GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, Ontario
XXXXX K1A 0L5
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Case: HQR0000937
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Subject:
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GST/HST APPLICATION RULING
XXXXX
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Dear XXXXX
Thank you for your letter of July 17, 1997, with attachments, concerning the application of the Goods and Services Tax ("GST")/Harmonized Sales Tax ("HST") to the subcontract between XXXXX and XXXXX a division of XXXXX[.]
Our facts were taken from the following documents and telephone conversations:
• your letter dated December 20, 1995, addressed to the XXXXX Tax Services Office, Revenue Canada;
• your letter dated April 17, 1996, addressed to XXXXX Tax Services Office, Revenue Canada;
• the subcontract agreement, XXXXX, between XXXXX and XXXXX that was attached to your letter of April 17, 1996, including XXXXX to the subcontract;
• a copy of the GST Application Ruling XXXXX dated April 29, 1996, that was issued by XXXXX Tax Services Office, Revenue Canada;
• your letter dated May 15, 1996, addressed to the XXXXX Tax Services Office, Revenue Canada;
• a copy of the GST Interpretation (XXXXX dated July 14, 1997, that was issued by C XXXXX Region, Revenue Canada;
• your letter dated July 17, 1997, addressed to XXXXX Revenue Canada;
• a copy of the Project Summary Sheet attached to your letter of July 17, 1997;
• a revised Statement of Work XXXXX to XXXXX received by facsimile transmission on September 23, 1997;
• a telephone conversation on October 7, 1997, between XXXXX Region and yourself; and
• our telephone conversation of January 8, 1998.
Our understanding of the facts is as follows:
Statement of Facts
1. XXXXX is a GST-registered resident. XXXXX is a XXXXX[.]
2. XXXXX is an unregistered non-resident that has no permanent establishment in Canada.
3. XXXXX and XXXXX entered into a subcontract XXXXX on November 15, 1995, with modification, January 3, 1996, for fabrication and testing of an enhanced ignition system to reduce cold-start emissions in an ethanol XXXXX light-duty truck engine.
4. The Statement of Work, XXXXX of the subcontract states that the specific goal of the project is for the selected XXXXX vehicle with the enhanced ignition system to meet or approach XXXXX emissions levels without using a large amount of ignition energy. Also, the enhanced ignition system shall demonstrate the potential to be cost competitive with an electrically heated catalyst system (another emission reduction approach the vehicle manufacturers are investigating).
5. The scope of the project shall involve fabricating XXXXX previously designed enhanced ignition system, conducting tests to determine interactions of the enhanced ignition system and engine controls system calibrations, and optimizing the enhanced ignition system to reduce cold-start hydrocarbon emissions.
6. The project is split into tasks as specified in the subcontract.
XXXXX
XXXXX
XXXXX
XXXXX
7. The deliverables of the project as specified in the subcontract are:
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
8. The subcontract provides for travel outside Canada in relation to the Program Review deliverable. XXXXX must make a presentation in XXXXX to defend their project before a group of their peers and an impartial panel of technical reviewers.
9. Upon completion of system testing and design update, XXXXX may request that an enhanced ignition system be sent to XXXXX for further evaluation of XXXXX dedicated ethanol vehicle. This work will fit either under XXXXX subcontract with XXXXX or become a new subcontract.
10. The subcontract specifies, in part, that in full consideration of XXXXX performance, XXXXX shall pay XXXXX the total price of XXXXX which is a firm fixed price. XXXXX shall pay this firm fixed price in amounts specified in the subcontract, upon receipt and acceptance of specified deliverables.
11. XXXXX technical proposal dated October 24, 1995, together with any revisions is incorporated by reference in the subcontract. This proposal was not submitted for review. Certified in the proposal is an agreement between XXXXX and XXXXX that all work to be performed would be done at XXXXX address. Further, in the event that XXXXX must contract out a specific area of work in relation to the project, the proposal stipulates that the subcontract will have to be modified.
12. On April 29, 1996, you were issued a GST application ruling letter XXXXX from XXXXX Tax Services Office, that ruled the work to be performed under this subcontract to be taxable at the rate of 7% for GST purposes. This was in response to your letters of December 20, 1995, and April 17, 1996.
13. In your letter of May 15, 1996, you indicate that you feel that there has been misinterpretations provided in the explanation of the GST application ruling issued April 29, 1996. In defining "research" you feel there should be an acknowledgment of legitimacy of "applied research". The subcontract has a definite, specific application in view and may include "work that might be undertaken or performed as a result of the plans and recommendations which may follow the inquiries and investigations performed in the course of rendering the research service". Further, you state, the design of the service has the prime purpose of examining the feasibility of using an enhanced ignition system to allow the test vehicle to achieve XXXXX standards. The Statement of Work explains that XXXXX goal is the advancement and the development of technology that allows for optimum use of alternative transportation fuels.
14. Your client recognizes that research is required to understand the ultimate potential durability and emission performance of vehicle engines using alternative fuels. They are willing to pay you a substantial sum for research that will produce technical reports that will add to the base of knowledge on the emissions, energy efficiency, performance, durability, driveability, coldstart ability, safety and range of XXXXX fuelled vehicles.
15. You further state in your letter of May 15, 1996, that the Statement of Work provides guidelines for test methods and apparatus. It enumerates in great detail what you plan to do to generate the technical reports. The remuneration is linked directly to technical reports which relate to the feasibility of XXXXX vehicles achieving XXXXX standards. The test apparatus including both the base vehicle, a prototype "mule" supplied by XXXXX and the enhanced ignition system, specified in the contract to be "of laboratory grade components", are simply experimental devices for testing the hypothesis. The test ignition system has no commercial value and will be of limited further experimental value (disassembled for components) at the end of the project. The components may be used in other experimental projects, but are never sold. The contract provides for the supply of a similar test apparatus (enhanced ignition system of laboratory grade components) to be built for XXXXX if warranted by the test results. This experimental device would be designed and fabricated for immediate export to XXXXX if required. Furthermore, you stated in our telephone conversation of October 7, 1997, that each time a new concept is tested, a new test bed is created.
