Meaning of in Respect of Real Property Situated in Canada and in Respect of Tangible Personal Property that is Situated in Canada at Time the Service is Performed, for Purposes of Schedule VI, Part V, Sections 7 and 23 to the Excise Tax Act

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-169R

Date of Issue

January 25, 1995
Revised May 25, 1999

Subject

Meaning of "in respect of real property situated in Canada" and "in respect of tangible personal property that is situated in Canada at the time the service is performed", for purposes of Schedule VI, Part V, sections 7 and 23 to the Excise Tax Act

Legislative Reference(s)

Schedule VI, Part V, paragraphs 7(b) and 7(c) to the Excise Tax Act (Act), applicable to supplies of services the performance of which began prior to June 10, 1993, and Schedule VI, Part V, paragraphs 7(d), 7(e), 23(b) and 23(c) to the Act, applicable to supplies of services the performance of which began on or after June 10, 1993.

Subsection 123(1) of the Act: definitions of "property", "personal property" and "real property".

National Coding System File Number(s)

11640-3

Effective Date

January 1, 1991

Text

Issue and Decision:

The purpose of this policy statement is to expand on the guidelines contained in Section 4.5.3 (Exports - Services and Intellectual Property) of the GST/HST Memoranda Series, concerning the meaning of the phrase "in respect of".

That section mentions the need to determine whether the direct object of the service is the property. This policy statement sets out more detailed guidelines which may be applied by the Department to specific fact situations in determining whether a service and property are "in respect of" each other for purposes of Schedule VI, Part V, paragraphs 7(b) and 7(c) to the Act as they applied prior to June 10, 1993, and Schedule VI, Part V, paragraphs 7(d), 7(e), 23(b) and 23(c) to the Act, as they apply on or after June 10, 1993.

These paragraphs all provide that services "in respect of" tangible personal property or real property are excluded from zero-rating.

Decision:

For purposes of the aforementioned paragraphs in Schedule VI, Part V to the Act, the Department's administrative position is that there must be more than a mere indirect or incidental nexus or connection between a service and the underlying real or tangible personal property, before the supply of the service will be excluded from zero-rating.

Whether the relationship between the service and the property is sufficiently direct for the service to be considered by the Department to be "in respect of" the property will depend on the particular circumstances of each case.

The following guidelines will be applied by the Department to aid in the determination of whether the connection between the service and the real or tangible personal property is sufficiently direct for the service to be "in respect of" the property for purposes of Schedule VI, Part V, sections 7 and 23:

a) Was the service designed, developed or undertaken to fulfil or serve a particular need or requirement arising from or relating to the property? This guideline involves determining the purpose or objective of the service. The purpose or objective of the service may often be determined by examining a written contractual agreement for the supply between the supplier and the recipient of the service in order to ascertain whether the supply is zero-rated under the Act.

If there is no formal written agreement, other documentation, such as purchase orders, correspondence between the parties or invoices or receipts may be useful in establishing the purpose or objective of the service.

It is important that the supplier's understanding of the purpose or objective of the service, as reflected in the contractual agreement with the non-resident customer, be taken into consideration. The supplier's perspective is important because it is the supplier who must determine whether the supply is zero-rated or whether to collect the GST/HST on the supply.

b) Is the relationship between the purpose or objective of the service and the property reasonably direct? The relationship between the service and the real or tangible personal property must be more direct than indirect in order for the service and the property to be considered by the Department to be "in respect of" each other. If some object comes between the service and the property, the connection becomes increasingly remote.

Consistent with the information contained in Section 4.5.3 of the GST/HST Memoranda Series, a service and property would generally be regarded as being "in respect of" each other pursuant to the above guidelines if the purpose of a service is to:

a) physically count the property;

b) appraise or value the property;

c) physically protect or secure the property; or

d) enhance the value of the property.

Similarly, if the service is aimed at effecting or dealing with the transfer of ownership of, claims on or rights to the property, or determining title to the property, the service will generally be regarded as "in respect of" the property.

SAMPLE RULINGS

A. SUPPLY OF A SERVICE RELATING TO AN INSURANCE POLICY

1. Interpretation of a clause in an insurance policy

Statement of Facts

1. A Canadian company acquired an insurance policy, issued by a non-resident insurance company, on tangible personal property that is situated in Canada.

2. The property was damaged but the non-resident insurance company refused to pay the claim because, in its view, the event that gave rise to the damages was not a risk covered by the policy.

3. The Canadian company sued the non-resident insurance company for refusal to abide by the contract of insurance.

4. On June 10, 1998, the non-resident insurance company retained a GST/HST-registered Canadian lawyer to represent its case.

5. The legal services ranged from providing a legal opinion as to whether the risk was covered by the policy, to conducting the insurer's defence in the litigation.

Ruling Given

The supply of the legal service was zero-rated pursuant to Schedule VI, Part V, section 23 to the Act.

Rationale

The non-resident insurance company acquired the services of legal counsel to establish that it did not have to pay the claim. In addition, the claim would not have arisen had property not been damaged. Also, the circumstances in which the property was damaged may be subject to dispute. Consequently, it could be argued that the service was undertaken as a result of a need or requirement of the insurance company arising from and relating to the property.

However, the service of providing a legal opinion or of litigating the issue arose because of a dispute surrounding the interpretation of the insurance policy and the question of the insurance company's liability to pay the claim under the terms of the policy. The purpose of the service was more closely related to the insurer's objective of not being liable to pay a claim under the policy than to a need or requirement relating to the property. The service was not directly connected to the property. Consequently, although there was a connection between the service and the property, the relationship was not direct in the circumstances.

2. Appraisal services

Statement of Facts

1. On November 4, 1998, a non-resident insurance company received a claim for damages to tangible personal property. The claim was made by an insured individual who ordinarily resides in Canada.

2. The damages were caused as a result of an accident which occurred in Canada.

3. On November 15, 1998, the non-resident insurance company hired a GST/HST-registered Canadian independent appraisal company to investigate and recommend the appropriate amount of compensation in satisfaction of the claim arising under the insurance policy.

4. The tangible personal property was situated in Canada throughout the time the service was performed.

Ruling Given

The supply of the service was not zero-rated under section Schedule VI, Part V, section 7 to the Act because of the exclusion in paragraph 7(e).

However, the appraisal service was considered to be a financial service pursuant to paragraph 123(1)(j) of the Act of the definition of a "financial service", and was an exempt supply pursuant to Schedule V, Part VII, section 1 to the Act.

Rationale

The purpose of the service was to examine the property and establish an estimate of the cost of repairing the property in order that the insurer could pay the appropriate compensation to the insured. The service was designed, developed and undertaken to meet a particular need or requirement arising from and relating to the damaged property. Also, the connection between the service and the property was direct rather than indirect.

B. SUPPLY OF A COLLECTION SERVICE

1. Collection of a debt - General

Statement of Facts

1. On June 22, 1998, a non-resident retains a Canadian GST/HST-registered lawyer to recover payment for a debt incurred by a Canadian resident in 1997.

2. The debt arose as a result of the sale of tangible personal property situated in Canada.

3. The debt was not secured by either the property that was sold or any other property.

4. The debt was recovered as a result of a series of telephone calls and demand letters sent by the lawyer to the debtor.

Ruling Given

The supply of the legal collection service was zero-rated pursuant to Schedule VI, Part V, section 23 to the Act.

Rationale

The debt would not have arisen and the lawyer's services would not have been undertaken, had the property not been sold to the Canadian resident. Accordingly, there was a connection between the service and the property because the service was undertaken to meet a particular need arising from or relating to the sale of the property.

However, the more direct connection was between the service and the debt. The connection between the service and the property was only indirect.

2. Collection of a debt - Litigation services

Statement of Facts

1. On July 10, 1997, a non-resident company sold tangible personal property to a Canadian company.

2. The Canadian company defaulted on the payment for the property.

3. On September 15, 1997, the non-resident company hired a GST/HST-registered lawyer in Canada whom it instructs to commence a civil suit to establish the liability of the Canadian company and to recover the amount of the debt through the courts.

4. The property was situated in Canada at that time.

Ruling Given

The supply of the legal service was zero-rated pursuant to Schedule VI, Part V, section 23 to the Act.

Rationale

The debt would not have arisen and the lawyer's services would not have been undertaken had the property not been sold to the Canadian resident. There was a relationship between the service and the property because the service was undertaken to meet a particular need arising from the sale of property.

However, the service was undertaken to collect a debt. Consequently, the connection between the service and the property was not direct.

It was not the property but the debt and the issue of liability at law which were the focus of the legal service.

3. Collection of a debt - Garnishment of the debtor's salary

Statement of Facts

1. On February 1, 1998, a non-resident company sold tangible personal property to a Canadian resident individual. The individual imported the property into Canada on February 9, 1998.

2. The individual defaulted on the payment for the property.

3. On July 10, 1998, a court ruled that the individual was liable for the debt and ordered him to pay the amount due.

4. Six months after the court judgement was issued, the non-resident still had not received any portion of the amount due.

5. On January 18, 1999, the non-resident company engaged a GST/HST-registered lawyer in Canada to recover the debt. The lawyer filed an Affidavit of Garnishee with the court so the court could issue a garnishee on the salary of the debtor and/or other monetary assets belonging to the debtor.

Ruling Given

The supply of the service was zero-rated pursuant to Schedule VI, Part V, section 23 to the Act.

Rationale

The service of undertaking garnishment proceedings to recover a debt arose because the debtor defaulted on his loan and because a court judgement had been rendered against the debtor ordering him to pay the debt.

The relationship between the service of obtaining garnishment and the property that the individual purchased was remote rather than direct - the service was undertaken to meet a need arising from the failure of the individual to pay the debt and abide by the court's judgment.

4. Collection of a debt - Seizure of property

Statement of Facts

1. On June 10, 1997, a non-resident company sold a printing machine to a Canadian company located in Dartmouth, Nova Scotia.

2. The Canadian company defaulted on the payment for the property.

3. The non-resident company retained a GST/HST-registered lawyer in Halifax, Nova Scotia, to undertake legal action to seize specifically identified assets of the debtor. The assets were in the form of tangible personal property and were situated in Canada, but did not include the printing machine sold.

Ruling Given

The supply of the service was not zero-rated Schedule VI, Part V, section 23 to the Act because of the exclusion in paragraph 23(c).

Rationale

There was a connection between the service and the assets to be seized because the service was designed, developed and undertaken specifically in respect of identified property.

Also, the connection between the service and the property was direct - to arrange for the legal seizure of specifically identified property.

C. SUPPLY OF AUDITING SERVICES

1(A) Attest to financial statements of Canadian subsidiary of non-resident parent

Statement of Facts

1. On December 12, 1998, a Canadian GST/HST-registered public accounting firm was retained by a non-resident company that is a parent of a Canadian subsidiary.

The supply made by the accounting firm is to perform an external audit, commonly known as a financial audit, of the financial statements of the subsidiary.

2. The financial audit procedure included an inventory count, as well as an examination of company assets, liabilities, revenues and expenses. The count and the examination procedures required a tailored audit programme to meet the requirements of the auditors (i.e., to comply with generally accepted auditing standards when examining financial statements).

3. Auditors signed off on the audited financial statements when they were assured through the examination that the financial statements represented fairly the position of the company. As part of the sign-off, there must have been assurance that the physical inventory existed and that it was properly valued in accordance with generally accepted accounting principles.

Ruling Given

The supply of the financial audit service was zero-rated pursuant to Schedule VI, Part V, section 23 to the Act.

Rationale

The public accountant's responsibility was to attest to the fairness, objectivity and comparability of the financial statements and their conformity with generally accepted accounting principles for the benefit of the owners, creditors and investors of the company. The purpose of the financial audit was to express an opinion respecting amounts which appeared on the financial statements of the company, including the inventory.

A component of the financial audit consisted of counting and examining inventory. Consequently, the service was undertaken, at least in part, to fulfil a need or requirement relating to property. Therefore, a connection existed between the service and the property.

However, although an important part of the audit program, the examination of inventory was just a part of the process. Also, the purpose of the service was to express an opinion on the company's financial statements, based on generally accepted accounting principles. Therefore, the relationship between the service and the property in inventory was not direct.

1(B) Single supply of inventory count services

Statement of Facts

1. On October 27, 1998, a Canadian GST/HST-registered public accounting firm was retained by a non-resident public accounting firm to perform a count of inventory of a non-resident firm. The non-resident public accounting firm was conducting a financial audit of the non-resident company. The inventory was located in Canada.

2. The results of the inventory count conducted in Canada were considered by the non-resident public accounting firm in reaching its opinion relating to the audited financial statements of the non-resident company.

3. The inventory count consisted of physically counting the inventory and valuing the inventory, or observing the count performed by warehouse staff. In the latter case, a test count and valuation was performed.

4. The results of the inventory count conducted in Canada were considered by the non-resident public accounting firm in reaching its opinion relating to the audited financial statements of the non-resident company.

Ruling Given

The supply of the inventory count service is not zero-rated under Schedule VI, Part V, section 23 because of the exclusion in paragraph 23(c).

