14 June 1999 GST/HST Interpretation HQR0001134 - Application of GST/HST to Packages of Three Bagels and Three Muffins

We have reviewed your April 6, 1998 inquiry concerning the following questions:

A restaurant, as a way of selling the previous day's bakery products, packages together three bagels and three muffins. The bagels are considered as unsweetened baked goods, the muffins are considered as sweetened baked goods. What is the tax status of the package? Could a bag of five muffins and one bagel be zero-rated? Also, what is the tax status of a package that contains three bagels and two muffins?

Answer

The supply of three bagels and three muffins in a single package and the supply of five muffins and one bagel in a single package would be considered a zero-rated supply under subsection 165(3) of the Excise Tax Act (ETA), pursuant to section 1 of Part III of Schedule VI to the ETA.

The supply of a package that contains less than six baked products, such as a package that contains three bagels and two muffins, would be considered a supply taxable at 7% or 15% as applicable pursuant to paragraphs 1(m) or 1(q) of Part III of Schedule VI to the ETA.

Analysis

Paragraph 1(m) of Part III of Schedule VI states:

1. Supplies of food or beverage for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of such food or beverages), other than supplies of ...

(m) cakes, muffins, pies, pastries, tarts, cookies, doughnuts, brownies, croissants with sweetened filling or coating, or similar products where

(i) they are prepackaged for sale to consumers in quantities of less than six items each of which is a single serving, or

(ii) they are not prepackaged for sale to consumers and are sold as single servings in quantities of less than six, but not including bread products such as bagels, English muffins, croissants or bread rolls, without sweetened filling or coating;

For the purposes of the following discussion an unsweetened bread product is considered to be a bread product without a sweetened filling or coating. Furthermore, the discussion assumes that the condition contained in subparagraph 1(m)(i) that the items are prepackaged for sale to consumers is met.

The position that the supply of a package containing a combination of sweetened and unsweetened baked products totaling six or more (as an example three bagels and three muffins) is zero-rated is supported by the structure of the statute. In the preamble of paragraph 1(m), the list of products that are exceptions to the zero-rating include cakes, pies and cookies, or "similar products". All sorts of baked goods are "similar products" including unsweetened bread products. Thus supplies of baked goods, would be excepted from zero-rated status except for those to which the subparagraphs and/or postamble of paragraph 1(m) apply.

A package that is prepackaged for sale to consumers and which contains three bagels and three muffins contains six baked goods, each of which is a single serving. Subparagraph 1(m)(i), then provides that this supply is zero-rated, as the subparagraph provides that such products are an exception to the overall exception in paragraph 1(m) which would otherwise require that tax at 7/15% as applicable be charged on such supplies. In other words, the test is whether of not there are more than five baked goods being supplied.

The postamble to paragraph 1(m) ensures that a package of less that six bread products is not taxable at 7/15% where the package contains only unsweetened bread products. For example, a package of four bagels would come within the ambit of the preamble, fail the conditions of subparagraphs (i) and (ii) and be taxable at 7/15% if it were not for the postamble. Conversely, a package of less than six sweetened baked goods would fail the conditions of subparagraphs 1(m)(i) and (ii) and the postamble.

However, a package that contains a combination of sweetened baked goods and unsweetened bread products which total less than six is a supply taxable at 7/15%. For GST/HST purposes, we consider that a package that contains five or less sweetened baked goods and unsweetened bread products, each of which is a single serving, is a single supply. Indeed, this package will fail the quantity test under subparagraphs 1(m)(i) and 1(m)(ii) by the fact that it contains less than six baked goods. Also, the supply will fail the test of the postamble of paragraph 1(m) as the package cannot be considered as a whole to be unsweetened bread products. Consequently, a package that contains three muffins and two bagels, will be taxable at 7/15%.

Since your question indicated that the supply was made by a restaurant, paragraph 1(q) of Part III of Schedule VI to the ETA may apply.

Paragraph 1(q) of Part III of Schedule VI to the ETA states:

(q) food or beverages when sold at an establishment at which all or substantially all of the sales of food or beverages are sales of food or beverages included in any of paragraphs (a) to (p) except where

(i) the food or beverage is sold in a form not suitable for immediate consumption, having regard to the nature of the product, the quantity sold or its packaging, or

(ii) in the case of a product described in paragraph (m),

(A) the product is prepackaged for sale to consumers in quantities of more than five items each of which is a single serving, or

(B) the product is not prepackaged for sale to consumers and is sold as single servings in quantities of more than five, and is not sold for consumption at the establishment;

Under subsection 1(q), supplies of certain food or beverages are taxable at 7/15% where all or substantially all of the goods supplied by the establishment are taxable at 7/15%. However, under this provision, supplies of certain goods are excluded and remain zero-rated based upon such factors as packaging and the quantity sold. We consider that a product listed in 1(m) would be those products which are excluded from zero-rating by the operation of paragraph 1(m).

Under paragraph 1(q)(ii), when sold in an establishment at which all or substantially all of the sales of food or beverages are subject to GST/HST at 7/15%, sweetened baked goods and/or unsweetened bread products will be zero-rated for GST/HST purposes when single servings are supplied prepackaged or at the time of sale in quantities of more than five items.

As noted in our previous discussion with respect to paragraph 1(m), we consider that a package prepackaged for sale to consumers containing a total of at least six single serving items, some of which are sweetened baked goods and others of which are unsweetened bread products, is not considered to be a supply of unsweetened bread products. As a result a supply of combination of these items must contain more than five items to be zero-rated. As an example, a package that contains five muffins and one bagel sold by a restaurant will be zero-rated. However, if the package contains three bagels and two muffins, the package will be subject to the GST/HST at the rate of 7/15%.

However, if the food service establishment supplies sweetened baked goods and/or unsweetened bread products for consumption at the establishment, the supply is subject to the GST/HST at 7/15% under subsection 1(q) regardless of the quantity supplied.

Should you have any questions or comments on the above matter, please contact me at (613) 952-8812.

Isabelle Breault
Goods Unit
General operations and border issues Division