12 May 2006 GST/HST Interpretation 77757 - Tax Status of Crating and Packaging

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 XXXXX, which was sent to our XXXXX Tax Services Office, in which you requested an application ruling in respect to the application of the Goods and Services Tax (GST) to a XXXXX service/product that you are offering. Your request has been transferred to us for a reply.

In accordance with GST/HST Memoranda Series Section 1.4, copy enclosed, an application ruling can only be issued with reference to a clearly defined fact situation of a particular registrant. Rulings are issued upon request and where the taxpayer has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services or property involved, the parties involved in all transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. We are pleased to issue you an interpretation, which will elaborate on how the GST applies to the questions raised in your letter.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

The following information was taken from your letter, the Joint Venture Agreement (JVA), XXXXX and our telephone conversations:

1- XXXXX entered into a JVA.

2- The purpose of the Joint Venture (JV) is to develop, market and XXXXX. The relevant facts, under the terms of the JVA, are as follows:

3- Under XXXXX the JVA - Introduction

XXXXX

4- Under XXXXX the JVA - Purpose of the Joint Venture

XXXXX

5- Under XXXXX the JVA - Management Structure and Fees

XXXXX

6- Under XXXXX the JVA - Accounting, Reports and Financial Statements

XXXXX

7- XXXXX, the customer will pay a fee XXXXX.

Interpretation Requested

You would like to know whether or not GST should be charged under the XXXXX and, if so, would the Joint Venture (JV) in turn pay GST on any purchases of XXXXX?

You would also like to know if the joint venture election under subsection 273(1) of the ETA would be available to you in this case.

Interpretation Given

Based on the information provided, the following is our interpretation for each of the questions posed.

A- Application of the GST/HST XXXXX

If a customer XXXXX and pays a fee XXXXX, the JV participants have each made a taxable supply to the customer. Such a supply would be subject to tax at the GST rate of 7%, when made in Canada in a non-participating province.

B- Purchases of XXXXX

When a supply is made in Canada in the course of a commercial activity of a registrant and no exempting or zero-rating provisions for such a supply apply, the supply is taxable at the GST rate of 7% or the HST rate of 15%, as applicable.

The GST or the HST applies to most supplies of property or services made in Canada. The supplier will determine if, in any particular circumstance, tax must be charged on any supply to the JV participants.

C- Joint venture election

You are aware that the election under subsection 273(1) of the ETA only applies to certain kinds of joint ventures, and that the one entered into XXXXX is not one of those types of joint ventures.

The responsibility for prescribing joint venture activities for purposes of section 273 of the ETA rests with the Department of Finance. Currently, only two activities have been prescribed as set out in the Joint Venture (GST) Regulations (SOR/91-36), neither of which includes the activities to be undertaken by the XXXXX JV.

However, over the last few years, the Department of Finance has undertaken a review of the Regulations and has identified other specified activities for which the joint venture election will be made available. Upon completion of their review, we understand that the legislation and/or Regulations will be amended to include the specified activities that have been identified in their review to date.

It is our understanding that these specified activities are to be prescribed. To date, the activity of the XXXXX JV is not one of those activities. Participants in joint ventures that are not eligible to use the election available under section 273 of the ETA are required to charge and account for tax under the normal rules.

Under the normal rules, each participant in a joint venture, if a registrant, must generally account for the tax on its share of joint venture sales and claim input tax credits for tax paid or payable on its share of joint venture purchases ^[xxi]footnote 1.

That being said, participants in a joint venture may authorize one participant to sell the joint venture's property or services on behalf of the other participant(s). Further, a participant in a joint venture may agree to acquire goods and services on behalf of the other participants. As a result, an agency relationship may exist in which one or more participants of the JV act as agent of the other(s).

Where an agency relationship exists ^[xxii]footnote 2 in circumstances in which no election under section 273 is in effect, and, if they qualify, the participants of a JV may jointly elect under subsection 177(1.1) of the ETA, to have the participant, who is acting as agent on behalf of the other participant, to account for the tax on supplies made by the other participant.

Under this joint election, the agent, generally, still has to charge and account for tax on its commission and services it would provide to the other participant (i.e., the principal) that relate to a supply.

Please refer to election form GST506 E - Election and Revocation of an Election Between Agent and Principal, copy enclosed, for further information, or call 1-800-957-8287.

D- Additional comments

In reviewing the agreement, we note that under XXXXX of the JVA, XXXXX will be paid a management fee XXXXX, for the management of the JV, XXXXX. XXXXX. Under XXXXX of the JVA, the JV is to be shared XXXXX between the parties. In case you were not aware, we wanted to alert you to the fact that, in our view, XXXXX is making a taxable supply of a management service to XXXXX as participant of the JV equal to a consideration of one half (1/2) of the XXXXX% management fee.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Goods and Services Tax Rulings.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 957-8223.

Yours truly,

Daniel Chamaillard
Senior Rulings Officer
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/06/23 — RITS 78986 — GST/HST Status of XXXXX Herbal Teas