Rationale

The service was designed and undertaken to deal with a particular need or requirement directly relating to the inventory. The audit of inventory was specifically designed and undertaken to express an opinion on the value of the inventory for the non-resident public accountant. The auditor's task in Canada was to count - or at least observe a count - and value inventory.

The focus of the service was the inventory, consisting of tangible personal property. The relationship between the service and the property was reasonably direct.

2. Performance of an operational audit of a Canadian subsidiary of non-resident parent

Statement of Facts

1. On July 15, 1997, a Canadian GST/HST-registered public accounting firm was retained by the non-resident parent of a Canadian subsidiary to perform a managerial audit, also known as an operational audit, of the resident subsidiary.

2. The audit consisted of a review of the operating procedures and methods to evaluate the efficiency and effectiveness of the organization's policies and procedures, and to determine if controls are operating as intended.

3. The audit included an examination of the company's controls and procedures relating to inventory management.

Ruling Given

The supply of the operational audit service was zero-rated pursuant to Schedule VI, Part V, section 23 to the Act.

Rationale

In an operational audit, the organization's operating procedures and methods were reviewed for the purpose of evaluating efficiency and effectiveness of the management control system of the organization. The terms of reference included generally accepted accounting principles, standard operating procedures, company directives, etc. At the completion of the audit, a managerial audit report was prepared for management. The report provided recommendations for improvements in operations.

The operational audit included an inventory count. The inventory count and examination were undertaken, at least in part, to fulfil a need or requirement relating to property. Therefore, there was a connection between the service and the property.

However, the relationship between the operational audit service and the property was not direct. The service was not directly related to the property in inventory and the other tangible assets of the company, but rather in respect of the general efficiency and effectiveness of the company's operations. The audit of inventory and asset management practices were merely one aspect of the overall objective of the service.

3. Inventory count services of a public warehouse

Statement of Facts

1. On January 14, 1999, a Canadian GST/HST-registered public warehouse operator is asked by a non-resident to perform an inventory count service on the non-resident's inventory.

2. The non-resident's inventory is stored in a warehouse of the warehouse operator located in Canada.

3. The request to count inventory is beyond the scope of the warehousing agreement. The public warehouse operator invoices the non-resident separately for the inventory count.

Ruling Given

The supply of the service of counting inventory is not zero-rated under Schedule VI, Part V, section 7 to the Act because of the exclusion in paragraph 7(e).

Rationale

Counting the inventory is a separate supply from the overall warehousing service. The purpose of the inventory count service is to provide the recipient of the service with a report on the actual quantity of goods held in inventory.

In this situation, the service of counting inventory is undertaken to fulfil a particular need of the client arising from or relating to the property (i.e., how much inventory is on hand?). The connection between the service and the property is sufficiently direct in the circumstances.

4. Composite supply of services of public warehouse operator

Statement of Facts

1. On December 27, 1996, a Canadian GST/HST-registered public warehouse operator contracted with a non-resident to store the inventory of the non-resident in the operator's warehouse located in Canada.

2. The public warehouse will perform the following warehouse services once the goods are received in the warehouse: the goods will be inspected, counted, secured and shipped.

Ruling Given

The supply of the services is not zero-rated under Schedule VI, Part V, section 7 to the Act because of the exclusion in paragraph 7(e).

Rationale

The purpose of the supply is to ensure that, once the goods are received, they are inspected, counted, secured and subsequently shipped. The object of the services is to ensure that no errors or omissions occur which could result in a dispute between the person who holds title in the goods and the public warehouse operator.

The warehousing services are undertaken to meet requirements relating to the property. There is a direct connection between the services and the property.

5. Services rendered to a creditor

Statement of Facts

1. On August 24, 1998, a non-resident creditor retained a Canadian GST/HST-registered public accounting firm to establish the value of a potential debtor's inventory situated in Canada, so that the creditor could decide whether to extend credit. The non-resident intended to take security on the inventory if it advanced the credit.

2. The accounting firm was required to prepare documentation stating that the value of the inventory had been verified.

3. A physical count of the inventory was undertaken by the firm or an observation was performed while the debtor's warehouse employees performed the count.

Ruling Given

The supply of the service was not zero-rated under section Schedule VI, Part V, section 23 to the Act because of the exclusion in paragraph 23(c).

Rationale

The purpose of the service was to ascertain the quantity and value of the inventory for the creditor. A direct connection existed between the valuation service and the property.