June 11, 1997
Dear XXXXX
Thank you for your memorandum of June 13, 1996 (with attachment) addressed to Les Jones concerning the time of liability for reporting the Harmonized Sales Tax ("HST") collected for XXXXX service providers, particularly with respect to the situation of XXXXX. This memorandum has been passed to me for a response. I apologize for the delay in responding to it.
Interpretation Requested
In your letter you wish to know the time of liability for a XXXXX service provider in XXXXX situation. Our understanding of the relevant facts is the following:
1. XXXXX is in the business of providing passive, interactive and/or live program services (information service, entertainment service, horoscopes, psychic service, etc.) to the general public XXXXX services).
2. XXXXX provides access to the XXXXX services offered by XXXXX via a XXXXX which the general public can call.
3. XXXXX has entered into an industry standard Accounts Receivable Management agreement ("ARM agreement") with XXXXX, the terms and conditions of which are the following:
a) XXXXX purchases from the XXXXX and XXXXX sells, assigns, transfers and sets over unto XXXXX all rights, title and interests in and to the accounts receivable of XXXXX Title to such accounts receivable passes to XXXXX immediately upon XXXXX providing a XXXXX service XXXXX XXXXX[.]
b) XXXXX records all relevant usage of XXXXX XXXXX services XXXXX calculates the amount owing and distributes the resulting statement XXXXX XXXXX XXXXX XXXXX also answers all XXXXX queries regarding billing conducted by XXXXX XXXXX services.
c) XXXXX pays to XXXXX an amount equal to the full value of each and every accounts receivable that XXXXX records, less the aggregate of tariffed network charges, including grace period charges, the level of bad debt that was incurred during the previous settlement period(s) and a discount equal to the ARM Fee, plus whatever taxes are applicable to these amounts. The resulting amount is referred to as the "Price for the Accounts Receivable". (NOTE: The ARM Fee means the amount charged to XXXXX for the services provided by XXXXX under the agreement.)
d) XXXXX will, on the XXXXX business day following the close of a billing cycle, forward to XXXXX an accounting report for each XXXXX service offered by XXXXX[.]
e) XXXXX pays to XXXXX the "Price for the Accounts Receivable" which XXXXX records in a billing cycle, 60 days after the close of each billing cycle.
f) At any time during the continuance of the agreement, XXXXX has the right to sell, assign, transfer and set over the accounts receivable with all or any rights, title and interests therein to any person, firm or corporation.
g) XXXXX is responsible for determining all of the (federal and provincial) taxes applicable to the provision of its services and which must be levied XXXXX must notify XXXXX of the applicability of any such taxes and the appropriate rates thereof.
h) XXXXX bills and collects the HST on behalf of XXXXX. The amount of the HST collected by XXXXX is forwarded to XXXXX and XXXXX is responsible for the remittance of the HST to the appropriate government authority.
i) In the event of first time bad debt callers, XXXXX will, on a Billing Cycle basis, provide a summary of the number of XXXXX charged back to XXXXX Program Number.
j) In the event of a repeated bad debt by specific callers, XXXXX will, on a Billing Cycle basis, provide in confidence and solely to facilitate collection, a report containing details pertaining to the specific callers.
4. XXXXX has a monthly reporting period for HST purposes.
5. Both XXXXX and XXXXX are registered for HST purposes.
6. XXXXX is supplying its services in Canada pursuant to paragraph 142(1)(g) of the Excise Tax Act ("ETA").
In this letter it should be noted that, pursuant to section 9 of the Draft Place of Supply (GST/HST) Regulations, HST of 15% applies to the supply of XXXXX services XXXXX originates in XXXXX on or after April 1, 1997. All supplies made before that date or outside of these provinces will be subject to goods and services tax (GST) of 7%. All references to HST should be interpreted as being references to the GST where appropriate.
Interpretation Given
The Department is unable to rule as to whether an agency relationship exists between XXXXX and XXXXX in this case. However, if we assume that such an agency relationship does exist, then it is the Department's position that the liability of XXXXX for HST for a XXXXX made by a customer of XXXXX to one of XXXXX XXXXX numbers arises at the earlier of the day that XXXXX receives payment from its customer for the use of the XXXXX service and the day that such payment becomes due. XXXXX must report and remit the HST by the end of the month following the month in which this occurs.
If we assume that no agency relationship exists between the two, then HST is collectible by XXXXX on the earlier of the day that payment is received by XXXXX from XXXXX and the day that such payment becomes due. XXXXX must report and remit HST by the end of the month following the month which contains the earlier of these two dates.
Agency
In this portion of the letter I will begin by describing the Department's position concerning the determination of agency. I will then describe what indicators of agency are used by the Department to determine whether XXXXX is acting as an agent of XXXXX. At the end of this section I will describe the consequences should it be found that XXXXX is acting as an agent for it.
It is the Department's position that a determination as to whether an agency relationship exists between two persons will be made based on the relevant facts of the situation and the principles of law. Moreover, while a person may act as an agent for some matters it cannot be concluded that the person is acting as an agent in all matters. Thus the Department will not rule on whether an agency relationship exists where the relationship in question is already established or ongoing. Where a HST ruling or interpretation turns on the question of agency, there must be a representation of fact made by the client as to whether an agency relationship exists. The Department will rely on such representation when providing the ruling or interpretation as to the application of the HST.
While a determination of this issue cannot be given to XXXXX, the following "essential qualities of agency" and "indicators of agency" may be examined in order to determine whether XXXXX is acting as an agent of XXXXX The "essential qualities of agency" are used to help one determine whether an agency relationship exists between two parties. Even if such a relationship exists between the parties, however, a party may act as an agent for the other party for some matters and not for others. Thus if an agency relationship exists between two parties then the "indicators of agency" may be used to determine whether any given transaction was conducted in the capacity of an agent on behalf of a principal. These tests are explained in detail in Policy Paper P-182, Determining the meaning of the terms "Agent" and "Agency" (Draft).
The "essential qualities of agency" that may be used to determine whether an agency relationship exists are the following:
1) Consent of both the Principal and the Agent
Agency exists where a principal authorizes another person to represent him and to take certain actions on his behalf. The grant of authority by the principal may be expressed or implied. In other words, the agency relationship may be created simply by the principal consenting to having the agent act on his behalf, or by the behaviour and actions of the parties where such consent is not explicit.
In the present situation all written and verbal agreements between XXXXX and XXXXX which are still in force should be examined to see if any of them contain an explicit statement to the effect that XXXXX has agreed to act as the agent of XXXXX and that XXXXX has agreed to have XXXXX act as its agent. It should be noted that even if an agreement does exist which explicitly states that XXXXX is (or is not) acting as an agent for XXXXX, this does not conclude the matter. It is well settled from case law that while a written agreement containing an express declaration of agency is strongly indicative of such a relationship, it remains open to the court, having regard to any other pertinent fact, to make a contrary finding. Conversely, although a written agreement may expressly state that a person is not acting as an agent, nevertheless, the person may, in law, be found to be acting in such a capacity based on other evidence. Thus even if such an agreement exists the remaining "essential qualities of agency" need to be examined in order to make a proper determination.
If no such agreement exists then the actions of the parties needs to be examined in order to determine if an agency relationship exists in fact. The following two "essential qualities of agency" described below will assist in making this determination.
2) Authority of the Agent to Affect the Principal's Legal Position
The concept of an agent binding his principal refers to the ability of the agent to affect the legal position of the principal. The most common example of an agent binding the principal is where the agent is authorized to enter into contracts with third parties on behalf of the principal. For instance, suppose A asks B to negotiate and purchase some equipment from C; and B signs the contract with C but A is stated as being the party who is purchasing the equipment. Therefore, B has bound A to the terms of the agreement. In other words, B's actions have caused A to be subject to the same obligations and to acquire the same rights as would have occurred if A had signed the contract himself.
The principles of law indicate that in a true agency relationship it should be evident that a person acting in the capacity of agent is empowered by the principal to act or enter into contracts on behalf of that principal. Any transactions undertaken by the person in the capacity as "agent" will be clearly done under the authorization of its principal. Consequently, through the agent's actions in the representation of its principal, the agent will conduct itself in such manner so as to affect the principal's legal position.
In the present case one would need to examine whether XXXXX has the power to bind XXXXX in a contractual agreement with a third party, such as the customer of XXXXX who is using XXXXX service. It is unclear from the facts whether there is any contractual relationship at all between XXXXX and the customer of XXXXX who is using XXXXX "XXXXX service.
3) The Principal's Control of the Agent's Actions
A principal exercises a greater degree of control over the actions of an agent than would exist between a person and an independent contractor who has been hired to provide a property or service. The independent contractor must provide the goods and services he has agreed to provide, though how he accomplishes that is limited only by the terms of his contract. The agent acts under the authority granted by the principal. This authority may be amended or revoked by the principal. The agent has a duty to account to the principal for his actions. For example, an independent contractor controls the amount charged for goods and services provided. The agent is bound by the instructions of the principal with respect to the amount charged.
In a relationship of agency, it should be clear that the principal has a degree of power over the actions of the agent; the agent would be acting as an extension of the principal and, therefore, would be under the principal's general direction and control. This is sometimes evidenced by requiring the principal's approval for certain expenditures or simply by requiring ongoing reports by the agent to the principal.
Here XXXXX may want to look at whether it can dictate to XXXXX how much to charge for the sale of its services, and whether XXXXX has any other control over XXXXX with respect to XXXXX provision of XXXXX XXXXX service to its customers. The nature of the monthly reports from XXXXX to XXXXX would also need to be considered. If they are nothing more than an accounting of XXXXX sales of XXXXX services this is not generally indicative of an agency relationship.
Indicators of Agency
If the above "essential qualities of agency" indicate that an agency relationship exists between XXXXX and XXXXX then the following "indicators of agency" need to be examined to determine if XXXXX is acting as an agent of XXXXX for the particular transactions in question:
1) Remuneration - Remuneration which is in the form of a commission on a set amount which is dictated by the principal is indicative of agency.
2) Ownership of Property - A person cannot be acting as an agent if he acts as a buyer or seller to or from the principal in a particular transaction. This does not appear to be the case here as the services are provided directly through XXXXX telephony equipment, while XXXXX equipment acts only as a gateway to connect the customer to XXXXX
3) Liability of Contract / Liability for Payment - It is unclear from the facts whether XXXXX or XXXXX would be liable to the customer for a failure to provide the service. Similarly, it is unclear as to whether XXXXX or XXXXX would be able to enforce payment for the use of the XXXXX service. If XXXXX were acting as agent then it would be XXXXX who must enforce payment and be liable for service failure.
4) Accounting Practice - An agent will not normally record as his own expense those expenses disbursed on behalf of the principal nor will he record as sales revenues amounts received for the service supplied as an agent. It is unclear what XXXXX practice is in this regard.
5) Best Efforts - An agent usually undertakes to use his best efforts in acting for his principal, rather than guaranteeing to achieve a certain result to or on the principal's behalf.
6) Assumption of Risk - An agent usually does not assume the risk of loss from the transaction with the third party.
7) Alteration of Property Acquired - This factor is not relevant to XXXXX situation.
8) Use of Property or Service by Agent - The agent does not normally use for his own purposes any property or service acquired from the principal.
If after going through the above test for agency it is determined that an agency relationship exists between XXXXX and XXXXX and that XXXXX is actually acting as an agent for XXXXX with respect to the sale of XXXXX XXXXX service to its customers, then for HST purposes XXXXX is considered to be the supplier of the XXXXX service to the customers of XXXXX[.] Pursuant to subsection 168(1) of the ETA, the supply of the XXXXX services will be subject to HST at the earlier of the day the consideration for the supply is paid and the day consideration for the supply becomes due.
A supplier is considered to have received payment when the consideration for the supply is in the supplier's possession or control. Receipt by an agent of the supplier generally constitutes receipt by the supplier. Thus if XXXXX were acting as an agent of XXXXX the consideration for the XXXXX services are considered to have been received by XXXXX at the time that they were received by or became due to XXXXX from the customer.
Subsection 238(1) of the ETA states that where a registrant has a monthly reporting period, the registrant must file a return within one month after the end of the reporting period. Subsection 228(1) of the ETA stipulates that every registrant who is required to file a return shall in that return calculate the net tax for the reporting period for which the return is to be filed. Thus XXXXX must report and remit HST by the end of the fiscal month following the fiscal month that XXXXX received payment or payment became due from XXXXX customer, whichever is earlier.
For supplies of XXXXX services provided by XXXXX acting as an agent of XXXXX before April 24, 1996, former subsection 177(1) of the ETA deems two supplies to have been made: XXXXX is deemed to have supplied the service to the customer and XXXXX is deemed to have supplied the service to XXXXX[.] Thus XXXXX is required to collect and remit goods and services tax (GST) equal to 7 per cent of the consideration for the supply of the service to the customer. Similarly, XXXXX is required to collect and remit GST on the amount paid by the customer to XXXXX, less any commission charged by XXXXX to XXXXX XXXXX liability to collect and remit GST on the deemed supply to XXXXX arises when XXXXX pays or credits to XXXXX an amount for the supply of XXXXX services made to the customer.
To use the example in the letter from XXXXX, let us assume that the following facts took place after April 23, 1996:
1. a customer of XXXXX places a XXXXX to one of XXXXX services in April;
2. this customer must pay the amount due for this XXXXX sometime during the month of May;
3. XXXXX supplies a monthly statement to XXXXX sometime between June 1 and June 15 which reports this XXXXX[;] and
4. XXXXX is required to pay XXXXX for the amount charged for the XXXXX (including HST), less a service fee and HST on that service fee by the end of July.
In this fact scenario, if XXXXX is acting as an agent of XXXXX, then consideration became due for the supply of XXXXX services from XXXXX to the customer in the month of May, and therefore XXXXX must report and remit the HST received from XXXXX by the end of June.
If in the above example the customer placed the XXXXX before April 24, 1996, then the rules in former subsection 177(1) would apply. Thus XXXXX would be responsible for collecting and remitting GST on the consideration for the supply of XXXXX services to the customer. XXXXX would be responsible for collecting and remitting GST on this same consideration less the service fee charged by XXXXX liability to collect and remit GST would arise when it receives payment from XXXXX in July. Therefore, pursuant to subsections 238(1) and 228(1), XXXXX would be required to report and remit GST on this amount by the end of August.
No Agency
If after going through the above test for agency it is determined that no agency relationship exists between XXXXX and XXXXX then the following rules apply. When a customer of XXXXX services, there are two simultaneous transactions for tax purposes. The first is the supply of XXXXX XXXXX services from XXXXX to XXXXX and the second is the resupply of these same services from XXXXX to the end customer. These supplies will be subject to HST at the earlier of the day the consideration for the supply is paid and the day consideration for the supply becomes due.
Consideration is considered to have been paid when it is received by the supplier. Under subsection 152(1) of the ETA, consideration, or a part thereof, is deemed to become due on the earliest of the following days:
(a) the day that the supplier first issues an invoice in respect of the supply for that consideration or part and the date of that invoice;
(b) the day the supplier would have, but for an undue delay, issued an invoice in respect of the supply for that consideration or part; and
(c) the day that the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.
The supply will be subject to HST at the earliest of the above dates. It is our understanding that normally no invoice for the supply is issued by XXXXX to XXXXX. If this is the case then the supply of XXXXX services will be subject to HST when XXXXX receives actual payment from XXXXX or when XXXXX is contractually required to pay XXXXX (i.e. 60 days after the close of XXXXX billing cycle), whichever is earlier.
Subsection 238(1) of the ETA states that where a registrant has a monthly reporting period, the registrant must file a return within one month after the end of the reporting period. Subsection 228(1) of the ETA stipulates that every registrant who is required to file a return shall in that return calculate the next tax for the reporting period for which the return is to be filed. Thus XXXXX must report and remit HST by the end of the fiscal month following the fiscal month in which XXXXX receives payment or payment becomes due (whichever is earlier) from XXXXX If we use the same fact scenario in the example given above and assume that XXXXX is not acting as an agent for XXXXX, then tax will become payable at the earlier of the date that XXXXX is required to pay XXXXX the amount charged for the XXXXX and the date that this amount is actually received by XXXXX from XXXXX. If we assume that XXXXX pays XXXXX during the month of July, then the HST on the supply will become payable by XXXXX at the end of the month of July, and XXXXX must report and remit this HST by the end of August.
I hope that this letter is of assistance to you. If you have any further questions do not hesitate to call me at 6138253.
Yours truly,
Gregory Smart
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Reference:
Policy Paper P-182: "Determining the Meaning of the Terms Agent and Agency"
HST Memo 300-6 "Time of Liability"
HST Memo 300[-]9 "Consignment Sales"
HST Memo 500-2 "Returns and Payments"
HST Memo 500[-]1 "Authorized Fiscal Periods and Reporting Periods"
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Originator's Desk Copy |
b.c.c.: NCS Subject Code(s) - 11665-4
Audit
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H.Q. Quality Assurance |
b.c.c.: hard copy - R/F HST - XXXXX
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