6 August 1999 GST/HST Interpretation HQR0001691 - PROPOSED LAW/REGULATION [Application of the GST/HST to Promotional Fees and Advertising Services]

Dear XXXXX

Thank you for XXXXX letter of February 23, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Our understanding of the transactions is as follows:

First Transaction: XXXXX enters into an agreement with a supplier for the purchase of goods. The goods are intended for resale in XXXXX retail outlets. Both XXXXX and the supplier are GST/HST registrants and the supply of the goods is a taxable supply made in Canada. The terms of the purchase agreement require XXXXX to promote the supplier's products in return for a promotional fee, under a program that is generally referred to as "co-op advertising". The promotional fee is calculated as a fixed percentage of the purchase price of the goods sold to XXXXX. Promotion of the supplier's products is to be carried out in any or all of the following ways:

•   advertising the products and/or brand name in flyers distributed to the public;

•   exhibiting signs or posters in its outlets advertising the products and/or brand name;

•   broadcasting the products and/or brand name in radio and television commercials; and

•   discounting the sale price of the distributor's products through promotional sales.

XXXXX issues a quarterly debit note to charge the supplier for the "co-op advertising". Payment of the debit note is effected when XXXXX deducts the amount against future payments for goods sold.

Second transaction XXXXX enters into a subsequent agreement with the same supplier. Under the terms of the agreement, XXXXX agrees to carry out additional promotion of the supplier's products under a program that is generally referred to as "over-and-above advertising". Such advertising services are provided for a fixed fee that does not vary with the volume of purchases. The nature of the promotional activities is essentially the same as described above.

The XXXXX issues a debit note to charge the supplier for the "over-and-above advertising". Payment of the debit note is effected when XXXXX deducts the amount against future payments for goods sold. Sample debit notes issued by XXXXX for "over-and-above advertising" were provided.

Interpretation Requested

You have asked if proposed section 232.1 of the Excise Tax Act (ETA) applies to either the "co-op advertising" allowance or the "over-and-above advertising" fee and, if so, whether proposed subsection 232.1(d) or (e) applies. If proposed section 232.1 does not apply, you have also asked if section 232 of the ETA applies to either of the charges.

Interpretation Given

Based on the information provided, proposed subsection 232.1(e) would apply to both of the transactions described above.

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

(a) a vendor (e.g., a retailer) 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 (e.g., the supplier), who has made taxable supplies of the property by way of sale to either the vendor or another person, pays to or credits 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 must be in return for the promotion by the retailer of the particular tangible property which has been supplied by the supplier. Accordingly, proposed section 232.1 would apply to the portion of the allowance which relates to the promotion of the specific products supplied by the supplier, where all of the above conditions in proposed section 232.1 have been met.

Proposed section 232.1 applies in both the first and second transactions since the conditions of proposed section 232.1 have been met. That is, XXXXX has acquired taxable supplies of tangible personal property from the supplier exclusively for resale in the course of its commercial activities and has received an amount (i.e., a debit note effected when XXXXX deducts the amount against future payments for goods sold) in return for the promotion of the particular tangible personal property.

Subsection 232.1(e) rather than subsection 232.1(d) applies since payment of the discount is effected against future purchases and not against specific property already acquired. However, if there was a specific reference in the debit note to a specific invoice issued either in the past or in the future, then paragraph 232.1(d)(i) would apply.

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 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) 952-9577 or Duncan Jones at (613) 952-9210.

Yours truly,

Marilena Guerra
A/Senior Technical Analyst
Financial Institutions and Real Property Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch
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