ZERO-RATED OR TAXABLE FOOD & DRINKS?
GST: FINE TECHNICAL LINE BETWEEN ZERO-RATED & TAXABLE FOR FOOD & DRINKS
The supplies of food and beverages that are for human consumption are generally zero-rated for GST/HST purposes in Canada – meaning that a 0% rate of tax applies! There are exceptions, however, particularly where the food or beverage falls into one of the specific exclusions set out in Part III of Schedule VI to the Excise Tax Act (“ETA”). This set of rules generally reflects Canada's intention that most food and drink products are free of GST, with the exceptions being fairly limited in scope.
Regrettably, recent Tax Court of Canada (“TCC”) jurisprudence may be applying a more restrictive approach and have been more willing to deny zero-rated treatment based on a threshold inquiry into whether the product qualifies as “food” or “beverage” in the first place. This is a marked change from earlier jurisprudence.
Taxable or Not? – The Traditional Approach
Earlier jurisprudence adopted a purposive approach that closely aligned with the structure and policy of the ETA and was largely consistent with the approach for Federal Sales Tax purposes (which found that anything ingested was non-taxable). For example, in 1146491 Ontario Ltd. v. The Queen (2002 CanLII 944), Justice Miller emphasized that Parliament deliberately chose not to define “food” or “beverage,” and on that basis, all food and drinks for human consumption generally qualified as zero-rated groceries unless explicitly falling within the list of exceptions. A separate determination what “food” or “beverage” meant was not required.
Justice Miller also recognized that policy considerations played a meaningful role in interpreting the exclusions list, meaning that products that do not exhibit the characteristics of snack or ‘junk’ foods were generally not excluded and could qualify as zero-rated.
A More Restrictive Trend in Recent Decisions
More recent jurisprudence now reflects a significant departure from the approach articulated by Justice Miller above.
For example, in Ike Enterprises Inc. v. The Queen (2017 TCC 59), the TCC addressed the GST status of three bulk food products. Rather than focusing on whether the products fell within the legislative exceptions, the Court framed the threshold issue as whether the products were “food” at all. The Court looked to packaging, labelling and how the "food" was presented to consumers.
In Aliments Koyo Inc. v. The Queen (2004 TCC 286), a strawberry-flavoured soy beverage was held to be taxable for GST purposes, rejecting the taxpayer's policy-based argument that beverages composed mainly of healthful ingredients ought to be zero-rated.
Determining whether food and drinks are zero-rated is far from straightforward!
Experienced Counsel can help navigate uncertainties.
Takeaways
Recent jurisprudence reflects an unwelcome development in determining whether food and beverage products qualify for zero-rated GST treatment: a more restrictive approach!
Direct sellers in the nutritional space should be aware and obtaining legal advice from Experienced Counsel is never a bad idea.
For help with the GST Treatment of Food & Drinks, please click here.
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