17 September 2004 GST/HST Interpretation 53557 - Contract Silent on the Tax Payable

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'agence.

Dear XXXXX:

Thank you for your e-mail XXXXX and the copy of XXXXX (the agreement) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of services supplied under the agreement.

It is our understanding that your company has a written agreement with a distributor XXXXX who is a GST/HST registrant. The agreement provides for a sales commission to be paid to the distributor based on a percentage of the revenues from sales made by the distributor.

Your e-mail states that the contract does not specifically provide that commissions paid to the distributor include or exclude the GST.

Interpretation Requested

Should you treat the commissions as being tax-included and claim an input tax credit (ITC) of 7/107ths or should you add 7% GST to the commissions?

Interpretation Given

Subsection 165(1) of the Excise Tax Act (ETA) provides that every recipient of a taxable supply made in Canada shall pay tax calculated at 7% on the value of the consideration for the supply.

Subsection 223(1) of the ETA provides that where a registrant makes a taxable supply, other than a zero-rated supply, and there is no visible notice given at the place where the supply is made, the registrant is required to indicate in the invoice, receipt or written agreement, the consideration paid or payable by the recipient of the supply and the tax payable in respect of the supply in a manner that clearly indicates the amount of the tax. Where the amount paid or payable by the recipient includes the tax, there must be an indication in the invoice, receipt or written agreement that the amount paid or payable includes the tax payable in respect of the supply.

In addition, subsection 223(2) requires, in part, that the supplier furnish upon request such information in writing as may be required to substantiate an ITC claim by the recipient.

In order to be eligible to claim an ITC, subsection 169(4) of the ETA requires that a registrant must have obtained sufficient evidence in such form containing such information as will enable the amount of the ITC to be determined, including such information as may be prescribed by regulation. The documentary requirements for such purposes are provided in the Input Tax Credit Information (GST/HST) Regulations.

Policy Statement P-116 Collection of GST by a supplier where the invoice is silent on the tax payable applies under the following circumstances:

(a) where a registrant made a taxable supply and the tax was payable to the supplier;

(b) the invoice, or receipt, did not state the amount of tax payable or that the amount payable by the recipient in respect of the supply included the tax payable;

(c) the supplier has not collected the tax;

(d) the supplier has accounted for or remitted the tax payable in respect of the supply, either pursuant to an assessment by the CRA after the fact, through a voluntary disclosure, or for some other reason; and

(e) the supplier reissues the invoice with GST added to the amount previously invoiced;

(f) the recipient of the supply refuses to pay any additional amount to the supplier.

Where the above circumstances apply, the CRA will confirm to the recipient that tax is payable in respect of the supply under section 165 of the ETA, but that the question of whether the price paid for the supply included the tax is a matter to be determined between the parties.

Both parties to the transaction will be informed that section 224 of the ETA is intended as the means to allow them to resolve their dispute. Section 224 authorizes a supplier to sue a purchaser where certain requirements have been met and does not involve the CRA. Suppliers will be reminded of their obligation to account for amounts of tax that became collectible and to remit positive amounts of net tax, regardless of whether or not the tax has been collected.

In some cases, where the supplier has failed to meet the requirements of subsection 223(1) of the ETA, an attempt is made to remedy the situation by issuing an amended invoice in compliance with the disclosure requirements. Where there are no contractual or common law restrictions that prevent the issuance of amended or additional invoices, the Canada Revenue Agency (CRA) will continue to accept that disclosure of tax can occur after the fact. This position was adopted since subsection 223(1) of the ETA is silent on the issue of timing and because many purchasers are agreeable to the extra charge, either because an ITC may be claimed or because they wish to maintain good relations with their supplier.

Should the circumstances described in (a), (b) and (c) above be discovered during an audit and where the supplier has not accounted for the tax collectible, the CRA auditor will review the facts of the particular situation and an assessment to account for the tax collectible by the supplier will be made either on a tax-included or tax-extra basis depending on those facts. We have enclosed a copy of Policy Statement P-118R Assessments on a tax-extra or tax-included basis which addresses the issue of whether the CRA will assess on a tax-extra or tax-included basis where a registrant fails to collect and account for the GST/HST on taxable (other than zero-rated) supplies.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7931.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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