Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
GST/HST Rulings Directorate
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Client Address]
Case Number: 246581
Dear [Client]:
Subject: GST/HST INTERPRETATION
Income from a Sales Performance Incentive Funding Formula (SPIFF)
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to incentive payments paid by your manufacturers to your employees through a Sales performance incentive funding formula (SPIFF). We apologize for the delay in responding to your request.
The HST applies in the participating provinces at the following rates: 13% in Ontario; 14% in Nova Scotia; and 15% in New Brunswick, Newfoundland and Labrador, and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
STATEMENT OF FACTS
1. You ([…][Company X]) are […][a] retailer selling manufacturers’ […][goods].
2. You hire salespersons for the main duty of selling [goods] at your store.
3. You pay your employees their regular salary plus commissions.
4. Your employees also receive “Sales performance incentive funding formula” (SPIFF) payments from manufacturers for selling specific products. These bonuses are meant to incentivize retailers’ employees to sell specific brands […][of goods].
5. When you hire your employees, they register on your website to qualify for the SPIFF program. […]. Afterward, they submit their qualifying sales online to the manufacturers to get their bonuses. No additional equipment or investment is required to participate in the program.
6. These payments are either paid directly from the manufacturers to them, but sometimes the payments are paid through you or through a third party company providing incentive management services […].
7. Your employees have no contract with the manufacturers and do not work for them in any ways. For most of them, their sole livelihood is selling [goods] at your store.
8. When they terminate their employment, the participation in the program terminates as well because the eligibility to the program is totally dependant upon their employment status.
9. Some of your employees have registered for GST/HST purposes […] because their income reported on T4A slips (from SPIFF payments) exceeded $30,000.
10. Each year, you issue a T4 slip, Statement of Remuneration Paid, to your employees. Where a SPIFF payment is made directly by you to an employee and you are reimbursed by a manufacturer, you include that amount in a T4 slip.
11. At the beginning of each year, your employees also receive T4A slips, Statement of Pension, Retirement, Annuity, and Other Income, for the bonuses paid to them in the prior calendar year by manufacturers or third parties. The income is reported either in Box 020 (Self-employed commissions), in Code 028 (Other income), or in Code 154 (Cash award or prize from payer).
INTERPRETATION REQUESTED
You would like to know:
1. If the income earned by your employees through SPIFF programs is consideration for a taxable supply, and therefore, subject to GST/HST.
2. If your employees are required to register for GST/HST due to the income earned from SPIFF programs.
INTERPRETATION GIVEN
Subsection 221(1) states that every person who makes a taxable supply must collect the tax payable by the recipient in respect of the supply. Subsection 240(1) states that every person who makes a taxable supply in Canada in the course of a commercial activity must be registered for GST/HST purposes, with some exceptions. Therefore, whether the bonuses paid to your employees by manufacturers are subject to GST/HST depends on whether the bonuses are consideration for a taxable supply made by your employees in the course of a commercial activity.
For there to be a taxable supply, there must be a supply in the first place. Under subsection 123(1), a “supply” is either the “provision of property or a service”. A person that sells property owned by another entity (for example, that of an employer or manufacturer) is not supplying property. The definition of “service” in subsection 123(1), means anything other than property, money, and anything supplied by a person in the course of or in relation to the office or employment of that person. Furthermore, for a supply to qualify as a “taxable supply”, it must be made in the course of a “commercial activity” which requires that your employees carry on a “business”. The definition of a “business” also specifically excludes employment. In this situation, a person that receives, in the course of their employment, bonuses from a third party is not receiving consideration for a “taxable supply” nor a “supply”. Therefore, the person is not required to be registered for GST/HST purposes, and does not have to collect GST/HST, where the person is not making taxable supplies in the course of a commercial activity.
Request for cancellation by registrant under subsection 242(2)
The Minister will cancel a registration upon request if the requesting person is not required to be registered, and the person has been registered for at least a year. The effective date of the cancellation would generally be after the last day of the person’s fiscal year. However, administratively, the effective date of the cancellation may be any other date established in consultation with the person as long as the above conditions are met. The person may file Form RC145, Request to Close Business Number Program Accounts, available on our website, containing the prescribed information:
a. the reason for the cancellation request;
b. the effective dates of registration and cancellation;
c. a statement that all commercial activity has ceased; and
d. the person’s signature or that of a person authorized by the person.
For more information, please refer to GST/HST Memoranda Series, section 2.7 Cancellation of Registration, especially paragraphs 6 to 9.
Request a rebate for tax paid in error
A person who has incorrectly reported an amount as GST/HST on their return has paid an amount in error. The following are the options for a person to recover an amount paid in error.
Where an amount paid in error is included in a return for a reporting period that has not been assessed, a person may claim a rebate under section 261, using Form GST189, Rebate under reason code 1C (amounts paid in error). The rebate application has to be filed within 2 years after the day the amount was paid in error.
Where an amount paid in error is included in a return for a reporting period that has been assessed, paragraph 261(2)(a) prevents a person from claiming a rebate for an amount paid in error. Where return has recently been assessed, a person has 90 days after the day the notice of assessment is sent to file a notice of objection under subsection 301(1.1). If the objection period has expired and the person has a valid reason for failing to file the objection on time, the person may apply for an extension of time. Subsection 303(7) allows the Minister to accept a notice of objection beyond the 90 days but it must be made within 1 year after the expiration of the time limit for objecting to the assessment.
Alternatively, a person may request a reassessment of their net tax, pursuant to subsection 296(1), to recover the amounts paid and remitted in error. Audit has the discretion to reassess under subsection 296(1) within the time limits set out in section 298 and make the adjustments for an overpayment of net tax. Subsection 298(1) requires that the reassessment be made within 4 years after the later of the day the return was required to be filed and the date the return was filed. A person may submit their request through My Business Account, or may send their request in writing to the appropriate tax centre. In either case, the person should provide the details of the changes requested. The person should ensure that the request is signed by the owner or an authorized representative for whom the CRA has the correct level of authorization and includes the name and telephone number of a person the CRA can contact if needed.
We have noticed a lack of consistency in the use of the boxes/codes on the T4A by the manufacturers to report the incentive payments. Here is an explanation for the three main boxes/codes used:
- Box 020 – Self-employed commissions: used to report the amount of commissions paid to an independent agent, as opposed to an employee.
- Code 028 – Other income: used for gifts, awards and other payments provided to an employee by a person who is not the employer, when the total value of such benefit exceeds $500. Also, any other amount that was not reported in a specific box or under a specific code will be reported here, but only if the amount exceeds $500 or the payer deducted income tax (box 022).
- Code 154 – Cash award or prize from payer: used for gifts, awards and other payments from a manufacturer provided directly to the employee of a dealer (for example, [a] retailer), when the total value of such benefit exceeds $500. Any tax deducted should be reported in box 022.
Note: If the payment is made to the dealer instead of the employee, the dealer (instead of the manufacturer) will have to report the payment on a T4 slip, in box 14, “Employment income”, using code 040 under “Other information”.
Therefore, code 154 should be used by manufacturers to report SPIFF payments that are paid directly to your employees. For more information, visit our websites T4A slip – Information for payers and Employers' Guide – Taxable Benefits and Allowances.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the interpretations given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretations or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 353-553-0164. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Sincerely,
Cynthia Lynch
Senior Rulings Officer
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings Directorate
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