19 March 2004 GST/HST Interpretation 8038 - Section 232.1 - Promotional Allowances

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX operations. We apologize for the delay in responding.

In your letter, you indicate the following:

•   XXXXX is in the food sector industry, as a wholesaler and a retailer.

•   XXXXX enters into various contracts with suppliers of food products who supply the stocks needed to operate XXXXX grocery stores.

•   The contracts provide for various bonuses, rebates and allowances to be paid by the suppliers to XXXXX, including signing bonuses, listing fees, payments for exclusivity.

•   XXXXX may be paid a bonus upon the signing of an agreement. The bonuses may be payable upon the signing of the agreement or they may be payable in several instalments.

•   XXXXX may receive payments from suppliers to add new products to its ordering list. The ordering list lists all the products available and is used by the retail stores XXXXX to order their stock for sale.

•   There is no written agreement for such listing fees, but XXXXX will bill its suppliers each time new products are added to the ordering list. Such fees become due prior to any purchase of the product, since in order to buy a product, it must first be listed on the ordering list.

•   In some cases XXXXX enters into agreements with suppliers to purchase a type of product exclusively from that supplier (e.g. XXXXX sells only one brand of XXXXX in its stores). XXXXX receives bonuses from the suppliers in these circumstances. The bonuses may become payable at the time of signing or they may be payable in several instalments.

•   XXXXX purchases among other things, meat which may be purchased in large format such as a quarter of beef, etc., and which XXXXX then cuts into smaller portions, slices and packages for resale. XXXXX receives allowances from its suppliers for the promotion of the meat. XXXXX is of the opinion that such allowances would not fall under section 232.1 because XXXXX does not purchase the meat for supply by way of sale by reason of the further processing undertaken by XXXXX prior to its sale.

Interpretation

1. You wish us to advise you as to the GST status of the signing bonuses by indicating whether such fees fall under section 232.1 or subsection 232(2), or whether XXXXXreceives consideration for a service (other than promotional) it renders by signing the contract.

2. You wish us to confirm the GST status of the listing fees by indicating whether such fees fall under section 232.1 or subsection 232(2), or whether XXXXX receives consideration for a service (other than promotional) that it renders.

3. You wish us to confirm the GST status of payments for exclusivity by indicating whether such payments fall under section 232.1 or subsection 232(2), or whether XXXXX receives consideration for a service (other than promotional) that it renders.

4. You wish us to clarify the wording of paragraph 232.1(a) with respect to the condition whereby a registrant must acquire property for "supply by way of sale for a price in money". More particularly, you wish us to clarify the intent of section 232.1 with respect to goods acquired and further processed prior to sale (e.g. a quarter of beef is acquired for further processing into steaks, hamburger, filets, etc).

Interpretation Given

All references are to the Excise Tax Act.

The following is the Canada Revenue Agency (CRA)'s interpretation of section 232.1, as it relates to the various questions raised in your submission.

Section 232.1 provides that, for the purposes of Part IX, if

(a) a particular registrant acquires particular tangible personal property exclusively for supply by way of sale for a price in money in the course of commercial activities of the particular registrant, and

(b) another registrant, who has made taxable supplies of the particular property by way of sale, whether to the particular registrant or another person,

(i) pays to or credits in favour of the particular registrant, or

(ii) allows as a discount on or credit against the price of any property or service (in this section referred to as the "discounted property or service") supplied by the other registrant to the particular registrant, an amount in return for the promotion of the particular property by the particular registrant,

the following rules apply:

(c) the amount is deemed not to be consideration for a supply by the particular registrant to the other registrant,

(d) where the amount is allowed as a discount on or credit against the price of the discounted property or service,

(i) if the other registrant has previously charged to or collected from the particular registrant tax under Division II calculated on the consideration or part of it for the supply of the discounted property or service, the amount of the discount or credit is deemed to be a reduction in the consideration for that supply for the purposes of subsection 232(2), and

(ii) in any other case, the value of the consideration for the supply of the discounted property or service is deemed to be the amount, if any, by which the value of the consideration as otherwise determined for the purposes of this Part exceeds the amount of the discount or credit, and

(e) if the amount is not allowed as a discount on or credit against the price of any discounted property or service supplied to the particular registrant, the amount is deemed to be a rebate in respect of the particular property for the purposes of section 181.1. (underlining added)

Section 232.1 applies to promotional allowances paid, credited or allowed as a discount after March 1997. If an adjustment to tax is made pursuant to either of subsection 232(2) or section 181.1 (as outlined above), the supplier must satisfy the relevant documentary requirements.

It should be noted that the consequences provided for in paragraphs 232.1(c) to (e) are only available when the requirements of paragraphs 232.1(a) and (b) are met. More particularly, paragraph 232.1(a) requires a purchaser to acquire particular tangible personal property (i.e. goods) exclusively for the purpose of supplying that property by way of sale for a price in money in the course of that purchaser's commercial activities, rather than for some other purpose. As such, it is our view that section 232.1 only applies in circumstances where goods are acquired with the intent/for the purpose of resale, 'as is', for consideration.

Goods acquired for consumption or use, including further processing prior to sale, are not property that is acquired for supply by way of sale for a price in money. As a result, goods that are acquired for consumption or use by a registrant, or for supply by way of lease, licence or similar arrangement, are excluded from the application of section 232.1. Property will be regarded as having been acquired for consumption or use where: it is treated as capital property for income tax purposes; it is to be fundamentally transformed or altered (e.g. there is a change in the property's form, nature, fundamental characteristics); it is incorporated into something else whereby it loses its identity in the process; it is used in manufacturing, processing or production of a 'new good'; it is improved beyond its original condition prior to sale; or it is consumed in the process of the formation of a finished product. Notwithstanding, it is generally understood by the CRA that a minimal amount of incidental handling of the property may be warranted in preparation for its supply (e.g. sorting, cleaning and bulk breaking).

You will note that for purposes of section 232.1, the CRA views the term "promotion" to mean efforts, activities or actions that directly or indirectly inform, persuade and influence the acceptance, distribution and sale/purchase of a product.

Given the preceding, it is our general view that section 232.1 will apply to signing bonuses, listing fees and payments for exclusivity, where all of the requirements of paragraphs 232.1(a) and (b) have been met. Where the requirements of paragraphs 232.1(a) and (b) are not met, these payments will be viewed as consideration for taxable supplies and GST (or HST) will be payable by the recipients of these supplies, pursuant to section 165. You will find attached Notice 180, Section 232.1 - Promotional Allowances for your information. This notice explains the CRA's general position with respect to the application of section 232.1 to promotional allowances. This notice also specifically addresses the first three examples raised in your letter: signing bonuses, listing fees, payments for exclusivity.

Finally, it is our view that ssection 232.1 will not apply to promotional allowances paid in circumstances outlined in your letter's fourth example (i.e. where a quarter of beef is acquired for further processing into steaks, hamburger, filets, etc) as it is our view that the property has not been acquired for supply by way of sale for a price in money. In our view, the processing cited goes beyond incidental handling of goods in its preparation for sale. In this particular case, the property will have been fundamentally transformed or altered; the meat arrives in carcass form and leaves the butchering operation in cuts acceptable to its intended market: retail purchasers of meat. Such cuts have, in the market place, not only a form but also qualities and properties that are different from their qualities and properties as part of the carcass.

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 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) 957-8226 or Philippe Nault, Manager - Specialty Tax Unit at (613) 952-9219.

Yours truly,

Indra Singh
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate