14 March 1997 GST/HST Interpretation HQR0000013 - GST Treatment of Illustration Charges

                                                                        GST Rulings and Interpretations
9th Floor, Tower C
25 McArthur Road
Vanier ON
XXXXX                                                                                 K1A 0L5

                                                                        March 14, 1997

Dear XXXXX:

Thank you for your facsimile of July 5, 1996 concerning the application of the Goods and Services Tax (GST) to your operations.

Interpretation Requested

In your facsimile you wish to know whether the charge for the illustration service provided to your clients is an integral part of the supply of services relating to the supply of property to the recipient (in this letter referred to as auctioneering services). You have also asked if this service would have the same tax status with respect to the GST as these auctioneering services. You also wish to know whether the same thing applies with respect to the supplies of restoration, insurance and appraisal services that you offer in conjunction with your auctioneering services. Included with the reply to these inquires is an overview of the proposed new rules concerning the supply of auctioneering services.

According to your letter and to our telephone conversation of March 4, 1997, the relevant facts are the following:

•   illustration services involve taking a photograph of the items to be auctioned;

•   these photographs are used in the catalogue of auction items, are sent to prospective purchasers, are sometimes projected onto a screen during the auction, and may be used in XXXXX advertisements at XXXXX discretion;

•   the customer can purchase auctioneering services without purchasing the illustration services, but then the customer would normally pay a higher commission for the auctioneering services;

•   the illustration charges appear separately on the bill to the customer from the commission charged; and

•   sometimes the illustration charges shown on the bill are lumped together with other charges for such things as insurance, restoration and appraisals and other times all of these charges are listed separately.

GENERAL INFORMATION REGARDING THE NEW RULES APPLYING TO AUCTIONEERS

As you may know, the Government introduced a Notice of Ways and Means Motion on April 23, 1996 containing over 100 proposed measures to streamline and simplify the operation of the GST. One of those measures provided for the elimination of notional input tax credits. Effective April 24, 1996, if an agent or auctioneer is making sales (other than an exempt or zero-rated supply) of tangible personal property on behalf of a principal who is not required to collect tax (normally a non-registrant), the agent or auctioneer is considered to have made a taxable sale to the customer. As a GST registrant, the agent or auctioneer is required to collect and remit the GST on such sales. The agent or auctioneer will no longer be able to flow through to the principal the tax collected under these conditions nor will the agent or auctioneer be able to claim an offsetting input tax credit. For sales made on behalf of a principal who is not required to collect tax, the agent or auctioneer does not have to charge GST on the supply of auctioneering services to the principal.

An exception to the general case described above is provided where the principal who is not required to collect tax in respect of a particular supply of property is nevertheless a registrant and the property was last used or acquired for consumption or use in a business or adventure or concern in the nature of trade of the principal or in making a taxable supply by way of sale of real property. Some principals in this circumstance may prefer to account for the tax on the property instead of having the agent or auctioneer do so. In that event, the principal and the agent or auctioneer may elect in writing to have the principal account for the tax. The result is that the principal charges and reports the tax on the supply of the property, and the agent or auctioneer must charge and remit GST on the fee for its services.

Where an agent auctioneer makes a taxable supply of tangible personal property (other than an exempt or zero-rated supply) on behalf of a principal who is required to collect tax (generally a GST registrant), the principal will be responsible for collecting and remitting the GST on all taxable sales and the agent or auctioneer will be responsible for collecting and remitting the GST on the services it provided to the principal.

Amendments are also proposed to the Credit Note Information Regulations and the Input Tax Credit Information Regulations. These amendments will ensure that an invoice issued by an agent or auctioneer who is making a supply on behalf of a principal satisfies the documentation requirements that the recipient of the supply must meet in order to be eligible for an input tax credit. Therefore an agent or auctioneer can use his GST number on invoices for sales made on behalf of a GST registrant.

If the good being sold is an exempt or zero-rated supply then no GST is collected on the sale of the good but the agent or auctioneer is responsible for collecting the GST on its auctioneering services.

Transitional Relief - April 24, 1996 to June 30, 1996

Transitional relief is available for auctioneers from the above rules for the period beginning April 24, 1996 and ending June 30, 1996. The proposed amendments announced on April 23, 1996 described above will continue to apply to auctioneers who adopted the new rules as of April 24. However, those auctioneers who operated under the previous rules during the transitional period will be entitled to claim notional input tax credits only if goods were sold by the auctioneer on or before June 30, 1996 on behalf of a person who would not have been required to collect tax if the person had sold the goods directly, and the auctioneer at any time pays or credits to the person an amount equal to the notional input tax credit available to the auctioneer. On sales made after June 30, 1996 and before April 1, 1997, all auctioneers must account for GST under the new rules described above.

Changes to Proposed Amendments Effective April 1, 1997

On April 1, 1997, further amendments will come into effect which will simplify the above rules for auctioneers. These amendments will be effective beginning April 1, 1997. Under these new rules, a supply of tangible personal property made by an auctioneer on behalf of a principal is deemed to be made by the auctioneer in all cases. As a result, the auctioneer will be responsible for accounting for and remitting the GST on all supplies of tangible personal property made by auction, even where the principal would not have been required to collect tax in respect of the supply. Thus the auctioneer will no longer be required to determine the tax status of the principal. Furthermore, the auctioneer will not be required to charge GST on the fee for its auctioneering services.

To address the potential negative cash-flow impact this change would have on certain registrants who frequently sell goods by auction in large lots, usually at the wholesale level, an auctioneer and a registrant will be able to make a joint election in certain circumstances. This election will allow the auctioneer to pass back the tax that the auctioneer has collected to the principal who would then be required to report and remit it. This election could only be made where all, or substantially all, of the proceeds on behalf of the principal at the particular auction are attributable to certain prescribed goods. The Department of Finance has indicated that the list of prescribed goods will include items such as motor vehicles, certain construction equipment, horses and flowers. Also, the election would apply only with respect to sales by auction where the principal would otherwise be required to collect the GST. In situations where this election is made, the auctioneering services would be taxable.

Effective April 24, 1996, where goods are imported by an unregistered non-resident for sale by auction in Canada, section 180 of the Excise Tax Act (the ETA) applies to the transaction. Section 180 treats the resident person (ie. the auctioneer) as having paid the GST that the non-resident person was required to pay. Thus the auctioneer will be able to refund to the non-resident the GST paid on the importation of the goods, and will then be able to claim an input tax credit for that GST.

Interpretation Given

It is the Department's position that the supply of illustration, restoration, insurance and appraisal services are separate supplies from the supply of auctioneering services. However, in this particular fact situation it is the case that the illustration service is directly related to the auctioneering services. Thus GST is not exigible on the supply of this service pursuant to subsection 177(1.2) of the ETA if the supply was made after March 31, 1997 and no election was made pursuant to subsection 177(1.3) of the ETA (see above). For supplies of illustration services made after April 23, 1996 but before April 1, 1997, no GST is exigible on the supply if the services were provided to a principal who is not required to collect tax (normally a non-registrant). In all other cases, GST is collectible on the supply of the illustration services. As well, GST is always collectible on the supply of illustration services if those services are not provided in conjunction with auctioneering services. The restoration, insurance and appraisal services are not directly related to the auctioneering services and thus GST must be charged on the value of these services at all times.

To determine whether the illustration services and the auctioneering services constitute a single supply or separate supplies, it is necessary to analyze the substance of the transaction and, in this regard, the following questions were used to assist in making this determination:

1. If the customer did not receive either of the illustration service or the auctioneering service would each, in itself, be of any use to the customer? Here the customer's objective is to auction off his or her goods. In this context the supply of the illustration service by itself would be of no particular use to the customer. However, the provision of the auctioneering services by itself would be of use in meeting the client's need. This suggests that the two supplies are separate supplies.

2. Is the provision of one of the supplies contingent on the provision of the other? No. The customer can choose to receive the auctioneering services without taking the illustration services, although the customer would be penalized with a higher commission rate for doing so. This suggests that the two supplies are separate supplies.

3. Is the customer made aware of the specific elements (in detail) that are part of the package. Yes. The customer is informed about the illustration services and the auctioneering services, and they are billed separately. This also suggests that the supplies are separate supplies.

The answers to the above questions indicate that the auctioneering services and the illustration services are separate supplies. Applying these same questions to the restoration, insurance and appraisal services would yield the same result, and thus the supplies of these services are also separate supplies from the supply of the auctioneering services.

Once it is determined that the supplies are separate supplies from the supply to the principal of the auctioneering service, it is necessary to determine if the supplies are deemed not to have been made to the principal pursuant to proposed subsection 177(1.2) of the ETA. If the supply to the principal is deemed not to have been made then no GST need be collected for it. According to subsection 177(1.2), the supply is deemed not to have been made if it is the supply of a service that relates to "the supply of the property to the recipient". In other words, the service in question must directly relate to the service of auctioneering the client's property. Whether or not a particular service directly relates to the supply of the auctioneering service is a question of fact which must be determined by examining the particular facts of the case. Thus the factors examined in the analysis below should not be construed as a general test for this issue.

With respect to the illustration services, from the point of view of the customer, these services are used solely as a means of promoting the items that the client has for sale. As well, those clients who purchase the illustration services receive a discount in the amount of their commission which at least partially offsets the charge for the illustration services. The illustration service is not the sort of service that a person would normally want unless they were also taking the auctioneering service. The illustration service would not normally be provided by anyone other than the person who is also offering the auctioneering services. These considerations suggest that the illustration service directly relates to the auctioneering service. Thus no GST needs to be charged on a supply of illustration services if the supply meets the conditions set out in the first paragraph of this section of the letter.

With respect to the restoration, insurance and appraisal services, these services may be provided by a third party, and they are not included in the price of the commission. As well, these services may be purchased by a person from a given supplier whether or not that person intends to have the item auctioned off by that supplier or by someone else. In other words these services have a use in themselves which is not necessarily related to the auctioneering services. For example, restoration services improve the appearance and value of the property, insurance services protect the value of the property, and appraisal services are related to ensuring the value of the property. Any of these three services are useful to the client whether or not the client also purchases auctioneering services. Thus these services do not directly relate to the auctioneering service and GST must be charged on them.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of GST Memoranda Series (1.4). If you need additional information, please feel free to contact me at 613-8253.

Yours truly,

Gregory Smart
GST Rulings and Interpretations Office attachment

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