2 July 1997 GST/HST Interpretation HQR0000497 - Transactions Between

Dear XXXXX

This refers to your facsimile and Memorandum of January 9, 1997, addressed to Mr. Les Jones, in which you request an opinion, to be passed on to Audit, to determine if an agency relationship exists between XXXXX . Also, you want to know whether or not XXXXX should be registered.

The facts supplied are as follows:

 XXXXX a non-resident non-registered publisher, entered into a Sales, Marketing and Distributing Agreement dated XXXXX a Canadian GST registrant. The agreement is from XXXXX

Under the agreement, books are shipped by XXXXX to XXXXX warehouse at its own expense on a consignment basis. XXXXX retains title to the books. These books are imported into Canada by XXXXX who is responsible for clearing the goods at Customs. XXXXX pays the brokerage fees, import duties and taxes. XXXXX markets and sells the products, establishes levels of credit for XXXXX customers, and accepts and processes orders on behalf of XXXXX assigns the accounts receivable to XXXXX who is responsible for collecting the receivables and assumes risk of loss for unpaid accounts. XXXXX invoices the Canadian customers; at this point in time, title to the goods passes to XXXXX insures the books while in transit to Canadian customers. XXXXX remits to XXXXX the net sales amount, less insurance, transportation, deductions, marketing fund, XXXXX commissions and any charges for other services.

Per telephone conversation with XXXXX auditor, on April 22, 1997, it was confirmed that XXXXX invoices the Canadian customers under their own name. XXXXX name does not appear on the sales invoices. XXXXX has been claiming ITC's for GST paid on the books at time of importation.

Per XXXXX financial statements for the year ended March 31, 1996 and trial balance as at March 31, 1996, XXXXX records its income as sales as opposed to commissions revenue.

You requested answers to the following questions:

i. Is XXXXX an agent of XXXXX subject to GST?

iii. Are other services provided by XXXXX (repacking, taking inventory, stickering, preparation of sales reports, etc.) subject to GST?

iv. Should XXXXX be registered?

v. Who is entitled to an ITC on the importation of XXXXX products?

These questions will be answered in the same order as listed above.

i. Is XXXXX an agent of XXXXX and XXXXX as follows:

A. Consent of both the Principal and the Agent

There is a written agreement signed by both parties. Some of the relevant clauses are as follows:

 XXXXX In this agreement, XXXXX appoints XXXXX as its commissioned sales representative and grants to XXXXX the exclusive right to sell in Canada XXXXX

 XXXXX - The agreement shall not be construed as creating an agency, partnership or other such relationship. XXXXX shall not make any representation or statement of agreement on behalf of XXXXX except as expressly authorized by XXXXX or in this Agreement.

 XXXXX - XXXXX agrees that it will not represent a competitive publisher whose books are substantially similar to XXXXX ... without the prior written consent of XXXXX - This agreement does not cover books listed in Appendix F as these are XXXXX books which are purchased by XXXXX and XXXXX did not intend to create an agency relationship. This is further evidenced by XXXXX financial statements for the year ended March 31, 1996 and trial balance as at March 31,1996. XXXXX records income as sales rather than commission revenue.

B. Authority of the Agent to Affect the Principal's Legal Position

 XXXXX has not been empowered by XXXXX to affect its legal position. XXXXX can not bind XXXXX to third parties when books are sold to Canadian customers. Therefore, this is not indicative of a true agency relationship.

C. The Principal's Control of the Agent's Actions

 XXXXX has control over the actions of XXXXX who is under its general direction. This is evidenced by the fact that XXXXX must furnish ongoing reports to XXXXX as listed in Agreement (clause 11). XXXXX sets all Canadian list prices of the books (clause XXXXX

The application of the Essential Qualities of Agency indicates that the relationship between XXXXX and XXXXX is not one of agency.

ii. Are commissions received by XXXXX subject to GST?

The relationship between XXXXX is not one of agency. The transactions between these two parties are consignments sales. In consignment sales, the consignor gives possession of his property to a consignee in order that the consignee sells the property. If and when the consignee sells the property to another person, the consignee also buys the property from the consignor. Thus, two transactions occur simultaneously, first the consignor sells the property to the consignee and second, the consignee sells the property to the third party. The sales by XXXXX to XXXXX are taxable as well as the sales by XXXXX to Canadian third parties.

Since XXXXX is not the agent of XXXXX the commissions received by XXXXX from XXXXX are not taxable.

iii. Are other services provided by XXXXX (repacking, taking inventory, stickering, preparation of sales reports, etc.) subject to GST?

These supplies are deemed to be made in Canada under paragraph 142(1)(g) and, therefore, are subject to GST at 7%. This supply is not zero-rated under section 7 of Part V of Schedule VI because a service, in respect of tangible personal property that is situated in Canada, is excluded from this section.

iv. Should XXXXX be registered?

 XXXXX is in "business" as defined in subsection 123(1), as XXXXX has a trade or undertaking that is engaged in for profit on a regular or continuous basis.

Two important components of a contract are an offer and acceptance. A contract is concluded where the offer is accepted. In this case, the offer is accepted when the sale to the Canadian customer is made in Canada by XXXXX

The operations, from which profits arise are performed in Canada. Furthermore, the goods are delivered in Canada, payments are made in Canada and the inventory is warehoused in Canada.

Therefore, XXXXX is carrying on business in Canada. Pursuant to subsection 240(1), XXXXX is required to register for their taxable commercial activities carried on in Canada unless XXXXX is a small supplier.

v. Who is entitled to an ITC on the importation of XXXXX products?

The 'flow-through' provisions under section 180 would allow XXXXX to recover Division III tax paid by XXXXX at time of importation. XXXXX should have provided XXXXX with satisfactory evidence to allow them to claim an ITC. Since XXXXX has been claiming ITC's on imported books, XXXXX is deemed to have paid GST at time of importation.

Since XXXXX is required to register and all ITC's on importation of books have been claimed by XXXXX it is suggested that XXXXX be registered prospectively as opposed to retroactively. It can also be pointed out to XXXXX that if they register retroactively, they are subject to penalty and interest on unpaid GST. Please ensure that GST has been remitted on sales to Canadian customers.

Should you require further information concerning the above, please feel free to contact me at (613) 952-0419.

Michèle Routhier
Border Issues
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch