18 July 2003 GST/HST Interpretation 32783 - Application of GST to Auctions

Dear XXXXX:

We are writing in response to XXXXX letter XXXXX (with attachments) concerning the application of the Goods and Services Tax (GST) to XXXXX auctions XXXXX. We apologize for the delay in responding to you.

Statement of Facts

Based on XXXXX letter and attachments, and my telephone conversations XXXXX with XXXXX and XXXXX, our understanding of the facts is as follows.

1. XXXXX (the XXXXX Auctioneer) operates an auction mart in XXXXX, where it supplies auctioneering services to producers who have XXXXX for sale. The XXXXX Auctioneer is registered for the purpose of the GST XXXXX.

2. The XXXXX Auctioneer charges the producers a commission as consideration for supplying auctioneering services. The XXXXX Auctioneer collects the GST on these commissions but has received information advising that the commissions are not subject to tax.

3. Depending on the situation, the XXXXX Auctioneer may make the following supplies to the producers in connection with the sale of their XXXXX:

(a) Feed — The XXXXX Auctioneer will feed the XXXXX housed at its stockyard, but only upon the request of the producer. While the XXXXX are housed at the XXXXX Auctioneer's stockyard, the producer cannot supply feed to its XXXXX nor can it have another person feed its XXXXX. The consideration for the supply of the feed (in this case, hay) is not included in the commission charged to the producer and the producer knows in advance that the XXXXX Auctioneer will make a separate charge for the supply of feed to its XXXXX. Regarding the consideration for the supply, the XXXXX Auctioneer charges the producer a daily XXXXX fee, as opposed to a charge based on the actual quantity of feed supplied to the XXXXX. The consideration for the supply of feed to the XXXXX (plus the GST) is stated on the invoice to the producer and is deducted from the gross proceeds of sale payable to the producer. The consideration for the supply of feed does not include amounts on account of yardage or storage.

If requested, the XXXXX Auctioneer will feed the XXXXX housed at its stockyard that belong to the XXXXX purchaser. On such occasions, the XXXXX Auctioneer will collect the GST on the consideration for supplying feed to the XXXXX purchaser.

(b) Pregnancy testing — All XXXXX delivered to the XXXXX Auctioneer's stockyard for sale as bred XXXXX must undergo pregnancy testing in order to determine whether the XXXXX are actually pregnant. The supply of the pregnancy testing service is made pursuant to a verbal agreement between the XXXXX Auctioneer and the producer, and is performed on the day before the sale by a veterinarian hired by the XXXXX Auctioneer. The producer does not have the option to decline the pregnancy testing service supplied by the XXXXX Auctioneer's veterinarian, nor can the producer arrange to have another veterinarian supply the pregnancy testing service. The consideration for the supply of the pregnancy testing service is not included in the commission charged to the producer and the producer knows in advance that the XXXXX Auctioneer will make a separate charge for the supply of the pregnancy testing service. Regarding the consideration for the supply, the veterinarian charges the XXXXX Auctioneer a XXXXX fee (plus the GST) for the supply the pregnancy testing service. The XXXXX Auctioneer then charges the same amount to the producer. The charge for the pregnancy testing service (plus the GST) is stated on the invoice to the producer and is deducted from the gross proceeds of sale payable to the producer.

4. The XXXXX Auctioneer also collects various amounts on behalf of third parties. These amounts include:

(a) Check-off fee XXXXX — A check-off fee is imposed on every XXXXX XXXXX sold XXXXX. The fee is payable by the vendor (in this case, the producer) and is deducted by the livestock dealer (in this case, the XXXXX Auctioneer) from the monies payable to the vendor for the XXXXX. The livestock dealer is entitled to receive a commission from XXXXX (the Association) for deducting and remitting the fee to the Association.

(b) Buyer's commission — A buyer will typically attend an auction for the purpose of buying XXXXX on behalf of another person (in this case, the XXXXX purchaser) and will charge that person a buyer's commission as consideration for supplying a buying service; however, the buyer does not collect the commission directly from that person. Instead, the XXXXX Auctioneer adds the buyer's commission to the purchase price payable by the XXXXX purchaser, and when the gross proceeds of sale are paid to the XXXXX Auctioneer, deducts the commission from the proceeds and forwards the commission (plus the GST charged and collected) to the buyer.

(c) Freight — The producer is responsible for transporting its XXXXX to the XXXXX Auctioneer's stockyard. Generally, the supply of the freight transportation service is made pursuant to a verbal agreement between an independent carrier and the producer, and the supply is invoiced in the name of the producer. The producer may choose to settle the invoice directly with the carrier or request that the XXXXX Auctioneer pay the carrier on its behalf. Such requests are written on the livestock receiving order (a document used by the XXXXX Auctioneer to record the receipt of the XXXXX and it is agreed that the amount (including the GST paid to the carrier) will be reimbursed to the XXXXX Auctioneer via an equivalent deduction from the gross proceeds of sale due to the producer. These amounts are stated on the invoice to the producer, and as agreed, are deducted from the gross proceeds of sale payable to the producer.

