12 February 2001 GST/HST Interpretation 31392 - Application of GST/HST to a Non-carbonated Beverage

We have completed our review of the case material concerning the above-referenced subject matter. In a memo to you dated July 21, 2000, XXXXX XXXXX, concluded that XXXXX (the 'product') is subject to 7% GST. The supply of the product is excluded from zero-rating pursuant to XXXXX of Part III of Schedule VI to the Excise Tax Act (ETA).

Product Description:

The product is a non-carbonated beverage based upon a combination of XXXXX.

The product is available in six flavours: XXXXX The product is available in 473 mL and 1.89 L formats.

A sample XXXXX label provides the following information about the product.

•   It is "A refreshing beverage made from a blend of XXXXX[.]

•   It contains "No artificial flavours."

•   It is "A naturally-flavoured beverage with the nutritional goodness of vitamins A & C."

•   The ingredients are: water, high fructose corn syrup XXXXX malic acid, ascorbic acid, XXXXX and beta carotene."

In a submission dated May 10, 2000, the manufacturer's representative XXXXX put forth their analysis of the product and the relevant legislation. Their comments are summarized as follows.

1. The statutes were drafted without this new and unique product in mind.

There are no competitive beverage products within the Canadian marketplace that are combinations of XXXXX. If the product had been in existence at the time the Goods and Services Tax (GST) was added to the ETA, the product would have been zero-rated by the drafters, as the ETA only intended to tax [7%] snack foods and drinks.

2. Combining two zero-rated goods should result in a zero-rated product.

Since the product is a combination of XXXXX, that on their own may be considered zero-rated supplies, the product by conjunction, should also be zero-rated.

3. The XXXXX is a sweetener not a flavouring, so the product XXXXX.

The XXXXX is added for the purpose of providing sweetness and tartness to an otherwise unpalatable XXXXX. The quantity of XXXXX added does not make the product a XXXXX. The product is a " XXXXX beverage in which XXXXX is added as a sweetening agent to improve the taste of XXXXX, which is the primary ingredient."

4. The size of the container indicates that the product is not a snack food.

A reasonable person would not regard a 1.8L container of the product as a "snack food," so according to the intent of the ETA, the product should be zero-rated.

In response to these arguments, we provide the following comments in the same numerical order.

1. The statutes were drafted without this new and unique product in mind.

We have observed several products in the Canadian marketplace that are also combinations of XXXXX[.] The ETA zero-rates supplies of food or beverages for human consumption; including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of such food or beverages. However, pursuant to Part III of Schedule VI to the ETA, exceptions to the zero-rating apply to certain supplies. The application of XXXXX is not limited to "snack foods and drinks" XXXXX. Conjecture on the intent of the legislation is not relevant and cannot be used to override the words of the statute.

2. Combining two zero-rated goods should result in a zero-rated product.

Although XXXXX and XXXXX may be zero-rated supplies, it is possible to combine two zero-rated goods and form a new good that is taxable at 7%. For example, the supply of unsalted nuts is zero-rated and the supply of salt is zero-rated but when combined to form salted nuts, the supply is taxable at 7%. The tax status of inputs used in the manufacture of a basic grocery is not relevant in determining the tax status of that product.

3. The XXXXX is a sweetener not a flavouring, XXXXX.

With respect to sweetness, although XXXXX may contribute to the sweetness of the product, it likely also contributes to the XXXXX. We note that high-fructose corn syrup (a sweetening agent) has been added to the product. This implies that the XXXXX provides insufficient sweetness to make the product palatable.

The noticeable XXXXX of the product is likely provided by the combination of XXXXX and the additional XXXXX included in the ingredients. XXXXX of Part III of Schedule VI to the ETA applies to all XXXXX regardless of whether the XXXXX. If there is a XXXXX, as in this case, then the beverage falls within XXXXX[.]

Furthermore, the product manufacturer's website states; XXXXX XXXXX[.] On the product label, the flavours focus on XXXXX and the images XXXXX. The label for XXXXX describes the product as "A refreshing beverage made from a blend of XXXXX[.]

4. The size of the container indicates that the product is not a snack food.

The size of the container in which the product is packaged is not determinative of its tax status in this case. As the product is excepted from zero-rating pursuant to XXXXX of Part III of Schedule VI to the ETA, the packaging format is no longer relevant. The product is taxable at 7% in all packaging formats. This is similar to the treatment of alcoholic beverages that are excluded from zero-rating, regardless of packaging format, under paragraph 1(a) of Part III of Schedule VI to the ETA.

The position that the product is a XXXXX added as a sweetening agent is not supported by the listed ingredients, the taste of the product XXXXX, and the manner in which the product is packaged and promoted.

The product label indicates that high-fructose corn syrup, (a sweetening agent) is the second most abundant ingredient in the product. One would question why it is necessary to add this ingredient if the XXXXX was added solely to provide sweetening rather than XXXXX. Further, the product label indicates that there are "No artificial flavours" and that the product is "A naturally-flavoured beverage". These statements coupled with the fact that the ingredients include XXXXX indicate the product is a XXXXX.

Based upon the ingredients, the taste of the product XXXXX and the manner in which the product is labelled and promoted, it is our position that this product is a XXXXX. Supplies of the product are not zero-rated due to the exception to zero-rating found in XXXXX of Part III of Schedule VI to the ETA.

If you wish to discuss the issue further, please call me at (613) 952-9218.

Kevin W. Smith
Excise & GST Rulings Directorate