17 January 2003 GST/HST Interpretation 31695 - Banner Advertising and Selling Works of Art Over the Internet

Dear XXXXX

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of advertising and works of art over the Internet. We apologize for the delay in responding to your enquiry.

Based on the information provided, we understand that:

•   You are a home-based GST/HST-registered sole proprietor, doing business as XXXXX (XXXXX), and are located in XXXXX.

•   On XXXXX Web site, you display various tangible works of art, such as arts and crafts, gifts and music, that are for sale. The works of art have been created by artisans from Canada and the US. Some of the artisans are registered for purposes of the GST/HST.

•   The selling prices for the works of art are set by the artisans. You have indicated that it is clear on the site that the products are created by the artisans. You also indicated that you never take possession of the products, nor resell them.

•   When you agree to show a work of art, you enter into the informal agreement wherein you will notify the artisan when a purchaser has contacted you and sent payment to you for the work of art plus shipping costs. You market and take care of all transactions (i.e. credit card payments, etc.) for the artisans. The artisan then ships the product directly to the purchaser. After the work of art has been shipped to the purchaser, you remit XXXXX % of the purchase price to the artisan (plus the cost of shipping) and retain the remaining amount as your revenue from this transaction.

•   In addition, you supply banner advertising on XXXXX Web site.

Interpretation Requested .

1. You have requested information on the tax status of your supply of banner advertising.

2. You have asked for clarification on the tax status of a supply of a work of art where it is shipped domestically or internationally.

3. You have asked about the application of GST/HST with respect to the XXXXX-split between you and an artisan and whether you are acting as an agent with respect to the supply by way of sale of a work of art.

Interpretation Given

For purposes of the following discussion, it should first be noted that a taxable (other than zero-rated) supply made in Canada is subject to the GST at the rate of 7% or, HST at the rate of 15%, if made in the participating province of Nova Scotia, New Brunswick and Newfoundland and Labrador. A zero-rated supply is taxed at the rate of 0%.

1. Supply of banner advertising

The supply of banner advertising is considered to be a supply of a service for purposes of the Excise Tax Act (ETA) and, more specifically, an advertising service.

Pursuant to paragraph 142(1)(g) of the ETA, a supply of a service is deemed to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Paragraph 142(2)(g) of the ETA deems a supply of a service to be made outside Canada if the supply is, or is to be, performed wholly outside Canada.

A taxable supply made in Canada may qualify for zero-rating as an export. Section 8 of Part V of Schedule VI to the ETA zero-rates a supply of an advertising service that is made to a non-resident person who is not registered for purposes of the GST/HST at the time the service is performed. It should be noted that when the non-resident person is registered for purposes of the GST/HST at the time the service is performed, the service may still be zero-rated under the general zero-rating provision concerning the export of services that is found in section 7 of Part V of Schedule VI to the ETA. This section zero-rates a supply of a service made to a non-resident person unless it is excluded by paragraphs 7(a) through 7(h) (The exclusions to this section are discussed in paragraphs 18 - 23 of the enclosed chapter 4.5.3, Exports - Services and Intellectual Property of the GST/HST Memoranda Series.) of that section. For example, a supply of a service made to a non-resident person is excluded from zero-rating under this section when the non-resident person is an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply of the service, or, when the service is rendered to an individual while that individual is in Canada.

It is the supplier's responsibility to verify that the recipient is a non-resident and is not registered for GST/HST purposes. For your information, we have enclosed section 4.5.1, Exports - Determining Residence Status of the GST/HST Memoranda Series. Appendix A of this Memorandum describes the documentation that the Canada Customs and Revenue Agency (CCRA) will generally accept as proof that the recipient of the supply is not resident in Canada and Appendix B describes the documentation that the CCRA will usually accept as proof that a non-resident person is not registered for purposes of the GST/HST. Also enclosed is section 4.5.3, Exports - Services and Intellectual Property that provides further information with respect to the zero-rating provisions that apply to taxable supplies of services.

When a supply made in Canada is not a zero-rated supply, a further analysis with respect to the province in which the supply is made or deemed to be made is necessary to determine the appropriate rate of tax. Whether a supply of a service made in Canada is made in a participating or non-participating province is determined by applying the rules in section 144.1 and Schedule IX to the Act. Section 144.1 of the ETA deems a supply to be made in a province if it is made in Canada and is, under the rules set out in Schedule IX to the ETA, made in the province; but the supply is deemed to be made outside the province in any other case. Also, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province.

Under paragraph 2(a) of Part V of Schedule IX to the ETA, a supply of a service is considered to be made in a particular province if all or substantially all [90% or more] of the Canadian element (In Part V of Schedule IX to the ETA, the "Canadian element" of a service means the portion of the service that is performed in Canada.) of the service is performed in that province. For example, if a taxable service is performed entirely in Nova Scotia, the supply of the service is considered to be made in Nova Scotia and would be subject to the HST at the rate of 15%, unless the supply is zero-rated.

A supply of a service can also be deemed to be made in a particular province pursuant to paragraph 2(b) of Part V of Schedule IX if the "place of negotiation" (The "place of negotiation" of a supply means the location of the supplier's permanent establishment at which the individual principally involved in negotiating the agreement for the supply ordinarily works or reports to in the performance of his or her duties relating to the supplier's activities in the course of which the supply is made. "Negotiating" includes the making or acceptance of an offer.) of the supply is in the particular province, and all or substantially all of the service is not performed outside the province.

2. Supplies by way of sale of TPP

Paragraph 142(1)(a) of the ETA provides that a supply by way of sale of tangible personal property (TPP) is deemed to be made in Canada if the TPP is, or is to be, delivered or made available in Canada to the recipient of the supply. A supply by way of sale of TPP is deemed to be made outside Canada, under paragraph 142(2)(a) of the ETA, if the TPP is, or is to be, delivered or made available outside Canada. If the supply by way of sale of TPP is deemed to be made outside Canada, it is not subject to the GST/HST.

Whether a supply of TPP is delivered or made available in Canada in a particular case may be determined by reference to the place where the good is considered to have been delivered under the law of the sale of goods applicable in that case. For instance, in certain circumstances, delivery of the good to a carrier for the purpose of transmission to the buyer is, subject to evidence to the contrary, considered to be delivery of the good to the buyer. With respect to a particular supply of TPP, the terms of the contract for the supply and all relevant facts must be considered. Paragraphs 7 to 11 of the enclosed GST/HST Memoranda Series Chapter 3.3 Place of Supply further explains where TPP is considered to be delivered or made available.

Subsection 143(1) of the ETA overrides the place of supply rule in section 142 of the ETA. Under subsection 143(1) of the ETA, a supply of TPP made in Canada by a non-resident person is deemed to be made outside Canada unless the supply is made in the course of a business carried on in Canada, or the supplier is registered for GST/HST at the time the supply is made. The factors that the CCRA will consider to determine whether a non-resident is carrying on business in Canada are discussed in enclosed Technical Information Bulletin B-090 GST/HST and Electronic Commerce.

A supplier is not required to collect tax in respect of the supply of TPP that is deemed to be made outside Canada under the previously explained rules. However, where TPP is shipped from outside Canada to a purchaser in Canada, the importation of TPP will generally be subject to tax payable by the importer.

Also, where a supplier who is not a GST/HST registrant (A person who is registered or required to be registered for GST/HST) makes a taxable supply of TPP in Canada, the supplier is not required to collect tax in respect of that supply. This includes a domestic small supplier (Generally, a person whose worldwide taxable sales do not exceed $30,000 over four consecutive calendar quarters.) who has not registered.

If TPP that is supplied by way of sale is deemed to be made in Canada, it may be zero-rated as an export under section 12 of Part V of Schedule VI to the ETA. This provision zero-rates a supply of TPP where the supplier:

•   ships the TPP to a destination outside Canada that is specified on the contract for carriage of the TPP;

•   transfers possession of the TPP to a common carrier or consignee that has been retained by the supplier on behalf of the recipient or by the recipient's employer to ship the TPP to a destination outside Canada; or

•   sends the property by mail or courier to an address outside Canada.

Section 1 of Part V of Schedule VI to the ETA allows for zero-rating of a supply of TPP made to a recipient who intends to export the TPP (as opposed to where the supplier handles the exportation as described above) provided:

•   the recipient is not a consumer (Generally, an individual who acquires the TPP for the individual's personal consumption, use or enjoyment);

•   the recipient exports the TPP as soon after the TPP is delivered to the recipient as is reasonable, taking into account the circumstances surrounding the exportation and the recipient's usual business practices;

•   the TPP is not acquired by the recipient for consumption, use or supply in Canada prior to export;

•   after the supply is made and before the recipient exports the TPP, it is not further processed, transformed or altered in Canada by the recipient except to the extent reasonably necessary or incidental for its transportation; and,

•   the supplier maintains satisfactory evidence of the exportation of the TPP by the recipient.

