North Shore Power - Tax Court of Canada finds that HST was imposed on a customer through the issuance to it of a credit note by an insolvent supplier

A supplier (Menova) received substantial down payments (described as “deposits”) respecting its sale of solar array projects, and then became insolvent before earning more than a fraction of the down payments. Menova then issued “credit memos” to the business customer (North Shore) for the value of the unperformed work, and was petitioned into bankruptcy.

CRA’s position was that the HST included in the credit memos was required to be added back to the net tax of North Shore (thereby effectively reversing the input tax credits previously claimed by North Shore). North Shore argued that “a mere recording of the credit does not meet the test” of a credit note (an argument which was modestly supported by Compagnie Minière Québec Cartier). In rejecting this submission, Bocock J adopted a much broader meaning for credit note, viz. “a note issued by a business indicating that a customer is entitled to be credited by the issuer with a certain amount.” The upshot was that North Shore effectively was denied ITCs for HST that it had incurred for clear commercial purposes (although, to mention another issue, ITCs are only available under s. 169 where property or services have been "acquired.")

In passing, Bocock J also found that the “deposits” were not deposits for HST purposes, stating that they did not represent “payment of earnest money to guarantee the completion of the contracts.”

Neal Armstrong. Summaries of North Shore Power Group Inc. v. The Queen, 2017 TCC 1 under ETA s. 232(3), s. 231(1), s. 168(9).