25 January 1999 GST/HST Interpretation HQR0001469 - Application of the GST/HST to Supplies of Frozen Shrimp Rings

XXXXX

Thank you for your letter of September 2, 1998, to Mr. Ed Gauthier in which you revisited some of the points discussed during the meeting of August 26, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of frozen shrimp rings.

Interpretation Requested

You have noted that paragraph 1(o.3) (previously subparagraph 1(o)(iv)) of Part III of Schedule VI to the Excise Tax Act excludes from zero-rating supplies of "platters of cheese, cold cuts, fruits or vegetables and other arrangements of prepared food". The Explanatory Notes to Bill C-62 state, in part,

This paragraph (i.e., paragraph 1(o)) lists prepared foods and beverages which are taxable under the GST:

... (iv) cheese platters or other arrangements prepared food

This includes, for example, trays of prepared foods prepared as part of a catering service.

Based on the wording of paragraph 1(o.3) and the Explanatory Notes quoted above, you suggest that only "... sales of trays of prepared foods by the deli department of a food store that puts them in competition with a catering service or a restaurant would attract the GST (or HST)." Further, the GST/HST should not apply to "... certain items in the frozen counter in direct competition to other similar consumer choices (bagged, cooked, frozen shrimp or potato skins, etc.) Finally, to regard frozen shrimp rings as "other arrangements of prepared food" for the purpose of paragraph 1(o.3) would open up the possibility of "... numerous other products being taxed ... (such as) smoked salmon, arranged potato skins with cheese, and ... many others such as chicken items and TV dinners all of which are in the frozen food section of any grocery store."

For these reasons, you have asked that we "... review and hence remove the GST/HST on supplies of frozen shrimp rings."

You have also asked that, in considering your request, we note that the seafood and food distribution industries were unaware of the impact of the amendment to paragraph 1(o) of Part III of Schedule VI to the Excise Tax Act until late January or early February, 1998, and members of these industries have no practical means of collecting tax in respect of supplies of frozen shrimp rings and similar products made between May 14, 1996, the day the amendment took effect, and early 1998.

Interpretation Given

Supplies of food, beverages, and qualifying ingredients are zero-rated by virtue of section 1 of Part III of Schedule VI to the Excise Tax Act unless one of the exceptions set out in paragraphs 1(a) through (r) applies.

Paragraph 1(o), before it was amended by 1997, c. 10, s. 137(3), read, in part:

(o) the following prepared food and beverages sold in a form suitable for immediate consumption, either where sold or elsewhere, namely

... (iv) platters of cheese, cold cuts, fruit or vegetables and other arrangements of prepared food,

The structure of paragraph 1(o) was significantly revised by 1997, c. 10, s. 137(3). New paragraph 1(o.3), which is applicable to supplies for which all of the consideration becomes due or is paid without having become due on or after May 14, 1996, reads:

(o.3) platters of cheese, cold cuts, fruit or vegetables and other arrangements of prepared food;

The principal difference between former subparagraph 1(o)(iv) (read in the context of former paragraph 1(o)) and new paragraph 1(o.3) is that subparagraph 1(o)(iv) applied only where certain platters and other arrangements were sold in a form suitable for immediate consumption, whereas paragraph 1(o.3) applies regardless of whether they are sold in a form suitable for immediate consumption. As a result, new paragraph 1(o.3) applies, for example, to supplies of frozen food arrangements, whereas subparagraph 1(o)(iv) did not.

It is the Department's position that the words, "other arrangements of prepared food", are intended to apply only to those arrangements with characteristics similar to (although not necessarily identical to) those of "platters of cheese, cold cuts, fruit or vegetables". To fall under paragraph 1(o.3), such arrangements should generally be reminiscent of arrangements a caterer might provide in the course of a catering service. In particular, they should:

•   be presented on a piece of servingware (i.e., something on which the prepared food is likely to be served)

•   be intended to achieve a desired visual effect

•   require little or no additional preparation

•   be intended to be served as a whole to two or more people

Frozen shrimp rings have all four of these characteristics and therefore, on balance, are "other arrangements of prepared food" for the purpose of paragraph 1(o.3). Consequently, supplies of frozen shrimp rings are excluded from tax relief under section 1 of Part III of Schedule VI and are taxable at 7% (or 15% where the supplies are made in a province participating in the HST).

We have not been persuaded that paragraph 1(o.3) should apply only to supplies of deli products which compete with catering or restaurant services. Paragraph 1(o.3) does not use the words "deli", "catering", or "restaurant", and although the Explanatory Notes to subparagraph 1(o)(iv) suggest that the scope of the exception was intended to include supplies of food trays made in the course of a catering service, they do not suggest that it was intended to be limited to such supplies, or to supplies competitive with such supplies. (Note that, although subparagraph 1(o)(iv) applied to food trays supplied as part of a catering service, new paragraph 1(o.3) does not, as food or beverages sold under a contract for, or in conjunction with, catering services now fall under paragraph 1(o.5), a more specific exception.)

Further, we can find no basis on which to conclude that the GST/HST was never intended to apply to supplies of food products which may compete to a certain extent with products that are not subject to tax. Indeed, supplies of cheese, cold cuts, fruit, vegetables or other prepared foods are only captured under paragraph 1(o.3) if they are supplied as a platter or other arrangement. Where they are supplied in a different form, paragraph 1(o.3) does not apply. Therefore, it is not surprising that a supply of a package of cheese slices (or a bag of frozen shrimp) does not fall under paragraph 1(o.3), whereas a supply of a cheese platter (or a frozen shrimp ring) does.

Although, in our view, paragraph 1(o.3) applies to any supply of a food arrangement where the arrangement is presented on a piece of servingware, is intended to achieve a desired visual effect, requires little or no additional preparation, and is intended to be served as a whole to two or more people, we do not think this position opens the door to the undue taxation of frozen food products. Indeed, it ensures that paragraph 1(o.3) applies only to those products with characteristics similar to (although not necessarily identical to) those of cheese, cold cut, fruit or vegetable platters. If you or one of your members are uncertain whether a particular product is an "arrangement of prepared food" for the purpose of paragraph 1(o.3), we would welcome a request for a ruling on the matter.

Regarding your concern that the seafood and food distribution industries were unaware of the effect of the addition of paragraph 1(o.3), the Department has reviewed the matter and agrees to assess tax only on supplies of frozen shrimp rings made on or after April 1, 1998.

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%. Where supplies of frozen shrimp rings are made in a participating province.

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.

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 call John Smith at (403) 231-4104.

Yours truly,

Adrien Venne
Director
General Operations and Border Issues
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch