Information and Disclaimer
This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.
Interpretation Letter TC-0004, August 2003
Thank you for your facsimile message, dated March 27, 2003, inquiring about the Ontario retail sales tax
(RST) as it applies to your business activities.
This interpretation is based on the information provided and which is conveyed in the "Understanding of
Facts" portion of this ruling. Please review the information for its completeness and accuracy. If it is
determined that the information is incomplete or inaccurate, this interpretation will not be binding. In the
event that our understanding of the facts is incomplete or inaccurate, please notify the undersigned, in
writing, so that we may reconsider our opinion.
Understanding of Facts
It is our understanding that Company A, on behalf of, and under the direction of a telecommunications
provider, sells cellular phones at a price which is substantially below Company A's initial cost of
acquisitions. Company A has confirmed that it is reimbursed in full for such below cost sales by the
telecommunications provider.
Company A has been charging its customers RST on the price of the cellular phones that are sold for a
reduced price or those that are given away free of charge, and then shows a credit for the discount
amount on the customers' invoices. Company A does not give the RST back on the credit and
sometimes the invoices are for the RST only.
Company A would like to know if it is correctly charging the RST.
Legislation and/or Administrative Policy
Subsection 2(1) of the Retail Sales Tax Act (Act) requires every purchaser of tangible personal property
(TPP) to pay a tax in respect of the consumption or use of the TPP acquired.
Subsection 1(1) of the Act defines a purchaser to mean, in part, a consumer or person who acquires TPP
anywhere, or who acquires or receives a taxable service at a sale in Ontario, for his, her or its own
consumption or use, or for the consumption or use in Ontario of other persons at his, her or its expense.
Subsection 2(22) of the Act states that RST is payable on promotional distribution as follows:
The tax payable under this section in respect of tangible personal property, a taxable service or an
admission that is supplied on a promotional distribution,
(a) is payable by the person to whom the promotional distribution is made in the amount
determined by applying the appropriate tax rate to the amount, if any, paid or payable by
the person for the tangible personal property, taxable service or admission, as the case
may be; and
(b) is payable by the promotional distributor in the amount determined by applying the
appropriate tax rate to the amount by which the full fair value of the tangible personal
property or taxable service, or the full price of admission, exceeds the amount, if any, paid
or payable to the promotional distributor by the person to whom the promotional
distribution is made.
Paragraph 3.1.1 of Regulation 1012 under the Retail Sales Tax Act (Act) sets out the exclusions from the
definition of "promotional distribution"
The provision of a cellular telephone to a person (the "recipient") at less than full fair value is
excluded from the application of the definition of "promotional distribution" if all of the following
criteria are met:
- The cellular telephone is provided to the recipient on or after December 18, 1997.
- Tax is or will be paid on any fair value paid at the time of retail sale.
- The cellular telephone cannot be used to access services of a person other than the
person (the "service provider") who provided it or caused it to be provided to the recipient
at less than full fair value.
- The services of the service provider that can be accessed by using the cellular telephone
include taxable services.
- The service provider has the reasonable expectation that the revenue he, she or it
receives from all taxable services described in paragraph 4 will equal or exceed the sum
of,
i. the cost of all taxable services described in paragraph 4, and
ii. the amount by which the full fair value of all of the cellular telephones described in paragraph 3 exceeds the amount, if any, that the recipients pay for them.
Analysis and Conclusion
When a vendor provides a cellular phone at a value discounted below cost, it may be considered a
promotional distributor and may, therefore, be required to charge RST on its selling value of cellular
telephones, and also account for RST on the difference between its cost and selling value.
However, based on the information provided, Company A acquires its cellular phone inventory from the
telecommunications provider. The cellular phones are configured to receive only the telecommunications
provider's services. Under the specific conditions established by the telecommunications provider,
Company A (on behalf of the telecommunications provider) may resell a cellular phone at a value below
Company A's initial cost of acquisition.
However, in such situations, the "below cost" sale undertaken by Company A is offset by compensation
provided by the telecommunications provider to Company A. The compensation received by Company A
should not be seen as compensation (revenue), rather, it is a purchase discount or a combination of a
purchase discount and an agreed upon commission. As a result, Company A is not a promotional
distributor as it is not truly reselling cellular phones at a value below cost.
Company A is required to charge RST on the net selling price of the cellular phones. Where the net
selling price to the client is zero, the purchaser/client holds no resulting RST liability.
