8 December 1998 GST/HST Interpretation HQR0001240 - PROPOSED LAW/REGULATION Application of the Excise Tax Act to Promotional Allowances

Dear Mr. XXXXX

Thank you for your letter of June 24, 1998, concerning the application of proposed section 232.1 of the Excise Tax Act (ETA).

Our understanding of the facts is as follows:

A retailer enters into an agreement with a distributor whereby the retailer undertakes to promote, for remuneration, both the sale of products sold by the distributor to the retailer, and the distributor's brand name in general. The retailer owns and operates retail outlets in every province, and the promotional activities it carries out are performed in every province. The promotion of the distributor's products and/or brand name is carried out in one or more of the following ways:

•   the retailer advertises the products and/or brand name in flyers distributed to the public;

•   the retailer exhibits signs or posters in its outlets advertising the products and/or brand name;

•   the retailer broadcasts the products and/or brand name in radio and television commercials; and

•   the retailer discounts the sale price of the distributor's products through promotional sales.

Under the agreement entered into with the distributor, the distributor grants various allowances for advertising, as described above, for volume purchases, for warehousing and for prompt payment. The allowances are given as discounts from the price of the goods sold to the retailer. On special occasions, the retailer and the distributor enter into a separate agreement for additional one-time advertising that was not contemplated in the original agreement. For example, the retailer decides to publish an advertising flyer promoting the products or brand name of several of its suppliers. The separate agreement usually provides for a flat fee payable by each supplier for which the retailer issues a separate invoice.

Interpretation Requ[e]sted

1. If the promotional activities carried out by the retailer are in whole or in part related to the distributor's brand recognition, or to the distributor's products in general, rather than solely to specific and identifiable products supplied by the distributor and resold by the retailer, is the allowance granted to the retailer still considered a promotional allowance to which section 232.1 applies?

2. If the allowance granted to the retailer for the promotional activities is a fixed amount (in sense that it does not vary either with the volume of goods purchased by the retailer from the distributor or with the volume of goods resold by the retailer), would the answer to Question 1 above differ?

3. If the allowance granted to the retailer relates in whole or in part to products that have not yet been supplied by the distributor to the retailer, but which are reasonably expected to be supplied in the future, would the answer to Question 1 or 2 above differ?

4. To the extent that section 232.1 applies to any of the foregoing, in what circumstances does subsection (e) rather than subsection (d) apply? For example, if the retailer issues a separate invoice for promotional activities that do not relate to specific purchases from the distributor (such as in the case where the retailer enters into a separate agreement to provide additional advertising that was not contemplated at the time orders for goods were placed), does this fact imply that the amount has not been allowed as a credit or a discount?

Interpretation Given

Based on the information provided, we provide the following responses.

1. The following conditions must be met for proposed section 232.1 to apply:

(a) a vendor (e.g. a retailer) who is a registrant acquires particular tangible personal property exclusively for supply by way of sale for a price in money in the course of its commercial activities, and

(b) another registrant (e.g., a distributor or manufacturer), who has made taxable supplies of the property by way of sale to either the vendor or another person, pays to or credits the vendor, or allows as a discount on or credit against the price of any property or service supplied by the registrant to the vendor, an amount in return for the promotion of the particular property by the vendor.

The allowance granted must be in return for the promotion by the retailer of the particular tangible property which has been supplied by the distributor. Accordingly, section 232.1 would apply to the portion of the allowance which relates to the promotion of the specific products supplied by the distributor, where all of the above conditions in section 232.1 have been met.

Where the promotional activities carried out by the retailer are related in whole or in part to the promotion of the distributor's brand name or the distributor's products in general, section 232.1 may apply, depending on the specific terms of the agreement between the parties.

2. No, the response remains the same as answer 1.

3. Section 232.1 applies where a particular registrant (e.g., the retailer) acquires the property and another registrant (e.g., the distributor) has made taxable supplies of the particular property. In the circumstances described, it does not appear that the distributor has already made the supply of the particular products (to the retailer or someone else) and that the retailer has acquired the products. However, pursuant to section 133 the Department will generally consider that the supplier has made a supply of the property and that the retailer acquires the property where an agreement is entered into to provide the property.

4. To the extent that section 232.1 does apply, on the facts stated in the question (i.e., where the retailer issues a separate invoice for providing promotional activities), it appears that paragraph 232.1(e) would apply to this qualifying amount, as this would result in a cash payment by the distributor, as opposed to a discount or credit against the price of property or a service supplied to the purchaser. This means that the amount is deemed to be a rebate in respect of the particular property for the purposes of section 181.1.

On April 1, 1997, the harmonized sales tax (HST) replaced the goods and services tax (GST) and the provincial sales tax (PST) in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%.

The foregoing comments represent our general views with respect to the proposed amendment to the Excise Tax Act as it relates to the subject matter of your letter. Any change to the wording of these proposed amendments or any future proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9577 or Duncan Jones at (613) 952-9210.

Yours truly,

Marilena Guerra
Rulings Officer
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch