1 October 1998 GST/HST Interpretation HQR0001068 - Beer Brewing and Wine Making Premises

Dear Sir:

Thank you for your letter of October 22, 1997 (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the operation of beer brewing and wine making premises. Our records indicate that you and your client XXXXX requested both an interpretation and a ruling with respect to the tax status of wine making and the brewing of beer. However, because the facts and requests presented in both cases are essentially the same and the applications vary on a case by case basis, we have provided the following interpretation of how the provisions of the Excise Tax Act (ETA) will apply.

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%. For supplies made in these provinces, to the extent that they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

We have not included any reference to HST in the body of this letter because our discussion is limited to XXXXX operation of a brew on premises facility in XXXXX[.] If your client makes a supply of a wine or beer making kit where the place of supply is in one of the participating provinces, then supplies that attract GST at 7% in XXXXX would be subject to the HST at 15% in the participating provinces. You had previously advised that your client is involved in assisting customers in the process of brewing beer and making wine on premises. They charge one lump sum for the whole process including the ingredients, use of equipment and other service necessary in the making of beer or wine on premises. The invoices do not distinguish between the ingredients and the services or other supplies provided. You also indicated that XXXXX invoices separately for beer bottles and labels as well as for the supply of bottles, labels and shrink seals used in the wine making process. According to the information provided, customers who wish to make wine may purchase take home wine making kits and do not have to make the wine on your clients premises. Customers usually purchase the ingredients at XXXXX wine making location when they wish to make wine on premises as opposed to making it elsewhere. They are allowed to bring their own wine making ingredients, however, this is very rare.

Where the customer makes wine on premises, XXXXX invoices represent charges for the following process:

•   The customer decides on a recipe.

•   The customer assists in the wine making process by adding water, wine concentrate, initial packets of ingredients, and yeast.

•   The wine is then stored for approximately four weeks.

•   During this four week period, XXXXX performs a rack and filtering service for the customer.

•   At the appointed time the customer returns to the facility to clean their bottles, fill them with wine and, finally, cork the bottles.

The all-inclusive invoice issued by your client includes the wine concentrate, raw product, the use of equipment and service necessary to prepare the product for customer bottling. As previously stated, bottles, labels and shrink seals are sold separately. With respect to the brewing of beer in XXXXX the customers cannot bring their own ingredients to brew on premises. However, they are allowed to purchase the necessary beer making ingredients, and bottles etc. to make beer otherwise than at your clients establishment. The beer making process involves the following steps:

-    The customer decides on a beer recipe.

-    The customers measure the required ingredients, including hops, malts, and corn syrup according to the recipe.

-    The customer mixes the ingredients into a XXXXX kettle of hot water.

-    After approximately one hour the mixture is transferred to a fermentation vessel and the customer adds the yeast.

-    After XXXXX the customer returns to package the final product.

-    The customer is responsible for cleaning and filling the bottles. The all-inclusive invoice for beer making includes the raw materials of malt, hops, yeast, sugar, the use of equipment and the services required including instructing the customer in the beer making and bottling process. Again, the bottles and labels are sold separately.

Interpretations Requested

Issues

1. In the case of invoices issued for one all-inclusive price, is the GST charged only on the 7% taxable items that make up the finished product (i.e. bottles, labels, caps, corks, seals, dressage and services)?

2. If the above question is correct, is the GST pro-rated according to the ratio of the cost of the zero-rated ingredients and the items that are subject to the GST at 7%?

3. Must the GST calculation method be clearly stated on the customer invoice or is it sufficient to display that only certain supplies are subject to tax?

4. If a registrant has been calculating their GST remittance to Revenue Canada incorrectly how far back can they go to their calculations?

5. Please provide information on the application of excise tax tosupplies of beer and wine.

Interpretations Given

Based on the information provided, we have prepared the following response to the points outlined in your inquiry:

Issue 1

Pursuant to subsection 165(1) of the ETA, the supply by XXXXX of both the ingredients and service charge for wine making and beer brewing together for one all-inclusive price is a single taxable supply that is subject to the GST at a rate of 7 %.

* Wine kits that contain ingredients as well as equipment for use in the manufacture of wine or beer that are supplied for one consideration are subject to GST at 7%.

Issue 2

The supplies referred to in question 1 are considered to be single supplies that are taxable in their entirety at 7%. Therefore, the question of prorating components of the supply is not an issue in this case.

Issue 3

According to proposed subsection 223(1) of the ETA, where a registrant makes a taxable supply (other than a zero-rated supply), the registrant shall indicate either in prescribed manner or on the invoice or receipt issued, or enters into an agreement in writing with a recipient:

(i) the total consideration and GST that is payable for the supply in a manner that clearly indicates the amount of tax; or

(ii) that the amount paid or payable by the recipient of the supply includes the GST payable in respect of the supply.

Proposed subsection 223(1.1) of the ETA provides that where a registrant makes a taxable supply (other than a zero-rated supply) and the registrant indicates in an invoice or receipt issued or in an agreement in writing in respect of the supply, the GST payable or the rate(s) at which tax is payable, the registrant shall indicate the following in that invoice, receipt or agreement:

(i) the total GST payable in respect of that supply in a manner that clearly indicates the total amount of GST payable for that supply; or the total of the rates at which GST is payable in respect of that supply.

According to Regulation SOR91-38 of the GST/HST Regulations made under the ETA, XXXXX has the additional option of indicating tax on the issuance of either an invoice, receipt or an agreement in writing, of giving clear visible notice of a taxable supply at their premises. In other words, even if an invoice, receipt or agreement is made, the registrant doesn't have to indicate the amount of tax or the total tax rate unless it is required under subsection 223(2) for a taxable supply to a person who is eligible to claim an ITC as described below.

However, pursuant to subsection 223(1.1) of the ETA, if your client chooses to indicate the GST payable or the rate(s) of tax payable on any invoice, receipt or agreement in respect of a supply, they must indicate either the total GST payable in respect of the supply or the rates at which tax is payable, 0% or 7% in this case. Subsection 223(2) of the ETA requires that when your client makes a taxable supply to persons who are eligible for an input tax credit (ITC) or rebate under Part IX of the ETA, they must, on request, provide sufficient particulars in writing so that those persons can substantiate a claim for an ITC or rebate in respect of the supply. In this case, the entire amount shown on the invoice is subject to GST at 7% and the easiest method of complying with the disclosure requirements is to show the tax calculation on the invoice itself. We have enclosed GST Memorandum 400-2 entitled Input Tax Credits - Documentary requirements for your reference.

Issue 4

According to our understanding of the information provided and our telephone conversations with you, XXXXX has been calculating GST on the total amount of the all-inclusive invoice to date. Therefore, we have not included any discussion on this question because it appears that GST is being correctly accounted for.

Issue 5

Pursuant to section 27 of the ETA, the following rates of excise tax apply to wine:

WINES OF ALL KINDS containing: not more than 1.2% absolute ethyl alcohol by volume - $0.0205 per litre more than 1.2% but not more than 7% absolute ethyl alcohol by volume - $0.2459 per litre - more than 7% absolute ethyl alcohol by volume - $0.5122 per litre[.] For wines manufactured or produced in Canada, excise tax is payable by the manufacturer or producer at the time when the wine is delivered to the purchaser. Excise tax is payable on imported wines by the importer, owner or other person liable to pay tax in accordance with the provisions of the Customs Act. The immediately foregoing paragraph is pursuant to section 28 of the ETA.

Beer

At present there is no excise tax imposed on beer. In addition, according to subsection 172(1) of the Excise Act (not the ETA), excise duties will also not be imposed on beer provided it is brewed by a person for personal or family use or to be given away without charge and is not for sale commercially. Please refer to the enclosed "Notice to Operators of Brew on premises and wine on premises Establishments" documents and attached guidelines issued by Revenue Canada. The following points are important to consider in assessing whether your client is in compliance with the ETA and Excise Act with respect to the making of wine or beer. Where goods subject to excise (beer or distilled alcohol) are concerned, non-compliance could be illegal as well. For wine, pursuant to paragraph (2)(1)(f) of the ETA, anyone who performs all of the traditional activities of mixing the raw materials and/or bottling the final product is considered to be a manufacturer by definition. Any manufacturer that produces wine in excess of the threshold of $50,000 in taxable sales in a year must be licenced in accordance with subsection 54(1) of the ETA.

1. Individuals will usually have to attend at XXXXX twice XXXXX once to start the batch of wine or beer brewing and later to prepare and bottle the final product.

2. The brew premises operator cannot be involved in the brewing process without a licence. Brewing products which are subject to excise without an excise duty licence is an indictable offence where both the owner of the facility and any employees involved can be charged. Inoculating or adding yeast to wine or beer ingredients by anyone other than the individual who is making the beer or wine for their own use is not allowed without a licence.

3. Another factor to consider is that the risk element lies in the manufacturing process. There is no risk to XXXXX for simply selling kits. Therefore, under conditions where the customer is properly instructed, the brew on premises operator should not have any legal responsibility for the quality of the final product made by the customer. Of course, the operator may provide relief for bad batches of their own volition.

4. Individuals who make beer or wine on premises and wish to swap with another person in order to get a variety of product must do so off premises. There is no reason to have bottled beer or wine on site at an unlicenced premises that is not for the immediate removal by the person who made the product. The foregoing comments represent our general views with respect to the proposed amendment(s) to the Excise Tax Act as it (they) relate(s) 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) 954-9700.

Yours truly,

Fred Adair
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch

c.c.:      XXXXX

Legislative References:           S. 2, 27, 28, 54 & 232; Ss. 123(1), & 223(1), (2) ETA;
Ss. 172(1) Excise Act.
P-077R, Rev. Can. Notice to brew on premises establishments,
Excise Duty Circular ED 212-10
d930809, Ltr 0398-I. Bastasic to XXXXX re: wine and beer kits HQR0000308 Excise Duty rate summary 9607 (library)

Beer brewing and wine making premises

Outline and Analysis:

In order to answer this question it is necessary to determine whether the client is making a single supply of a service or product or if they are making multiple supplies that are a combination of both zero-rated and 7% taxable components. Policy P-077R "Single and Multiple Supplies" (enclosed) was developed for this purpose.

The policy discusses some of the factors that should be considered in the course of conducting a single supplymultiple supplies analysis. The policy is not meant to give conclusive answers and should be applied in a flexible manner to each situation. There are three main factors used in determining if a particular transaction is a single supply or multiple supplies. In addition, a number of other questions can be asked in order to arrive at a conclusion. We will discuss the primary factors in relation to your client's operation first and then address the additional questions that may apply after that.

The three primary factors discussed in Policy P-077R are:

(a) Whether some elements are inputs or themselves supplies

A distinction must be made between those elements that are actually supplied to a customer and those that are merely inputs consumed in making the supply. In this context, it is apparent from the information provided on the process that XXXXX is making one supply of a product or service that includes the use of equipment and services provided to their customers. The amounts that make up the total included in the all-inclusive invoice are costs incurred in the provision of a single overall supply. They are components supplied to the customer for one invoiced amount. This suggests that the client is making a single supply.

(b) The provisions or terms of the agreement, contract or invoice

A contract, agreement or invoice should be examined in the context of factors such as the intent of the parties to the transaction, the circumstances surrounding the agreement and the supplier's usual business practice. An analysis of the contract, agreement or invoice may help to determine whether some elements of the supply are inputs to the supply or a component of multiple supplies.

The invoices provided with the submission indicates that a single supply of a product or service is being supplied.

(c) The number of suppliers and recipients

It is important to consider whether a combination of goods andor services are supplied by the same supplier or different suppliers and whether there is more than one recipient. Where there is more than one supplier, it generally indicates that there are multiple supplies being made even though the various elements may be supplied together. It is also an indication that multiple supplies are being made when a single supplier provides elements to more than one recipient.

In this case, we are dealing with a single supplier and recipient which indicates that a single supply is being made[.]

Additional Questions

The primary factors indicate that XXXXX, according to the information given, is making single supplies and there is no need to examine the additional questions in this case. Wine kits and beer kits, when sold as a package that includes only the zero-rated ingredients necessary to make wine or brew beer will be zero-rated when sold to the customer pursuant to section 1 of Part III of Schedule VI to the ETA. However, if a wine or beer kit contains anything other than the zero-rated ingredients, such as equipment or apparatus that is used in the manufacture of beer or wine, or any taxable items such as bottles, caps, corks, labels etc., for one inclusive price, the total supply will attract GST at 7% or HST at 15% if supplied in a participating province pursuant to subsections 165(1)/(2) of the ETA.

The tax status of wine and beer making kits has been established. If a single price is charged for a kit that includes both zero-rated ingredients and non zero-rated taxable equipment andor supplies, the entire supply is subject to the GST/HST at either 7% or 15%. The issue of wine kits that are sold in a special pail with a liner and valves has been determined to be other than the usual container for such products and thus, where this container is sold as part of the wine kit, the whole kit is subject to tax at 7% or 15% as the case may be.