11 February 1999 GST/HST Interpretation HQR0000917 - Disbursements

Dear XXXXX

Thank you for your letters of October 24, 1997, and of March 3, 1998, (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to professional disbursements.

Background

XXXXX is comprised of lawyers, patent and trade-mark agents and professionals in the intellectual property field, (herein referred to as patent and trade-mark agents) in both the private and corporate sectors.

You described in your letter the following factual situations related to disbursements commonplace in the intellectual property area. We will examine each particular situation submitted, to determine if the patent and trade-mark agent's disbursement is incurred in its capacity as an agent for a particular client or if the patent and trade-mark agent made a disbursement for an expense incurred in the course of its practice.

Situation 1

Whenever a Canadian patent and trade-mark agent makes a request of the XXXXX XXXXX, to determine whether there is a secret pending application corresponding to a foreign patent, a fee must be paid to the XXXXX[.] Similarly, whenever a Canadian patent and trade-mark agent files a XXXXX XXXXX an international search fee is required to be paid to the XXXXX), relating to searches conducted by the XXXXX for Canadian applicants. These fees are not set by the Canadian government, but by XXXXX and eventually, the fees are sent to XXXXX[.]

Interpretation Requested

You want to know if disbursements incurred for searches under section 11 of the XXXXX and similar international searches qualify as disbursements incurred by a patent and trade-mark agent in its capacity as an agent.

Interpretation Given

Based on the facts provided, it is our position, that disbursements for searches under section 11 of the XXXXX and similar international searches are not incurred by a patent and trade-mark agent in its capacity as an agent of a client. Consequently, GST/HST is applicable to the total consideration for the services supplied in Canada by the patent and trade-mark agent (including reimbursement of any such search fees). The Department's position with respect to these searches is specifically addressed in policy P-209 "Lawyer's disbursements". The inability to choose whether or not to pay the section 11 fee or the international search fee does not alter the treatment of the disbursement for GST/HST purposes.

Situation 2

A Canadian patent and trade-mark agent engages a foreign associate to conduct a patent or trade-mark search, and possibly also file the patent or trade-mark application. The foreign associate may be an attorney or a patent agent or a trade-mark agent or a searcher. The Canadian agent provides the foreign associate with instructions as follows.

In the case of a patent search, which may be to determine the state of the relevant art, patentability, infringement, validity or patent equivalency, the Canadian agent provides direction as to the nature of the search, the scope of the search, a description of the technology, examples of patents or literature and whatever other information is needed for the search to be completed by the foreign associate. The search may be for purposes of determining the client's position in the foreign country or it may be for purposes of finding relevant art which may influence the client's position in Canada and/or throughout the world. In the case of a trade-mark search, the Canadian agent gives the foreign associate details of the mark, the wares/services with which it is associated, and perhaps the nature of how the client conducts its business in the foreign country.

The actual patent or trade-mark application may then be sent by the Canadian agent on behalf of the client to a foreign associate (who may or may not be the same person performing the patent or trade-mark search) for filing in the relevant country. The foreign associate files the application, paying any required government fees and reports to and bills the Canadian agent. The instructions sent by the Canadian agent are generally minimal, and merely comprise of the information and documents required to place the application on file.

Since patent and trade-mark applications are usually examined in many countries before rights are granted, the Canadian agent generally interacts with the foreign associate by providing comments relating to, for example, the technical subject matter and the prior art, in the case of patents, or wares/services and the nature of the client's business, in the case of trade-marks all of which assists the foreign associate in having the patent or trade-mark application filed. (Sometimes the Canadian agent will also ask the foreign associate as to whether a patent application contains allowable claims under the laws of the foreign associate's country, and may also engage in correspondence prior to the filing, providing technical comments in response to the foreign associate's questions. The same situation could arise in respect of a trade-mark application with the questions relating to, for example, registerability of the mark or the descriptions of wares and/or services.)

Once the foreign associate completes the requested work, the associate usually responds with a written report (which may include an opinion based on the foreign law) and an account for particular services, including applicable disbursements. The foreign associate will typically bill the Canadian agent for both professional services and related disbursements.

In all instances, and while the foreign associate may or may not be selected with the specific client's input or knowledge, the client has either given the Canadian agent the express authority to engage a foreign associate, if need be, and left it to the Canadian agent's judgment in terms of the most appropriate foreign associate to engage, or given the Canadian agent blanket instructions to proceed as appropriate (i.e., engaging the appropriate person for the tasks required in the relevant foreign jurisdiction).

Interpretation Requested

You want to know if a disbursement representing the cost of engaging a foreign associate to conduct some services in a foreign country qualifies as a disbursement incurred by the patent and trade-mark agent in its capacity as an agent for a particular client.

Interpretation Given

Based on the facts set out above, a disbursement representing the cost of engaging a foreign associate has the following GST/HST consequences. To the extent that the disbursement represents professional services provided by the foreign associate, it is not regarded as being incurred by the Canadian agent in its capacity as agent of the client. The Canadian agent is considered to have acquired the services for use in making a supply of professional services to the client.

For disbursements incurred by the foreign associate and passed on to the client, as such, the tax status would be the same as if the disbursement were incurred by the Canadian agent. For example, a disbursement representing a fee described in "Situation 4" may be passed on to the client without GST/HST.

As indicated in P-209 Lawyers disbursements, certain fees paid to foreign persons and related disbursement can be incurred as agent. Specifically, in performing certain duties in respect of intellectual property, a Canadian agent may need to obtain the services of a non-resident patent and trade-mark agent in which case the client is made aware of and approves the selection of the non-resident professional. The Canadian agent must have no professional input on the proceedings undertaken by the non-resident, but merely act as a conduit for the information to and from the non-resident. If the Canadian agent uses the services of a non-resident professional as an input in making a supply to the client, such disbursements would not be incurred as agent.

Situation 3

A patent or trade-mark application is sent by the Canadian agent on behalf of a client directly to the XXXXX for filing, and the required XXXXX[.]

Interpretation Requested

You want to know if the fee paid to the XXXXX for filing a patent or trade-mark application by a Canadian patent and trade-mark agent is a disbursement incurred in its capacity as an agent.

Interpretation Given

Based on the facts set out above, fees paid to a foreign office for filing a patent or trademark application are disbursements incurred by the patent and trade-mark agent in its capacity as an agent. Consequently, GST/HST is not applicable to such fees when passed on to the client.

Situation 4

Of the services provided by Canadian agents for Canadian resident clients, the ones which are most readily classified in the "agent" category as set out in policy P-209 involve renewals and maintenance of foreign patents, patent applications, registered trade-marks and registered designs, all of which involve governmental fees. Usually these activities are managed without the professional input of a Canadian Agent. In the non-resident context, such services are often performed by international firms which specialize in such an area.

Interpretation Requested

You want to know if disbursements incurred in respect of renewals and maintenance of foreign patents, patent applications, registered trade-marks and registered designs performed by international firms qualify as a disbursement incurred in their capacity as an agent.

Interpretation Given

Based on the facts set out above, fees paid by international firms in the name of a Canadian client to renew and maintain foreign patents, patent applications, registered trade marks and registered designs are considered to be disbursements incurred in their capacity as an agent of the client.

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 the services performed are taxable supplies (which are not zero-rated) made in a participating province, tax must be collected at the harmonized rate.

The foregoing comments represent our general views with respect to the subject matter of your letter. 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) 952-8812.

Yours truly,

Isabelle Breault
Services and Intangibles Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate