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GST/HST IMPLICATIONS ON COMMON INCENTIVES

BONUSES, COMMISSIONS, PRIZES & AWARDS

For direct sellers, one important aspect of running a successful compensation plan is offering bonuses, commissions, prizes and awards to recognize and incentivize high performance.  While these incentives are a common feature of direct selling plans, their GST/HST implications are often overlooked.  This blog outlines the key GST/HST considerations that direct sellers should keep in mind when providing such incentives.

General Requirements to Pay GST/HST

Under subsection 165(1) of the Excise Tax Act (the “ETA”), recipients of taxable supplies made in Canada are generally required to pay GST/HST in respect of the supply. 

The terms “supply” and “taxable supply” are defined broadly under ETA 123(1).  Because of the broad definitions, most goods and services provided in the course of business will be considered taxable supplies under the ETA.  In the context of the direct selling industry, the “taxable supplies” include the services the Independent Sales Contractors (“ISCs”) provide to the companies.  Accordingly, once exceeding certain thresholds ISCs are generally required to register for GST/HST, and charge, collect, and remit GST/HST on the consideration they receive (i.e., the payment for the supplies).  The companies are required to pay the GST/HST.

Bonuses & Commissions

Bonuses/commissions are integral to most direct selling compensation plans.  Because ISCs are usually treated as independent contractors rather than employees, bonuses and commissions paid to them may be considered “consideration” for taxable supplies made by the ISCs to the companies.  This raises a potential obligation for the ISC to charge and collect GST/HST.

Fortunately, the ETA provides relief through special sales tax rules, including the Alternate Collection Method and the Network Sellers Method, which can simplify compliance.  We discussed these methods in a previous blog post here.

Prizes & Awards

Prizes and awards also play a crucial role in motivating ICSs. If such rewards are freely given, with no conditions or obligations attached, they may be considered gifts, and therefore not subject to GST/HST.

However, complications arise when there are conditions tied to the reward.  For example, if a prize is tied to the ISC achieving a certain sales level, and the prize is a cash prize, the Canada Revenue Agency (the “CRA”) may view the prize as consideration for the ISC’s taxable supplies of sales services to the direct selling company. 

Further issues can arise when the prize is non-monetary, such as a vacation.  In such cases, the CRA may view there to be two “cross-supplies”, potentially creating obligations for both the company and the ISC to charge, collect and remit GST/HST.  Another potential issue is the value of the non-cash prize for GST/HST purposes, which is based on the prize’s fair market value pursuant to ETA 153(1)(b) .

Takeaways

Given the complex and technical nature of the ETA, direct sellers should be cautious when developing compensation plans involving bonuses, commissions, prizes or awards.  Expert legal advice is strongly recommended to not only help direct sellers properly assess tax consequences but also assist with developing a streamlined plan that reduces compliance burdens for both the company and its ISCs.

In next month’s edition, we will write about the income tax implications of prizes and awards, which will include a deeper dive into valuation issues for non-cash incentives.

For help with a Direct Selling tax issue, click here.

Download a PDF copy of this Blog here.