Section 232

Subsection 232(1)

See Also

HMR Commissioners v Investment Trust Companies (in liquidation), [2017] UKSC 29

unjust enrichment claim against supplier who claimed ITC re non-refunded VAT overcharge

Using Lord Reed’s simplified facts, the invoice to an investment fund of its manager included VAT of £100 based on a UK VAT provision which was later determined to have improperly treated (contrary to the EU Directive) the manager’s services as taxable rather than exempt. The manager claimed input tax (i.e., an ITC) of £25 in the same mistaken belief that it was making taxable supplies, and remitted £75 to HMRC. Recovery of the £75 from HMRC was now statute-barred.

Lord Reed held that the fund had no common law claim of £75 against HMRC for unjust enrichment given inter alia that the manager’s supposed £75 remittance obligation to HMRC had been independent of its £100 charge to the fund in the sense that the former was triggered by the provision of its services rather than the receipt of the £100 from the fund. However, the fund had a valid £25 claim for unjust enrichment against the manager.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Unjust Enrichment investment funds had valid unjust enrichment claims against a supplier who had charged VAT on an exempt supply 778

Administrative Policy

7 December 2016 Ruling 158637

choice between supplier refund or recipient rebate

After finding that a cancellation fee charged by a registered charity was not subject to GST/HST, CRA stated:

Under subsection 232(1), where a charity has charged or collected an amount as GST/HST in error on an exempt supply, it has the option to adjust, refund or credit the excess tax within two years after the day the amount was so charged or collected. …

Alternatively, persons that paid an amount as GST/HST on supplies that are exempt or on which no tax is payable may file an application for a rebate of amounts paid in error [on] Form GST 189… .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 182 - Subsection 182(1) no GST/HST on a fee charged for the cancellation of an exempt supply agreement 156
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply contract cancellation fee not consideration for a supply 113
Tax Topics - Excise Tax Act - Schedules - Schedule V - Part V.1 - Section 1 educational services not excluded 23

Subsection 232(2) - Adjustment

Cases

North Shore Power Group Inc. v. Canada, 2018 FCA 9

no sum is credited to the purchaser if no sum is placed at its disposal

The appellant (“North Shore”) entered into contracts in 2010 with Menova Energy Inc. for the purchase of solar panels, under which it paid one-half of the purchase price plus HST up front with the balance payable on delivery. Menova eventually cancelled 10 of 18 contracts, issued credit memos that documented its obligation to refund the associated up-front payment, including HST, but did not satisfy this obligation before becoming bankrupt. North Shore ultimately only recovered a relatively small portion of what was owed. The Minister issued reassessments to North Shore Power Group Inc. that added to its net tax amounts of HST that were “credited” to North Shore as described above.

Woods J stated (at paras 28- 29):

The question is whether an agreement to refund tax is a “credit” within the meaning of “refund or credit” in subsection 232(2)… .

…[T]he Tax Court erred in concluding that the term “credit” in subsection 232(1) takes its meaning from the commercial terms “credit note” and “credit memorandum.” …[T]hese commercial terms do not appear in subsections 232(1) and (2), which are the provisions that engage section 232 by giving the supplier the option to adjust tax. The term “credit note” is used in subsection 232(3) only to describe the documentation required if section 232 has been engaged.

Woods J further found (at paras 35, 38, and 45):

[A]t the time section 232 of the Act was introduced into law, existing case law had ascribed to the term “credit” in an income tax context the narrow interpretation from Le Petit Robert [(operation by which someone puts a sum of money at the disposal of someone else)]… .

Section 232 appears to contemplate that a credit given under this provision will actually be satisfied. It makes no sense for the supplier to be allowed a deduction from net tax and for the purchaser to be required to add an amount to its net tax if there is no transfer of funds.

[T]he term “credit” in section 232 should have the meaning from Le Petit Robert, above… . I do not suggest that money must actually be set aside, but it is not sufficient if there is no sum at the disposal of the purchaser.

She concluded (at paras 50 and 51) that as “Menova did not put funds at the disposal of North Shore when it issued the credit memos … section 232 does not apply to the transactions at issue as HST was not credited to North Shore.”

Words and Phrases
credit
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 231 - Subsection 231(1) no bad debt credit under s. 231 for a s. 232 credit which becomes bad 148

Administrative Policy

21 December 2017 Ruling 157478

compensation to retailer returning merchandise for its incremental freight charges in addition to refund of purchase price precluded access to s. 232

A registrant (the “Corporation”) entered into the Purchase Agreement with Retailer. Some of the sales of merchandise under the Purchase Agreement were for delivery in Canada, in which case the Corporation charged GST/HST. Where the Retailer returned the merchandise to the Corporation, the Purchase Agreement provided that the amount payable by the Corporation included the original price paid to it on the purchase of the merchandise, plus an additional amount representing the freight, duty, and brokerage costs incurred by the Retailer with respect to the shipment of the merchandise to Canada, with the Retailer charging GST/HST based on the Province of the place of delivery back to the Corporation.

In finding that the return of the merchandise was not governed by s. 232 and was at taxable sale (so that the Retailer was correct in charging GST/HST)), CRA stated:

… Memorandum 12.2 … states that a reduction in consideration may occur under various circumstances, including “where goods are returned to the supplier for a full or partial refund of the consideration.”…

However, according to the terms of the Purchase Agreement, title and ownership of the merchandise is transferred to [the Retailer] upon delivery of the merchandise to [the Retailer] at the delivery point specified in the applicable purchase order. In addition, the fact that [the Retailer] charges [the Successor Corporation] a unit price that is higher than the price originally paid for the merchandise by [the Retailer] further indicates that the merchandise is being sold back to [the Successor Corporation], rather than returned to [the Successor Corporation]. In our view, it would be difficult to view the transaction as a “reduction in consideration” contemplated by subsection 232(2), since the amount of the consideration would effectively be reduced by an amount that is greater than that consideration.

21 December 2017 Ruling 167830

no requirement on a supplier to refund GST/HST on an excess charge

Project Co. had an Agreement with a Joint Venture for construction of an Asset. Under the Agreement, the Joint Venture provides a Design and Construction Energy Guarantee (Guarantee). In accordance with the Guarantee, the Joint Venture has paid the Project Co. $X. Project Co. believes that the $X payment should have GST applied, and as such, has invoiced the Joint Venture $X plus 5% GST. Should GST should be applied (i.e. refunded) to the $X payment? CRA responded:

The tax originally paid pursuant to the Agreement was properly payable at that time.

Consequently, a refund or credit to the Project Co, as provided for under the Guarantee would be regarded as a subsequent reduction in consideration pursuant to subsection 232(2). …

Note that the legislation uses the word “may”. As such, it is at the discretion of the Joint Venture (the particular person) whether to refund the GST on the reduction in consideration.

18 September 2017 Interpretation 176502

credit can be generated by issuing credit note to bankrupt customer

A registrant is reassessed for GST/HST that it did not charge on an invoice to a customer which declared bankruptcy prior to the reassessment and is unable to pay the invoice. Can the GST/HST amount assessed under s. 296(1)(d) satisfy the requirements for a credit under s. 231(1), given the reporting requirement under s. 231(1.1)? After indicating that s. 231(1.1) effectively indicates that where a supplier is assessed on audit for failure to charge and remit the tax, no bad debt deduction is available for the uncollectible tax where, for example, the customer declared bankruptcy before the audit and resulting assessment, CRA stated:

[S]ection 232 does appear to offer a solution where the consideration is reduced. Where the supplier issues a credit note to the customer (which is now bankrupt) to relieve it of that debt, the supplier would be entitled to claim a deduction if all conditions set out in paragraph 232(3)(b) are met.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 231 - Subsection 232(1.1) credit not available for tax assessed on audit 154

GST/HST Memorandum 12.2 "Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act" April 2008

Reduction in consideration must be given to original recipient re amounts already charged and must not relate to any action of the recipient

6. A reduction in consideration may occur under the following circumstances:

  • when some or all of the consideration is returned;
  • as a result of surpassing a certain volume of purchases, i.e., a volume rebate;
  • where goods delivered are found to be substandard; or
  • where goods are returned to the supplier for a full or partial refund of the consideration.

7. The reduction in consideration must be given to the original recipient of the supply, or that person's agent, and must relate to an amount that has been collected or charged.

8. The reduction in consideration must also relate to the original supply and may be made for any reason but must not depend on any action undertaken by the recipient or any supply made by the recipient. ...

12. There is no requirement for the supplier to refund, adjust, or credit the GST/HST charged or collected....

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(3) 74

P-084R "Forgiven Debts Considered Bad Debts" 8 March 1999

[F]orgiven debts pursuant to an arrangement under the Companies' Creditors Arrangement Act are considered to be bad debts as opposed to reductions of consideration. As such, the provisions of section 231 of the ETA apply to forgiven debts as opposed to the provisions of section 232 of the ETA.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 231 - Subsection 231(1) 48

Subsection 232(3) - Credit or Debit Notes

See Also

GEM Health Care Group Limited v. The Queen, 2017 TCC 13

issuance of credit note is mandatory for ITC claim

A Canadian corporation (“GEM”) reduced, effective December 31, 2009, the quantum of management fees which it had previously charged to four nursing home subsidiaries. This reduction was effected by adjustment to the fee amounts and HST thereon in its books of account, but with no credit notes being issued by it – but it nonetheless claimed input tax credits equal to the HST amount on such fee reductions. In confirming CRA’s denial of these ITCs, Sommerfeldt J stated (at para. 98):

[T]he issuance by a supplier of a credit note in a situation such as this is critical, as it enables the recipient to ascertain whether the supplier will reduce or refund (as the case may be) the GST/HST, or whether it will be necessary for the recipient to apply for a rebate of tax under section 261 of the ETA. The issuance of a credit note, where required by paragraph 232(3)(a) of the ETA, is not a mere procedural formality….

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 153 - Subsection 153(1) no barter of management services for HST purposes between two affiliates employing the same key manager 320
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Recipient no barter of managment services between affiliates/construction supplies acquired by parent as agent for owner-subs 192
Tax Topics - General Concepts - Agency construction supplies acquired by parent as agent for subsidiary owning the real estate 360

North Shore Power Group Inc. v. The Queen, 2017 TCC 1, rev'd 2018 FCA 9

HST imposed on a customer through the issuance to it of a credit note by an insolvent supplier

The appellant (North Shore) paid half (or approximately $3.0 million plus HST) of the purchase price for various solar array projects to the supplier (“Menova”). Menova only completed approximately 1/5 of the work, and issued “Credit Memos” (including HST) to North Shore late 2010 and in 2011 to reflect the work for which it had been paid but had not performed. North Shore made additions to its net tax under s. 232(3)(c) to reflect the HST in these credit memos. However, Menova was insolvent and was petitioned by North Shore into bankruptcy on June 29, 2012. North Shore sought to effectively reverse the s. 232(3)(c) additions to its net tax by claiming bad credits under s. 231. CRA initially assessed on the basis that the sums received by North Shore were deposits, but thereafter its position was that the s. 232(3)(c) additions and s. 231 credits were valid and invalid, respectively. North Shore ultimately accepted that the s. 231 credits claimed were invalid, so that the sole issue was whether the Credit Memos constituted credit notes under s. 232(3).

North Shore had argued (at para. 30):

A mere recording of the credit does not meet the test. …[T]here was no amount set aside or provision made by Menova, the debtor, under the Credit Memos, to honour the credit.

In rejecting this submission, Bocock J first referred (at para. 33) to the ordinary meaning of “credit note,” e.g., “A note issued by a business indicating that a customer is entitled to be credited by the issuer with a certain amount,” and then stated (at para. 37):

The Credit Memos were factually sufficient to provide a clear indication of a credit being established in writing to the detriment of Menova and to the benefit of North Shore. …

Words and Phrases
credit note
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 168 - Subsection 168(9) "deposit" for work being performed was not a deposit 159
Tax Topics - Excise Tax Act - Section 231 - Subsection 231(1) only supplier can claim the credit 180

Vivaconcept International Inc. v. The Queen, 2013 TCC 336

23 month delay acceptable

This case is summarized in greater detail under s. 231(1). In brief, the appellant claimed a bad debt credit under s. 231 with respect to the GST in a customer receivable. After Revenue Quebec indicated that it would deny this claim on the basis that the situation instead engaged s. 232 (apparently based on the acceptance by the appellant of a proposal made by the customer to its creditors almost 23 months previously), the appellant thereupon issued a credit note to the customer, and claimed a credit under s. 232(3) for the GST in its return for the related reporting period. Revenue Quebec considered that the credit note had not been issued "within a reasonable time," as required by s. 232(3). Tardif J first found that the appellant was entitled to the s. 231 credit.

Respecting the "reasonable delay" issue arising under s. 232(3) in the alternative, Tardif J stated (at para. 55) that "it is true that a delay of 23 month is relatively long," but found that it was reasonable in the circumstances as the appellant did not find out that Revenue Quebec was denying its bad debt claim until shortly before issuing the credit note. The appeal was allowed.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 231 - Subsection 231(1) no requirement to pursue collection from insolvent company/write-off requirement satisfied 317

Quinco Financial Inc. (formerly Landex Investments Company) v. The Queen, 2013 TCC 20, aff'd 2014 FCA 108

no credit note ITC recapture if ITCs subsequently claimed

For income tax planning reasons, the registrant followed a practice of not claiming input tax credits ("ITCs") for a number of successive monthly reporting periods ("Deferral Periods") and then, in its return for the reporting period following that grouping of Deferral Periods (the "ITC claim return"), claimed ITCs for the Deferral Periods.

Suppose that in a Deferral Period, the registrant was invoiced $1,070 including GST, and received credit notes (e.g., respecting order shortfalls) for $107 including GST. In its ITC claim return, it claimed ITCs of $70-$7, or $63 for that Deferral Period. Later, on the advice of KPMG, the registrant claimed ITCs for a further $7 (the "Residual ITC") in a return for a reporting period subsequent to that for which it filed the ITC claim return. (In fact, the Residual ITCs were claimed in returns for five different reporting periods within the s. 225(4) ITC-barring periods in respect of a three-year period of Deferral Periods commencing in 2000, and totaled $3,910,610.)

In finding that the registrant was entitled to the Residual ITCs, D'Auray J found (at para. 20) that "except for section 232…there are no provisions in the Act that require a registrant to make an adjustment to an ITC as a result of a credit note or debit note being received," so that (reverting to the above example) the registrant was entitled to ITCs of $70 for the Deferral Period as that was the month in which it was invoiced for the related supplies (see ss. 168(1) and 152(1)); and (at para. 26-27) that "additions to net tax will be required pursuant to paragraph 232(3)(c)…only if the appellant has claimed ITCs in respect of credited tax in the same, or a preceding, reporting period as the one in which the credit…notes were issued or received," whereas here the registrant instead claimed such ITCs in subsequent reporting periods.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 298 - Subsection 298(1) - Paragraph 298(1)(a) statute-barring computation did not commence until residual ITCs claimed 226

Dowbrands Canada Inc. v. The Queen, [1997] GSTC 85 (TCC)

rebates reduced consideration but no obligation to rebate GST

The registrant, when it paid volume rebates to customers, was found by McArthur J to be thereby reducing the consideration on the previous sales for purposes of s. 232(2) (stating at p. 85-5 that "volume rebates...[are] a mechanism which reduces the consideration paid by the customer to the manufacturer"). However, it was not obligated under s. 232(2) to rebate GST under s. 232(3) when the consideration was so reduced (as the word "may" only gave it the "option" of doing so), and it did not do so. Accordingly, for purposes of former s. 181.1, s. 232(3) did not apply to the volume rebates.

Words and Phrases
consideration

Administrative Policy

25 February 2016 CBA Roundtable, Q.8

subsequent assessment of return to allow unclaimed credit

In P-149R, CRA states that it generally will not assess a prior GST/HST return at the request of the registrant to the extent this will result in a reduction in net tax, so that the registrant should instead carry forward unclaimed input tax credits for claiming in its current return. However, this does not work for a credit arising under 232(3) , as that credit cannot be carried forward to a subsequent return. CRA indicated that in its policy under P-149R, it has the “flexibility” to allow assessing the prior return “where the adjustment relates to an amount that may not be reported or accounted for in a subsequent period.”

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 296 - Subsection 296(1) CRA “flexibility” to assess a prior return to allow an unclaimed s. 232 rebate credit 185

8 July 2013 Interpretation Case No. 145134

recipient required to remit refunded GST even if no credit note/s. 232 trumps s. 181.1

In Scenario 1, Corp A, a registrant, makes a taxable supply of tangible personal property to Corp B, also a registrant. On a subsequent refund of a portion of the consideration, Corp A also refunds an amount on account of GST but does not issue (or receive) a credit note (or debit note).

In Scenario 2, Corp A makes a taxable supply of the property to Corp B which, in turn, sells it to Corp C. Corp A then pays a rebate to Corp C and indicates in writing that its amount includes GST.

Respecting Scenario 1, CRA (after noting that a "credit note or debit note can be written in a memorandum, an invoice or in a letter"), stated that as there was no credit note or debit note, there was no adjustment made to the net tax of Corp A or Corp B for the refund. However, the recipient (Corp B) was required (presumably under s. 225(1) –A) to pay the refunded GST to the Receiver General.

Respecting Scenario 2, CRA stated, before finding that s. 181.1 applied:

[G]enerally, section 232 applies to refunds paid or credited by a supplier directly to a recipient in respect of a supply made by the supplier to that recipient, and section 181.1 applies to rebates paid by a supplier to third parties with whom the supplier was not dealing directly (e.g., rebates paid by a manufacturer to consumers in respect of property originally supplied by the manufacturer to a distributor or other intermediary). … [I]f subsection 232(3) applies, then section 181.1 cannot apply by virtue of paragraph 181.1(d).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 181.1 s. 232 trumps s. 181 in direct supplies 187

GST/HST Memorandum 12.2 "Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act" April 2008

20. ...If the refund, adjustment, or credit of the tax relates to more than one invoice, the note should indicate the dates of the first and last invoices issued. ...

22. There is no requirement to issue a credit note or debit note unless a refund, adjustment or credit of the tax is made by the supplier to the recipient. However, no corresponding adjustment to net tax is permitted unless a credit note or debit is issued.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(2) 166

5 February 2013 Ruling Case No. 141852

Company A (a Canadian-resident registrant) sells crude oil for its market value to Company B (its U.S.-resident affiliate and also a registrant), with title and delivery occurring when it is injected into the pipeline, and with Company B being the importer of record into the U.S. Where Company B does not require the crude oil which it purchased, it will sell the crude back to Company A at the current market price, with payment generally made on a set-off basis.

In finding that the rule in s. 153(3) did not apply, CRA stated:

…the crude oil supplied by [Company B] does not serve as consideration for the supplies of crude oil by [Company A] to [Company B]….[T] here is a difference between property supplied as consideration for other property, and property which is supplied for which a credit is given for use against future supplies.

28 November 2011 Interpretation Case No. 137792

no requirement to adjust for GST/HST

In response to a question as to whether s. 232 applies where the Corporation (which is a registrant) engaged in the resale of tangible personal property sold to it by registered vendors where the written agreement with the vendors provides that the Corporation will initiate subsequent adjustments for price differences, damages or shortage, promotional allowances and freight allowances with no GST or HST adjustments, CRA stated:

There is no requirement to issue a credit note or debit note unless a refund, adjustment or credit of the tax is made by the supplier to the recipient.

After referring to Policy Statement P-243 "Promotional Allowances," CRA stated:

Whether any particular price difference may be either a reduction in consideration under subsection 232 or a promotional allowance which is subject to section 232.1, would be determined by a review of the related documentation.

16 December 2005 RITS No. 76598

indication on invoice qualifies as credit note

CRA would accept a reduction of consideration and corresponding tax adjustment shown on an invoice as meeting the Credit Note and Debit Note Regulations requirements provided that this was clearly indicated.

GST Memorandum 12.2

"Refund, Adjustments, or Credit of the GST/HST under Section 232 of the Excise Tax Act: 'Where the customer is a registrant, the supplier may choose not to refund, adjust or credit the GST/HT previously charged or collected. This may be desirable where the person making the refund, adjustment, or credit had already accounted for the tax and the recipient has already claimed or is entitled to claim a corresponding input tax credit. (para. 13)"

Articles

Sheila Wisner, "Imported Services Price Adjustments - Uneven Ground", Canadian GST Monitor, March, 2009, No. 246, p. 1.

Paragraph 232(3)(a)

Administrative Policy

23 March 2017 CBA Commodity Taxes Roundtable, Q.19

incorrect invoice could be corrected with a letter

CRA indicated that where an invoice has named the wrong person as the recipient of a taxable supply, this can be corrected by obtaining an amended invoice from the supplier or by obtaining a letter from it confirming the name of the recipient to whom the invoice should have been addressed. CRA did not state that the original invoice must instead be reversed by a credit note complying with s. 232(3)(a).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Regulations - Input Tax Credit Information (GST/HST) Regulations - Section 2 - Supporting Documentation invoice addressed to the wrong person can be corrected for GST/HST purposes with a letter confirming this 244