17 July 2000 GST/HST Interpretation 8356R - Tax Treatment of Disbursements and Professional Services Made Outside Canada

Dear XXXXX:

Thank you for your subsequent letter of January 13, 2000, in respect of my previous interpretation letter of December 22, 1999, in which you are requesting clarification concerning certain issues raised in the above mentioned interpretation letter. Also, following our telephone conversation of March 17, 2000, I understand that XXXXX registers patents world-wide for purposes of protecting XXXXX. The purpose of registering the creator's patent world-wide is to allow XXXXX to make supplies of a right (intangible personal property) to use the intellectual property under a licensing agreement with third parties. As a result, XXXXX receives compensation, in the form of royalties, from third parties, which is shared with the XXXXX).

Interpretation Requested

You have asked that I clarify the following points:

1. What is meant, in paragraph 3 of Interpretation Requested, by "XXXXX incur disbursements outside Canada ... on XXXXX behalf, which are billed to XXXXX through the XXXXX, that act as a conduit for such disbursements".

2. What is meant, at the bottom of the first paragraph under Interpretation Given, by "XXXXX commercial activities".

3. What is meant, in the second paragraph under Interpretation Given, where it is stated "Where the XXXXX invoice is sent ... to the XXXXX and the latter merely passes it on to XXXXX".

4. What is meant, on the second line of the fourth paragraph under Interpretation Given, by "... where the XXXXX subcontracts with the XXXXX".

5. You would also like to be advised on the following issues: Why the response was not in the form of a ruling? What does "... bind Canada Customs and Revenue Agency" mean? Is Canada Customs and Revenue Agency all one name, or is it two names with Revenue Agency being Revenue Canada?

Interpretation Given

I am responding to you in the same order as the clarifications/advice you requested.

On the question of the XXXXX acting as a conduit in connection with the billing by the XXXXX of disbursements, the billing of such disbursements would flow through from the XXXXX to XXXXX where XXXXX is the recipient of the supply to which the disbursements relate. For example, where the XXXXX incurs an expense such as payment of a patent registration fee in Europe, and the patent is registered in XXXXX name, the disbursement, if specifically identified on the XXXXX invoice, would not be subject to GST/HST.

On the other hand, where the XXXXX invoice to XXXXX shows an amount paid or payable to the XXXXX in respect of services acquired by the XXXXX from the XXXXX, such as name searches, the amount would not be regarded as a disbursement, but as a payment for services rendered. Consequently, the XXXXX would be required to charge GST/HST in respect of such amounts on their invoice to XXXXX.

On the issue of whether XXXXX is acquiring professional services and disbursements either by the XXXXX or the XXXXX, or from both, in the course of XXXXX commercial activities is a question of fact.

Subsection 123(1) of the Act, defines "commercial activity". Generally, a commercial activity means a business, adventure or concern in the nature of trade, carried on by a person with a reasonable expectation of profit, except to the extent to which the business, adventure or concern involves the making of exempt supplies by the person.

The comment that was made in my December 22, 1999 letter, at the bottom of the first paragraph under Interpretation Given, was a general comment that I had to include to inform you that should the supplies made by the XXXXX not be made for use, consumption or supply exclusively in the course of XXXXX commercial activities, these services would be taxable, pursuant to subparagraph 217(a)(i) of the Excise Tax Act (the Act). Accordingly, XXXXX would have to self-assess the appropriate amount of tax and include this amount on its GST/HST return.

As I understand it, XXXXX makes supplies of intangible personal property to third parties, such as a right to use intellectual property under a licensing agreement. Such supplies would be made in the course of XXXXX commercial activities. Therefore, when XXXXX acquires taxable professional services from a XXXXX, for use exclusively in the course of the above commercial activities, XXXXX would be eligible for an input tax credit.

XXXXX, a public service body, is registered for GST/HST purposes. It's GST/HST business number is XXXXX. If XXXXX acquires taxable goods and services that are not in the course of its commercial activities, as mentioned above, it is, nonetheless, eligible for a partial rebate of the tax charged on the acquisition of such taxable supplies for purposes of its exempt activities. For further information, I have taken the liberty of enclosing GST Memorandum 400-4, entitled Public Sector Bodies.

Concerning the question on whether the manner of invoicing affects the application of the GST/HST, as mentioned previously, it appears that in most cases the XXXXX invoices XXXXX for its professional services, including services supplied by the XXXXX to the XXXXX. As such, XXXXX supplies of these professional services are taxable. However, where the XXXXX invoices XXXXX for supplies of professional services, all of which are made outside Canada, these supplies, which are not included in the XXXXX supply of professional services, would not be subject to tax. As noted above as in the case of disbursements supplied by the XXXXX, and in the latter case, XXXXX would be the recipient of the supply of the professional services made by the XXXXX.

If the XXXXX professional services are included in XXXXX supply of professional services, this would be an indication that the XXXXX acquired the XXXXX services as an input into the XXXXX supply of professional services to XXXXX, all of which would be taxable.

You also seek clarification in connection with the term "subcontracts" used in the fourth paragraph, under Interpretation Given, as the term applies to XXXXX. This term implies that if there is an agreement between the XXXXX and XXXXX to provide the latter with the registration, world-wide, of one of its creator's intellectual property (i.e. a patent), where the XXXXX hires another person, such as a XXXXX, to perform services, etc., abroad, in order for the XXXXX to provide XXXXX with the registration of a patent world-wide, pursuant to the agreement between the XXXXX and XXXXX, the XXXXX would have acquired the XXXXX professional services on a subcontractual basis.

This would include situations where the XXXXX is an agent or associate of the XXXXX. Therefore, the XXXXX professional services would constitute an input into the XXXXX supply made to XXXXX and would be taxable when invoiced by the XXXXX. A disbursement made by the XXXXX may, however, remain non-taxable should the XXXXX be acting as an agent of XXXXX, when it makes the disbursement. For example, where the XXXXX pays a registration fee on behalf of XXXXX, the disbursement would not be subject to tax when invoiced by the XXXXX to XXXXX.

Turning now to three issues on which you wish to be further advised, let me begin by stating that a request for a ruling should not be based on different scenarios but should reflect a set pattern of factual transactions of a particular person. Hypothetical situations cannot be responded to in the form of a ruling. An interpretation, rather, can be provided in such situations outlining, in general terms, CCRA's position on the application of the relevant provisions of the law.

It is unfortunate that you were advised to provide scenarios instead of a clearly defined fact situation, in order to receive a GST/HST application ruling. For your information, I have enclosed GST/HST Memoranda Series, 1.4, entitled Goods and Services Tax Rulings.

With respect to what is meant by "... bind Canada Customs and Revenue Agency" (CCRA), the CCRA will be bound by a ruling to the extent of the accuracy of the factual situation upon which it has issued a ruling. For further information on the exceptions to the binding effects of a ruling, please refer to paragraphs 16-19 of the above GST/HST Memoranda Series, 1.4.

Turning now to the issue of whether Canada Customs and Revenue Agency is all one name or is two names with Revenue Agency being Revenue Canada. As of November 1, 1999, the Department of National Revenue became the Canada Customs and Revenue Agency (the CCRA), all one name, pursuant to the Canada Customs and Revenue Agency Act.

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 Canada Customs and Revenue Agency 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) 957-8220.

Yours truly,

Daniel E.B. Chamaillard, Senior Technical Analyst
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

Enclosures

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