(d) Government XXXXX fees and deductions — The Government XXXXX imposes XXXXX fees and deductions in connection with the sale of XXXXX originating from XXXXX that are sold at certain stockyards in XXXXX. These stockyards, which includes the XXXXX Auctioneer's stockyard, are those where the Department XXXXX XXXXX has negotiated an agreement for the collection of statutory deductions from XXXXX livestock owners, and where such XXXXX are inspected prior to their sale. The fees and deductions collected on behalf of the Government of XXXXX are:

(i) XXXXX inspection fee — a fee is imposed on XXXXX transported from XXXXX for sale at certain stockyards in XXXXX;

(ii) check-off fee — a fee is imposed on every XXXXX raised or fed in XXXXX that an owner delivers for sale to certain stockyards in XXXXX; and

(iii) XXXXX deduction — a deduction imposed on XXXXX transported from XXXXX for sale at certain stockyards in XXXXX.

In all cases, the fees and deductions are payable by the owner (in this case, the producer) and is set aside by the livestock dealer (in this case, the XXXXX Auctioneer) from the monies received on account of the sale of the XXXXX. The livestock dealer is entitled to receive a commission from the Government of XXXXX as consideration for collecting and remitting the deduction to the Minister of Finance XXXXX.

(e) Insurance premiums — The XXXXX Auctioneer carries an insurance policy with XXXXX (the Insurer) and collects insurance premiums from the producers as consideration for coverage under the policy. The XXXXX Auctioneer requires that all producers pay insurance premiums with respect to XXXXX that are delivered and housed at its stockyard for sale. Payment of the insurance premiums by the producer are made pursuant to a verbal agreement between the XXXXX Auctioneer and the producer. The producer does not have the option to decline the insurance coverage provided by the XXXXX Auctioneer, even if it has its own insurance policy. The consideration for the supply of the insurance coverage is not included in the commission charged to the producer and the producer knows in advance that the XXXXX Auctioneer will make a separate charge on account of insurance. The charge for the insurance premium is stated on the invoice to the producers and is deducted from the gross proceeds of sale payable to the producer. The XXXXX Auctioneer forwards the insurance premiums collected to the Insurer but does not charge or collect the GST on the premiums. The XXXXX Auctioneer is entitled to receive a commission from the Insurer as consideration for collecting and remitting the insurance premiums.

Interpretation Requested

You would like confirmation that the XXXXX Auctioneer is not required to collect the GST on the commissions it receives for supplying auctioneering services to producers and whether the services offered to producers are subject to the GST. In addition, you would like assistance in determining which of the amounts set out above and collected on behalf of third parties are subject to the GST.

Interpretation Given

The Canada Customs and Revenue Agency's (CCRA) position is that the XXXXX Auctioneer is not required to collect the GST on the following:

•   the commissions it receives from producers as consideration for supplying auctioneering services;

•   the amounts it receives from producers as consideration for supplying hay to their XXXXX;

•   the amounts it receives from XXXXX purchasers as consideration for supplying hay to their XXXXX (assuming that the hay is ordinarily used as feed for farm livestock and is supplied in a quantity that is larger than the quantity that is ordinarily sold or offered for sale to consumers);

•   the amounts it receives from producers as consideration for supplying pregnancy testing services to bred XXXXX offered for sale;

•   the amounts it receives from producers as reimbursement for freight transportation charges paid to independent carriers (assuming that the charges are paid by the XXXXX Auctioneer as agent of the producer);

•   the Government XXXXX fees and deductions (i.e., the XXXXX inspection fee, check-off fee, and XXXXX deduction);

•   the commissions it receives from the Government XXXXX as consideration for collecting and remitting the fees and deductions; and

•   the insurance premiums it collects from the producers (assuming that the premiums are collected as agent of the Insurer).

The CCRA's position is that the XXXXX Auctioneer is required to collect the GST on the following:

•   the amounts it receives from XXXXX purchasers as consideration for supplying hay to their XXXXX (if the hay is not ordinarily used as feed for farm livestock or if it is supplied in a quantity that is not larger than the quantity that is ordinarily sold or offered for sale to consumers);

•   the commission it receives from the Association as consideration for deducting and remitting the check-off fee;

•   the amounts it receives from producers as reimbursement for freight transportation charges paid to independent carriers (if the charges are not paid by the XXXXX Auctioneer as agent of the producer);

•   the insurance premiums it collects from the producers (if the premiums are not collected as agent of the Insurer); and

•   the commission it receives from the Insurer as consideration for collecting and remitting the insurance premiums.

Finally, the CCRA's position is that the supplier, if a GST registrant, is required to collect the GST on the following:

•   the check-off fee XXXXX; and

•   the buyer's commission.

Explanation

Feed supplied to XXXXX purchasers

Section 2 of Part IV of Schedule VI to the Excise Tax Act (ETA) zero-rates a supply of hay that is ordinarily used as feed for farm livestock when supplied in a quantity that is larger than the quantity that is ordinarily sold or offered for sale to consumers. In this regard, hay is ordinarily sold or offered for sale in bales which can have varying sizes and shapes. To be a zero-rated supply, hay must be sold in a quantity larger than one large round bale or an equivalent to this amount. A single large round bale is one which weighs between 750 and 1000 kg (1650 and 2200 lbs). An equivalent to this would be 15 to 20 square bales, each weighing 50 kg (110 lbs). That is to say, although the supply of hay may be sold in different proportions than the round bale, provided the total supply is the equivalent, it will be a zero-rated supply pursuant to section 2 of Part IV of Schedule VI to the ETA.

Taxable supplies under section 165 of the ETA

The following amounts are consideration for a taxable supply, and as a result, are subject to the GST at 7% under the general provision of section 165 of the ETA:

•   the check-off fee XXXXX;

•   the commission the XXXXX Auctioneer receives from the Association as consideration for deducting and remitting the check-off fee;

•   the buyer's commission; and

•   the commission the XXXXX Auctioneer receives from the Insurer as consideration for collecting and remitting the insurance premiums.

The XXXXX Auctioneer is only required to charge and collect the GST on the consideration for supplies made by it (i.e., the commissions from the Association and the Insurer). The XXXXX Auctioneer is not required to charge and collect the GST on the consideration for supplies made by other persons. However, it may do so as an agent of that person, as discussed below.

Check-off fee XXXXX and Buyer's commission

The Association and the buyer are required to collect the GST on supplies made by them (i.e., the check-off fee and the buyer's commission, respectively). However, if the XXXXX Auctioneer is an agent of a principal (i.e., the Association or the buyer, as the case may be) with respect to charging and collecting an amount, it is the XXXXX Auctioneer, in its capacity as agent, which usually charges and collects the GST payable on the amount and passes the tax back to the principal, which is required to account for it in its net tax calculation. Whether there is an agency relationship between the XXXXX Auctioneer and the principal is a question of fact; however, the following are considered to be essential qualities of an agency relationship:

1. Consent of both the principal and the agent — The intention of the parties is an important factor when deciding the nature of the relationship. Generally, in an agency relationship, the principal will authorize the agent to do something on the principal's behalf. Consequently, in considering whether a relationship is an agency relationship, it should be evident that the person who is supposedly an agent is arranging transactions for the principal and not for itself. Agency is generally evident from the conduct of the parties.

2. Authority of the agent to affect the principal's legal position.

3. The principal's control of the agent's actions.

If an agency relationship does not exist, then the XXXXX Auctioneer must charge tax on the reimbursed amount.

Please note that the agent and principal may file an election under subsection 177(1.1) of the ETA making the agent liable to account for the tax in its net tax calculation.

Freight

The carrier is required to collect the GST on the freight transportation charges, as applicable. Where the XXXXX Auctioneer pays for the supply of the freight transportation service, as agent of the producer, the XXXXX Auctioneer is not required to collect the GST on the amount reimbursed to the XXXXX Auctioneer by the producer.

Whether there is an agency relationship between the XXXXX Auctioneer and the producer is a question of fact. Please refer to the essential qualities of an agency relationship, as discussed above. If an agency relationship does not exist, then the XXXXX Auctioneer must charge tax on the reimbursed amount.

Insurance premiums

A premium charged on account of an insurance policy by a person other than an insurer is consideration for a taxable supply and is subject to the GST at 7% under the general provision of section 165 of the ETA. However, if the XXXXX Auctioneer is an agent of the Insurer with respect to charging and collecting the insurance premium, then the service of underwriting the insurance policy by the Insurer is not subject to the GST. Generally, the service of underwriting an insurance policy is exempt from the GST, pursuant to section 1 of Part VII of Schedule V to the ETA, provided that the insurance policy is issued by an insurer.

In this particular case, there are a number of factors which indicate that the XXXXX Auctioneer is not the insured person under the insurance policy, and as a result, may be an agent of the Insurer. For example:

•   the type of insurance in question is property insurance, which generally insures the owner of property or a person who would be liable for its loss — in this case, the XXXXX Auctioneer does not own the property, nor is it liable for its loss;

•   the Insurer considers the producers to be the insured because they are the ones who have the risk of loss and they own the livestock; and

•   the Insurer does not consider the XXXXX Auctioneer to be the insured, which is supported by the fact that it pays a commission to the XXXXX Auctioneer for collecting and remitting the insurance premiums.

Whether there is an agency relationship between the Insurer and the XXXXX Auctioneer is a question of fact. Please refer to the essential qualities of an agency relationship, as discussed previously. If an agency relationship does not exist, then the XXXXX Auctioneer must charge tax on the insurance premiums.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8224.

If you require information on the general operation of the GST/HST, please contact the XXXXX GST/HST Rulings Centre at 1-800-959-8287.

Yours truly,

Christopher Lewis
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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