6 February 2001 GST/HST Interpretation 30982 - Interpretation of Paragraph 1(d) of Part V.1 of Schedule V to the ETA

Dear XXXXX

Thank you for your letter of April 20, 2000 concerning the interpretation of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a supply of advertising services by a charity.

All statutory references are to the Excise Tax Act (RSC 1985, Chapter E-15, as amended.) unless otherwise noted.

Background

Our understanding of the facts is as follows:

1. An organization (charity) is a "registered charity" as defined in the Income Tax Act (RSC 1985, Chapter 1 (5th Supplement), as amended.), and is thus a "charity" (Subsection 123(1).), as defined for GST/HST purposes.

2. The charity produces a magazine for sale by subscription to individuals in Canada. The subject matter of the magazine relates to XXXXX[.]

3. The charity treats the sales of magazines as taxable under paragraph 1(d) of Part V.1 of Schedule V as the supply by way of sale of new goods.

4. The charity sells advertising space in the magazine to Canadian advertisers. The advertisers may or may not be subscribers to the magazine.

5. The charity also treats the supply of advertising as taxable.

6. The sole purpose of the charity is to produce and sell the magazine. Other minor sources of revenue include donations and interest income.

Interpretation Requested

That the supply of advertising services by a charity to Canadian residents in a magazine produced and sold by that charity, where the sole purpose of the charity is the production and sale of the magazine, is a taxable supply for GST/HST since paragraph 1(d) of Part V.1 of Schedule V applies.

Interpretation Given

Based on the information provided, it is our view that the supply by a charity to Canadian residents of advertising services in a magazine produced and sold by that charity, is an exempt supply and is not covered by the exclusion in paragraph 1(d) of Part V.1 of Schedule V.

Explanation

Subsection 165(1) provides that GST is payable by the recipient of a "taxable supply". A "taxable supply" (Subsection 123(1).) is defined to mean a supply that is made in the course of a "commercial activity". "Commercial activity" (Subsection 123(1).) is defined, in part, as a "business" (Subsection 123(1).) ("includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit ...") carried on by a person, except to the extent to which the business involves the making of "exempt supplies".

An "exempt supply" (Subsection 123(1).) is defined to mean a supply included in Schedule V. The opening words of paragraph 1 of Part V.1 of Schedule V read (emphasis added):

A supply made by a charity of any property or service, but not including...

The general rule is that all supplies made by a charity are exempt unless specifically excluded in paragraphs 1(a) to (m) of Part V.1 of Schedule V. (Although not applicable in this case, we note that where a supply is excluded from section 1 of Part V.1 of Schedule V, it may fall under another exempting provision in Schedule V.) Thus, the supply of advertising services by a charity to a Canadian resident is exempt unless the supply is described in one of these paragraphs.

You have suggested that paragraph 1(d) of Part V.1 of Schedule V can be interpreted to include the supply of advertising services by a charity to Canadian residents where the magazine is produced and sold by that charity, on the basis that the supply of advertising services is "in respect of" the supply of the magazine.

The relevant part of paragraph 1(d) of Part V.1 of Schedule V excludes from the general exemption (emphasis added), a supply of:

tangible personal property that was acquired, manufactured or produced by the charity for the purpose of making a supply of the property ..., or any service supplied by the charity in respect of such property, ...

It is the Canada Customs and Revenue Agency's (CCRA's) position that paragraph 1(d) of Part V.1 of Schedule V does not support the interpretation you have proposed. The phrase "any service supplied by the charity in respect of such (tangible personal) property" contemplates the provision of two related supplies to one recipient. In the facts provided, it is our understanding that the recipient of the supply of the magazine and the recipient of the advertising services are usually not the same person.

Further, it is our view that the guidelines in Policy Number P-169: Meaning Of "In Respect Of" For The Purposes Of Sections 7 and 23 of Part V of Schedule VI (January 25, 1995.) (P-169), and in GST/HST Memorandum Series 4.5.3: Exports - Services and Intellectual Property ( June 1998.), have not been satisfied for reasons discussed below.

Memorandum 4.5.3 and P-169 (CCRA Policy) set out detailed guidelines for determining whether a service and property are "in respect of" each other for the purposes of paragraphs 7(b) and (c) of Part V of Schedule VI and paragraphs 23(b) and (c) of Part V of Schedule VI. These guidelines are equally applicable to the interpretation of paragraph 1(d) of Part V.1 of Schedule V.

CCRA Policy states that there must be more than a mere indirect or incidental connection between a service and the underlying tangible personal property before the supply of a service "in respect of" tangible personal property will be included in the taxable status. Whether the relationship between the service and the property is sufficiently direct to be "in respect of" property will depend on the particular circumstances of each case.

The specific guidelines identified in CCRA Policy to help in determining whether the connection between the service and the tangible personal property is sufficient for the service to be "in respect of" the property consists of two questions:

•   Is the service designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property?

•   Is the relationship between the purpose or objective of the service and the property reasonably direct?

Is the service designed, developed or undertaken to fulfill or serve a particular need or requirement arising from or relating to the property?

In our view the supply of advertising services in the magazine was not developed to serve a particular need or requirement arising from or relating to the magazine. The "need or requirement" must be linked to the tangible personal property. It is insufficient to state that the service generates revenue for the production of the tangible personal property.

The following are examples of services which the CCRA would generally consider to be "in respect of" tangible personal property:

(a) services physically performed on the tangible personal property;

(b) services that enhance the value of the property or affect the nature of the property, or protect or secure the property; or

(c) services related to transfers of, security interests in, or title issues pertaining to, the tangible personal property.

The supply of advertising services in a magazine clearly does not fall in any of these categories. Neither does the supply of advertising services fall within the types of services identified.

Is the relationship between the purpose or objective of the service and the property reasonably direct?

This guideline involves determining the purpose or objective of the service.

The purpose or objective of a service may often be determined by examining a written contractual agreement for the supply between the supplier and the recipient of the service. We have not been provided with a copy of this contract, or other documentation such as purchase orders, correspondence between the parties or invoices or receipts. It is reasonable to assume that separate invoices would be issued in respect of the supply of advertising services and supply of the magazine, even where a particular subscriber also advertises in the magazine.

You state that the "objective of the advertising is to allow groups and individuals to advertise products and services that would be of particular interest to readers of the magazine. Without the magazine, the advertising would be far less effective if placed elsewhere."

In summary, it is our view that the relationship between the purpose of the advertising service and the supply of the magazine is not reasonably direct.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

If you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-0329.

Yours truly,

Aurelia I. Mauro
Charities, Non-Profit Organizations and Educational Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate