16 December 1996 GST/HST Interpretation 11680-7[1] - Application of the GST to the Supply of Cards Sold to Independent Distributors in Canada as a Telecommunications Service

Dear XXXXX

I refer to previous correspondence between your firm and the XXXXX, and our telephone conversation on December 5, 1996, concerning the application of the Goods and Services Tax (GST) to the supply of XXXXX. Your firm's code number for this file, as indicated on your facsimile message of July 19, 1996, to the XXXXX.

You described the following situation in your letter:

1. A non-resident company (NRCo) will be selling XXXXX (cards) to independent distributors in Canada.

2. The independent distributors will sell the cards to customers (purchasers) in Canada.

3. NRCo will pay the independent distributors a commission for selling these cards.

4. The cards, which are available in several preset denominations, provide the purchasers with XXXXX. The purchasers will be able XXXXX. The cards do not contain any magnetically recorded information. Each card does, however, contain a unique number.

5. XXXXX.

6. NRCo is installing a rack-mounted computer interface unit to be used in conjunction with its underlying carrier's network in Canada. This unit will enable NRCo to XXXXX made by the resident customers. The unit will be installed in Canada in the premises of NRCo's telecommunications supplier.

In your message of July 19, 1996, you raised four questions. I understand that you have been in contact with Revenue Canada, Customs, regarding the issue raised in Question #4 (i.e., whether the GST will apply at the time of importation of the cards). I will, therefore, not address that issue. Concerning the remaining three questions, I will answer them in a slightly different manner, taking into account our telephone discussion on December 5, 1996.

Interpretation Given

Bill C-70 tabled before parliament proposes a definition of the term "telecommunication service", as follows:

"telecommunication service" means

(a) the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any other similar technical system, or

(b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a);".

The cards to be supplied by NRCo to independent distributors in Canada would appear to fit the definition of telecommunication service.

The supply of the cards would be deemed to be made in Canada pursuant to the proposed section 142.1 of the Excise Tax Act (Act). However, this proposed section is subject to section 143 of the Act.

If NRCo is not making the supplies in the course of a business carried on in Canada and is not registered for GST purposes, NRCo's supplies of cards would be deemed to be made outside Canada under the provisions of subsection 143(1) and not subject to the GST at 7% under Division II. NRCo would, therefore, not be required to collect and remit the GST.

The supplies of the cards by the independent distributors in Canada to the purchasers would, also, appear to be supplies of telecommunication services. These supplies are deemed to be made in Canada under the provisions of proposed section 142.1. Provided the independent distributors are not small suppliers, they would be required to collect and remit the GST at 7% on their supplies of the cards.

The commissions received by the independent distributors from NRCo might be consideration for supplies of a service made by the independent distributors to NRCo. As a result of the proposed amendments to Schedule VI, Part V, section 7 to the Act, these supplies would qualify for zero-rating (i.e., subject to the GST at 0%). However, the better view is that there is no service being supplied by the independent distributors to NRCo and that the commission may represent a reduction in the selling price of the telecommunication service supplied to the independent distributors.

Enclosed is a copy of Section 14.1 (Direct Sellers) of the GST Memoranda Series. You will note that the direct seller provisions contained in sections 178.1 to 178.5 of the Act are not applicable because NRCo is not making supplies of personal property.

The foregoing comments represent our general views with respect to the proposed amendments to the Act relating to the subject matter of your message. These comments are not rulings and, in accordance with the guidelines set out in the GST Memoranda Series (1.4), do not bind the Department with respect to a particular situation.

Please contact me at (613) 952-6743 if you have any questions or require further information.

Yours sincerely,

Garry L. Ryhorchuk
Senior Policy Officer
Border Issues Unit
General Operations and Border Issues Division
GST Rulings and Interpretations
Policy and Legislation Branch