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XXXXX
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File number: 11925-1
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XXXXX
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Rits number: HQR0000377
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Dear XXXXX
I am writing in response to your letter dated October 23, 1996 concerning the tax status under the GST of XXXXX and its various supplies made in Canada. While your letter requested an interpretation from this office, you subsequently asked in a telephone conversation on February 5, 1997 that rulings be provided where possible.
The rulings provided in this letter are based on the information and documentation provided with your letter and in previous meetings and telephone conversations concerning the XXXXX[.] Where insufficient facts have been provided to issue an application ruling or where the questions relate to proposed legislation, we have provided interpretations of the applicable legislative provisions.
Our understanding of the relevant facts is as follows:
Facts
1) XXXXX[.]
2) As requested, we will assume that the XXXXX is a non-profit organization for the purposes of this letter.
3) XXXXX is not registered for the purposes of the GST.
4) XXXXX has a permanent establishment in Canada. Its Canadian branch, located in XXXXX carries on activities to promote tourism in XXXXX[.] Similar branches are located in other countries.
5) XXXXX raises some revenue from its activities but these revenues only help defray some of the costs of its activities.
6) Payments for major expenditures by XXXXX are approved in Canada but are not made from Canada. Major sources of revenue are not received in Canada. For example, revenue from the distribution of publications on behalf of arm's length partners in XXXXX as well as advertising revenues from partners in Canada are received by XXXXX in XXXXX on behalf of XXXXX[.]
7) Records maintained by XXXXX in XXXXX are primarily cash disbursement records. XXXXX maintains copies of all contracts and letters of agreement reflecting its activities with partners in Canada. It also retains copies of all invoices for expenditures incurred. Although certain transactions are processed in XXXXX the revenues and expenses are directly attributable to XXXXX operations. Any returns to be filed in respect of activities carried on by XXXXX would in all likelihood be prepared in XXXXX after recording revenues earned in Canada.
8) XXXXX activities fall under the following general categories which are discussed at greater length below:
XXXXX distributes promotional publications that have been provided by arm's length participants located in XXXXX[.] This includes brochures and other literature produced by hotels and bed and breakfast establishments, theatre ticket agencies, tour operators, airlines, car rental services and by XXXXX[.] The publications, which remain the property of these non-resident participants, are provided free of charge to Canadians.
XXXXX offsets some of the costs associated with this activity by charging the arm's length participants the following fees:
• an annual fee is charged for inclusion of information about their promotional materials in the publication entitled XXXXX shows brochures that may be ordered by Canadians interested in learning about the services of these businesses and tourist boards in XXXXX[.] This publication contains brief descriptions of the contents of these brochures, colour pictures of the brochures and the addresses, fax and telephone numbers of the non-resident organizations. Canadians may order these brochures simply by indicating their choices on a reply postcard to XXXXX
• a "per publication fee" is charged each time one of their brochures is requested and distributed free of charge in Canada.
B. Distribution Service for XXXXX Promotional Publications
XXXXX provides a distribution service in Canada for XXXXX promotional publications. These publications are produced in XXXXX and are imported duty and GST free by XXXXX Advertising space in the main publication XXXXX is sold by XXXXX in XXXXX[.] In initial mailings, Canadians receive copies of the guide, XXXXX and XXXXX free of charge.
Canadians are asked if they would like to donate XXXXX to help defray the costs of publication and shipment of the publications they request. This is a voluntary contribution. The requested material will still be sent if the XXXXX is not paid.
It is proposed that Canadians will also receive a third publication called XXXXX which will be produced on behalf of XXXXX and will promote specific XXXXX publications.
To date, XXXXX and XXXXX have been distributed free of charge in Canada but XXXXX is considering charging nominal fees for handling and postage to help defray warehousing and distribution costs. This charge would be with respect to specific XXXXX publications ordered from a card to be included in XXXXX.
C. Advertising Revenues from Partners
XXXXX participates in marketing ventures with businesses with whom it deals at arm's length XXXXX. The term "partners" is used to describe these relationships.
Although both parties approve the design of a particular campaign, XXXXX contracts directly with the advertising agency, is billed directly and pays the fee. XXXXX is then reimbursed an agreed upon proportion of the consideration by its partner.
D. Events, Trade Shows and Publications with Partners
XXXXX presents breakfasts and trade shows and participates in the development of promotional material such as XXXXX publications with various partners.
In carrying on these activities, XXXXX will:
• develop the promotional idea,
• arrange the necessary inputs (e.g., leased space, tables, meals, booths, advertising, etc.),
• budget total costs and
• seek out partners to share a proportion of the overall costs as XXXXX bears only a portion of the total cost of the activity.
While an agreement is normally entered into with the business partners, these agreements are generally not very formal (e.g., a letter or memorandum of understanding with a business plan and costs attached.)
XXXXX sends out invitations to travel agencies in its own name and on behalf of the participating partners. No fee is charged to the individual consumers, travel agents or tour operators who are invited to participate in these activities.
E. Expenditures with No Offsetting Revenues
XXXXX also participates in promotions controlled by other parties. In this case, it may simply pay its share of the advertising campaign or special event XXXXX[.] Other expenditures incurred by XXXXX include promotional expenses relating to a news clipping service, newsletters, press lunches, trips to XXXXX for journalists and travel agents and miscellaneous giveaways, such as cardboard cut-outs and umbrellas.
Indirect expenses include general operating expenses with respect to telephones, computer equipment, office services, rent, salaries and travel.
Each of the principal activities described above operates at a loss. Funds from the XXXXX cover cost shortfalls and all indirect, general and administrative costs.
Rulings and Interpretations Requested
A. Distribution Service for Arm's Length Promotional Publications
Ruling Requested
1) Is the "per publication fee" charged by XXXXX to the non-resident businesses and tourist boards subject to the GST prior to 1997?
Ruling Given
The fee that is charged to non-resident organizations each time one of their brochures is selected and mailed to Canadians is consideration for the service of distributing these materials in Canada.
Prior to the proposed amendments to the ETA introduced on November 29, 1996, section 6 of Part VI to Schedule V provided an exemption to supplies of a service made in the course of a business of supplying that service if the value of the consideration paid or payable by the recipient was equal to the usual charge for the service and if the consideration did not, or could not reasonably exceed the direct cost of that service.
The direct cost of a service provided directly to a recipient by a non-profit organization included the cost of any articles or materials used by the organization in the course of supplying the service.
The cost of any services acquired from another person by the non-profit organization in the course of providing the distribution service, that are resupplied in the same form to the recipient would also comprise part of the direct cost of the distribution service.
Therefore, distribution services provided by XXXXX would be exempt if amounts charged in respect of this service did not exceed the direct cost of this supply.
Interpretation Requested
2) Is the "per publication fee" charged by XXXXX to the non-resident businesses and tourist boards subject to the GST after 1996?
Interpretation Given
The Notice of Ways and Means Motion tabled on November 29, 1996 introduced a number of significant changes to the ETA. Included among these are changes to the exemption provided in section 6 of Part VI to Schedule V and to the definition of "direct cost" in subsection 123(1). These amendments apply to supplies for which all of the consideration becomes due after 1996 or is paid after 1996 without having become due.
Proposed section 6 of Part VI to Schedule V will apply to sales of tangible personal property (other than capital property) and to supplies of services that are purchased by a public service body for the purpose of resale.
As a result, this exemption will no longer apply to services that are supplied directly by a public service body.
Ruling Requested:
3) Are the publications provided free of charge in Canada exempt supplies or inputs consumed by XXXXX in the course of providing a distribution service to these non-resident entities?
Ruling Given
These publications are produced by the non-resident organizations and provided to XXXXX for the purpose of their distribution in Canada. The publications are not exempt supplies of XXXXX property nor are they consumed by XXXXX when provided to the public in the course of this distribution service. These materials remain the property of these non-resident organizations.
Warehousing, inventory and other costs incurred by XXXXX in respect of these publications are inputs to the service of distributing this material on behalf of the non-resident organizations.
Ruling Requested
4) Is the annual fee charged to the non-resident businesses for inclusion of information about their brochures in the publication XXXXX consideration for an advertising service?
Ruling Given
The publication XXXXX is a means used by XXXXX to distribute the promotional material provided by non-resident businesses and tourist boards in XXXXX In addition to allowing Canadians to order brochures that interest them, this publication also provides a brief description of the information provided in these brochures as well as the addresses, telephone and fax numbers of these entities.
We consider that the non-resident organizations that pay an annual fee in order to buy space in this publication have acquired an advertising service from XXXXX As this publication is produced and distributed in Canada, it falls within the scope of the GST.
Ruling Requested
5) Does the direct cost rule apply to the supply of the advertising service by XXXXX to the non-resident organizations prior to 1997?
Ruling Given
Prior to the proposed amendments to the ETA introduced on November 29, 1996, section 6 of Part VI to Schedule V provided an exemption to supplies of a service made in the course of a business of supplying that service if the value of the consideration paid or payable by the recipient was equal to the usual charge for the service and if the consideration did not, or could not reasonably exceed the direct cost of that service.
The direct cost of a service provided directly by a non-profit organization included the cost of any articles or materials used by the organization in the course of supplying the service. Direct cost also included the costs of any services acquired from another person in the course of providing the service, that are resupplied in the same form to the recipient.
Therefore, advertising services provided by XXXXX would not have been subject to the GST if amounts charged in respect of this service did not exceed the direct cost of this supply.
Interpretation Requested
6) Does the direct cost rule apply to the supply of the advertising service by XXXXX to the non-resident organizations after 1996?
Interpretation Given
As mentioned earlier, section 6 of Part VI to Schedule V now applies to sales of tangible personal property (other than capital property) and to supplies of services that are purchased by a public service body for the purpose of resale.
As a result, this exemption no longer applies to services that are supplied directly by a public service body, such as the advertising services provided by XXXXX[.] As you note in your letter, a supply of a service of advertising may be zero-rated under certain circumstances. As we do not have sufficient information on hand to issue a ruling on this point, we would make the general comment that a service of advertising by XXXXX may be zero-rated under section 8 of Part V to Schedule VI if it is made to a non-resident business that is not registered for the GST.
B. Distribution Service for XXXXX Promotional Publications
Ruling Requested
7) Are supplies by XXXXX publications both before and after January 1, 1997 exempted by section 10 of Part VI to Schedule V?
Ruling Given
To date, XXXXX has mailed out XXXXX publications free of charge upon request. Section 10 of Part VI to Schedule V provides an exemption to supplies of promotional material provided by XXXXX where all or substantially all of this material is provided for no consideration. The proposed amendments to section 10 of Part VI to Schedule V as contained in the legislation tabled on November 29, 1996 do not affect supplies made by XXXXX[.] We do not regard the XXXXX "voluntary contribution" requested by XXXXX as consideration for the supply of these publications as this material is sent out by XXXXX regardless of whether this payment is made. Therefore, XXXXX is making an exempt supply in this situation.
Interpretation Requested (Proposed Transaction)
8) If the publications are provided for no charge but a fee is charged for handling and postage, would this be regarded as two supplies - a taxable distribution service and an exempt supply of tangible personal property?
Interpretation Given
We appreciate that the purpose of this fee is to offset the costs of handling and postage, however, we do not consider that this means XXXXX is making two supplies in this situation (i.e., an exempt supply of the publication and a taxable distribution service).
Instead, we would regard the recipient as having received a single supply of promotional material delivered to his or her address. In other words, the recipient is paying consideration for the promotional material, not simply for the service of having it delivered.
In this situation, consideration is charged for the publications, therefore, section 10 of Part VI to Schedule V will no longer apply. The supply of this material would be taxable unless the direct cost exemption provided in section 6 of Part VI to Schedule V applies. Once registered for the GST, XXXXX would be entitled to claim input tax credits in respect of purchases acquired for the purpose of making this taxable supply.
C. Advertising Revenues from Partners
Ruling Requested
9) How will the direct cost exemption apply to the purchase and resupply of advertising services by XXXXX to its partners before 1997?
Ruling Given
Based on the information provided, we agree that XXXXX is acquiring and resupplying a service of advertising when it undertakes primary control of an advertising campaign, enters into a contract with the advertising agency, pays the consideration for the supply and then invoices its partners their proportion of the costs of the total consideration paid for the advertising service.
In this situation, XXXXX pays GST in respect of the acquisition of the taxable advertising service from the advertising agency. It then resupplies the advertising service to the partner or partners participating in the campaign. The consideration is divided proportionally between them (i.e., XXXXX only invoices its partners their portion of the total cost of the advertising).
Section 6 of Part VI to Schedule V applies to services where the supply was made in the course of a business of making supplies of that service and where the value of the consideration paid was equal to the usual charge and did not or could not reasonably be expected to exceed the direct cost of the supply.
The direct cost of the advertising service in this situation would be the value of the consideration originally paid by XXXXX when it acquired the service from the advertising agency. If the service was resupplied to one or more partners, the direct cost of the resupply may be determined proportionally.
Example:
XXXXX entered into an advertising campaign with another partner. Each party agreed to pay XXXXX of the cost of advertising services acquired from the advertising agency. XXXXX acquired the advertising services for XXXXX[.] It invoiced its partner for its portion of the cost. As the consideration paid by the partner did not exceed the direct cost determined proportionally XXXXX the resupply of the advertising service by XXXXX was exempt.
Interpretation Requested
10) How will the direct cost exemption apply to advertising services acquired and resupplied by XXXXX to its partners after 1996?
Interpretation Given
Section 6 of Part VI to Schedule V has been significantly changed in Bill C-70 introduced on November 29, 1996. It will apply to services purchased by XXXXX for the purpose of resale but the exemption now provides a two-part test depending on whether the organization has charged an amount as tax in respect of the supply.
