14 December 1999 GST/HST Interpretation 7401/HQR0001007 - PROPOSED LAW/REGULATION Proposed Section 232.1 of the Excise Tax Act - Promotional Allowances

Dear XXXXX

This is in reference to a letter (with attachments) submitted by XXXXX of your staff, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain activities undertaken by XXXXX XXXXX inquiry to this office for reply.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the CCRA).

Statement of Facts

Based on the information included in XXXXX letter as well as a December 2, 1999 telephone conversation with XXXXX in which clarifications were brought to XXXXX request, our understanding of the facts is as follows:

•   XXXXX manufactures and supplies food products as a division of the XXXXX currently promotes its products through national trade shows and advertisements throughout Canada and the United States.

•   To offset some of the costs of these promotions, XXXXX is offering its suppliers two types of promotional activities - product advertising in a bi-monthly publication and conferences wherein a supplier will have its products showcased.

•   Advertising - XXXXX offers suppliers an opportunity to advertise their products in a bi-monthly publication that is mailed to XXXXX retail bakery customers located across Canada. The cost of the advertisements range from XXXXX depending on the size of the advertisement, the number of products listed and the inclusion of photos. The bi-monthly publications are intended to highlight XXXXX national price specials and will include XXXXX suppliers' products in circumstances where the suppliers have paid for such advertising.

•   Conferences - XXXXX also offers suppliers an opportunity to showcase their unique products and services by becoming a sponsor of two conferences called XXXXX[.] These conferences will feature seminars led by a professional in the field (e.g. bread trends, signature cakes) and will include presentations, demonstrations, sampling and discussion. For a cost of XXXXX where the supplier participates in both conferences), XXXXX will provide exclusive use of the supplier's products in seminars conducted during the conference, logo recognition in confirmation packages and the show program, the opportunity for the supplier to display their product on the trade show floor, inclusion of the product in the show's specials packages, and two complementary passes to the conference.

•   Under both promotions, XXXXX suppliers can be grouped into four different categories:

(1) suppliers who supply XXXXX with product that XXXXX re-supplies in the same form;

([2]) suppliers who supply XXXXX with bulk product that XXXXX breaks down into smaller quantities, repackages and/or cleans, and then supplies; and

(3) suppliers who supply XXXXX with product that XXXXX uses as ingredients for products it manufactures;

(4) suppliers who supply XXXXX with product that has multiple purposes (e.g. products are purchased in bulk by XXXXX and used both as ingredients in XXXXX manufacturing activities and broken down into smaller quantities, repackaged and/or cleaned, and then supplied).

Interpretation Requested

Will the proposed section 232.1 of the Excise Tax Act apply to the advertising services and conference sponsorships provided by XXXXX to its suppliers?

Interpretation Given

Based on the information provided, our view is:

1. Proposed section 232.1 would apply to the supplies of advertising and conference sponsorships, where the advertising and conference sponsorships are in respect of property that XXXXX acquires exclusively for supply by way of sale for a price in money in the course of its commercial activities. This would include property that XXXXX acquires with the intent and for the purpose of being exclusively supplied in the same form ("as is") for monetary consideration from category 1 suppliers, as well as property that XXXXX acquires in bulk format from category 2 suppliers, which XXXXX breaks down into smaller quantities, repackages and/or cleans, and then in turn supplies exclusively by way of sale for a price in money.

2. Proposed section 232.1 would NOT apply to the supplies of advertising and conference sponsorships, where the advertising and conference sponsorships are in respect of property that XXXXX acquires with the intent and for the purpose of further processing, or for use/consumption in XXXXX commercial activities. Such property would include ingredients acquired for use/consumption in XXXXX manufacturing activities (i.e. products acquired from category 3 suppliers). In the absence of any other relieving provision, XXXXX would be required to charge GST/HST in respect of these supplies of advertising and conference sponsorships.

3. Proposed section 232.1 may or may not apply to supplies of advertising and conference sponsorships, where the advertising and conference sponsorships are in respect of property that XXXXX acquires with the intent and for the purpose of multiple uses. This would include products acquired from category 4 suppliers. Whether proposed section 232.1 applies will be based on whether these products are acquired exclusively for supply by way of sale for a price in money (i.e. whether 90% or more of the goods acquired are intended to be supplied by way of sale for a price in money).

Explanation

It is our view that goods acquired with the intent and for the purpose of use/consumption in your commercial activities or for further processing prior to sale are not property that is acquired for supply by way of sale for a price in money. It is our view that such goods lose their form, nature and fundamental characteristics during the processing or manufacturing process. Subsequent to this processing and/or manufacturing, XXXXX will be supplying other products (e.g. bread) rather than the ingredients that it acquired (as required for section 232.1 to apply).

In the absence of any other relieving provision, XXXXX would be required to charge GST/HST in respect of the supplies of advertising and conference sponsorships, where those supplies of advertising and conference sponsorships are made to category 3 suppliers (i.e. suppliers of goods acquired for further processing, use or consumption in its commercial activities). Proposed section 232.1 would not apply to any allowance paid to XXXXX by its suppliers in such circumstances as the property was not acquired for supply by way of sale for a price in money, irrespective of the fact that an allowance is paid by the supplier to promote these products.

It is also our view that proposed section 232.1 may or may not apply to supplies of advertising and conference sponsorships, where the advertising and conference sponsorships are in respect of property acquired by XXXXX for multiple uses (i.e. category 4 suppliers). Whether proposed section 232.1 applies will depend on whether these products are acquired exclusively for supply by way of sale for a price in money.

As an example, XXXXX might acquire a particular product in bulk (e.g. flour) which it uses both as an ingredient in its manufacturing activities and which it breaks down into smaller quantities, repackages and/or cleans, and then supplies. Section 232.1 would apply to the supplies of advertising and conference sponsorships, if XXXXX intent at acquisition is to supply 90% or more of this product (i.e. the flour) by way of sale through its bulk breaking activities. In this case, XXXXX must not intend to use over 10% of product in its manufacturing activities. If more than 10% of the product is intended to be used in XXXXX manufacturing activities, section 232.1 would not apply, as the product was not acquired exclusively for supply by way of sale for a price in money.

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%. To the extent that XXXXX makes non zero-rated taxable supplies in the participating provinces, they will attract tax at the harmonized rate.

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 CCRA with respect to a particular situation. For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-3413.

Yours truly,

Philippe Nault
Senior Technical Analyst
Corporate Reorganizations Unit
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate

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