18 July 2002 GST/HST Interpretation 39345 - GST/HST on Supplements

Dear XXXXX:

This letter is in response to your email of XXXXX, to Mr. John Bain of the Department of Finance wherein you requested confirmation of the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by XXXXX.

XXXXX is a multi-level marketing company which supplies supplements. You have made the following queries with respect to the application of GST/HST to supplies of supplements in Canada.

Interpretation Requested

1. Are nutritional supplements in capsule form subject to GST/HST?

2. Are nutritional supplement-drink mixes for human consumption subject to GST/HST?

3. Are sales aids (e.g., brochures/audios/videos) used by distributors to promote their business subject to GST/HST?

4. Is PST calculated on GST included prices?

5. Is shipping and handling included in the price before GST/HST is added?

6. Is GST/HST applicable without PST and vice versa?

Interpretation Given

1. Are nutritional supplements in capsule form subject to GST/HST

2. Are nutritional supplement-drink mixes for human consumption subject to GST/HST??

A supply 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) is zero-rated (i.e., taxed at a rate of 0%) pursuant to section 1 of Part III of Schedule VI to the Excise Tax Act (ETA). Certain food or beverages (e.g., carbonated beverages) are taxable at 7% (or 15% if made in a province participating in the Harmonized Sales Tax) because they are excluded from zero-rating by paragraphs 1(a) to 1(r) of Part III.

It should be noted that products which qualify and are labelled as "nutritional supplements" or "meal replacements" pursuant to the Food and Drugs Act and Regulations are considered food or beverages for purposes of section 1 of Part III of Schedule VI to the ETA. Moreover, they are not subject to the exclusions under paragraphs 1(a) to 1(r) of Part III and, therefore, are zero-rated.

The terms "food" and "beverage" are not defined in the ETA. The CCRA considers that a product is a food or a beverage if an average consumer would recognize and purchase the product as a food or beverage in the ordinary course of buying basic groceries. Put differently, products would be considered food or beverage if they would be consumed by an average consumer at times when food or beverages are typically consumed, such as at mealtimes or for a snack. Products that meet special dietary needs of certain segments of the population such as those with restricted or special purpose diets, high performance athletes and dieters may not necessarily be viewed by the average consumer as food or beverages. In addition, individual preferences for, or dislikes of, certain products would not alter the general perception that a product was, or was not, a food or beverage.

Consumers usually consume food for enjoyment or to allay hunger, while beverages are usually consumed for enjoyment or to quench thirst. That is, 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. Therefore, products that are labelled, packaged 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. Rather, these products are represented as being for another purpose. For this reason, products in pill, tablet, or capsule format are not commonly regarded as "food" as they are not products that an average consumer would purchase in the course of buying food or beverages.

Furthermore, the CCRA considers a product to be an ingredient if an average consumer would recognize the product as an ingredient used in food or a beverage, and it is the view of the CCRA that an average consumer would consider a product to be an ingredient if the product added to the flavour, texture or appearance of the final product; that is, if it was integral to the final product. As with food and beverages, it is also recognized that products that are consumed for their therapeutic, preventative, or performance or physique enhancing properties would not be recognized by an average consumer as ingredients. Moreover, in order to be regarded as an ingredient to a food or beverage, the final product, in and of itself, would be considered to be a food or beverage by the average consumer.

Finally, a product that is marketed for its beneficial effects, and that is added to a food or beverage simply as a means of consuming it, would not be considered by an average consumer as an ingredient simply because it is ingested in this manner

If a product's tax status is in doubt, the CCRA will consider the manner in which the product is labelled, packaged, and marketed when determining its tax status. The following are some of the factors considered by the CCRA when determining whether a product would be considered food, beverage or ingredient, by an average consumer:

•   the product is labelled as a 'supplement', 'dietary supplement', 'food supplement' or similar terminology (Note that this factor does not apply to products that are labelled in accordance with the Food and Drugs Act as "nutritional supplements".)

•   this may be an indication that the product is consumed for the purpose of enhancing or improving a person's state of health and not as a food, beverage or an ingredient;

•   there are claims of a therapeutic or preventative effect, enhanced mental or physical performance, enhanced physique or weight loss specific to the product - this is indicative that the product is consumed for another purpose and not as a food, beverage or an ingredient;

•   emphasis is placed on the purity or superior quality of a particular nutrient and there is a related therapeutic or beneficial health effect, or enhanced performance linked to that nutrient - this is an indication that the product is not food, beverage or an ingredient;

•   there are restrictions or recommendations as to the consumption of the product (e.g., consumed with specific frequencies, quantities or dosages) - this is an indication that the product is not food, beverage or an ingredient;

•   there are warnings on the product label as to who should not consume the product (e.g. not recommended for pregnant women, or children) - indicative of a product that an average consumer would not normally consider to be a food, beverage of or an ingredient.

3. Are sales aids (e.g., brochures/audios/videos) used by distributors to promote their business subject to GST/HST?

Generally, a supply of sales aids is a taxable supply. If the supplier of the sales aids qualifies and applies pursuant to the ETA, to be a direct seller, then there are special rules in respect of the supply of the sales aids. Please find enclosed Chapter 14.1 of the GST Memoranda Series, which provides information about the application of the tax for direct sellers.

4. Is PST calculated on GST included prices?

As indicated in my acknowledgement email to you, queries regarding the application of provincial sales tax should be directed to the provincial sales tax office except for the harmonized provinces of Newfoundland and Labrador, Nova Scotia, and New Brunswick, where the HST has replaced the provincial sales tax.

Note, the GST/HST is applicable on the total value of the consideration for a supply excluding taxes.

5. Is shipping and handling included in the price before the GST/HST is added?

If a supplier sells goods and delivers them directly to a customer at a price that includes the delivery, and the terms of sale are FOB the customer's premises (i.e. title to the goods passes when the customer receives them), GST or HST applies to the full price charged for the goods at the appropriate tax rate:

•   15% in the participating provinces of Nova Scotia, New Brunswick and Newfoundland and Labrador;

•   7% elsewhere in Canada; or

•   0% for zero-rated goods, regardless of where the supply is made.

The supplier is not regarded as making a separate supply of freight transportation service in these circumstances, even where a delivery charge is itemized separately on an invoice.

If goods are sold FOB the vendor (i.e., title to the goods passes when the goods are given to the carrier), the delivery service is regarded as being a separate supply, and GST or HST applies separately to the service. This means that, even if the goods are zero-rated, such as basic groceries, the delivery charge is taxable at 7% (or 15% if the goods are delivered to a participating province), unless the freight transportation service is itself zero-rated.

6. Is GST/HST applicable without PST and vice versa?

Please see the response to question 4 above.

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.

Should you require clarification on the above matter, please do not hesitate to contact me at (613) 952-8530. For other queries related to the GST/HST, contact the Windsor Tax Service Office - 185 Ouellette Avenue, P.O. Box 1655, Windsor ON, N9A 7G7, the telephone number for that office is (519) 252-4705.

Yours truly,

Dwayne Moore
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate