17 December 1999 GST/HST Interpretation HQR0001919 - Sale of a Bad Debt Portfolio

Dear Sir:

Thank you for your letter of August 11, 1999 (with attachments), concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

Statement of Facts

You have provided the following facts pertaining to the transactions :

1. XXXXX and/or its affiliates (hereafter referred to as XXXXX is a GST registrant located in Canada.

[2]. XXXXX is a GST registrant located in Canada. XXXXX is in the business of supplying long distance telephone services to residential and commercial customers located in Canada. The long distance telephone services are taxable at 7% for GST purposes. XXXXX remits the 7% GST invoiced to a customer's account to Revenue Canada on XXXXX GST return in accordance with section 228 of the Excise Tax Act (the "Act").

[3]. Customer accounts which are deemed to be uncollectible are written off as "bad debts" by XXXXX[.] This means the customer account has been closed and removed from the accounts receivable ledger of XXXXX deducts from its net GST an amount equal to 7/107, of the bad debts written off in accordance with subsection 231(1) of the Act.

4. XXXXX is proposing to purchase XXXXX bad debt portfolio. The bad debt portfolio consists of long distance telephone accounts for residential and commercial customers located in Canada which have been written off as bad debts (see #3). The dollar value of the customer accounts written off as bad debts is XXXXX (no GST is included in this amount). XXXXX is proposing to pay XXXXX to acquire XXXXX bad debt portfolio.

Interpretation Requested

1. Is the proposed sale of the bad debt portfolio by XXXXX to XXXXX considered a "sale of account receivable" under proposed section 222.1 of the Act?

2. Would the answer to #1 above be any different if the purchaser of the bad debt portfolio was a non-resident of Canada, not registered for GST?

3. How does XXXXX treat the sale of its bad debt portfolio to XXXXX for GST purposes?

4. How does XXXXX treat amounts received from customers in respect of the bad debt portfolio purchased from XXXXX for GST purposes?

Interpretation Provided

1. Is the proposed sale of the bad debt portfolio by XXXXX to XXXXX considered a ["]sale of account receivable" under proposed section 222.1 of the Act?

Yes — An account receivable that will not be paid by the debtor (recipient of the supply) is often referred to as an uncollectible account. Once the supplier has decided to write off the amount of the receivable as uncollectible, the amount written off is accounted for as a bad debt in accordance with GAAP.

Writing off a debt acknowledges the probability of collecting the debt is unlikely, but the amount written off does not necessarily cause collection efforts by the supplier to cease. The fact that an account receivable may be written off for financial reporting purposes does not necessarily alter its treatment for tax purposes nor does it negate the legal right of the supplier to pursue the debt. The debt continues to exist and, in this case, will be sold by XXXXX at a discount, to XXXXX. The sale of these uncollectible accounts receivable would be subject to proposed section 222.1 of the Act.

2. Would the answer to # 1 above be any different if the purchaser of the bad debt portfolio was a non-resident of Canada, not registered for GST?

No — We confirm that the residency and the GST/HST registration status would not change the answer to # 1 above.

3. How does XXXXX treat the sale of its bad debt portfolio to XXXXX for GST purposes?

For the purpose of proposed section 222.1 of the Act, the sale or assignment of a bad debt portfolio will require XXXXX to collect and remit tax on the consideration received from XXXXX[.]

4. How does XXXXX treat amounts received in respect of the bad debt portfolio purchased from XXXXX for GST purposes?

We confirm that — amounts received by XXXXX in respect of the bad debt portfolio purchased from XXXXX would not constitute the recovery of bad debt under section 231(3) of the Act. The sale of these accounts receivable would be subject to proposed section 222.1. Therefore, GST/HST would not be recoverable by the Canada Customs and Revenue Agency (CCRA) from any amounts received by XXXXX from XXXXX customers in respect of these accounts receivable.

The foregoing comments represent our general views with respect to the proposed amendment(s) to the Excise Tax Act as it(they) relate(s) to the subject matter of your letter. Any change to the wording of these proposed amendments or any future 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 CCRA with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact David Crawford, Technical Analyst, General Operations, at 954-7931.

Yours truly,

J.A. Venne
Director
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate