The Canadian Professional Sales Association turned to Charlie Eansor, Executive Director of Commodity Tax at Ernst and Young who prepared this response:
The challenge for sales representatives when GST was first implemented in 1991 was to have their services zero-rated when provided to a non-resident client. Where services are zero-rated, no GST applies and that is particularly advantageous where the invoice is being paid by a non-resident, as many non-residents are not registered for GST and cannot claim GST back as input tax credits.
Initially, it was commonly thought a particular zero-rating provision for agents’ services applied to the services of all sales representatives. About a year and a half after the GST implementation, however, the Canada Revenue Agency (“CRA”) issued GST Memorandum 300-3-5: Exports in which it indicated that the zero-rating for agents’ services applied only to “legal” agents.
Legal agents, in the eyes of the CRA, are persons who are authorized to enter into contracts (such as sales contracts) on behalf of the client they represent. According to that interpretation, the vast majority of the services provided by sales representatives to non-residents would become taxable because most sales representatives did not have the authority to enter into contracts on behalf of their clients (and failed to qualify as legal agents).
This caused a great deal of controversy because Canadian sales representatives would become far less competitive if their non-resident clients (who could not claim input tax credits) had to pay GST on their services.
The CRA initially agreed to enforce its interpretation going forward from the date of the interpretation, and subsequently, due primarily to the efforts of the CPSA, agreed to a moratorium on assessments relating to this issue altogether. In 1996 the CPSA was ultimately able to persuade the Department of Finance to formally amend the GST legislation to allow for the zero-rating of services supplied by sales representatives to non-residents irrespective of whether or not the sales representative was a legal agent. This change was made retroactive to 1991.
So, that solved everyone’s GST problems – right? Well, it certainly opened the door for zero-rating sales representatives’ services but not as wide as some may have thought. What is zero-rated is a particular range of services typically supplied by sales representatives under a particular set of conditions. Go outside the scope of the specified services or fail to document that all of the conditions are met, and the CRA will likely be looking for tax on the transaction.
Conditions for Zero-rating
Expressed in language everyone understands, a sales representative service is zero-rated where it is provided to client outside and relates to a sale made by that client outside . For many, that is all that needs to be known. However, tax provisions are expressed in much more precise and legalistic language and, whether tax does or does not apply to a service can hinge on the nuances of that legalistic language. For this reason, the technical language of the tax provision will be used in explaining the details of the conditions necessary for zero-rating.
1. Supply to a non-resident
The first condition is that the service must be supplied to a non-resident client. Whether a client is or is not a resident of is a matter that is not determined by their mailing address. It is determined by examining a whole host of facts and applying long-established legal principles. Thankfully, for purposes of this provision, the CRA does not require the supplier to prove that its client is a non-resident. What the CRA does require is that the supplier provides evidence that its client is a non-resident and, for this purpose, will accept a written declaration by the client saying that the client is a non-resident.
2. Service of arranging for, procuring or soliciting orders
Secondly, the service rendered has to be that of “arranging for, procuring or soliciting orders for supplies made … by…” the non-resident. Typically, the principal activity of a sales representative should come within the scope of arranging for, procuring or soliciting orders for supplies made by its client.
Nevertheless, it is very common for a sales representative to undertake activities which, when viewed in isolation, are not arranging for, procuring or soliciting orders in the strict sense. Examples would include the provision of after sales support, storage or logistics services, and the collection of receivables. If such “extra” services are provided in return for the sales or commission, it is reasonable to regard them as part of or incidental to the service of arranging for, procuring or soliciting orders. However, if a separate fee or charge is made for these services, they may not qualify for zero-rating as sales representative services, and may be subject to GST.
3. Supply made to by the client outside
Finally, the service has to relate to supplies made by the non-resident outside . To know if this condition applies, a fairly intimate knowledge of the terms under which the client sells its product is required.
In the case of supplies of , supplies are made outside where the are:
- delivered by the supplier of the outside ; or,
- delivered by the supplier of the in where the supplier is a non-resident who is not registered for GST.
Exactly what is necessary to establish that the client delivers outside can vary widely from case-to-case. Where the product originates outside Canada and is shipped to a destination outside Canada, the circumstances will generally dictate that the supplier delivered the product outside Canada. Where the originates outside Canada and is shipped to a destination in Canada, the terms of sale will usually indicate the place of delivery. Ideally, the client’s sales agreements with its customers or customer invoices will specify the delivery location or quote trade terms such as “FOB (Freight on Board) Origin” or “Ex Works” that clearly denote that delivery occurred at the client’s premises outside . In the absence of such indicators, factors such as who imports the , where title transfers and who has the risk of loss while the are in transit may be helpful in determining the delivery point.
