13 June 2002 GST/HST Interpretation 37661 - Chips, Crisps, Puffs and Other Similar Snack Foods

Dear XXXXX:

Thank you for your letter of October 22, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the tax status of chips, crisps, puffs and other similar products.

Interpretation Requested

You have asked us the following questions:

1. If you change the advertising/marketing of a product but it has the same name, same composition and is positioned in the same area of the supermarket, does this change its tax status? For example, in order to benefit from a perceived consumer preference for snack foods, this baked item previously marketed as a cracker, and which qualified for zero-rating as such, is now advertised as equivalent to XXXXX. If neither the product name, nor composition change, and the product remains in the cracker section of the supermarket, can a simple change in advertising strategy result in a change in tax status?

2. If research shows that consumer perceptions of a product have changed over time, and the manufacturer consequently changes the packaging/labelling of the product to better align the description to consumer perceptions, but it is still located in the same area of the supermarket, does its tax status change? For example, Company A produces a snack cracker. The product is located in the cracker section of the supermarket. Consumer research shows that consumers view this product as more snack than cracker. The product description is changed from XXXXX to XXXXX. The product is still sold in the cracker section of the supermarket. Is this product still considered a zero-rated basic grocery, or is it taxable under paragraph 1(f) of Part III?

3. In example #2 above, subsequent to the name change, if the product is moved to the area of the supermarket where potato chips and other snack foods are sold, does this change its tax status?

4. Does the tax status under paragraph 1(f) of Part III of Schedule VI to the Act change if a product is sold in bulk rather than in a box? Does the tax change if a product is sold in a bag rather than a box?

5. If a manufacturer or retailer believes they have a product whose tax status may have changed from zero-rated to taxable as a result of one of the above events, and they request a ruling for confirmation, can the Canada Customs and Revenue Agency (CCRA) provide assurance that any change to the tax status would be applied prospectively, allowing the affected party a reasonable time period to implement the change? Given industry standards, we submit that a "reasonable" period would be approximately 3 months, taking into consideration the necessary system changes, the time necessary to advise all participants in the distribution chain, etc.

Interpretation Given

Taxable supplies of goods and services made in Canada are generally subject to tax at 7% (or 15% where the supplies are made in one of the provinces participating in the HST). However, "zero-rated" supplies of goods and services are subject to tax at 0%. A zero-rated supply is any supply included in Schedule VI to the Act.

Section 1 of Part III of Schedule VI to the Act zero-rates supplies of food or beverages for human consumption ("basic groceries") and sweetening agents, seasonings and other ingredients mixed with or used in the preparation of such food or beverages, unless one of the exceptions set out in paragraphs 1(a) through 1(r) applies.

In accordance with paragraph 1(f) of Part III of Schedule VI of the Act, the following products are taxable at 7% (or 15%):

"chips, crisps, puffs, curls or sticks (such as potato chips, corn chips, cheese puffs, potato sticks, bacon crisps and cheese curls), other similar snack foods or popcorn and brittle pretzels, but not including any product that is sold primarily as a breakfast cereal".

To determine whether a product is similar to snack foods described under paragraph 1(f), we consider many factors. No single factor is determinative of the tax status of a product, and the CCRA considers all relevant factors to make a determination. Some of the factors we consider are:

•   Properties:

Ingredients

Products that have ingredients similar to products excepted under paragraph 1(f).

Flavours

Products that are available in similar flavours such as salt & vinegar, barbecue, all-dressed, cheese, nacho, ketchup, pizza, sour cream and onion, etc.

Texture

Crispy, crunchy, brittle, fluffy, products may be similar.

Cooking Process

The product is deep fried, or baked. (The fact that a product is baked would not preclude it from falling within paragraph 1(f)/III/VI.)

Size & Shape

Small, thin, slice, (chip)

Long and slender cylindrical form, (stick)

Fluffy mass, (puff)

Spiral or winding form, (curl).

•   Labelling& Packaging

The word "chip", "crisp", "puff", "curl" or "stick" appears in the name of the product or elsewhere on the label, (e.g., "healthier than a chip" or "taste like a chip" or "part chip").

The label includes words found on packages of chips, crisps, puffs, curls, or sticks (e.g., "snack", "party snack", "crunch").

The product is packaged loosely in a bag.

•   Marketing

The advertising, whether through print or electronic media, includes words such as "chips", "crisps", "puffs", "curls", or "sticks" (e.g., chip-loving eaters, healthier than a chip).

The advertising, whether through print or electronic media, includes words found on packages of chips, crisps, puffs, curls or sticks (e.g., "snack", "snack food", "party snack", "crunch", "crispy").

Changes in the labelling, packaging and/or marketing will not necessarily result in a different tax status

Although we consider placement of a product in store aisles as a relevant consideration, it alone is not considered a determinative factor. Furthermore, the tax status is not affected if the product is sold in bulk rather than in a box.

I am pleased to inform you that a GST/HST Policy Statement on Meaning of "Other Similar Snack Food" Under Paragraph 1(f) of Part III of Schedule VI to the Excise Tax Act (The Act) will be issued in the next few weeks. This policy will provide a framework for the industry as well as for GST/HST Rulings Offices to determine when a product is considered to be a similar snack food to those products enumerated in paragraph 1(f).

In response to your concerns about a change in the tax status of a product, this is usually discussed on a case by case with the client. The CCRA's position is to address the concerns of its clients including any allowance for a reasonable length of time to make the necessary modifications to the client's business practices.

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) 954-5124.

Yours truly,

Gabrielle Nadeau
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate