28 October 1998 GST/HST Interpretation HQR0001314 - Tax Status of Observer Services Supplied by Public Sector Companies to Resident and Non-resident Fishers

GST/HST Rulings and
Interpretations
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
Vanier, Ontario K1A 0L5

I refer to Ms. XXXXX E-mail message of August 21, 1998, addressed to Mr. XXXXX concerning the place of supply and tax status of observer services supplied by private sector companies to both resident and non-resident fishers. Forwarded with XXXXX message was a copy of her proposed response to XXXXX for comment.

I agree with XXXXX statement in the proposed response that the starting point in determining the application of the GST/HST is a determination of where the supply takes place. When dealing with services (other than prescribed services, services that relate to real property or telecommunication services) reference should be made to the specific provisions, i.e., paragraphs 142(1)(g) and 142(2)(g) of the Excise Tax Act (Act), rather than just to subsections 142(1) and 142(2). Also, please note that these paragraphs do not deem a supply to be "performed" in Canada. They deem a supply to be "made" in Canada.

Contrary to the statement on page 2 of the proposed response, subsection 123(2) of the Act does not provide a definition of Canada, rather, it states what Canada includes. Policy Statement P-152 issued September 6, 1994, provides a meaning of "Canada" for purposes of Division II tax. You will note that the effect of subsection 123(2) is that the GST jurisdiction extends beyond the territorial sea (i.e., XXXXX to XXXXX, but only for the specific resources related purposes set out in the subsection, that is, activities related to mineral exploration and exploitation, and not other activities, such as fishing or fish processing.

Sections 4 and 5 of Schedule VIII to the Act state that the "Nova Scotia offshore area" and the "Newfoundland offshore area" are participating provinces.

Subsection 123(1) of the Act contains definitions for "Newfoundland offshore area", "Nova Scotia offshore area" and "offshore activity". In all three definitions, references are made to the Canada-Newfoundland Atlantic Accord Implementation Act or the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act. XXXXX Both of the aforementioned acts deal with offshore petroleum resource management and revenue sharing.

Section 2 of the Canada-Newfoundland Atlantic Accord Implementation Act and section 2 of the Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act both state that:

"'petroleum' means oil or gas;

'oil' means

(a) crude oil regardless of gravity produced at a well head in liquid form, and

(b) any other hydrocarbons, except coal and gas, and, without limiting the generality of the foregoing, hydrocarbons that may be extracted or recovered from deposits of oil sand, bitumen, bituminous sand, oil shale or any other types of deposits on the seabed or subsoil thereof of the offshore area;

XXXXX

'gas' means natural gas and includes all substances, other than oil, that are produced in association with natural gas;".

Both of these acts also contain definitions of "offshore area".

For purposes of these acts, it is clear that fishing, or services related to fishing, are not considered to be "offshore activities".

In his incoming memorandum to you dated April 6, 1998, XXXXX stated, in part, that At-Sea Observers are deployed to vessels operating in Canadian territorial waters inside the 200 Exclusive Economic Zone, as well as to vessels operating outside the zone in NAFO waters. These observers are employed by private sector companies under contract to the Crown. They collect funds directly from fishing enterprises for the payment of this observer coverage to their vessels. XXXXX also stated that these companies are located in XXXXX[.]

XXXXX, the following information was provided to the Department by XXXXX

•   Foreign vessels may be licensed by XXXXX to fish commercially in Canadian waters XXXXX[.]

•   The owner of a foreign fishing vessel (other than a XXXXX vessel) and an observer company enter into a contract under which the foreign vessel owner must pay, directly to the observer company and according to a fee schedule set by XXXXX all related costs for the observers such as salaries, meals, costs associated with picking up and dropping off observers, briefing and debriefing and, if required and approved, costs associated with time spent preparing for and attending court procedures. These fees are paid on the basis of a set fee per "sea day" and "land day". Sea days are those days spent at sea, or in briefing or debriefing. Land days are those days spent on standby or in travel and days spent preparing for and attending court procedures. (In practice XXXXX rather than the foreign vessel owner pays for the land day costs incurred for time spent preparing for and attending court procedures as this cost is incurred long after the end of the contract.)

•   The Government of Canada and an observer company enter into a contract which outlines the services to be performed by the observers supplied by the observer company.

•   The sample contract forwarded by XXXXX stated that the observer company agrees to provide appropriate project management and certified fisheries observers onboard domestic and foreign vessels as and when requested in accordance with Appendix A and Annex A1 of the contract.

•   The appendix states that the role of the observer is twofold: to ensure compliance with Canadian fisheries regulations and to record scientific information (in the form of a trip report which becomes the property of the Government of Canada) as input into the management of fisheries within the XXXXX zone.

•   Under the terms of the contract, Her Majesty directs to the observer company any foreign fishing vessel wishing to fish in Canadian waters within the region covered by the contract and states that the observer company will be the sole provider of observer services for that region. The contract also states that Her Majesty will assume no liability for the payment of such services provided on board cost recoverable fishing vessels (i.e., foreign fishing vessels except those from XXXXX[.]

•   The manner in which the observer company claims for and receives payment for services provided onboard foreign fishing vessels shall be paid directly by the fishing vessel owner, at the same rates, terms and conditions as stipulated in the contract for domestic fishing vessels.

Subsection 123(1) of the Act states, in part, that

"'recipient' of a supply of property or a service means

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

Although the agreement for the supply of the observer services is between XXXXX and the observer company, it is the fisher that is liable to pay the consideration for the observer services. Therefore, the fisher is the recipient of the supply of the service (i.e., the person to whom the supply of the service is made).

The following information was provided by XXXXX a company supplying observer services, in a letter dated XXXXX

•   The observers work onboard domestic and foreign fishing vessels operating mainly within Canada's XXXXX nautical limit. Occasionally, a part of the entire fishing activity is conducted outside the XXXXX nautical limit, but the observer sails on the vessel from a Canadian port. Therefore, some of the charges are incurred in Canada's EEZ.

•   The fees are structured based on the time spent at sea on any calendar day, as follows:

•   sea day charge for any calendar day that the observer spends at least six hours at sea;

•   land day charge for any calendar day that less than six hours are spent at sea and for relevant shore-based activities (travel to the port of sailing, stand-by awaiting the sailing of the vessel).

Based on the above information, it is clear that the observer services supplied to resident and non-resident fishers are performed, in part, in Canada. Therefore, the supplies are deemed to be made in Canada pursuant to paragraph 142(1)(g).

It must now be determined if the supplies of observer services are deemed to be made in a province under the provisions of Schedule IX, Part V, sections 2 or 3 to the Act. (NOTE: These provisions deem supplies to be made in a province and not a "participating province" as stated on page 3 of XXXXX proposed response.)

Schedule IX, Part V, section 1 to the Act states that "Canadian element" of a service means the portion of the service that is performed in Canada. The service performed in Canada would be the service that is performed on land or up to and including the 12-mile nautical limit (subject, of course, to international boundaries). However, for purposes of the observer services, which relate to fishing, the Canadian element of a service that is performed in a province would only be that part of the service that is performed on shore. The territorial sea (i.e., the XXXXX nautical limit subject to international boundaries), while in Canada, is not in a province.

Schedule IX, Part V, paragraph 2(a) states that a supply of a service is made in a province if all or substantially all of the Canadian element of the service (i.e., 90% or more) is performed in the province. This provision would, in all likelihood, not apply because it is highly unlikely that 90% or more of the service would be performed in the province.

Schedule IX, Part V, paragraph 2(b) states that a supply of a service is made in a province if the place of negotiation of the supply is in the province and is not the case that all or substantially all of the service is performed outside the province. The place of negotiation of the supply would be in the province. However, it is likely that all or substantially all of the service would be performed outside the province (either within or at the limit of the territorial sea, which is in Canada but not in a province, and outside the 12-mile nautical limit and, therefore, outside Canada). As a result, this provision would probably not apply.

The provisions of Schedule IX, Part V, section 3 would not apply because the Canadian element of the service would not be performed primarily (i.e., more than 50%) in the participating provinces, and the place of negotiation for the supply is in Canada.

Therefore, because the supply of observer services is made in Canada and is not deemed to be made in a province under the rules set out in Schedule IX, it is deemed to be made outside the province and because the supply is not made in any participating province, it is deemed to be made in a non-participating province pursuant to section 144.1 of the Act. A determination must now be made regarding the tax status of the supply of the observer services.

As there are no exempting provisions in Schedule V to the Act which could apply, the supply is either subject to the GST at 7% or 0% (zero-rated), as follows:

•   If the supply of the observer services is made to a resident or a registered non-resident, the supply will be subject to the GST at 7% under the provisions of subsection 165(1) of the Act.

•   If the supply of the observer services is made to an unregistered non-resident, the supply will be zero-rated under the provisions of subsection 165(3) of the Act and Schedule VI, Part V, section 2 to the Act.

XXXXX proposed response should be rewritten to reflect the above comments.

As a final note, I would like to point out that the HST at 15% is not imposed under the provisions of subsection 165(2) of the Act (as stated on page 2 of XXXXX proposed response). Subsection 165(2) only imposes the provincial portion of the HST (8%) on a supply. The HST at 15% is imposed under the provisions of subsections 165(1) and 165(2).

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-6743.

Garry L. Ryhorchuk
Senior Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

•   on page 3 of your letter of May 12, 1998, to XXXXX, you made reference to the zero-rating provisions of Schedule VI, Part V, section 7 to the Act.

Please note that this provision could not apply to the supply of the observer services in view of the exclusions in 7(a) and 7(a.1). However, the supply of the services could be zero-rated under Schedule VI, Part V, section 2. I would suggest that you write a follow-up letter to XXXXX [t]o clarify this point.

NCS Subject Code:                 11680-1