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Proposed Regulatory Changes in Support of Harmonized Provinces

The purpose of this notice is to inform interested parties that the Honourable James Flaherty, Minister of Finance, intends to propose amendments to the federal Deduction for Provincial Rebate (GST/HST) Regulations to facilitate the expanded application of the point-of-sale rebate of the provincial portion of the Harmonized Sales Tax (HST) on books. The proposed amendments would be effective as of September 1, 2006.

The governments of New Brunswick, Nova Scotia, and Newfoundland and Labrador recently announced amendments, effective September 1, 2006, to their respective provincial sales tax regulations to expand their book rebates to apply to eligible products that consist of a printed book packaged with a CD-ROM or a textbook purchased with a CD-ROM and/or an access code to a website. The proposed amendments to the federal Deduction for Provincial Rebate (GST/HST) Regulations would add the newly eligible products to the items listed in these regulations.

The following draft regulations and explanatory notes provide further details on the measure.

Draft Regulations Amending the Deduction for Provincial Rebate (GST/HST) Regulations

AMENDMENTS

1. Section 1 of the Deduction for Provincial Rebate (GST/HST) Regulations is amended by adding the following in alphabetical order:

"composite property" means property that is wrapped, packaged or otherwise prepared for sale as a single product the only components of which are a printed book and

(a) a read-only medium that contains material all or substantially all of the value of which is reasonably attributable to one or more of the following:

(i) a reproduction of the printed book, and

(ii) material that makes specific reference to the printed book and its content and that supplements, and is integrated with, that content; or

(b) if the product is specially designed for use by students enrolled in a qualifying course, a read-only medium or a right to access a website, or both of them, that contains material that is related to the subject matter of the printed book. 

"qualifying course" means a course the service of instructing in which,

(a) is an exempt supply included in Part III of Schedule V to the Act; or

(b) would be an exempt supply included in Part III of Schedule V to the Act but for the fact that the supplier of the service has made an election under that Part. 

"read-only medium" means a tangible medium that is designed for the read-only storage of information and other material in digital format. 

2. The schedule to the Regulations is amended by adding the following after item 3:

4. A composite property

COMING INTO FORCE

3. Sections 1 and 2 are deemed to have come into force on September 1, 2006.

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Explanatory Notes

These explanatory notes are provided to assist in an understanding of the proposed amendments to the Deduction for Provincial Rebate (GST/HST) Regulations. These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Draft Amendments to the Deduction for Provincial Rebate (GST/HST) Regulations 

The Deduction for Provincial Rebate (GST/HST) Regulations (the Regulations), together with subsection 234(3) of the Excise Tax Act (the Act), facilitate the delivery, at the point-of-sale, of a rebate of the provincial component of the Harmonized Sales Tax (HST) on printed books and related items that the participating provinces provide to purchasers of such materials. 

The point-of-sale rebate in each participating province (New Brunswick, Nova Scotia and Newfoundland and Labrador) is provided under an Act of the legislature of the province. In order to simplify administration and compliance, registrants can pay or credit purchasers of printed books and other qualifying items the amount of the rebate at the point of sale and deduct an amount prescribed by regulation from their net GST/HST remittances. Subsection 234(3) of the Act provides for this deduction. The Regulations specify that the amount of the deduction is the amount of the point-of-sale rebate of the provincial component of the HST paid or credited by a registrant in respect of an item listed in the Regulations. 

Consistent with the changes to the point-of-sale rebate recently announced by the participating provinces, the Regulations are amended to allow registrants to deduct from their net tax determination an amount equal to the point-of-sale rebate they pay or credit to purchasers of products that meet the new definition “composite property” in amended section 1 of the Regulations. 

The amendments to the Regulations are deemed to have come into force on September 1, 2006.

Section 1

Definitions

Deduction for Provincial Rebate (GST/HST) Regulations
1

Three new definitions are added to section 1 of the Regulations.

Definition “composite property”

The new definition “composite property” in section 1 of the Regulations describes products that include a printed book as a component and in respect of which a registrant supplier may deduct an amount equal to the rebate of the provincial component of the HST the registrant paid or credited to a purchaser of the property. 

The portion of the definition before paragraph (a) specifies that a composite property must be prepared for sale as a single product. The non-printed components of a composite property must also be described in either or both paragraphs (a) or (b) in order to fall within the definition.

Paragraph (a) - “composite property”

Paragraph (a) applies to products the only components of which are a printed book and storage medium that meets the new definition “read-only medium”. The paragraph stipulates that material described in either or both of subparagraphs (a)(i) or (ii) must be included on the read-only medium.

Subparagraph (a)(i) refers to a reproduction of the printed book. 

Subparagraph (a)(ii) refers to material that both makes specific reference to the printed book and the material contained in it and supplements and is integrated with that material. In order to meet the condition in subparagraph (a)(ii), material on the read-only medium must be supplementary to the material in the printed book rather than the primary focus of a combined product. 

Material on the read-only medium that does not make specific reference to the printed book and its contents cannot meet the test in subparagraph (a)(ii), even if that material can be said to supplement the printed book. For example, material on a read-only medium giving additional information about the same topic addressed in a printed book, but without specific references to the printed book, and its contents, could not meet the test in that paragraph. 

The material contained on the read-only medium component of a composite property described under paragraph (a) must also meet a second test which requires that all or substantially all of the value of the material on the read-only medium be reasonably attributable to material referred to in either or both subparagraphs (a)(i) or (ii). 

Paragraph (b) - “composite property” 

Products the only components of which are a printed book and either, or both, a storage medium that meets the new definition “read-only medium”, and a right to access a website, can qualify as composite property under paragraph (b), provided the product as a whole is specially designed for use by students enrolled in a course that meets the new definition “qualifying course”. Paragraph (b) also requires that there be information on the read-only medium or website component of the product that relates to the subject matter of the printed book. 

Definition “qualifying course”

The new definition “qualifying course” is relevant for the purposes of the new definition “composite property”. In order to qualify as a composite property under paragraph (b), a product must be specially designed for use by students enrolled in a qualifying course. 

For a course to be a qualifying course, the service of instructing individuals in that course must either be an exempt supply included in Part III of Schedule V to the Act, or be a service that would be an exempt supply included in that Part if the supplier had not elected, under a section of that Part, to make the supply GST/HST taxable. 

Definition “read-only medium”

The new definition “read-only medium” is relevant for the purposes of the new definition “composite property” in that a read-only medium is one of the components that can be prepared, together with another component that is a printed book, for sale as a “composite property”. A read-only medium must be a tangible medium that is designed for the read-only storage of information or other material in digital format. 

Section 2

Items

Deduction for Provincial Rebate (GST/HST) Regulations
Schedule

The Regulations are amended by adding the expression “composite property” to the list of items in the schedule to the Regulations. This amendment has the effect of expanding the list of items in respect of which an amount paid or credited by a registrant supplier in favour of a purchaser can be deducted under subsection 234(3) of the Act in determining the net tax of the registrant. The amount of the deduction is the amount of the point of sale rebate paid or credited by a registrant in respect of the supply of “composite property”.