13 March 2008 GST/HST Interpretation 92312 - Amount charged on direct recoverable costs

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 and our subsequent correspondence and telephone conversations concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of consulting programs that you intend to offer in conjunction with your insurance products. We apologize for the delay in responding to your enquiry.

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

Effective January 1, 2008, the rate of the GST has been reduced from 6% to 5% and the rate of HST from 14% to 13%. The new rates apply to supplies for which the GST/HST is paid on or after January 1, 2008, 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 GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

Based on the facts submitted and our subsequent telephone conversations, we understand that XXXXX has been negotiating with XXXXX to provide consulting programs to XXXXX's group insurance policyholders. XXXXX has not yet decided whether the consulting programs will be offered to all of its group insurance policyholders or whether it will be an optional service nor has it decided whether the fee charged for the insurance and for the consulting programs will be bundled together as a single amount or whether the fee charged for the insurance and for the consulting programs will be stated separately on the invoice issued by XXXXX to the customer. The total will be collected as a single amount. XXXXX

You have advised that the agreement with XXXXX has not yet been finalized, as such you are unable to provide it for our review, however, you have advised that an interpretation is sufficient for your purposes at this time.

A GST/HST ruling provides the Canada Revenue Agency's (CRA) position on specific provisions of the legislation as these relate to a clearly defined fact situation of a particular person. Generally, a clearly defined fact situation would include the names of the parties involved, documentation supporting the transactions or supplies that are occurring (e.g., a copy of a written agreement), and other specific facts concerning the situation.

Where insufficient facts are provided to issue a definitive ruling, we may provide an interpretation of the relevant portions of the legislation in order to assist the requester in fulfilling its obligations under the law. An interpretation is a general explanation of how the law would apply but does not relate to any specific contemplated or completed transaction by a specific requester. Based on the information you provided, we are able to offer the following interpretation.

Interpretation Requested

You asked that we confirm that the consideration charged with respect to the supply of consulting programs in conjunction with an insurance policy would be deemed under section 139 to be a financial service and thus exempt from GST/HST.

Interpretation Given

An insurance policy is a financial instrument, and the issue or granting of a financial instrument is a financial service. These terms are all defined in subsection 123(1). The issuance of an insurance policy is considered for GST/HST purposes to be a supply of a financial service exempt from GST/HST pursuant to section 1 of Part VII of Schedule V unless zero-rated under section 2 of Part IX of Schedule VI. However, the supply of a consulting service or the service of providing assistance is, for GST/HST purposes, generally a taxable supply. GST/HST Memorandum 300-4-7, Financial Services, available on the CRA Web site, provides more information on financial services.

Where there is a transaction consisting of several elements, at issue is whether a single supply or multiple supplies are being made. This is especially important where a combination of taxable and exempt elements is being supplied together.

The determination of whether a transaction consisting of several elements is to be regarded as a single supply or as multiple supplies is based on a determination of fact. The CRA will use the principles outlined in Policy Statement P-077R2, Single and Multiple Supplies, available on the CRA Web site, to determine whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies.

If the analysis concludes that there is a single supply, it is necessary to determine which element is the predominant one. Where the predominant element of the supply is an exempt service, the supply would then be considered an exempt supply. On the other hand, where the predominant element is a taxable service, the supply would then be considered a taxable supply.

In determining the predominant element of a supply, one must consider a number of factors including the following:

•   the purpose of acquiring the supply;

•   the purpose of making the supply and the business in which the supplier is engaged;

•   the consideration charged for the supply and the supplier's costs of providing the services; and

•   the marketing undertaken by the supplier.

On the other hand, if the analysis concludes that there are multiple supplies supplied together for a single consideration it is necessary to determine if a particular supply is incidental to another and deemed by section 138 to form part of that supply.  You may wish to refer to GST/HST Policy Statement P-159R1, Meaning of the Phrase "Reasonably Regarded as Incidental", also available on the CRA Web site.

Where it is determined that section 138 does not apply and at least one of the multiple supplies provided together for a single consideration is a supply of a financial service, then the application of section 139 should be considered.

Section 139 is a mixed-supply rule that sets out conditions under which the supply of a number of separable financial services, non-financial services, and properties for a single consideration are treated as a supply of only financial services. 

The provision will apply where the following conditions are met:

(a) one or more financial services are supplied together with one or more other services that are not financial services, or with properties that are not capital properties of the supplier, for a single consideration,

(b) the financial services are related to the other services or the properties, as the case may be,

(c) it is the usual practice of the supplier to supply those or similar services, or those or similar properties and services, together in the ordinary course of the business of the supplier, and

(d) the total of all amounts, each of which would be the consideration for a financial service so supplied if that financial service had been supplied separately, is greater than 50% of the total of all amounts, each of which would be the consideration for a service or property so supplied if that service or property had been supplied separately.

It is important to note that:

1. The way in which the price for a transaction is set out does not in itself determine whether there are one or more supplies. A single price does not automatically mean that there is one supply. Equally, separately identified prices for certain elements do not necessarily mean that there are two or more supplies.

2. Where the purchaser has an option of whether it will acquire a certain service or property when acquiring another service, the optional service or property will generally be considered to be a separate supply whether or not a single amount is payable for the services or service and property provided.

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, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA 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 XXXXX. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.

Yours truly,

XXXXX
Rulings Officer
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

2008/03/04 — RITS 102045 — Green Tea XXXXX