31 July 2003 GST/HST Interpretation 42955 - ITC Eligibility with Respect to Postage

This is in response to the memorandum XXXXX faxed to Dawn Weisberg XXXXX, concerning input tax credits (ITCs) claimed by XXXXX with respect to postage costs incurred in mailing credit card statements together with advertising material. As XXXXX is currently on leave, you indicated that we should address our response to your attention. We are also providing comments on an issue raised by XXXXX XXXXX responsible for this case, with respect to ITCs claimed in relation to postage costs incurred for a credit card marketing program.

I. ITC ELIGIBILITY WITH RESPECT TO POSTAGE USED FOR THE CREDIT CARD PACKAGE

A. Facts

Based on information provided by XXXXX XXXXX, our understanding of the facts with respect to the issue raised by XXXXX is as follows.

1. XXXXX is a registrant Canadian resident XXXXX that is a de minimis financial institution under paragraph 149(1)(c) of the Excise Tax Act (ETA) because of its credit card operations.

2. XXXXX[.]

3. XXXXX mails its credit card statements to its customers on a monthly basis, together with return envelopes for payment of credit card balances, and brochures that advertise taxable products and services of XXXXX and other companies. The packages may also include brochures that advertise tax exempt goods or services.

4. No additional postage is payable as a result of XXXXX including the brochures in the outgoing envelope, since the total weight of the package never exceeds the maximum weight for basic postage.

5. One of the companies whose brochures may be included is closely related to XXXXX. XXXXX and that closely related company made an election under subsection 150(1) of the Excise Tax Act (ETA) to have taxable supplies between the two companies deemed to be supplies of financial services.

6. XXXXX has claimed ITCs equal to approximately XXXXX % of the tax that it pays on its postage that is used to mail the credit card statements and related material. XXXXX arrived at this figure on the basis of the weight of the materials being mailed. There is an assumption that all of the packages weigh XXXXX grams, and that everything that is not specifically identified as an input for use in commercial activities relates to exempt activities. The weight of the brochures that are used to advertise commercial activities is compared to the assumed weight of the package (XXXXX grams), less the outgoing envelope and the return envelope. The weight of the outgoing envelope and the return envelope are not included in the calculation.

7. XXXXX now intends to claim additional ITCs for the past four years equal to XXXXX % of the tax paid on the postage at issue, and in future to claim ITCs equal to XXXXX % of the tax paid on that postage. In order to support the XXXXX % rate, a new calculation has been derived.

8. The new calculation is also based on the assumption that each package weighs XXXXX grams. However, the new calculation assumes that everything in the package relates to commercial activities except those items that are specifically identified as inputs for use in exempt activities.

The weight of the outgoing envelope is ignored in calculating the exempt portion of the total, as are the brochures that advertise the products or services of the closely related company, and the brochures that advertise tax exempt products or services. Because the return envelope has advertisements for taxable products on it, an assumption has been made that only half of its weight relates to exempt activities.

It is proposed to add a second page to the credit card statement that will be made up of seven blocks. One will be used for credit purposes, while six are available for commercial advertising. The calculation includes an assumption that the six spaces that are available to advertise commercial activity are actually used in commercial activity, whether or not there is sufficient advertising to fill the spaces.

9. XXXXX

B. Interpretations Requested

1. Is XXXXX eligible to claim any ITCs with respect to tax paid on postage costs incurred in mailing the credit card package?

2. If XXXXX is eligible to claim ITCs with respect to tax paid on such postage costs, should the current allocation method or the proposed allocation method be considered fair and reasonable for purposes of subsection 141.01(5) of the ETA?

C. Interpretations Provided

Whether or not XXXXX is eligible to claim ITCs with respect to postage costs that it incurred in mailing its credit card packages will depend on why XXXXX incurred the postage costs. If you conclude that XXXXX incurred the postage costs solely for the purpose of mailing the credit card statements, XXXXX would not be eligible to claim ITCs with respect to the GST/HST paid on those costs. However, if you conclude that the postage costs at issue relate to both the credit card statements and the advertisements, XXXXX would be eligible to claim ITCs with respect to the GST/HST paid on that portion of the postage costs that were incurred in order to mail the advertisements, to the extent that such advertisements relate to taxable supplies of property or services made by XXXXX, and provided that all the requirements of subsection 169(1) of the ETA have been met.

The information that has been provided to us indicates that XXXXX postage costs would have remained the same if no advertisements had been included with the credit card statements. Consequently, it is possible to conclude that all of XXXXX postage costs for mailing the credit card packages relate to the credit card statements and that none of the postage costs were incurred in order to include the advertisements in the packages. The cost of mailing the credit card statements is part of XXXXX cost of making supplies of financial services, which are generally exempted by section 1 of Part VII of Schedule V to the ETA. XXXXX would therefore not generally be eligible to claim an ITC with respect to any of the GST/HST paid on the postage costs at issue. Under subparagraph 141.01(2)(b)(i) of the ETA, a person is deemed to have acquired property or a service for consumption or use otherwise than in the course of the person's commercial activities, to the extent that the person acquired the property or service for the purpose of making supplies in the course of the person's endeavour that are not taxable supplies made for consideration.

However, depending on the particular fact situation, it may be possible to conclude that the postage costs at issue were incurred in mailing both the credit card statements and the advertisements that XXXXX enclosed with the statements. Such a conclusion would permit XXXXX to claim ITCs with respect to the GST/HST that it paid on that portion of the postage costs that were for mailing the advertisements, to the extent that the advertisements related to taxable supplies made by XXXXX, and providing that all the conditions of subsection 169(1) of the ETA have been met. Under paragraph 141.01(2)(a) of the ETA, a person is deemed to have acquired property or a service for consumption or use in the course of the person's commercial activities to the extent that the person acquired the property or service for the purpose of making taxable supplies for consideration in the course of the person's endeavour.

If XXXXX is eligible to claim ITCs with respect to a portion of the postage costs at issue, subsection 141.01(5) of the ETA would require XXXXX to use a method of allocation that is fair and reasonable. Whether a particular method of allocating inputs is fair and reasonable in a particular situation is a question of fact that will depend on the extent to which the calculation method corresponds with the actual use of the postage. Our general comments with respect to the calculation method are as follows.

The proposed new calculation method is based on the assumption that each package weighs XXXXX grams, and that everything in the package relates to commercial activities except those items that are specifically identified as inputs for use in exempt activities. While a calculation based on weight may be reasonable, it should be based on the average actual weight of credit card packages and not on an assumed weight of XXXXX. All of the material that is actually in the package should be included in the calculation. Also, XXXXX should not use the assumption that unused capacity relates to taxable activities. Since the primary purpose of the credit card package is to mail out the credit card statements, XXXXX is only eligible to claim ITCs with respect to that material that relates specifically to XXXXX taxable activities.

Although the credit card statement and the return envelope may have advertisements on their surfaces, they are primarily intended to facilitate the use of XXXXX credit card services, which are supplies of financial services. Since XXXXX and the closely related company have made an election under subsection 150(1) of the ETA, XXXXX supply of a service of advertising to the closely related company that would otherwise be taxable would be deemed to be a supply of a financial service, regardless of whether those products or services were taxable or exempt. Since supplies of financial services are generally exempt, XXXXX would not generally be eligible to claim ITCs with respect to the GST/HST paid on that portion of the postage that related to the credit card statements, the return envelopes and the advertisements for the closely related company with which XXXXX made the election.

XXXXX would only be eligible to claim ITCs with respect to GST/HST paid on that portion of the postage at issue that was used to mail advertisements for XXXXX taxable products or services, or to mail advertisements for products or services (taxable or exempt) of other companies that have not made an election with XXXXX under subsection 150(1) of the ETA. Regardless of whether another company's products are taxable or exempt, XXXXX is supplying a taxable service to that company in advertising its products, unless the company is a closely related company and has made an election with XXXXX under subsection 150(1) of the ETA.

However, even where advertisements relate to XXXXX supplies of taxable products or services, they may also be intended in part to promote the use of XXXXX credit card services. Consequently, that portion of the credit card package that appears to relate exclusively to XXXXX taxable supplies may in fact relate partially to XXXXX supplies of financial services, which are generally exempt.

II. ITCS CLAIMED WITH RESPECT TO POSTAGE COSTS INCURRED FOR A MARKETING PROGRAM

XXXXX provided us with a copy of a memorandum XXXXX, which he sent to Michael Warren of Headquarters Technical Applications. XXXXX asked for our comments on the memorandum, which addressed XXXXX ITC eligibility with respect to tax paid on postage costs relating to XXXXX credit card marketing program.

A. Facts

The facts of the case, as indicated in XXXXX memorandum, are as follows.

1. XXXXX operates its own credit card program. XXXXX mails vouchers to certain XXXXX credit card holders or potential XXXXX credit card holders. These mailings are independent of the credit card statement mailings. The mailings typically consist of an envelope and voucher.

2. Individuals who receive the vouchers can use them to receive a discount on the price of XXXXX products and services that they pay for with an XXXXX credit card.

3. The primary purpose of the marketing program is to increase interest revenue on credit card sales. Its secondary purpose is to increase sales of XXXXX products and services.

4. XXXXX has requested confirmation that it can claim ITCs with respect to postage that is consumed or used in the marketing program.

B. Interpretation Requested

Is XXXXX eligible to claim ITCs with respect to GST/HST paid on postage that is consumed or used in the marketing program?

C. Interpretation Provided

XXXXX would not be eligible to claim ITCs with respect to any GST/HST paid on that portion of the postage that it used to mail vouchers that promote its exempt products or services, because XXXXX did not acquire the postage for use in the course of its commercial activities. XXXXX would not generally be eligible to claim ITCs with respect to the GST/HST that it paid on that portion of its postage that was used to mail vouchers promoting the use of its credit cards, or was used to mail vouchers promoting products or services of a related company that made an election with XXXXX under subsection 150(1) of the ETA. XXXXX acquired that portion of the postage for consumption or use in making supplies of financial services, which are generally exempt.

Provided all the requirements of subsection 169(1) of the ETA are met, XXXXX would be eligible to claim ITCs with respect to the GST/HST that it paid on that portion of the postage that it used to mail vouchers promoting a specific taxable product or service of XXXXX. Similarly, XXXXX would be eligible to claim ITCs with respect to the GST/HST paid on that portion of the postage that it used to mail vouchers promoting a specific product or service (whether taxable or exempt) of another company that has not made an election with XXXXX under subsection 150(1) of the ETA. In mailing such advertisements, XXXXX would be making a taxable supply of a service of advertising to the other company.

However, even where vouchers relate to XXXXX supplies of taxable products or services, they may also be intended in part to promote the use of XXXXX credit card services. Consequently, those vouchers that appear to relate exclusively to XXXXX taxable supplies may in fact relate partially to XXXXX supplies of financial services, which are generally exempt.

If you require any further information, please contact me at (613) 952-9211.