7 February 2007 GST/HST Ruling 78839 - XXXXX Music Cards

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 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to employee benefits.

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

Effective July 1, 2006, the rate of the GST has been reduced from 7% to 6% and the rate of the HST from 15% to 14%. The new rates apply to supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date. Specific transitional rules apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to Reduction in the Rate of the GST/HST - Questions and Answers <http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html> on the CRA Web site.

We understand that a GST/HST registrant distributor of consumer products awards trips to exotic locations outside of continental North America to employees who have achieved prescribed sales volumes. Sometimes the registrant purchases fairly expensive non-cash items (such as jewellery) that are awarded to the top performers at a ceremony conducted outside of Canada. The dollar value of these awards exceeds $500 each and, therefore, they are considered to be taxable benefits under paragraph 6(1)(a) of the Income Tax Act (ITA).

Having purchased the awards outside of Canada, the registrant did not pay any GST/HST on the purchase or on the importation of the goods. Rather, the employee pays Division III tax under section 212 of the ETA upon his/her return to Canada.

However, the registrant is required pursuant to section 173 of the ETA to remit Division II tax on the amount of the taxable benefit that was required to be included in the employee's income by virtue of paragraph 6(1)(a) of the ITA unless excluded under the provisions of any of subparagraphs 173(1)(d)(i) to (iv). Subparagraph 173(1)(d)(i) of the ETA provides that a registrant is not required to self-assess tax on the amount of the taxable benefit where the registrant was not entitled, because of section 170, to claim an ITC in respect of the importation of the property. Section 170 of the ETA provides that a registrant is not entitled to claim an ITC in respect of tax payable by the registrant on (among other things) the importation by the registrant of property imported exclusively for the personal consumption, use or enjoyment of an employee or a person related to the employee.

You are concerned that section 170 of the ETA does not apply in these circumstances to deny the registrant an ITC and, as a result, subparagraph 173(1)(d)(i) of the ETA does not apply to relieve the registrant from the requirement to self-assess the tax on the amount of the taxable benefit in these circumstances. Consequently, there is an element of double taxation.

Interpretation Requested

You wish to confirm CRA's interpretation of the application of the above provisions in the circumstances described above.

Interpretation Given

Based on the information provided, we confirm that section 170 of the ETA will not apply to deny the registrant an ITC as no tax was payable by the registrant and the registrant did not import the property as required under that section. None of the exclusions in subparagraphs 173(1)(d)(i) to (iv) of the ETA apply to exclude the registrant from the requirement to self-assess the tax on the amount of the benefit that was included in the employee's income.

We confirm that there is double taxation in this situation. As you know, the CRA is responsible for administering the ETA as enacted by Parliament. Any legislative amendments are the responsibility of the Department of Finance. We will bring this issue to the attention of the Department of Finance.

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.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-7931.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2007/02/09 — RITS 79000 — Application of GST/HST to Supplies of Emu Fat, and Emu Oil for Topical Purposes