6 December 2002 GST/HST Ruling 39906 - Host Gifts Under the Alternate Collection Method

Dear XXXXX:

We are writing to you in response to your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction described below. We apologize for the delay in our response.

All legislative references are to the Excise Tax Act and regulations thereunder, unless otherwise specified.

Statement of Facts

Our understanding of the facts is as follows:

•   XXXXX established Canadian corporation. It is a direct seller XXXXX is a GST/HST registrant and has been approved to use the Alternate Collection Method (ACM) to account for the GST/HST in accordance with the rules contained in section 178.3.

•   XXXXX will purchase exclusive products from XXXXX. It will sell these products to independent sales contractors (ISC). ISCs will solicit orders and re-sell products based on product demonstrations to individual consumers.

•   Within the course of XXXXX business, gifts will be provided by ISCs to individuals who host demonstrations. The gifts are in the form of a credit to receive free merchandise to be ordered from XXXXX catalogue or that is otherwise available as a merchandise offer.

•   The value of the gift is computed as a percentage of the total sales generated at the time of the demonstration. No money is exchanged and no voucher or credit note is issued.

•   In the event the host orders merchandise in excess of the value of the gift earned, additional payment would be required for this excess amount. In addition, any credit amount earned but not taken at the time of an order is lost.

•   The ISCs are not distributors in respect of whom an approval has been granted, and is in effect, under subsection 178.2(4) on an application made jointly with XXXXX.

Ruling Requested

You requested an application ruling to confirm your analysis of the following questions:

1. Does the host amount earned represent consideration for a supply?

2. Does the supply of the gift in the form of free merchandise fall within the scope of subsection 178.5(7) such that there is no supply and no consideration for the supply and, therefore, the GST/HST will not apply to the value of the free gift?

3. Is the GST/HST applicable to any consideration payable by a host for merchandise ordered that is valued in excess of the value of the free gift?

Ruling Given

Based on the facts set out above, we rule the following:

1. Pursuant to subsection 178.5(7), the host amount earned in the form of free merchandise is deemed not to be consideration for a supply.

2. The supply in the form of merchandise does fall within the scope of subsection 178.5(7). The host is deemed not to have made a supply of the service and the service is deemed not to be consideration for a supply, therefore, the GST/HST will not apply to the value of the gift.

3. The GST/HST is payable by a host on the consideration payable for merchandise ordered that is valued in excess of the credit. Tax is payable at the rate of 7% or 15% on the value of the merchandise that exceeds the allowable credit provided the merchandise is not exempt or zero-rated.

This ruling is subject to the general limitations and qualifications outlined in the enclosed section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that all necessary facts and transactions for which a ruling has been requested have been fully described.

Explanation for Ruling 3

As per your technical analysis, subsection 178.5(7) states, in part, that:

"where, at any time ... when an approval of the Minister for the application of section 178.3 to a direct seller is in effect, an independent sales contractor of the direct seller ... makes a supply of property to a person as consideration for the supply by the person of a service of acting as a host at an occasion that is organized for the purpose of the promotion or distribution by the contractor of exclusive products of the direct seller, the person shall be deemed not to have made a supply of the service and the service shall be deemed not to be consideration or a supply."

This means that when an ISC of a direct seller approved to use the ACM supplies property to a person as consideration for the supply by the person of a service of acting as a host at an occasion organized to promote or distribute by the ISC exclusive products of the direct seller, the host is deemed not to have made a supply of the service and the service is deemed not to be consideration for a supply. This rule only applies when the ISC is not a distributor of the direct seller when an approval for the application of section 178.4 to the distributor is in effect.

Subsection 178.5(7) refers to "a supply of property" to a person for the service of acting as a host. Property is defined in subsection 123(1) to mean "any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money". Pursuant to subsection 123(1) money includes "any currency, cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument, whether Canadian or foreign, but does not include currency the fair market value of which exceeds its stated value as legal tender in the country of issuance or currency that is supplied or held for its numismatic value".

In this case, the host is given a credit value to be used towards merchandise. No money exchanges hands in respect of the compensation for the service of acting as a host. If the host does not use the full credit, the value of that credit is lost. The credit would not fall under the above definition of money. It would, however, qualify under the above definition of property. Only a supply of property qualifies under subsection 178.5(7) as payments of money are specifically excluded from the definition of property.

Generally the value of consideration for a supply is expressed in money. Section 153 provides that the value of consideration, or any part thereof, for a supply shall be deemed to be the amount expressed in money or where the consideration is other than money, the fair market value of the consideration. Pursuant to subsection 123(1), consideration includes any amount that is payable for a supply by operation of law.

When the value for the merchandise chosen by the host is higher than the value of the credit, the value of consideration for the merchandise would be the difference. In this case, the host would only be required to pay the difference in value as the credit for merchandise would be applied to the total price for the merchandise.

Therefore, as per the example given in your letter, where a host has earned a credit of $80 towards free merchandise but orders merchandise valued at $100, the value of consideration for the merchandise would in fact be the difference of $20 and would be subject to the GST/HST at a rate of 7% or 15% provided the merchandise is not exempt or zero-rated.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Carolle Mercier at (613) 957-8223.

Yours truly,

Doris Rist
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorat