16 December 1999 GST/HST Interpretation 8271/HQR0001877 - PROPOSED LAW/REGULATION Proposed Section 232.1 - Promotional Allowances

Dea[r] XXXXX

Thank you for your letters of June 24, 1999 and November 12, 1999 (with enclosures) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

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 your letters, our understanding of the facts is as follows:

•   XXXXX markets its products through a number of different channels. Retail XXXXX are sold at both dealer locations and agency locations.

•   A dealer is an independent business person who purchases XXXXX from XXXXX and resells them to consumers. In this case, the XXXXX is owned by the dealer.

•   An agent is an independent business person who contracts with XXXXX to sell XXXXX product, on XXXXX behalf, at the agency location. In this case, the XXXXX is owned by XXXXX[.]

•   Dealers and agents are referred to collectively as "franchisees".

•   At both types of location, it is common for the kiosk to offer other items for sale, such as candy, soft drinks, cigarettes, and other consumer goods. Unlike XXXXX the inventory of these convenience items, whether at a dealer or agency location, is owned by the franchisees, not by XXXXX has negotiated a number of contracts with national manufacturers or distributors of such convenience items. Generally speaking, the vendor of the product will offer XXXXX franchisees the opportunity to purchase under the terms of the agreement negotiated by XXXXX although the franchisees are under no obligation to purchase anything.

•   XXXXX informs franchisees of the existence of the negotiated pricing and will use all reasonable commercial efforts to encourage franchisees to purchase the products of the national manufacturers and distributors.

•   XXXXX will also develop annual calendars of promotional events, including events at franchisee locations, featuring products offered for sale by the franchisees, which products might include the products of the national manufacturers or distributors. XXXXX will provide the franchisees with appropriate point-of-sale displays and signage.

•   To the extent that franchisees do purchase, and dependent on the volumes actually purchased by them, the national manufacturer or distributor will pay XXXXX an allowance, which may be used to design the promotional activities referred to above.

•   In essence what happens is that the sale occurs and title passes from the national manufacturer or distributor to the franchisees, while the allowance goes from the national manufacturer or distributor to XXXXX has received a number of notifications from its suppliers that applicable taxes (i.e. GST, HST) would no longer be added to the payment of the allowance, on the basis of the relief provided in proposed section 232.11 of the Excise Tax Act.

•   XXXXX[.]

Interpretation Requested

XXXXX

You believe that the wording of proposed section 232.1 is not broad enough to apply to the agreements entered into by XXXXX since title to the goods passes from the national manufacturer or distributor to the franchisees, while the allowance is paid by the national manufacturer or distributor to XXXXX[.]

You suggest that it would be consistent with the policy underlying proposed section 232.1 that the allowances paid to XXXXX under its contractual arrangements be accorded a "no consideration" treatment.

You also suggest that proposed section 232.1 be amended to provide the "no consideration" treatment to an allowance paid to a person that "arranges" for supplies between registrants (e.g. between a manufacturer and that person's franchisees) in circumstances where that person does not acquire property exclusively for supply by way of sale for a price in money in the course of its commercial activities.

Based on the foregoing, you wish to receive confirmation that your franchisees' suppliers need not change their present practice of excluding GST and HST from promotional allowance payments made to XXXXX and that the non-inclusion of the GST/HST on the allowances is within the intent of the tax policy found in proposed section 232.1.

Interpretation Given

Based on the information provided, proposed section 232.1 would not apply to the transactions described in your submission.

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

(a) a vendor 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, who has made taxable supplies of the particular property by way of sale to either the vendor or another person, pays to or credits to 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 to the vendor by the registrant must be in return for the promotion by the vendor of the particular property that was supplied by the registrant (either to the vendor or another person) and that was acquired for resale by the vendor (from the registrant or another person). Where all of the above conditions have been met, proposed section 232.1 would apply to the portion of the allowance that relates to the promotion of the particular products.

In the circumstances outlined in your letter, XXXXX has not acquired tangible personal property exclusively for supply by way of sale for a price in money in the course of its commercial activities, as required in proposed subsection 232.1(a). As such any amounts received by XXXXX for the services of promoting a national manufacturer or wholesaler's products to XXXXX franchisees or to the public would fall outside the ambit of proposed section 232.1. Given that proposed section 232.1 does not apply to the transactions outlined in your submission, and in the absence of any other relieving provisions, XXXXX must account for GST/HST on these supplies and the national manufacturers and distributors are liable to pay the GST/HST on these supplies.

As you are aware, the CCRA administers the GST legislation as passed by Parliament. The change to proposed section 232.1 which you have suggested is a matter of tax policy and falls within the purview of the Department of Finance. I can assure you that Finance officials have been made aware of your views on this matter.

On April 1, 1997, the HST replaced the 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 the supplies referred to in your letter are made in the participating provinces, they will attract tax at the harmonized rate.

The foregoing comments represent our general views with respect to the proposed amendments to the Excise Tax Act as they relate 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.

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