Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-173

Date of Issue

March 1, 1995

Subject

Section 9 of Part V of Schedule VI to the Excise Tax Act (the Act) zero-rates supplies of advisory, consulting or research services made to non-residents in specified circumstances. This paper focuses on those situations where the services are "intended to assist the (non-resident) person in...establishing a business venture in Canada."

Legislative Reference

Section 9 of Part V of Schedule VI to the Excise Tax Act

National Coding System File Numbers

11640-3

Effective Date

January 1, 1991

Text

Issues and Decisions

In order to determine the scope of relief under section 9 of Part V of Schedule VI to the Act, four questions must be addressed:

a) What is the meaning of the phrase "advisory, consulting or research service"?

Only advisory, consulting and research services are zero-rated under section 9 of Part V of Schedule VI to the Act. The terms "advisory" and "consulting" are discussed in paragraph 92 of GST Memorandum 300-3-5 for purposes of sections 7 (prior to amendment by Bill C-112) and 9 of Part V of Schedule VI to the Act. These definitions continue to be applicable for purposes of this policy. The term "research" was not discussed in the memorandum.

In the absence of a legislative definition, the word "research" should be given its ordinary meaning. The term generally imports a diligent and systematic inquiry or investigation into a subject in order to discover or revise facts, theories, applications, laws, etc.

Further, advisory, consulting and research services are, by their nature, preliminary services which help lay the ground-work for future endeavours. As discussed in paragraph 92 of GST-Memorandum 300-3-5, an "advisory" or "consulting" service does not include any work (i.e., implementation services) that might be undertaken or performed as a result of the plans or recommendations accepted by the non-resident client or the advice provided to the client. Similarly, a research service does not include any work that might be undertaken or performed as a result of the plans and recommendations which may follow the inquiries and investigations performed in the course of rendering the research service.

There may be situations where the plans or recommendations contained in the advisory, consulting, or research report are to undertake further advisory, consulting or research studies -- e.g. a preliminary feasibility study leading to formulation of a detailed implementation plan. The second-level study would continue to be zero-rated under section 9 of Part V of Schedule VI provided the study is intended to assist the non-resident in establishing a business venture in Canada. If the action recommended is not to undertake further advisory, consulting or research services or if the business has been established, then the services would not be zero-rated under section 9 of Part V of Schedule VI.

b) What is the meaning of the phrase "intended to assist"?

The services must be intended to assist the non-resident person in establishing a business venture in Canada. It should follow that the non-resident person must intend to establish a business venture in Canada when the supply of the service is made.

However, if the non-resident ends up not establishing a business venture in Canada, this would not change the tax status of the supply provided the non-resident establishing a business venture in Canada at the time the supply was made was reasonably interested and not unduly vague.

c) What is the meaning of the phrase "business venture"?

Business:

Subsection 123(1) of the Act defines "business" as including "a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, license or similar arrangement, but does not include an office or employment."

GST-Memorandum 200-1-1, entitled "Carrying on Business in Canada" states that "business" is defined by reference to what it includes and is not limited to the examples listed in this definition, and encompasses the commonly accepted meaning of a business. The policy statement "Meaning of the First Part of the Definition of Business" provides a more complete explanation of what is meant by "business" for the purposes of the Act. A second policy statement on the second part of the definition is also being developed.

A non-resident need not, however, intend to establish a "commercial activity." A non-resident who intends to establish, for example, a financial institution that will make principally exempt supplies in Canada, may be able to take advantage of section 9 of Part V of Schedule VI so long as the financial institution meets the definition of a "business" for the purposes of the Act.

Venture:

The word "venture" is not defined in the legislation. Where words or terms are not defined in the statute itself or in the Interpretation Act, they may be given their common, ordinary meaning.

The word "venture" is often associated with the notions of "risk" and "uncertainty". The term is generally defined as an undertaking involving risk and uncertainty as to the outcome.

Business Venture:

The qualification of "business" by the addition of the term "venture" in section 9 of Part V of Schedule VI may convey the notion of a higher degree of risk and uncertainty that would not otherwise be imparted if the legislators had merely used the phrase "establishing a business in Canada."

However, the term "business venture" should not be interpreted more narrowly than "business." In effect, activities or undertakings included in the definition of "business" in subsection 123(1) would also be considered activities or undertakings in the course of a "business venture." It is the Department's view that the addition of the term "business venture" extends relief under section 9 of Part V of Schedule VI, to certain services acquired prior to the actual commencement of the intended business activities, that is, the period at the outset when uncertainty is at its greatest.

d) What is the meaning of the phrase "establishing a business venture in Canada"?

The phrase"establishing a business venture in Canada"extends to situations where the non-resident intends to acquire the assets of an existing Canadian business (or part of an existing Canadian business) as well as to situations where the non-resident intends to start a new business in Canada. The phrase does not extend to situations where the non-resident intends to acquire management and control of an existing corporation through the acquisition of shares. (In the case of advisory, consulting and professional services relating to the acquisition of equity in a company, section 23 of Part V of Schedule VI may apply to such services.)

SAMPLE RULINGS

Sample Ruling #1

Our understanding of the facts are as follows:

Facts

1. ShoeCo, a retail shoe store is for sale.

2. ShoeCo is operated as a sole proprietorship by Mr. S.

3. Ms. N., an unregistered non-resident, is considering purchasing the assets of the business, consisting of the real property and store fixtures. No sale inventory or goodwill will be sold.

4. Ms. N. is considering operating a pet food store from the particular location.

5. Prior to making an offer to purchase certain of the assets of the business Ms. N. contracts with a Canadian registrant, MarketCo, to undertake a market survey to determine the likelihood of the new business being successful.

Ruling Requested

Is the supply of the service of conducting the market survey made to Ms. N. zero-rated under section 9 of Part V of Schedule VI to the Act?

Ruling Given

The supply of the service is zero-rated pursuant to section 9 of Part V of Schedule VI to the Act as "a supply made to a non-resident person of an advisory, consulting or research service that is intended to assist the person in...establishing a business venture in Canada."

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. We are bound by this ruling provided none of the issues above is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and you have fully described all necessary facts and transactions for which you requested a ruling.

Sample Ruling #2

Our understanding of the facts are as follows:

Facts

1. A non-resident individual, Ms. H., signs an "Offer to Purchase" to purchase a small hobby craft store in a Canadian border town, conditional upon the viewing (and analysis) of the financial statements of the present proprietor.

2. She has indicated that if she purchases the store, she will continue to operate the enterprise as a hobby craft store.

3. Prior to finalizing the offer to acquire the assets of the store from the current owner, she consults with a Canadian accountant to determine if the purchase of the business assets would be a good investment.

Ruling Requested

Are the services of the accountant zero-rated under section 9 of Part V of Schedule VI to the Act?

Ruling Given

The supply of the services is zero-rated pursuant to section 9 of Part V of Schedule VI to the Act.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. We are bound by this ruling provided none of the issues above is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and you have fully described all necessary facts and transactions for which you requested a ruling.

Sample Ruling # 3

Our understanding of the facts are as follows:

Facts

1. A U.S. advertising company, Kruks Inc., is planning to establish a new advertising business in Canada. The advertising company is not registered for GST and does not have a place of business in Canada.

2. The company now has Canadian clients, but all business is conducted in the USA and Kruks Inc. is not considered to be doing business in Canada.

3 Kruks Inc. will incorporate this business in Canada (separate from its own corporation) before the actual commencement of business operations.

4. Operations will begin approximately 6-8 months after incorporation.

5. Before incorporating the subsidiary it acquires the services of a business research company, Guess, Fuor, and Yu (GFY), to study the steps necessary for, and implications of, incorporation in Canada.

6. GFY will bill Kruks Inc. in the U.S. for their services, which will be completed before Kruks Inc. incorporates the Canadian subsidiary.

Ruling Requested

Is the service of the research company to the non-resident zero-rated under section 9 of Part V of Schedule VI to the Act?

Ruling Given

The supply of the research service is zero-rated under section 9 of Part V of Schedule VI to the Act..

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. We are bound by this ruling provided none of the issues above is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and you have fully described all necessary facts and transactions for which you requested a ruling.

Sample Ruling #4

Our understanding of the facts are as follows:

Facts

1. A European consortium (the Consortium) is interested in expanding its product sales into Canada. It has researched the market in Canada and found that there is a demand for its products. The Consortium is registered for GST as a non-resident of Canada.

2. It is now making supplies (i.e., carrying on business) in Canada

3. It has now hired an advisor to determine what type of presence they should have in Canada; whether it should incorporate as a separate subsidiary company, form a joint venture or a partnership with an existing Canadian company, or open a branch office (i.e., maintain a permanent establishment) and continue doing business in Canada through the permanent establishment.

4. The advisor will complete her report before the Consortium finalizes any establishment in Canada.

5. Although the type of presence is dependent upon the advisor's report, the Consortium intends to begin to acquire the necessary plant (real property) and equipment (tangible personal property). It is unknown at this point if the Consortium will have acquired any real property or have a fixed place of business in Canada before completion of the advisor's report. Regardless, no supply will be made through this establishment until the type of business establishment (presence) is determined.

Ruling Requested

Is the service of the advisor investigating and determining the appropriate presence in Canada made to the non-resident European consortium zero-rated under section 9 of Part V of Schedule VI to the Act?

Note: This ruling is requested as it is the Consortium's view that section 9 is not limited to non-residents not doing business in Canada. Even if the Consortium purchased real property in Canada, it is the Consortium's view that it would not be considered resident under subsection 132(2) of the Act since no supply will be made through the property at that point in time.

Ruling Given

The supply of the advisory services is zero-rated pursuant to section 9 of Part V of Schedule VI to the Act.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. We are bound by this ruling provided none of the issues above is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and you have fully described all necessary facts and transactions for which you requested a ruling.

Sample Ruling #5

Our understanding of the facts are as follows:

Facts

1. The European consortium, mentioned in Sample Ruling #4, has decided to set up and incorporate their operations in Canada as a separate subsidiary company, CanEuro Ltd.

2. CanEuro Ltd. has purchased a distribution warehouse and set up a temporary office.

3. The Consortium and CanEuro Ltd. are now using the services of a lawyer, S. Doug-Arey & Co., to work on various agreements to enable the distribution of their product (e.g., transfer license and patent agreements, change existing contracts signed by the Consortium to CanEuro Ltd., etc.)

4. Ms. Doug-Arey bills the Consortium and CanEuro Ltd. separately. To keep any conflict of interest as low as possible, each company's portfolio is handled by separate partners.

Ruling Requested

Are the services of the S. Doug-Arey & Co. zero-rated under section 9 of Part V of Schedule VI to the Act?

Ruling Given

The supply of the services of S. Doug-Arey & Co. to CanEuro Ltd. is not zero-rated under section 9 of Part V of Schedule VI to the Act.

The supply of the services of S. Doug-Arey & Co. to the Consortium is zero-rated under section 23 of Part V of Schedule VI to the Act.

These rulings are subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. We are bound by these rulings provided none of the issues above is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and you have fully described all necessary facts and transactions for which you requested a ruling.

Rationale

1. CanEuro Ltd. is a resident in Canada and not eligible for the provisions of section 9.

2. The services of the law firm are not being used by the Consortium to assist it in taking up residence or establishing a business venture and therefore they do not qualify under section 9.

3. These services to the Consortium, though, would qualify under section 23 of Part V of Schedule VI as professional services (that are not subject to the exclusions listed in paragraphs (a) to (d)).

Sample Ruling #6

Our understanding of the facts are as follows:

Facts

1. An American company that holds a 10% in the shares of an existing Canadian corporation receives and offer from the other 90% shareholder to sell the 90% holding.

2. The Canadian corporation is classified as a Canadian Controlled Private Corporation

3. The Canadian corporation, although presently operating, is in trouble financially. The American corporation hires a Canadian advisor to determine if the price for the shares is a realistic value, and whether or not there is potential to turn around the Canadian corporation's fortune if the American company acquires management and control.

Ruling Requested

Are the services of the Canadian advisor zero-rated pursuant to section 9 of Part V of Schedule VI to the Act?

Ruling Given

1. The advisory services supplied by the Canadian advisor are not zero-rated under section 9 of Part V of Schedule VI to the Act. These services are zero-rated under section 23 of Part V of Schedule VI to the Act.

This ruling is subject to the general limitations and qualifications outlined in the GST Memoranda Series 1.4. We are bound by this ruling provided none of the issues above is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and you have fully described all necessary facts and transactions for which you requested a ruling.

Rationale

The services provided by the Canadian advisor are not intended to assist the American company in establishing a business venture in Canada. The services are intended to assist the American company acquiring management and control of an existing Canadian corporation.