CRA clarifies that the provision of goods is not incidental to services for TOSI purposes where the customer acquires property of significant value

A CRA webpage provides examples for computing the 90% services exclusion in s. (a)(i) of the "excluded share" definition in the tax on split income (TOSI) rules. These include:

• Where a corporate cleaning business consumes cleaning supplies in performing its cleaning services, such supplies will be included in its services revenue even if charges therefor are separately identified in its invoices (Example 4);
• Or where it also “separately” sells cleaning supplies to some of its customers, such sales will be respected as not belonging to its services revenue (Example 5);
• Where a corporation, that constructs and repairs decks, charges for its materials and labour for each job, its services revenue is determined by backing out its charges for materials from its total revenues (Example 6).

In commenting further on these examples, CRA stated:

Example 4 demonstrates incidental use or consumption of goods in the provision of services. In this example, the cleaning products are incidental to the services, since they were used or consumed in providing the services. Ultimately, in this situation, the customer is seeking to have their premises cleaned.

Example 5 describes a situation where the corporation, in addition to providing cleaning services, sells cleaning supplies and equipment, perhaps to other businesses providing cleaning services, or to its own customers but separate and apart from the cleaning services. In this example, the goods are not incidental to the service as they are acquired by the customer for their own use.

In example 6, a contractor is engaged to supply the materials for and carry out the construction of a deck. In this situation, the materials are significant enough of an element in the construction of the deck that the business provides both a service and non-service component. The corporation supplied all materials and labour when constructing and repairing decks. The service component was the labour provided. Given that customer is acquiring an improvement to their property in the form of the deck which is a tangible improvement affixed to the customer’s property, to the extent that the revenues reflect the provision of the materials, they are considered a non-service component provided together with, as opposed to incidental to, the services.

Neal Armstrong. Summary of 2021 Alberta CPA Roundtable under “Tax on Split Income – Services Restriction to Excluded Shares” under s. 120.4(1) – excluded share – s. (a)(i).