4 October 2001 GST/HST Interpretation 36581 - Application of the GST to Joint Marketing Services

Following are our views, as you requested, on the application of the GST to the following transactions involving the XXXXX (the Association) and the XXXXX (the Corporation).

Background

•   The Corporation, a for-profit entity, is the owner/operator of the XXXXX XXXXX where horse racing and gaming operations are carried on.

•   The Association, a non-profit organization, provides various services to, and represents the interests of, its members, who are owners and trainers of racehorses in XXXXX.

•   The Corporation and the Association entered into an agreement for the period from January 1, 2001 to December 31, 2002. It addresses such matters as purse distribution and other revenue sharing terms. At issue are the provisions of the agreement concerning a joint marketing program, the rental of stalls, and the Lasix program (Lasix is a medical treatment program for racehorses).

XXXXX (Audit) of your office provided much of the following background in our telephone conversations: to a large extent, the following information is not set out in the above-noted Agreement and so we assume that the advice to us accurately represents the facts.

Joint Marketing

•   Each year the Association and the Corporation decide how much the Corporation can spend on joint marketing. Generally, joint marketing refers to generic advertising, e.g., television/publication ads promoting horseracing in XXXXX. The Association agrees to reimburse the Corporation for up to XXXXX of expenses incurred in this endeavor. More specifically, the Association will reimburse the Corporation for the first XXXXX incurred (for instance, if the Corporation spends XXXXX, they may still bill the Association for XXXXX ).

•   In Year One of this arrangement ( It is apparent that this joint marketing arrangement was initiated prior to the implementation of the formal agreement described above.), the Corporation billed the Association for XXXXX, in Year Two for XXXXX and for last year, XXXXX.

•   The expenses are incurred solely by the Corporation (they arrange everything and are invoiced by the advertisers).

Stalls

•   The Corporation agrees to provide stalls to thoroughbred horsemen. The Corporation incurs costs related to the stalls such as cleaning and hauling, and is reimbursed by the horsemen for these amounts. The Corporation claims an ITC for the tax incurred on these expenses, but does not collect tax on the reimbursements (and it makes no adjustment to net tax for the ITCs claimed).

Lasix Program

•   The Lasix program is handled somewhat similar to the above in that the Corporation incurs the expense, pays the GST, claims the ITC and receives a reimbursement without tax. However, in this case the Corporation reports an adjustment reducing its net tax by the amount of the ITC previously claimed.

Our Opinions

a)  Joint Marketing

It is our view that the reimbursements paid by the Association to the Corporation are consideration for a taxable supply, and as such are subject to GST. In reaching this conclusion, we considered three important issues:

(i) whether the expenses for which the reimbursements were paid were incurred jointly by the Corporation and the Association, or

(ii) whether the Corporation incurred a portion of the expenses, for which it was reimbursed, as an agent of the Association, and

(iii) whether the Corporation made a taxable supply in return for the reimbursements.

Concerning (i), it is clear from the facts that the expenses are incurred solely by the Corporation. That is, the Corporation alone enters into an agreement with a vendor (e.g., an advertiser) for the purchase of promotional property or services. Thus the Association cannot be said to be "jointly" liable for such purchases. In other words, these purchases were not made "jointly."

Concerning (ii), the fact that the Association is not legally implicated in respect of the purchases made by the Corporation indicates that the Corporation is not acting as an agent of the Association in making such purchases. One of the essential indices of agency (Note Policy Statement P-182 on the meaning of agency and the Federal Court Decision in the Case of Glengarry Bingo v. the Queen.) is that the agent binds the principal legally: i.e., to cite from P-182:

The principles of law indicate that in a true agency relationship it should be evident that a person acting in the capacity of agent is empowered by the principal to act or enter into contracts on behalf of that principal. Any transactions undertaken by the person in the capacity as "agent" will be clearly done under the authorization of its principal. Consequently, through the agent's actions in the representation of its principal, the agent will conduct itself in such manner so as to affect the principal's legal position.

Since the Corporation is not affecting the legal position of the Association when making such purchases, it does not appear to be acting as an agent of the Association.

The other essential indices of agency — control over an agent's actions, and intention/consent of an agency relationship — also appear to be lacking. In this connection, there is no evidence (in the facts that you presented) that the Corporation acts under the general direction and control of the Association. And finally, there is no indication that the parties intended that the Corporation act as an agent of the Association with respect to the joint marketing endeavor.

Concerning (iii), it should be noted that a "supply" is defined under subsection 123(1), in part, as "... the provision of property or a service in any manner ..." and that a service, in part, is "... anything other than property or money ...." Since the Corporation has agreed to carry out the task of the "joint marketing" endeavor, is apparent to us that the Corporation is providing a service. Further, since there is no apparent exemption for this service, it is a taxable supply.

It is not necessary to decide whether this service is provided to the Association. The "recipient" of a supply is defined in subsection 123(1), in part, as the "person who is liable under the agreement to pay (the) consideration..." Since the Association has agreed to pay consideration for this service, in the form of reimbursing the Corporation's expenses, the Association, pursuant to subsection 165(1), is subject to tax on such consideration as the "recipient."

(b) Stalls

As is the case for the marketing expenses, the Corporation has agreed to provide stalls to the horsemen, and the horsemen have agreed to reimburse the Corporation for some of its expenses. These reimbursements represent consideration for the rental of horse stalls. Further, there is no apparent exemption that would apply to the rental of horse stalls. Accordingly, the amount paid by the horsemen to the Corporation as reimbursement for expenses pertaining to the upkeep and maintenance of the stalls is consideration for a taxable supply and is thereby subject to GST.

(a) Lasix Program

The GST should apply to the reimbursements in the same manner as described above. However, as you describe it, rather than indicating a remittance amount on its GST Return, the Corporation instead reported an adjustment reducing its ITC claim. The effect on net tax, you indicate, is the same. That is, the ITC adjustment would be equal to the tax exigible on the reimbursements. In this case, and at your discretion (this is really an Audit issue), you may wish to advise the Corporation of the proper method of accounting for this tax, without requiring any adjustments to present or prior returns.

I trust these comments may assist you. I transferred to the Real Property Unit on October 1, 2001. Therefore, if you have any comments or concerns, please address them to Danielle Laflèche, Manager, Charities, NPOs and Educational Services Unit, at (613) 954-7936.