15 January 2008 GST/HST Ruling 96386 - Services provided by XXXXX

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 to the XXXXX GST/HST Rulings Centre concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain products sold by XXXXX in Canada.

XXXXX.

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 was reduced from 6% to 5% and the rate of the 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, GST/HST Rate Reduction in 2008 on the CRA Web site at: www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

Statement of Facts

We understand the facts to be as follows:

1. The two products are labelled XXXXX.

2. Both are XXXXX; one is in caplet form and the other in powder form.

3. The products are meant to be used in combination with the XXXXX Program and exercise.

4. Additional information on each product is discussed in the Explanation portion of this ruling.

5. XXXXX that all the products were food products and therefore exempt from Ontario retail sales tax.

Ruling Requested

You would like to know the tax status for GST/HST purposes of the XXXXX products.

Ruling Given

Based on the facts set out above and in the Explanation portion of this ruling, we rule that the supplies of the XXXXX products are subject to GST at 5% and HST at 13%.

This ruling is subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by this ruling provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.

Explanation

For the purposes of this ruling, "taxable" refers to taxable at 5% or 13%.

The preamble to section 1 of Part III of Schedule VI zero-rates the following:

"Supplies of food or beverages for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of such food or beverages), other than supplies of ..."

Paragraphs 1(a) to (r) contain the exclusions from zero-rating. None of the exclusions apply to the products in question.

The words "food", "beverages" and "ingredients" are not defined in the legislation. Memoranda Series Chapter 4.3 Basic Groceries addresses the question of whether products commonly described as "dietary supplements" are zero-rated as foods, beverages or ingredients. Paragraph 2 of Memorandum 4.3 states that the CRA considers a product to be a food or beverage if an average consumer would recognize and purchase the product as such in the ordinary course of buying basic groceries. Consumers usually consume food and beverages to sustain or maintain life, to allay hunger or thirst, or for enjoyment rather than for therapeutic or preventative effects (e.g., to correct actual or perceived health problems) or to achieve specific beneficial benefits related to performance or physique. The only exceptions to the policy specifically stated are for meal replacements and nutritional supplements (as defined in the regulations to the Food and Drug Act). The products in question are neither meal replacements nor nutritional supplements.

The salient points contained in the memorandum with respect to food and beverages are:

•   a product will be a food or beverage if an average consumer would recognize and purchase the product as a food or beverage;

•   the determination is based on the views of an average consumer - individual preferences for, or dislikes of, certain products, or special dietary needs of certain segments of the population such as those with restricted or special purpose diets, are irrelevant;

•   consumers usually consume food for enjoyment or to allay hunger, while beverages are usually consumed for enjoyment or to quench thirst - in general, food and beverages are consumed to sustain or maintain life, to allay hunger or thirst, or for enjoyment, rather than for therapeutic or preventative effects (e.g., to correct actual or perceived health problems) or to achieve specific beneficial effects related to performance or physique; and

•   products that are labelled or marketed as products to be consumed to facilitate the intake of certain ingredients (nutritive or otherwise) or which place an emphasis on claims relating to the benefits of the product, for example, therapeutic or preventive effects, or enhancing performance or physique, are not considered to be products that an average consumer would ordinarily purchase in the course of buying food or beverages (e.g., products in pill, tablet, or capsule format).

With respect to ingredients, paragraph 4 of Memorandum 4.3 states that an average consumer would consider a product to be an ingredient if it added to the flavour, texture or appearance of the final product; that is, if it was integral to the final product. Moreover, to be considered an ingredient, the final product must, in and of itself, be a food or beverage. A product that is marketed for its beneficial effects and that is added to a food or beverage simply as a way to consume it would not be considered an ingredient.

However, not all things that are added to food are considered to be zero-rated ingredients. Memorandum 4.3 lays out specific criteria for determining whether a product is a dietary supplement in paragraphs 148 to 159, based on the following sources:

•   labelling;

•   packaging/format; and

•   marketing.

With respect to the XXXXX caplets, products in capsule form are prima facie considered to be dietary supplements and therefore the XXXXX caplets are taxable.

With respect to the XXXXX powder, the following criteria indicate that the powder is a dietary supplement:

•   The label states, XXXXX. It also provides instructions on how to use the powder in order XXXXX. In other words, the product is promoted as part of a weight loss program.

•   The product's name clearly indicates a weight loss or weight control purpose.

•   The product is a powder. It is sold in a XXXXX-gram container. Products in powder format are often associated with dietary supplements, although not in all cases. While XXXXX can be sold as an ingredient, it usually comes in a form XXXXX.

•   The product is available only through XXXXX. The product is meant to be used in combination with the XXXXX.

•   On the XXXXX website, the powder version of the product is marketed together with the capsule version of the product.

•   The information on the website reinforces the information on the label that the product is a weight loss product.

Although a number of the other criteria for characterizing the product as a dietary supplement are not present, the primary emphasis on the product's use for promoting weight loss is significant. As noted earlier, a dietary supplement does not become an ingredient simply because it is added to something else as a means to consume the supplement. In balancing the various criteria, our view is that the labelling, format and marketing of the product as a weight loss product is predominant.

XXXXX the Ontario Retail Sales Tax Act is provincial legislation XXXXX. However, we note that the definition of "food products" in section 1 of Regulation 1013 of the Ontario Retail Sales Tax Act includes "any dietary supplement or adjunct that is not a drug or medicine". Unlike the GST/HST, there is a legislative basis for exempting dietary supplements from Ontario's retail sales tax.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-957-8253. 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,

Gunar Ozols
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2008/01/08 — RITS 98472 — [Application of the GST/HST on Basic Groceries]