A foreign affiliate ("FA1") of a Canadian manufacturer (the "Taxpayer") provides testing services to the Taxpayer on products (namely, prototypes) manufactured by the Taxpayer in Canada or abroad and which are owned by the Taxpayer. The tests on the prototypes help validate the manufacturing processes developed in Canada by the Taxpayer and resolve problems. Although the prototypes themselves are not sold, the information generated from the testing thus ameliorates issues on subsequent production for sale as a result of corrective adjustments being made. Taxpayer employees are involved in oversight of the testing.
Did s. 95(3)(b) apply so that the testing services were not services for purposes of s. 95(2)(b)? In responding negatively, the Directorate stated (TaxInterpretation translation):
Our long-standing position respecting the expression services performed in connection with the sale of goods is that only services directly related to such sales so qualify.
…[T]hese activities fall under scientific research and experimental development…and not under services related to the sale of goods, per se.
See also summary under s. 95(3)(d).