When TPP is zero-rated as an export, the supplier must maintain satisfactory evidence of the exportation. We have enclosed a copy of section 4.5.2, Exports - Tangible Personal Property of the GST/HST Memoranda Series that discusses these zero-rating provisions and the documentary requirements.

If a taxable (other than zero-rated) supply of TPP by way of sale is made in Canada, it is subject to HST at the tax rate of 15% where made in a participating province. Again, section 144.1 of the ETA works in conjunction with Schedule IX to the ETA to determine the particular province in which the supply of TPP is made.

As stipulated in section 1 of Part II of Schedule IX to the ETA, a supply by way of sale of TPP is made in a province if the supplier delivers the TPP or makes it available in the province to the recipient of the supply.

Generally, the criteria used to determine whether TPP is delivered or made available in a particular province are the same as for determining whether TPP is delivered or made available in Canada. However, the deeming rule under section 3 of Part II of Schedule IX to the ETA must also be considered. This section provides that TPP is deemed to be delivered in a particular province, and not in any other province, if the supplier ships it to a destination in that particular province that is specified in the shipping contract for the TPP, or transfers possession of the TPP to a common carrier or consignee retained by the supplier on behalf of the recipient to ship it to such a destination. For example, a supplier in Ontario sells TPP to a recipient in New Brunswick. The supplier uses its own truck, hires a common carrier, or retains a common carrier on behalf of the recipient, to deliver the TPP to the recipient. The supply would be regarded as having been made in New Brunswick and thus subject to the HST. TPP is also deemed to be delivered in a particular province under section 3 if the supplier sends it by mail or courier to an address in the particular province. For example, a supplier in Ontario sells TPP to a recipient in Nova Scotia but mails it (at the request of the recipient) to an address in Manitoba; the supply of TPP would be subject to the GST at 7% as the TPP is mailed to, and therefore deemed delivered in, Manitoba, a non-participating province.

As the artisan is involved in shipping the work of art to the purchaser, consideration must be given to whether the shipping is considered to be part of the supply of the work of art, in which case it is subject to tax at the same rate as the TPP, or, a separate supply of a freight transportation service, in which case it may be subject to tax at a different rate. Such a determination must be made by analyzing the terms of the agreement for the supply of the TPP. For example, if pursuant to the terms of the agreement for the supply of the TPP, the supplier is required to deliver the TPP to the purchaser at a place designated by the purchaser (such as the customer's premises) and remains responsible for the TPP until it is so delivered, then the freight charge would generally be considered to be part of a single supply of TPP, and this is regardless of whether there is a separate freight charge. The enclosed publication, section 28.2, Freight Transportation Services of the GST/HST Memoranda Series, provides further information on the application of tax to freight transportation services.

3. Application of GST/HST to XXXXX split

A person is considered and treated for GST/HST purposes as an agent based on fact and the principles of common law. The three essential qualities of an agency relationship are the consent of both the principal and the agent, the authority of the agent to affect the principal's legal position, and the principal's control of the agent's actions. Also, there are a number of different indicators that are useful to consider when ascertaining the capacity in which a person acts. For additional information on determining whether an agency relationship exists, please refer to the policy statement P-182 - Determining the Meaning of "Agent" and "Agency".

Normally, a person who makes a taxable (other than zero-rated) supply in Canada is required to collect tax under subsection 221(1) of the ETA in respect of that supply. Pursuant to subsection 225(1) of the ETA, that amount of tax must be included in determining the net tax of the person for the reporting period in which the amount became collectible or was collected.

Where a person acts as an agent in making a taxable supply on behalf of a principal, the principal is considered to have made the supply and is consequently required to account for any tax collectible or any tax collected by the agent in respect of the supply in the net tax for the reporting period in which it became collectible or was collected, as the case may be, and to remit any resulting positive net tax.

Therefore, if you act as an agent in making a taxable supply on behalf of an artisan, it is the artisan who is considered to be making a taxable supply to the recipient and you, as an agent are considered to be making a taxable supply of your services of acting as agent to the principal. As a GST/HST registrant, an agent has the obligation to collect tax from the principal on the value of the consideration for its service of acting as agent (such as a commission) where the service is a taxable (other than zero-rated) supply made in Canada. Whether a supply of an agent's service is made in Canada and in a participating province is determined by the previously explained place of supply rules for services. Generally, a principal who is a GST/HST registrant is entitled to claim an ITC in respect of the tax payable in respect of the agent's service provided all of the conditions for claiming the ITC are met.

