalf.
There is no evidence, however, in the XXXXX XXXXX, to indicate that bingo associations in XXXXX are acting as agents of their member clubs when they make other purchases or incur expenses related to the conduct of bingos. Rather, it is evident that bingo associations in XXXXX may make such expenditures in their own right, rather than as agents. For example, as indicated under the Statement of Facts,
• the XXXXX states that one of the functions of a bingo association is "... to negotiate and sign a lease agreement for a facility, procure supplies, and hire personnel. ..."
• XXXXX indicates that one of the roles of an association is to "arrange for facility, procurement of supplies, equipment, salaried personnel, and other items of common interest to member organizations."
• XXXXX also indicates the types of purchases an association can make 'those "directly related to conduct of bingo ... (such as) rental of equipment or premises, purchase of bingo cards etc. ...'
With respect to the paid workers, it is evident from the information provided by Revenue Canada Taxation and XXXXX XXXXX that these individuals are regarded as employees of the bingo associations. Further, it is our understanding that the bingo associations treat these individuals as their employees (i.e. they are on the associations' payrolls and the associations withhold CPP, UIC and income tax).
Accordingly, it could not be said that when the associations pay these individuals, they do so only as agents of the member clubs. If this were so, these individuals would then, in fact, be employees of the member clubs.
The preceding comments are not meant to preclude the possibility that a bingo association may act as an agent of a member club in respect of other purchases of which we are not aware. For example, if an association were empowered to lease a facility on behalf of a member club, such that the member club is liable under the lease agreement, then the association may be acting as an agent of the club in this transaction.
The above example illustrates that such determinations must be made on a case-by-case basis. That is, it is possible that a bingo association may be party to an agreement with its member clubs whereby it acts as an agent of the clubs in respect of some purchases.
With respect to the receipt of gaming revenues, since only charitable and religious organizations in XXXXX re licensed to earn revenues from the sale of bingo cards and admissions, and since the province stipulates procedures, as outlined under the Statement of Facts, whereby these funds remain the property of the licensed clubs (i.e. strict controls over the handling of cash receipts, deposit of receipts to the licensed club's account, provision of the return of surplus to the member), it is our view that bingo associations, where they collect bingo revenues from bingo card sales and admissions, do so as agents of their member clubs.
Further, since the gaming revenues are those of the member clubs, and the bingo prizes are paid from these revenues, the bingo association pays these prizes as agents of the member clubs.
2. On the Requirement to Collect and Remit GST
Legislative Provisions:
Pursuant to subsection 165(1) of the ETA, "every recipient of a taxable supply" is required to pay a tax of 7% on the "value of the consideration" for that supply. Under the provisions of sections 222 and 225, the person making the supply (the "supplier") is required to collect the tax from the recipient, and to remit it to the Receiver General.
A supply is defined under subsection 123(1) of the ETA as "the provision of property or a service in any manner ..." and a "taxable supply" is defined as "a supply made in the course of a commercial activity", which includes "a business carried on by the person (other than) ... the making of exempt supplies." Exempt supplies of non-profit organizations are described under Schedule V to the ETA.
The meaning of "value of consideration" is provided in subsection 153(1); it deems this amount to be equal to, where expressed in money, "... the amount of the money."
As indicated above, a supply is defined as the provision of a property or service in any manner. Property is defined under subsection 123(1) as "any property, whether real or personal, movable or immovable, tangible or intangible ..." and service is defined as "anything other than
(a) property,
(b) money, and
(c) anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person."
Application of the Above Provisions to Bingo Associations:
On the basis of the documentation on hand, it is evident that bingo associations in XXXXX provide a service to their member clubs. In fact, according to XXXXX XXXXX, the role and function of bingo associations is to provide a service of assisting the member clubs in the conduct of bingo events. Since this is not a service described as exempt under Schedule V of the ETA, it will be a taxable supply.
Reimbursements or similar compensation received from member clubs in respect of this service are viewed as consideration for the supply, on the basis that these payments offset expenses incurred by the association in the course of supplying a service to the member clubs.
It should be noted that the provisions of section 178 of the ETA clarify that the reimbursement of an expense received in making a supply of a service is to be treated as consideration for that supply. However, in the present situation, it is our view that the reimbursements or similar compensation received by bingo associations would be viewed as consideration for the supply of their services to member clubs in any case. Therefore the deeming provisions of section 178 are not relevant with respect to bingo associations.
The amount of the advance from a member club that would be consideration for a supply would be limited to the amount that the member club is required to pay the association in respect of the costs incurred by the association for that event(s).
This comment is made to recognize the possibility that cash advances from any particular member club may differ from the amount the member is required to pay in respect of that event. In these situations, it is important to note that the amount representing consideration for the supply of the association's services is the amount received by the association from a member club to offset the costs related to that member's event(s).
Usually this will not be an issue since, in most cases, it will be evident from the accounting for an event, that the advances, reimbursements or similar compensation received from member clubs directly offset expenses related to the event.
Any amounts received by the association that are paid out as bingo prizes would not be subject to tax, since the association is acting as an agent of the member club in respect of these outlays.
Attached is an example of how the above provisions apply.
It should be noted that if the total consideration for all taxable supplies of any particular bingo association do not exceed $30,000 over four consecutive calendar quarters, the association may choose not to register for the GST and would not be required to charge GST.
If an association is registered for the GST, it is entitled to recover the GST paid on purchases that are related to making taxable supplies by claiming input tax credits.
Closing Comments
As you are aware, we have also received a request by XXXXX for a ruling. This association has entered a "joint venture agreement" with its member clubs. We are reviewing what effect, if any, this agreement will have concerning the issue of agency before issuing a ruling.
We have had a number of enquiries from the district offices in XXXXX, particularly from the audit and appeals divisions. We would appreciate it if you would ensure that this interpretation letter is circulated to these offices.
If you have any questions or comments concerning this letter, please contact Joanne Houlahan at (613) 954-7945 or Michael Place at (613) 954-7936.
Yours truly,
J.A. Venne
Director
Tax Policy - Special Sectors
Policy and Legislation
Excise/GST
| c.c.: |
B. McCloskey
A. Venne
P. Banham
J. Houlahan
R. Wong
M. Place
H. Do (HQ Appeals) |
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