Custom farm services and the pitfalls of GST/HST

Most farmers are aware that they must charge GST/HST on custom work, but are you aware that you may need to charge GST/HST on supplies on which you did not pay GST/HST? If you operate a custom services business providing the application of fertilizer or chemical to farmers in Canada and your business is registered for HST, you should be aware of a policy statement published by the Canada Revenue Agency (CRA) affecting HST on those crop inputs.

GST/HST Policy Statement P-254 deals with the tax status of zero-rated fertilizer and/or pesticide supplied together with a taxable application service. The statement discusses the following regarding fertilizer and pesticides:

Fertilizer – A supply of fertilizer is zero-rated for GST/HST purposes when the fertilizer is supplied in bulk or in a container that contains at least 25 kg of fertilizer, where the total quantity of fertilizer supplied to the recipient at that time is at least 500 kg. Essentially, any fertilizer bought in smaller quantities that would be more suitable for domestic or residential use is considered taxable and GST/HST should be charged on the purchase.

Pesticide – A supply of pesticide by way of sale labelled in accordance with the Pest Control Products Regulations as having a purpose that includes agricultural use and a product class designation other than “domestic” is a supply of prescribed property by way of sale and is therefore zero-rated.

Thus, when a farmer purchases fertilizer or chemical that fits into the above descriptions for use on their own farm, the transaction is considered a single-supply service and is zero-rated. However, that zero-rated status can change when the crop input is provided as part of a custom application service by another business (even if that business is also farming). If a farmer hires a custom operator to apply fertilizer and/or to spray pesticide and the fertilizer/pesticide is provided as part of the custom service, that service is considered a multiple supply service and the entire service is subject to GST/HST. The tax is to be charged on the fertilizer and/or chemical as well, even though the purchase of such on its own would be a zero-rated supply.

What does this mean for you?

In the scenario above, it is the custom operator’s responsibility to ensure the correct amount of GST/HST is charged on the invoice and remitted to the CRA on the appropriate GST/HST returns. Two strategies in particular can help distinguish between a single supply and a multiple supply:

1. Ensure that the supply of fertilizer and/or pesticide is not contingent upon the supply of the application service or vice versa. The recipient farmer should have the option of purchasing the fertilizer and/or pesticide separately from the application service.
2. Separate invoices should be provided and should clearly indicate a rate for the custom application and a rate for the fertilizer and/or pesticide purchased.

Consider the following examples when determining whether the service provided is a single supply or a multiple supply.

Example #1

• A farmer contacts a custom application company to have his fields fertilized. The company agrees to an application service for a set price per acre. The price per acre includes both the cost of the fertilizer and the service of applying it.
• The invoice separately itemizes both the cost of the fertilizer and the cost of application on a per-acre basis.
• The company generally does not supply fertilizer without also supplying the application service.

This is a single supply of an application service and is thus taxable. The supply of fertilizer is not separate from the application service. The fertilizer is an input to the supply of that service. Even though the cost of the fertilizer is indicated on the invoice, the farmer does not have the option to purchase it separately. In this case, GST/HST should be charged on all items in the invoice: custom work and fertilizer.

Example #2

• A farmer contacts a company to discuss the purchase of 500kg of fertilizer and is quoted a price.
• The farmer is advised that the company will apply the fertilizer to the farmer’s fields for an additional charge per acre. However, the farmer can choose to buy the fertilizer without buying the application service.
• The farmer purchases the 500kg of fertilizer and agrees to have the company apply it for him.
• The invoice separately indicates the cost of the fertilizer and the cost of the spraying service.

This is a multiple supply service: one supply of zero-rated fertilizer and one supply of a taxable application service.

Many custom application businesses do not charge GST/HST on the fertilizer and/or pesticide provided to farmers as part of the custom application. Since the input is zero-rated when purchased by the custom operator, that status is then passed on to the farmer.

It is important to look at the facts in each specific case in order to determine whether GST/HST should be charged on the purchase of fertilizer and/or pesticides. If the custom operator does not charge the correct amount of GST/HST and the operation is reviewed by the CRA, the business will be assessed as if it had collected the GST/HST, and it will need to remit to the CRA for the period(s) in question.

If you are a custom applicator business and have questions on the amount of GST/HST you should be charging your customers, please contact your nearest Baker Tilly advisor for more information and guidance.