Where the client delivers in Canada, the issue can be somewhat problematic because while the CRA will generally accept that a client is a non-resident and not registered for GST based on the client’s written declaration to that effect, the CRA could question whether the client is required to register for GST, and a sales representative is generally not in a position to adequately address that issue.
Understanding and abiding by the provisions that zero-rate sales and purchasing representative services is only part of the struggle. The true test is surviving a challenge by the CRA.
For all its non-resident clients, a sales representative should have on hand copies of the non-resident declarations (as mentioned above) written agreements specifying that the service rendered is that of arranging for, procuring or soliciting orders, and documentation that the service relates to a supply made to by the client outside Canada. If evidence to this effect is missing or insufficient, the CRA will make determinations based on the available evidence and may decide that zero-rating does not apply.
The following examples have been provided to illustrate whether a sales representative’s services are zero-rated:
is located in and is a sales representative of Sturdy Steel Company of . calls on manufacturers in and around the GTA and obtains orders for Sturdy Steel from local manufacturers. Bob sends the orders to Sturdy Steel for fulfillment. Sturdy Steel sells the steel to the GTA manufacturers F.O.B Sturdy Steel’s shipping dock and the GTA manufacturers import the steel into . Sturdy Steel pays a commission to of 5% of the selling price of the steel. Is ’s commission zero-rated or does have to collect GST?
’s commission is zero-rated provided Sturdy Steel is not a resident of . The service is that of procuring orders for a supply made outside by Sturdy Steel. The CRA may require to provide evidence that Sturdy Steel is a non-resident, and that the steel were delivered outside .
is located in , and represents Generator Corp. of . makes a trip to and manages to obtain orders for Generator Corp.’s generators from a contractor in . Generator Corp. sells the generators to the contractor and pays a 7% commission on the sale.
’s commission is zero-rated provided Generator Corp. is not a resident of . In this instance, the are delivered by the supplier to the ultimate customer but, because that destination is outside , the supply by Generator Corp. is considered to have been made outside . The CRA may require to provide evidence that Generator Corp. is not a resident and that the were delivered outside .
is located in , and represents Food Company of . calls on restaurants and specialty food retailers in promoting the of Specialty, and leaves catalogues and order forms. Orders placed by the restaurants or retailers with are fulfilled by and the are sent by directly to the restaurants and retailers in Ontario FOB destination. pays Ken a commission of 10% of the sales value of the orders.
’s commission is zero-rated provided is a non-resident and is not registered for GST. Despite that the are delivered in , the fact that is not registered for GST deems the to have been delivered outside and thus make the sale of the a supply outside . The CRA may require to provide evidence that is not a resident of and is not registered for GST.
is located in , and represents an automobile parts manufacturer from . is paid a commission for sales orders he obtains for the parts manufacturer from an automobile manufacturer in based on a percentage of the selling price of the parts. Bruce also ensures that once the automobile parts are imported into Canada, they are staged properly so that the proper quantity of parts arrive at the automobile manufacturer’s premises to coincide with the manufacturer’s production schedule. charges the parts manufacturer an additional fee for the staging services.
’s sales commission is zero-rated provided the parts manufacturer is not a resident of and not registered for GST. However, ’s sequencing services are likely not zero-rated because that service is not a service of procuring orders and relates to the parts while the parts are in .
is located in , and represents a company that sells computer modems to consumers. The San Francisco-based company ships the computer modems in bulk to Ken, who stores the modems in a warehouse. When obtains a sales order for the modems from a Canadian purchaser, he ships modems from the warehouse to the Canadian purchaser, and charges the company a commission in respect of the sale.
Ken could be responsible for having to collect GST on his commissions on the basis that he is procuring orders for a supply made by the San Francisco-based company in Canada. Despite that the company may not be registered for GST, it is likely required to be registered for GST in the eyes of the CRA, because it fills Canadian sales orders from inventory maintained in . If the company is required to be registered, the supplies it makes under these circumstances to Canadian residents are considered to be supplies made in , and there would be no zero-rating of the sales commission.
 The appropriate wording and format appears in Appendix A of GST/HST Memoranda 4.5.1 Exports – Determining Residence Status as is the format for a similar declaration that a person is not registered for GST. Each can be found at http://www.cra-arc.gc.ca/E/pub/gm/4-5-1/4-5-1-e.pdf