1 October 1997 GST/HST Interpretation HQR0000363 - Application of Tax on Employment Contracts Between and Its Sales Representatives

Thank you for your letter of October 11, 1996, concerning the application of the Excise Tax Act ("ETA") to certain transactions conducted between XXXXX and its sales representatives. We apologize for the delay in responding.

Statement of Facts

1. XXXXX is a wholly owned Canadian subsidiary of XXXXX , which is based in XXXXX Canadian operations focus primarily on XXXXX area and has XXXXX

2. XXXXX is a GST/HST registrant who enters into employment contracts with their sales representatives.

3. Each XXXXX sales representative is required to execute an employment contract, designed exclusively for XXXXX and their business operations, which sets out the particulars of their employment including the commission formula by which they will be remunerated and the items which will be deducted from their earned commission. Sales representatives for XXXXX are primarily individual employees and approximately XXXXX of their workforce are corporate entities referred to in the employment contracts as "agents". For individuals, XXXXX accounts employment income for T4 purposes as the net of earned commission and items deducted such as XXXXX

4. The contracts are specific to each of the positions and include particulars relating to the equipment owned by XXXXX and provided to the employee or agent for use in the course of their duties, the product and information which is furnished by XXXXX the method of remuneration including costs which are the responsibility of the employee or agent, as well as certain restrictive covenants which come into force at the termination of the agreement between XXXXX and the employee or agent.

5. Each employment contract contains a clause to the effect that the sales representatives will promote only XXXXX products. To this end, XXXXX provides samples of their products to the sales representatives.

6. In addition, XXXXX provides its representatives with all merchandise, inventory, and supplies ("MIS"), including XXXXX necessary to complete the job. To recover its overhead costs, XXXXX marks up all MIS by XXXXX before charging it to the sales representative.

7. As a condition of employment, XXXXX XXXXX . XXXXX

8. XXXXX maintains there is no supply as the title and ownership to the MIS remains with XXXXX at all material times. Accordingly, no GST is charged.

9. Issues related to the method XXXXX remunerates its employees/agents were addressed by our taxation counterparts earlier this year. It was determined that XXXXX current method of remuneration did not conform with sections 5 and 8 of the Income Tax Act (ITA). Further, it was determined that for T4 and T4A purposes, the gross amount of earnings should be reported, in which case the employees would then be in a position to claim sales related allowable expenses pursuant to section 8 of the ITA.

Interpretation Requested:

The issue at hand is two fold: Does the provision of MIS XXXXX by XXXXX to its sales representatives constitute a supply of property pursuant to subsection 123(1) of the ETA. If so, is the supply taxable.

Interpretation Given:

We concur with your views as identified in your letter of October 11, 1996, and your letter dated February 20, 1996, to XXXXX that XXXXX is making a taxable supply of property and services to its sales representatives. This view is consistent with the approach taken by our counterparts in analyzing the application of the Income Tax Act. In addition to those views, we add the following information.

It is a commonly held principle that it is not necessary for title to formally pass in order for beneficial interest in a property to vest in a new person, namely the employee/agent.

A review of the employment contracts reveals that XXXXX has XXXXX distinct methods for the handling of equipment or samples owned by XXXXX and MIS provided to the sales representatives. The various contracts clearly identify the equipment or samples which are, and will continue to remain, property of XXXXX With respect to the MIS in question, the contracts clearly state that the MIS is "given" or "furnished" to the sales representatives. The use of these words, also supports the view that a supply has been made given the broad definition of "supply" in subsection 123 of the Act. It should be noted that in cases where title has clearly not passed, it is still possible for a supply to take place. For example, allowing a person to use property for a period of time can certainly be considered a supply.

Under the terms of their contracts, XXXXX are required to have all XXXXX differs from the XXXXX for which the employee was charged under the term 'MIS' in that it has been used to XXXXX Once XXXXX become property of XXXXX According to XXXXX is exclusive to XXXXX It is our view that in XXXXX a supply of a service has occurred. In exchange for the supply of XXXXX services of the XXXXX (previously purchased from XXXXX by the sales representative as XXXXX exerts ownership of the XXXXX It is our view that stipulations made by XXXXX with respect to the XXXXX does not add any weight to the argument that a supply has not been made.

Both of the above transactions entered into between XXXXX and its sales representatives fall within the ETA's definition of supply. Each supply is taxable.

 XXXXX states "The inventory in the hands of the employees/agents is similar to the idea of inventory held on consignment; it is inventory owned by XXXXX but held by another party. Once used to generate revenue, the ultimate sale is recorded at XXXXX level". Generally, for GST purposes, where items are inventory and are held for consignment, GST applies on the sale made by the consignor to the consignee and then on the sale made by the consignee to the customer. In addition, where a consignee takes ownership of the property for his or her own use, a supply has been made for GST purposes. As such, the application of GST to consignment sales does not add to the argument that a supply has not been made.

Insurance coverage, within the context of XXXXX is another example put forth by XXXXX to support the "no supply" position. Interestingly, XXXXX clearly state that samples are the property of XXXXX and lost, stolen or unaccounted for samples will be charged to the sales representative. While we are unable to provide comment without examining the actual policy, it should be noted that the policy itself would not be sufficient to determine that a supply has not been made.

Regarding the tooling of XXXXX , it is XXXXX contention that "Once the XXXXX it remains in XXXXX possession to be used year after year as long as the account is maintained" and "The XXXXX remain the property of J XXXXX supports this position by stating that if the XXXXX were in fact the property of the sales representative, the sales representative "should maintain, in their possession and control, the physical XXXXX This position is inconsistent with XXXXX earlier contention on XXXXX where the sales representative had possession but ownership remained with XXXXX It is our view that XXXXX possession of the XXXXX is not evidence of XXXXX ownership of the XXXXX In addition, the entire XXXXX cost is allocated against the sales representative's commision over a XXXXX year period. In our view, the XXXXX is a supply made by XXXXX to the sales representatives, based on the same arguments put forward in respect of the MIS provided to the sales representatives.

Although multiple supplies have occurred between XXXXX and its sales representatives, it is a question of fact whether the individual employees/agents may claim ITCs on the acquisition of MIS. In the case of the individual employees, the employees are not carrying on a commercial activity as their duties fall within the broad term of 'employment', which is excluded from the definition of 'business' in subsection 123(1) of the ETA. However, where the expenses relating to the MIS are found to be deductible for computing the employee's income from employment, for income tax purposes, the employee may then avail themselves of the rebate provided in section 253 of the ETA for the tax paid by the employee in respect of MIS which was acquired, imported or brought into a participating province.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-2560.

Yours truly,

KerriAnne Boyd
General Operations Unit
General Operations and Border Issues Division Division
GST/HST Rulings and Interpretations Directorate

Legislative References: 123(1), 253