There are special GST/HST accounting rules that apply in certain circumstances where a person acts as an agent in making a supply on behalf of a principal. Specifically, subsection 177(1.1) of the ETA provides an alternative to the above procedure. This subsection permits a GST/HST registrant who, in the course of its commercial activity, acts as an agent in making a supply (otherwise than by auction) on behalf of a principal who is required to collect tax in respect of the supply to elect jointly with the principal to account for the tax collectible in respect of the supply as if the tax were collectible by the agent. In this case, the agent is required to include the tax collectible in respect of the supply in its net tax as if it were collectible by the agent and to remit any resulting positive net tax. However, the agent and the principal are jointly and severally liable for all obligations that arise upon or as a consequence of the GST/HST becoming collectible, any failure to account for or remit net tax, and the repayment of any overpayment of a net tax refund.

The election has to be made in prescribed form, i.e., on form GST506 - Election and Revocation of an Election Between Agent and Principal (copy enclosed).

Under subsection 177(1.1) of the ETA, where an election is made, the treatment of the agent's service is still subject to the general rules. The agent is required to collect any tax payable in respect of its supply of services made to the principal and to account for that tax in its net tax.

Proposed amendments to the GST/HST rules relating to the accounting of tax by agents were announced on December 20, 2002. In summary, with respect to the election described above, the amendments:

•   ensure that amounts collected by the agent as or on account of tax are deemed held in trust by the agent for the Crown separate and apart from other funds of the agent and that the agent is eligible to claim a net tax deduction in respect of a refund or credit given by the agent of excess tax collected or tax relating to a reduction of consideration;

•   ensure that the principal and agent are jointly and severally liable with respect to any claims the agent may make with respect to a net tax deduction relating to bad debts or price or tax adjustments relating to the supply, and any failure to pay an amount as a result of the agent erroneously claiming or over-claiming a net tax deduction in respect of a bad debt or a price or tax adjustment;

•   ensure that if the agent claims bad debt deduction relating to the supply, the agent and principal are jointly and severally liable for a determined amount in respect of the tax on the supply if all or part of the bad debt is subsequently recovered;

•   require the consideration for the supply made on behalf of the principal to be included in the agent's threshold amounts for purposes of determining the agent's reporting periods.

Additional information regarding the proposed amendments can be found at at the Web site address http://www.fin.gc.ca/news02/02-108e.html.

There is also a special rule that must be considered when the principal is a person who is not required to collect tax in respect of a taxable (other than zero-rated) supply made on its behalf (such as where the principal is a small supplier). Subsection 177(1) of the ETA provides, in part, that where a GST/HST registrant, in the course of its commercial activity, acts as agent in making a supply of TPP (other than a zero-rated or exempt supply) on behalf of a principal who is not required to collect tax in respect of the supply, the supply of the TPP to the recipient is deemed, for GST/HST purposes, to be a taxable supply made by the agent and not the principal. In this case, the agent is also deemed not to have made a supply to the principal of its services relating to the supply of the TPP.

For example, an artisan is not required to collect GST/HST in respect of the supply of a work of art and you act as agent in making the supply of the TPP that is subject to GST at 7% or HST at 15% to a customer. In this case, subsection 177(1) of the ETA deems the supply of TPP to be made by you and not the artisan. As a result, you are required to collect GST/HST in relation to the supply of the work of art and to account for it in your net tax. However, you are not required to collect tax from the principal in respect of your services of acting as an agent.

In certain cases, a taxable supply of a service of an agent or representative may qualify for zero-rating if the supply of the service is made to a non-resident person. Section 5 of Part V of Schedule VI to the ETA zero-rates a supply made to a non-resident person of a service of acting as an agent of the person or of arranging for, procuring or soliciting orders for supplies by or to the person, where the service is in respect of a zero-rated export made to the non-resident, or a supply made outside Canada by or to the non-resident person.

Paragraphs 8 - 11 of the aforementioned section 4.5.3 of the GST/HST Memoranda Series provide further information on this zero-rating provision.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 (copy enclosed), do not bind CCRA 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) 952-8806.

Yours truly,

Marjorie Stevens
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate