12 September 2001 GST/HST Interpretation 34344 - Tax Status of Taxidermy

This refers to your e-mail messages dated December 20, 2000, and January 30, 2001, requesting that the Border Issues unit review the tax status of taxidermy with respect to XXXXX.

Specifically, you have raised the issue of whether a supply of taxidermy is a supply of tangible personal property ("TPP") or a supply of a service as described in your summary of XXXXX and reproduced below.

Scenario 1

A non-resident harvests an animal in Canada. According to the Wildlife Act, the hunter owns the wildlife as long as it was harvested under license and in compliance with the Wildlife Act. The hunter ships the skin, which is one of several components for the replica reproduction, to the taxidermist, located in XXXXX. The taxidermist uses the pelt to create, for example, a rug or mount or a life size animal. Other than the carcass, all components are manufactured or supplied by XXXXX. For example, for a life-size figure of a bear, XXXXX supplies the bear eyes, claws, the life-size mannequin on which the pelt is tacked, and any other details to create a realistic replica of the live animal.

The taxidermy product is for the personal use of the hunter and is exported to the hunter in the U.S. by a commercial carrier XXXXX[.]

Scenario 2

The same scenario as above, except for the fact that the non-resident harvests an animal outside Canada. The carcass is brought into Canada on a temporary basis and exported after completion of the taxidermy product.

Scenario 3

XXXXX Analysis

Is taxidermy a supply of TPP or a supply of a service?

In each of the scenarios, it is necessary to determine whether the supply is a supply of TPP or a supply of a service. In this regard, the key factor to be considered is the substance of the contract for the supply. Specifically, where the substance of the contract is the production of a good to be sold (transfer of property in that good), it would indicate a supply of TPP. Where the substance of the contract is the skill and labour of the supplier in the performance of work for another, it would indicate a supply of a service, (notwithstanding that certain materials may be used as inputs by the supplier in the performance of that work).

In scenarios 1 and 2, the recipient provides the taxidermist with a key component (the animal carcass/parts) that is necessary to the making of the supply. There is no indication that the recipient transfers ownership of that property at any time. In these cases, the supplier is essentially processing or working on property owned by the recipient.

In order to stuff or mount an animal, the skill, expertise, knowledge and ability of a taxidermist or artist is required and this is what the recipient is seeking from the supplier under the contract.

Based on our analysis, the substance of the contract between the recipient and the supplier, in the circumstances outlined in scenarios 1 and 2, is the skill and labour of the supplier in the performance of work for the recipient. Consequently, our position is that this is a supply of a service. This is notwithstanding that some accessory materials, in the case of the taxidermist, such as glass eyes, may have to be used by the taxidermist in the course of supplying its service and end up forming part of the property that is ultimately returned to the recipient.

In scenario 3, the taxidermist XXXXX. The substance of the contract is the production of a good to be sold. It is therefore a supply of TPP.

In conclusion, the supply made by the taxidermist in scenarios 1 and 2, is a supply of a service if the customer is providing and owns the property in respect of which the supplier is performing work.

However, where the supplier provides all of the property necessary (the animal carcass/parts) as in scenario 3, the supplier is considered to be supplying TPP.

We note that this treatment is in keeping with the treatment of photocopies as set out in recently issued Policy Statement P-236, Supply of Photocopies.

Is the service in respect of TPP that is situated in Canada at the time the service is performed?

It has already been established that the supply made in scenarios 1 and 2 is considered to be a supply of a service. To determine whether it is zero-rated when it is supplied to a non-resident person, consideration must be given to whether the service is in respect of TPP and the location of the TPP at the time the service is performed.

Reference must be made to Policy Statement P-169R, Meaning of "In respect of Real Property Situated in Canada" and "In Respect of Tangible Personal Property That is Situated in Canada at the Time the Service is Performed", to determine whether the service is in respect of the TPP, namely; the animal carcass/parts.

The CCRA considers a service to be "in respect of " property if there is more than a mere indirect or incidental nexus between the service and the property. If the relationship between the service and the property is sufficiently direct, then the CCRA will consider the service to be "in respect of".

The purpose or objective of the service was stated above. The fact that something is physically done to the TPP to change its form, indicates that the relationship between the service and the property is more direct than indirect.

Section 7 of Part V of Schedule VI to the Act zero-rates a supply of a service made to a non-resident person. However, pursuant to the exclusion in paragraph 7(e) of Part V of Schedule VI to the Act, a service in respect of TPP that is situated in Canada at the time the service is performed, cannot be zero-rated.

Therefore, due to the fact that the service is in respect of TPP situated in Canada at the time the service is performed, the supply of the service cannot be zero-rated because of paragraph 7(e) of Part V of Schedule VI to the Act.

Is the supply in scenario 2 zero-rated?

In scenario 2, a non-resident harvests an animal outside Canada and temporarily imports the carcass into Canada for the sole purpose of having the taxidermy service performed. The taxidermy product is exported from Canada as soon as is practicable after the service is performed. In this case, the supply of the service is zero-rated under section 4 of Part V of Schedule VI to the Act as is any TPP supplied in conjunction with the service.

Is the supply in scenario 3 zero-rated?

In scenario 3, XXXXX, it has already been established that the contract is in substance for a sale of goods. In this scenario, section 12 of Part V of Schedule VI to the Act would apply to zero-rate the supply where the supplier of the property (taxidermist) delivers the property to a common carrier for export.

Other

The following arguments were provided XXXXX.

1. Manufacturing or Processing

XXXXX is not providing a service on tangible personal property (TPP) situated in Canada at the time the service is performed. XXXXX is manufacturing TPP that is a replica reproduction of a fish, animal or bird. In essence, a replica reproduction is manufactured from such creatures. As part of the manufacturing process, the customer provides the skin, which is one of several components for the replica reproduction. The pelt provided by the customer is only a small part of the good "produced". Its value is minimal in relation to the finished product. Other than the carcass, all components are manufactured or supplied by XXXXXs. For a life-size figure of a bear, for example, XXXXX supplies the bear eyes, claws, the life size mannequin on which the pelt is tacked, and any other details to create a realistic replica of the live animal.

XXXXX contends that it has met the condition outlined in paragraph 8 of Section 4.5.2 and Income Tax Interpretation Bulletin 145R (IT145R).

XXXXX is of the opinion that the CCRA has not fully addressed the issue raised of the client manufacturing a product.

Response

There is no debate that the supplier may be manufacturing, producing or processing. However, the activities may be undertaken in respect of customers' goods (in which case the supply would be a service) or in respect of XXXXX own goods, for sale following processing (in which case the supply would be one of TPP).

2. Title

XXXXX is adamant that title to the pelt or skin received from the customer is transferred to XXXXX. (However, there is no indication on the invoice that title transfers to XXXXX[.] Based on the analysis provided in XXXXX, if a pelt is provided to the taxidermist, then the taxidermist is considered to be performing a service on the pelt or skin. In fact, the reason the pelt or skin is sent to a taxidermist is that only a taxidermist has that skill or expertise in taxidermy to produce a taxidermy product. The pelt is transferred to XXXXX, an acknowledgement is sent to the customer, the customer provides instructions to XXXXX and the customer provides a deposit. Based on the facts, there is nothing to support a finding that title to the pelt in fact passes to XXXXX and then back to the recipient.

XXXXX

The fact that XXXXX incurs delivery and initial processing costs does not mean that title to the pelt transfers to XXXXX.

XXXXX XXXXX

Conclusion

1. The supply of taxidermy is considered to be a supply of a service in scenarios 1 and 2. A key factor in these cases is that the recipient is providing the property (the carcass/pelt, etc.) in respect of which the service is performed.

2. With respect to scenarios 1 and 2, the supply of a taxidermy service is in respect of TPP situated in Canada at the time the service is performed and is excluded from zero-rating under section 4 of Part V of Schedule VI because of paragraph 7(e) of Part V of Schedule VI to the Act.

3. With respect to scenario 2, the supply of the taxidermy service is zero-rated pursuant to section 4 of Part V of Schedule VI to the Act, provided the conditions of that section are met.

4. With respect to scenario 3, the supply is a supply of TPP. The supply may be subject to the zero-rating provisions of section 12 of Part V of Schedule VI to the Act, provided that the conditions of that section are met.

Should you have any questions, please contact me at (613) 952-6743.