22 December 1998 GST/HST Interpretation HQR0000858 - "Administrative Services"

This memorandum is in response to your fax of September 3, 1997, and our subsequent telephone conversation of August 24, 1998, where you requested our views on a XXXXX XXXXX the manufacturers who supply independent dealers with appliances, and the independent dealers. I apologize for the delay in responding to this matter.

During my conversations of September 4, 1998, and September 10, 1998, with Mr. XXXXX, I obtained some additional information with respect to the arrangements. Mr. XXXXX also posed an additional question to the Department with respect to transactions between XXXXX and non-resident manufacturers.

Background

•   XXXXX has coordinated XXXXX arrangements between manufacturers who supply independent dealers with appliances, and the independent dealers who purchase appliances from the manufacturers. XXXXX itself never purchases appliances from the manufacturers involved in these arrangements according to XXXXX[.]

•   XXXXX purchases a quantity of $XXXXX "coupons" from XXXXX[.] Under the previous arrangement, XXXXX paid XXXXX $XXXXX for each "coupon" purchased. A new arrangement has been negotiated with XXXXX, whereby currently, the $XXXXX "coupons" are purchased from XXXXX for $XXXXX per "coupon".

•   According to XXXXX, XXXXX treats the supply of "coupons" sold to XXXXX as being "zero-rated". (You addressed this issue in your October 2, 1997, interpretation to XXXXX[.]

XXXXX provides the XXXXX coupons" to the independent dealers when their salespersons sell certain appliances. Salespersons receive a $XXXXX "coupon" for each appliance sold.

XXXXX previously invoiced the manufacturers $XXXXX for each $1XXXXX "coupon" provided to the independent dealers. The arrangements with the manufacturers have since been modified. Currently, XXXXX only invoices the manufacturers $XXXXX for each $XXXXX "coupon" it provides to the independent dealers.

Interpretation Requested

XXXXX requested in his fax of March 11, 1997, confirmation from the Department that XXXXX was correct in treating its supply of $XXXXX "coupons" to manufacturers as being zero-rated. It is this issue that you have forwarded to Headquarters for our views.

XXXXX also enquired in our conversation of September 10, 1998, how the transactions with non-resident manufacturers were to be treated where XXXXX invoices the manufacturers for "administrative services" performed in Canada (i.e., taxable or zero-rated).

Headquarters' Interpretation

The supply of "coupons" by XXXXX to XXXXX is not zero-rated because supplies of coupons (as well as gift certificates) are not included in Schedule VI to the Excise Tax Act (ETA). We concur with the response you provided to XXXXX in your October 2, 1997, interpretation on this particular issue.

Based upon the information provided, and conversations with XXXXX, it is our understanding that the manufacturers never receive the XXXXX "coupons" "in hand". The substance of the transactions are such that XXXXX is providing "administrative services" (i.e., XXXXX coordinates a promotional campaign). The administrative services provided by XXXXX to the manufacturers under both the old and the new arrangements would be subject to the general imposition provisions under the ETA.

Under the previous "administrative arrangement", XXXXX paid XXXXX $XXXXX per "coupon", and invoiced the manufacturer(s) $XXXXX per "coupon" provided to the independent dealer(s). As you stated in your interpretation of October 2, 1997, the XXXXX "coupons" sold to XXXXX under this scenario would be regarded as "gift certificates" pursuant to section 181.2 of the ETA when sold to XXXXX[.]

Because XXXXX is currently paying a discounted amount to XXXXX for the $XXXXX "coupons", for total consideration of $XXXXX per "coupon", the "coupons" no longer satisfy one of the conditions specified under Policy Paper P-202, which states that the consideration given for the "gift certificate" must equal the stated value on the "certificate". As such, the special rules that apply to "gift certificates" under section 181.2 of the ETA would not apply in this scenario, and the supply of "coupons" from XXXXX to XXXXX [un]der this new arrangement would now be subject to the general imposition provisions under the ETA.

With respect to XXXXX most recent enquiry regarding supplies of "administrative services" to non-resident manufacturers, section 7 of Part V of Schedule VI to the ETA provides that a supply of a service made to a non-resident person is zero-rated. However, paragraph 7(e) of Part V of Schedule VI to the ETA provides that a service "in respect of" tangible personal property (TPP) that is situated in Canada at the time the service is performed is not zero-rated.

Appliances situated in Canada and sold by independent dealers in Canada would be regarded as being TPP situated in Canada. XXXXX does provide XXXXX coupons" to the independent dealers when they sell TPP (i.e., appliances) which had been purchased from certain non-resident manufacturers participating in the arrangements. As such, the question does arise whether or not the "administrative services" provided by XXXXX to non-resident manufacturers are "in respect of" TPP.

The following guidelines will be applied by the Department to aid in the determination of whether the connection between the service and the TPP is sufficiently direct for the service to be "in respect of" the property for purposes of paragraph 7(e) of Part V of Schedule VI to the ETA:

•   Was the service designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property? This guideline involves determining the purpose or objective of the service.

•   The relationship between the services and the TPP (i.e., appliances) must be more direct than indirect in order for the service and the property to be considered by the Department to be "in respect of" each other. If some object comes between the service and the property, the connection becomes increasingly remote. In the scenario presented, XXXXX does provide XXXXX "coupons" to independent dealers every time TPP is sold.

The Department has taken the position that the direct object of the service must be the TPP. Since this is the case in the situation at hand, the "administrative services" would be regarded as being "in respect of" TPP, and would therefore not be zero-rated, pursuant to paragraph 7(e) of Part V of Schedule VI to the ETA. The general imposition provisions under the ETA would apply to these transactions with non-resident manufacturers.

I hope the explanation above will be of some assistance to you in finalizing your response to XXXXX. Should you have any additional questions with respect to this matter, please contact me at (613) 954-9699.