25 June 1997 GST/HST Interpretation HQR0000435 - Expense Claims for Telemarketing Tickets Sold by a Charity Through an Agency

                                                                        File no. HQR0000435

                                                                        June 25, 1997

                                                                        XXXXX

Dear XXXXX

This is in response to a note dated November 22, 1996 sent by XXXXX of your office. XXXXX requested an opinion as to who would be regarded as the recipient of expenditures incurred in a situation where a charity resident in XXXXX contracts with a local telemarketing company to sell lottery tickets on behalf of the charity, and consequently who would be entitled to the claim input tax credits or rebate for the GST paid on the expenditures incurred under this contract XXXXX[.]

Facts

Based on the information submitted by XXXXX our understanding of the pertinent facts is as follows:

1. A registrant, XXXXX, entered into a contract on XXXXX, with a charity, the XXXXX, to perform a service of telemarketing lottery tickets on behalf of XXXXX for the period commencing XXXXX with the winning ticket drawn on XXXXX[.]

2. XXXXX is a registered charity within the meaning of the Income Tax Act and is not registered for the GST/HST.

3. The lottery ticket license, which is issued by the provincial government, was purchased in the name of the charity, XXXXX[.]

4. The lottery tickets were specifically in the name of XXXXX with the only reference to XXXXX being the mailing address for ticket payments.

5. XXXXX printed the tickets and sold them to XXXXX residents over the telephone from its XXXXX office. The contract with XXXXX specified that it would employ XXXXX telephone representatives who were to be paid XXXXX per hour plus performance bonus; and XXXXX couriers in XXXXX couriers in XXXXX and one courier in XXXXX who were to be paid XXXXX per delivery.

6. The terms of the contract specified that XXXXX accepted sole responsibility for all associated financial risks and all project invoices were in the name of XXXXX All project expenses were to be paid from gross sales revenue and XXXXX accepted sole responsibility for all debts if expenses were to exceed revenues.

7. XXXXX XXXXX opened a joint bank account for the project to which all project revenues were deposited and from which all project-related expenses, such as telephone, printing, and wages, were paid under joint signing authority. XXXXX executive director had the right to approve all project expenditures.

8. XXXXX claimed input tax credits for the GST paid on all the expenditures incurred under the XXXXX contract. The XXXXX expenditures were in XXXXX name.

9. XXXXX had also contracted with the registrant telemarketing company in XXXXX under conditions similar to the XXXXX contract. The telemarketing company claimed input tax credits for the expenditures incurred in XXXXX although in this case, the expenditures were in the name of the charity.

10. XXXXX guaranteed XXXXX a minimum net return of XXXXX of net profit, whichever amount was greater (i.e., after expenses are paid, the remaining net profit is split, typically in the area of XXXXX between the registrant and the charity). The remaining profit accrued to XXXXX as its management fee for project administration and included the GST factor of 0.654. The management fee usually worked out to be about 20% of gross revenues.

11. XXXXX provided monthly statements of revenues and expenses, in addition to a final financial statement of total project revenues and expenses, to XXXXX and submitted to XXXXX a copy of the final financial statement on behalf of XXXXX[.]

Issue

XXXXX raised the question as to who should have claimed the GST paid on expenditures incurred under the XXXXX telemarketing contracts between the two parties, i.e., who should have been regarded as the recipient of those expenditures? In other words, who was entitled to the claim input tax credits (or rebates) for GST that was paid on the expenditures incurred under the XXXXX contracts between the charity, XXXXX and the telemarketing company, XXXXX[.]

Analysis and Response

The issue of who is the recipient of the expenditures incurred in a service contract such as that between the charity, XXXXX and the registrant telemarketing company, should be resolved by the terms of the service contract between these parties. Since uncertainty has arisen as to who is the recipient of the expenditures (i.e., the charity or the telemarketing company), and therefore who is eligible to claim input tax credits or rebates in respect of those expenditures, we offer the following general comments to assist you in providing a response to your client.

First, it is important to note that the gross revenues from the sale of the lottery tickets belong to the charity as the lottery license is in the name of the charity. As such, the registrant telemarketing company, XXXXX sold lottery tickets on behalf of the charity. Therefore, the sale of the lottery tickets was an exempt supply by the charity (Excise Tax Act (ETA) references: prior to 1997 - section 5.1, Part VI, Schedule V, after 1996 - section 1, Part V.1, Schedule V) and no GST would have been charged on the lottery ticket sales made through XXXXX[.] This GST treatment applies to both the XXXXX telemarketing service contracts.

A "recipient" of a supply of a property or service for purposes of the GST/HST is defined in subsection 123(1) of the ETA to mean:

(a) where the consideration for a supply is payable under an agreement, the person who is liable under the agreement to pay that consideration, and

(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration.

Evidence that XXXXX was the recipient of the project expenditures can be found in the terms of the contract between XXXXX and XXXXX which specified that XXXXX accepted sole responsibility for all associated financial risks associated with the project and if project expenses were to exceed project revenues, XXXXX would be exclusively responsible for all such debts. In addition, all project expense invoices were to be issued to in the name of XXXXX and XXXXX was to provide XXXXX with a monthly statement of expenses. The terms of the contract also stated that XXXXX would employ the telephone representatives and the couriers. This would lead us to conclude that XXXXX was the party liable to pay the consideration for the expenditures associated with the project.

Notwithstanding the financial arrangements specified under the contract between the two parties, i.e., the joint bank account and the split of net profit between XXXXX, we could also regard the amount that XXXXX did not "keep" (i.e., what XXXXX retained) as what XXXXX "paid" for the telemarketing service. In effect, the consideration for the telemarketing service would be regarded as being comprised of two elements: recovery of XXXXX expenses and XXXXX management fee which is based on a percentage of net profit. In other words, the "reimbursement" of expenditures incurred by the telemarketing company in the provision of its services constitutes part of that service and is subject to GST based on the tax status of the service. Thus the amounts retained by XXXXX i.e., the amount allowed for expenses plus the amount that represented the management fee, is the total consideration for a taxable supply of a telemarketing service.

As the total consideration charged by XXXXX for the taxable supply of a telemarketing service included both an expenditure portion and a management fee portion, the entire amount retained by XXXXX (i.e., the amount that XXXXX "paid" to XXXXX was subject to GST at 7%. This treatment is illustrated in the following hypothetical example:

Example:

In this example, the $80,000 that the charity does not receive represents consideration paid to the telemarketing company for services provided, and this consideration has two components: $60,000 for expenditures plus a management fee of $20,000. As the telemarketing service is taxable, the telemarketing company charges tax on the combined total of $80,000, and can claim input tax credits applicable to the $60,000 of expenditures it incurred to provide the taxable service. The charity would not be entitled to a 50% public service bodies' rebate on the expenditures since it was not the recipient. However, the charity can claim a rebate for the tax applicable to the $80,000 consideration it paid to the telemarketing company for the telemarketing service.

Irrespective of any uncertainty regarding the recipient, an examination of each expenditure would reveal that some were clearly the telemarketing company's, such as telephone and wages. Pursuant to section 169 of Part IX of the ETA, XXXXX could claim an input tax credit for the GST it paid as a recipient of a taxable supply, to the extent that the property or service it acquired was for consumption, use, or supply in the course of its commercial activities.

I hope these comments are of assistance to you. Please do not hesitate to contact Susan Eastman at (613) 952-6761 if you have any questions.

Joanne Houlahan
Manager
Charities, Non-Profit Organizations and Educational Services
GST/HST Rulings and Interpretations Directorate

File no. 11830-1