16. On July 14, 1997, you were issued a GST interpretation letter (XXXXX Region; this letter provided you with a further explanation of the ruling issued on April 29, 1996. This interpretation letter was in response to your letter of May 15, 1996.
17. In your letter of July 17, 1997, you provide further clarification to the language used in the Statement of Work.
• XXXXX
• XXXXX
• XXXXX
• XXXXX
• XXXXX
• XXXXX
18. You clarify in your letter of July 17, 1997, that the XXXXX tested was equipped with a prototype ignition system and related engine control system/calibration strategy modified from the gasoline version of this 2.2 litre 4-cylinder engine. The "enhanced ignition system" was a test apparatus replacing, for this project, the XXXXX ignition system. It was constructed in your laboratory, using the expertise and experience gained in your earlier work. As Intellectual Property Rights to some of your earlier methanol ignition system work are held by the Government of Canada, through the Ministry of Natural Resources, you felt that it was germane that the wording of the Statement of Work would make it perfectly clear that XXXXX did not, as a result of the contract, gain any property rights to any proprietary information used in the design and application of the research program. This apparatus was installed and tested, and the test results published in a ninety-eight page technical report to XXXXX[.] Further, you state that the XXXXX is an experimental engine test bed, the "enhanced ignition system" is a laboratory apparatus constructed to test a concept. Neither prototype (particularly in retrospect, as the engine will not be built) has any commercial value. XXXXX receives the technical report (s) on the feasibility of having light-duty trucks fuelled with 80% ethanol/20% gasoline meet XXXXX emission standards.
19. With respect to the subject invention in which XXXXX retains title XXXXX government has a non-exclusive, non-transferable, irrevocable, paid-up licence to practice or have practiced for or on behalf of XXXXX he subject invention throughout the world. XXXXX[.]
20. XXXXX government has unlimited rights in contract data except as otherwise provided in XXXXX with respect to proprietary data owned by XXXXX obtains a copyright to the contract data, XXXXX reserves for itself, and others acting on its behalf, a royalty-free, non-exclusive, irrevocable, world-wide licence for governmental purposes to publish, distribute, translate, duplicate and exhibit any such data.
22. Pursuant to our telephone conversation of January 8, 1998, you confirmed that research work on this contract did not generate a patent for an invention.
Ruling Requested
What is the GST/HST tax status of Contract XXXXX between XXXXX and XXXXX[.]
Ruling Given
Based on the facts set out above, we rule that the research services provided to XXXXX are taxable at the rate of 7% in accordance with subsection 165(1) of the Excise Tax Act ("ETA").
This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to departmental interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.
Explanation
Section 23 of Part V of Schedule VI to the ETA, zero-rates the supply of an advisory, professional or consulting service made to a non-resident person but excludes a supply of a service enumerated in paragraphs (a) to (d) of that section. Specifically, paragraph 23(c) of Part V of Schedule VI to the ETA excludes from the zero-rating provision, a service in respect of tangible personal property that is situated in Canada at the time the service is performed.
For purposes of paragraph 23(c) of Part V of Schedule VI to the ETA, The Department's administrative position as explained in our Policy Paper P-169, copy enclosed, is that there must be more than a mere indirect or incidental nexus or connection between a service and the underlying tangible personal property, before the supply of the service will be excluded from zero-rating.
Whether the relationship between the service and the property is sufficiently direct for the service to be considered by the Department to be "in respect of" the property will depend on the particular circumstances of each case.
The following guidelines will be applied by the Department to aid in the determination of whether the connection between the service and the tangible personal property is sufficiently direct for the service to be "in respect of" the property for purposes of paragraph 23(c) of Part V of Schedule VI to the ETA:
a) Was the service designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property? This guideline involves determining the purpose or objective of the service. The purpose or objective of the service may often be determined by examining a written contractual agreement for the supply between the supplier and the recipient of the service, in order to ascertain whether the supply is a zero-rated supply under the ETA.
b) Is the relationship between the purpose or objective of the service and the property reasonably direct? The relationship between the service and the tangible personal property must be more direct than indirect in order for the service and the property to be considered by the Department to be "in respect of" each other. If some object comes between the service and the property, the connection becomes increasingly remote.
XXXXX objective, under the subcontract, is to fabricate and test an enhanced ignition system (tangible personal property), that will reduce start-up emissions of high ethanol content XXXXX fueled vehicles. XXXXX designed and constructed the enhanced ignition system in their own laboratory, tested it, and then published the test results in a XXXXX technical report to XXXXX[.] A direct relationship exists between the research service and the enhanced ignition system as the duties performed are being undertaken to provide acceptable emission standards relating specifically to the XXXXX vehicle with the enhanced ignition system.
In applying the above guidelines, the research service rendered to XXXXX is in respect of tangible personal property that is situated in Canada at the time the service is performed. Therefore, the research service is not zero-rated pursuant to section 23 of Part V of Schedule VI to the ETA; it is taxable at the rate of seven per cent in accordance with subsection 165(1) of the ETA.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0419.
Yours truly,
Michèle Routhier
a\Rulings Officer
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
attachment
| c.c.: |
R. Nanner
A. Trattner
M. Routhier
XXXXX |
| Legislative References: |
Section 133, Subsection 165(1), Paragraph 142(1)(g), Section 23, Part V, Schedule VI |
| NCS Subject Code(s): |
11640-3 |
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