Another significant change has been made to the definition of direct cost. The direct cost of a service acquired for the purpose of resale now includes the consideration paid by the supplier for the acquisition or importation of the service, the GST payable by the supplier and any tax, duty or fee prescribed for the purposes of section 154 (e.g., provincial sales tax).
Under the new direct cost rule in section 6 of Part VI to Schedule V, an organization that sells goods or services on an exact cost recovery basis can choose to sell them as either taxable or exempt. The following examples show how this new provision works:
Paragraph (a) of section 6 of Part VI to Schedule V
Where XXXXX does not charge an amount as tax, the supply will be exempt if the charge to the recipient does not exceed the direct cost of the supply.
Example:
XXXXX enters into an advertising campaign with a partner. Each will share XXXXX of the costs. XXXXX acquires the advertising service for XXXXX plus 7% GST. The direct cost of the service is XXXXX invoices its partner for XXXXX of the direct cost (i.e., XXXXX and does not charge an amount as tax.
In this situation, the resupply of the advertising service is exempted by paragraph (a) of section 6 of Part VI as the amount charged does not exceed the direct cost of the supply (determined proportionally).
Paragraph (b) of section 6 of Part VI to Schedule V
Where XXXXX charges an amount as tax, the resupply of the advertising service will be exempt only if the consideration is less than the direct cost of the service without reference to the tax.
Example:
XXXXX acquires an advertising service for XXXXX plus 7% GST. The direct cost of the advertising service is XXXXX invoices its partner for XXXXX of the cost and charges an amount as tax XXXXX The resupply in this situation is taxable.
If advertising services resupplied by XXXXX do not fall under the exemption provided in section 6 of Part VI to Schedule V, they will be subject to the GST. However, as mentioned earlier, if a taxable advertising service is provided by XXXXX to a non-resident person that is not registered for the GST, that service will be zero-rated pursuant to section 8 of Part V to Schedule VI.
XXXXX will be entitled to claim input tax credits for the GST paid on its purchases to the extent that these purchases are acquired for the purpose of making taxable supplies (including zero-rated supplies).
D. Events, Trade Shows and Publications with Partners
Ruling Requested:
11) What supplies are being made by XXXXX when it provides breakfasts and trade shows and develops promotional materials? Is XXXXX entitled to claim full input tax credits for the GST paid on purchases related to this activity?
Ruling Given
In this situation, XXXXX plans the event or promotional material, attracts interested partners, enters into agreements, acquires the necessary elements (rooms, meals, utilities, publications), invites the target audience and then invoices the partners for a portion of the total cost.
Travel agents and other interested persons attending the events receive free meals, listen to presentations, obtain promotional material at no cost, etc.
In our view, this activity involves the following:
• taxable supplies of the service of arranging and coordinating the event provided by XXXXX to its partners and
• exempt supplies of admissions made for no consideration to the attendees.
Accordingly, this organization will be required to use a reasonable apportionment method in order to allocate expenditures incurred with respect to this activity. The portion of the total cost of the activity that is invoiced by XXXXX to its partners represents consideration for a taxable service. Input tax credits may be claimed to the extent that purchases acquired by XXXXX can be linked to the making of this supply.
E. Expenditures with no Offsetting Revenue
Ruling Requested
12) Are miscellaneous giveaways, such as umbrellas or cardboard cutouts and loans or giveaways of videos and slides exempted by section 10 of Part VI to Schedule V?
Ruling Given
Miscellaneous giveaways by XXXXX are exempted by section 10 of Part VI to Schedule V; therefore, no input tax credits may be claimed in respect of the GST paid for their acquisition.
The rulings provided in this letter are subject to the general limitations and qualifications outlined in GST Memoranda Series, Section 1.4. We are bound by these rulings provided that none of the above issues is presently under audit, objection or appeal, that there are no relevant changes in the future to the ETA and provided that you have fully described all necessary facts and transactions for which you have requested a ruling.
Also, proposed or future amendments may result in changes to the interpretations provided in this letter. These comments are not rulings and in accordance with the guidelines set out in the memorandum indicated above, do not bind the Department with respect to a particular situation.
If you have any questions or would like to discuss these matters further, please contact me at (613) 952-6761.
Yours sincerely,
Elaine Bonnah
Policy Officer
Public Service Bodies and Governments
GST Rulings and Interpretations
Leg. Ref. ss. 123(1), s. 169, s. 6 and 10 of Part VI to Schedule V and s. 8 of Part V of Schedule VI.
| c.c.: |
J.A. Venne
J. Houlahan
E. Vermes
XXXXX
Subject File |
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