William E. Coutts Co. v. The Queen, docket 96-4665-GST-G

Date: 19990517

Docket: 96-4665-GST-G

BETWEEN:

WILLIAM E. COUTTS COMPANY LTD., o/a HALLMARK CARDS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Mogan, J.T.C.C.

[1]            The legislation imposing the goods and services tax ("GST") is enacted as Part IX (sections 122 to 363) of the Excise Tax Act, R.S.C. 1985, c.E-15 as amended. Each reference to a statutory provision in these reasons for judgment will be a reference to that Act unless otherwise specified. The issue in this appeal concerns the interpretation and application of sections 161 and 181.1 of the Act. This appeal was argued on an Agreed Statement of Facts ("ASF") signed by counsel and filed in Court on the day of the hearing. Accordingly, there was no oral evidence and no documentary evidence apart from the five documents included as part of the ASF. Set out below are the 16 paragraphs which comprise the ASF:

1.              The Appellant is registered under Part IX of the Excise Tax Act (the "Act") for purposes of the Goods and Services Tax (GST).

2.              Attached as Tab 1 is a submission, together with supporting invoices, as filed by Appellant with Respondent related to the time period relevant to the present appeal.

3.              Attached as Tab 2 is the Respondent's reply.

4.              The example which follows is representative of the procedures followed by the Appellant during the time period relevant to the present appeal.

5.              On June 1, 1992, Appellant made taxable supplies to its customer, who was also registered under Part IX of the Act, for $100 plus 7% GST ($7.00), for a total invoice amount of $107.00, subject to payment terms shown on the invoice of 2%, July 10th (10th Month Following), net July 31 (end Month Following).

6.              Upon the issuance of the invoice, Appellant credited its sales account in the amount of $100 and its GST payable account in the amount of $7.00, the whole in accordance with section 161 of the Act.

7.              In accordance with section 228(2) of the Act, Appellant remitted $7.00 in GST with its GST return for the period June 1, 1992 to June 30, 1992. The GST return was filed by the Appellant on July 31, 1992.

8.              Appellant's customer paid the invoice on July 8, 1992 (i.e. before July 10) and remitted $104.86 (i.e. $107.00 less 2% of $107.00) to Appellant.

9.              The amount of the cash discount taken by the customer was $2.14 (i.e. $107.00 - $104.86).

10.            Appellant did not issue a credit note to its customer with respect to the June 1, 1992 invoice.

11.            Appellant claimed an input tax credit of 7/107 of the $2.14 (i.e. 14 ¢ ) on its GST return for the period October 1, 1994 to October 31, 1994, which it filed on November 28, 1994.

12.            Respondent issued an assessment dated January 11, 1995 to Appellant denying the input tax credit as claimed by Appellant on its GST return as filed on November 28, 1994, (See Tab 3).

13.            Appellant filed a Notice of Objection dated April 10, 1995, (See Tab 4).

14.            Respondent issued a Notice of Decision dated October 15, 1996 to Appellant, (See Tab 5).

15.            By Notice dated December 17, 1996 Appellant appealed the Notice of Decision to this Honourable Court.

ISSUE

16.            Having regard to sections 181.1 and 161 of the Act, is the Appellant entitled to claim input tax credits equal to 7/107 of the cash discounts allowed to its customers during the period January 1, 1991 to December 31, 1992, in accordance with the fact pattern as set out in paragraphs 1 to 15 hereinabove?

[2]            The document identified as Tab 1 in the ASF is a letter dated November 28, 1994 from the Appellant to Revenue Canada from which I will quote only the parts which I consider most relevant:

Attached is a copy of our GST return for the period October 1 to October 31, 1994, which was submitted on November 28, 1994. Included as an input tax credit (ITC) on line 106 of the return is $288,699.96 which represents 7/107 times the cash discounts taken by our customers on taxable sales (other than zero-rated) during the period January 1, 1991 to December 31, 1992.

Section 161 of the Excise Tax Act (ETA) requires that "...

Assume that on February 20, 1991 we invoiced a customer for Everyday Products $100 plus 7% GST ($7.00) for a total of $107.00, subject to payment terms (shown on the invoice) of 2%, 10th Month Following, Net End Month Following. When the invoice was issued, the sales account was credited $100.00 and the GST payable account was credited $7.00. The $7.00 in GST was remitted with the GST return for the period February 1 to February 28, 1991, which was filed March 31, 1991. The provisions of Section 161 of the ETA were met. By crediting the GST payable account $7.00, we recognized that the consideration for the sale was $100.00 and the tax liability of $7.00 was established based on that consideration.

When the customer paid his invoice on March 8, 1991 (i.e. within 10th of the following month from the invoice date), he remitted $104.86 ($107.00 less 2% of $107.00 = $2.14). the amount of the cash discount was $2.14 ($107.00 - $104.86). It should be noted that our seasonal cash discounts term requires payment by the 10th day of the month of the event - for example, to be eligible for discounts on Christmas invoices, they must be paid by December 10.

The Concise Oxford Dictionary, 1990 defines a rebate as " ... a deduction from a sum to be paid; a discount." The cash discount referred to in the previous paragraph is clearly consistent with the definition of a rebate.

Section 181.1 of the ETA (as first added by S.C. 1993, c. 27, s. 46(1)) states that ...

The $2.14 cash discounts taken by our customers in 1991 and 1992 are rebates on which we are eligible to claim input tax credits of 7/107 times the amount of the rebate (14 ¢ ). This is consistent with the provisions of Sections 161 and 181 of the ETA. Section 161 does not preclude a taxpayer from claiming the input tax credit described in Section 181.1. The two sections are independent. Claiming the input tax credit is consistent with the provisions of each of them.

Would you please confirm in writing, that we are indeed eligible to claim $288,699.96 input tax credit as described above.

...

[3]            The document identified as Tab 2 in the ASF is a letter dated December 14, 1994 from Revenue Canada to the Appellant replying to the letter in Tab 1. Again, I will quote only the relevant parts of Tab 2:

...

You indicated that your GST return for the reporting period October 1, 1994 to October 31, 1994 was submitted on November 28, 1994. Included as an input tax credit (ITC) on line 106 of the return is $288,699.96 which represents 7/107 times the cash discounts for early payments (i.e. terms of payment 2%, 10th month following ) taken by your customers on taxable sales (other than zero-rated) during the period January 1, 1991 to December 31, 1992.

You are claiming that the above described cash discounts for early payments are rebates on which you are eligible to claim input tax credits of 7/107 pursuant to section 161 and 181.1 for the Excise Tax Act ("the Act"). Therefore, you are requesting written confirmation on the eligibility of the $288,699.96 ITC.

Section 161 of the Act requires that ...

In other words where the consideration is shown on an invoice for a supply of goods or services and the recipient may obtain a discount for prompt payment, the value for tax is not affected by the discount. The GST applies to the amount of consideration shown on the invoice without regard to the discount. Thus, for example, if an invoice showed the price of goods as $100 (plus $7 of GST) and a 2% discount for prompt payment were offered, the GST would be $7 even if the discount were taken.

It is the Department's position that you are not eligible to claim the $288,699.96 input tax credit as described above.

...

[4]            Taken together, the above letters are like two ships passing in the night. The Appellant claimed an input tax credit of $288,699 in Tab 1 relying on its interpretation of section 181.1 which refers to an "input tax credit" in paragraph (d). Revenue Canada replied with a description of how section 161 operates when section 161 makes no reference to an input tax credit. Set out below is section 161 excluding certain words which, in my view, are not relevant for the purposes of this case:

161           ... where tangible personal property (is) ... supplied and the amount of consideration for the supply shown in the invoice ... may be reduced if the amount thereof is paid within a time specified in the invoice, or an additional amount is charged ... if the amount of the consideration is not paid within a reasonable period specified in the invoice, the consideration due shall be deemed to be the amount of consideration shown in the invoice.

[5]            Respondent's counsel in his written brief of argument restated section 161. I have modified his words and would restate section 161 as follows:

the consideration for tax purposes is that amount shown in the invoice which may be reduced or increased to facilitate either an early payment discount or late payment penalty.

In my view, that is a fair restatement of section 161 because the purpose of the section is to establish a fixed amount of consideration for goods or services so that the supplier will know the amount of consideration on which to collect the GST without regard to whether the supplier offers an early payment discount or charges a late payment penalty.

[6]            It is important to recall that the GST is based on the value of the consideration for the goods or services; it is payable by the recipient of the goods or services; and the supplier is obliged to collect and remit the GST.

165(1)      Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply.

168(1)      Tax under this Division in respect of a taxable supply is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.

221(1)      Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.

228(2)      Where the net tax for a reporting period of a person is a positive amount, the person shall remit that amount to the Receiver General on or before the day on or before which the return for that period is required to be filed.

In the context of these statutory provisions which place an obligation on the supplier to determine the amount of the GST and to collect it, section 161 is an important guideline. For the supplier who offers an early payment discount or charges a late payment penalty, section 161 removes any doubt from the mind of that supplier with respect to the amount of GST which must be collected. It is apparent from the ASF (paragraphs 5, 6, 7, 8 and 9) that the Appellant followed the guideline in section 161.

[7]            There is no dispute between the parties with respect to section 161. The Appellant followed the provisions of section 161 when it invoiced its customers and remitted GST with respect to such invoices. In the example set out in the ASF (paragraphs 5 to 9), the Appellant invoiced the customer for $107 on June 1st and remitted $7 in GST on July 31st. The parties disagree on the interpretation and application of section 181.1 as it applied to 1991 and 1992. Because this section is at the heart of the case, I will discuss it in two phases. First, to get a sense of the section, I will exclude the formula following paragraph (e) because that formula is only mechanical. Later, I will apply the formula to the facts.

181.1        Where

(a)            a supplier makes a taxable supply in Canada of property or a service (other than a zero-rated supply),

(b)            a particular person acquires the property or service, either from the supplier or from another person, and is, at a particular time, paid a rebate by the supplier in respect of the property or service, and

(c)            subsection 232(3) does not apply to the rebate,

the following rules apply:

(d)            where the supply by the supplier was made at a time when the supplier was a registrant, for the purpose of determining an input tax credit, the supplier shall be deemed to have received a taxable supply of a service for use exclusively in a commercial activity of the supplier and to have paid, at the particular time, tax in respect of the supply equal to the tax fraction of the amount of the rebate, and

(e)            where the particular person is a registrant who was entitled to claim an input tax credit, or a rebate under Division VI, in respect of the acquisition of the property or service, the particular person shall be deemed, for the purposes of this Part, to have made a taxable supply and to have collected, at the particular time, tax in respect of the supply equal to the amount determined by the formula ...

[8]            Counsel for both parties agreed that subsection 232(3) did not apply to the Appellant's invoicing and collecting transactions because section 161 did apply. See subsection 232(4). In other words, subsection 232(3) will not be a deterrent if the Appellant can otherwise bring itself within the four corners of section 181.1. To facilitate interpretation and comprehension, I will replace the nomenclature of persons in section 181.1 with the corresponding words from the example in paragraphs 5 to 9 of the ASF. The "supplier" becomes the Appellant, and the "particular person" becomes the customer. Using the new nomenclature, I will restate paragraphs 181.1(a), (b) and (d) on which the Appellant relies.

181.1        Where

(a)            the Appellant makes a taxable supply in Canada of property or a service,

(b)            a customer acquires the property or service from the Appellant and is, at a particular time, paid a rebate by the Appellant in respect of the property or service, and

(c)            ...

the following rules apply:

(d)            where the supply by the Appellant was made at a time when the Appellant was a registrant, for the purpose of determining an input tax credit, the Appellant shall be deemed to have received a taxable supply of a service and to have paid, at the particular time, tax in respect of the supply equal to the tax fraction of the amount of the rebate, and

(e)            ...

[9]            The real issue in this appeal is whether the customer was "paid a rebate" by the Appellant within the meaning of paragraph 181.1(b). Before considering the interpretation of paragraph 181.1(b), I will determine the effect of the rule in paragraph 181.1(d) assuming that the customer was paid such a rebate. At all relevant times, the Appellant was a registrant. Therefore, under paragraph 181.1(d), the Appellant is deemed to have received a taxable supply of a service and to have paid (at the time of the rebate) tax equal to "the tax fraction of the amount of the rebate". The "tax fraction" is defined in section 123 to be 7/107, and the amount of the discount in the ASF (which the Appellant claims is a rebate) is $2.14. Therefore, "the tax fraction of the amount of the rebate" (if the Appellant's argument is accepted) is:

                                                7/107           x            $2.14 = 14 ¢

Applying the rule in paragraph 181.1(d) to the example in paragraphs 5 to 9 of the ASF and assuming that the customer was "paid a rebate", for the purpose of determining an input tax credit, the Appellant is deemed to have paid tax of 14 ¢ . As a registrant, this would give the Appellant an input tax credit of 14 ¢ .

[10]          I will now consider the interpretation of paragraph 181.1(b). Was the customer "paid a rebate" by the Appellant within the meaning of that paragraph? According to paragraph 6 of the ASF, upon issuing the invoice, the Appellant credited its sales account $100.00 and credited its GST payable account $7.00. Although there are no further comments in the ASF with respect to bookkeeping or accounting procedures, I assume that the Appellant debited its accounts receivable $107.00 at the same time as it credited the two accounts just referred to. The Appellant's main argument was on the interpretation of the word "rebate" but I would find it helpful if there had been a description of the bookkeeping entries which would be made by the Appellant to record the complete transaction in paragraphs 5 to 9 of the ASF. For example, in paragraph 7 of the ASF, when the Appellant remitted $7.00 in GST, did it debit its GST payable account in the amount of $7.00 to offset the credit entry referred to in paragraph 6 of the ASF?

[11]          And in paragraph 8 of the ASF, when the customer paid $104.86, what were the bookkeeping entries? One may assume that the Appellant debited its bank and credited its accounts receivable each in the amount of $104.86 but what did the Appellant do with the residual debit balance of $2.14 in its accounts receivable? When the Appellant decided that the customer's payment of $104.86 before July 10th would be accepted as payment in full of the invoice for $107.00, the Appellant was required to eliminate the debit balance of $2.14 in its accounts receivable. One may assume that the Appellant credited its accounts receivable in the amount of $2.14 but what did it debit? Sales $2.00 to show that the goods shipped on June 1st for $100 were really sold for $98? GST payable 14 ¢ to show that no GST would be collected on the $2.00 reduction in sales?

[12]          In my opinion, the bookkeeping entries are relevant because the Appellant claims to be under the umbrella of section 181.1 and, according to the rule in paragraph 181.1(d), the Appellant is deemed (at the time of the claimed rebate) to have received a taxable supply and to have paid tax in respect of the supply. If the Appellant debited its GST payable account in the amount of 14 ¢ as if it had paid that amount in tax when, in fact, it was giving effect to its early payment discount, then the commercial reality of the bookkeeping entries would match the tax deemed to have been paid in paragraph 181.1(d). Similarly, if the Appellant credited its account receivable in the amount of $2.14 to record its acceptance of $104.86 as payment in full of the invoice for $107.00, one could reasonably say that such a credit to accounts receivable was the payment of a rebate because the Appellant was writing off and was no longer expecting to receive the $2.14. In the special circumstances of this case, I regret that I was not provided with more information concerning the bookkeeping entries which would be made to record the transaction in paragraphs 5 to 9 of the ASF.

[13]          Counsel for the Appellant argued that the word "rebate" in paragraph 181.1(b) includes "discount". Rebate is an ordinary non-technical word used frequently in commercial transactions. In Chateau Manufacturing Ltd. v. Deputy Minister of National Revenue, (1983) 6 C.E.R. 100, Heald J.A. delivering judgment for the Federal Court of Appeal stated at page 102:

                The language used in Paragraph 21 is common language bearing a plain meaning. Accordingly there is no reason, in my view, for not giving to the words used therein the broadest meaning possible consistent with the context in which those words are found. Insofar as the context of Schedule V is concerned, I find nothing therein to require a departure from the plain meaning of the words used in interpreting the scope to be given to Paragraph 21 of Schedule V. ...

The Appellant provided five dictionary definitions of "rebate" from which I will quote three:

The Concise Oxford                                                             1. A partial refund of money paid.

Dictionary of Current

English, 9th Ed. 1995                                                            2. A deduction from a sum to be

                                                                                                paid; a discount.

ITP Nelson Canadian                                                           A deduction from or a return of

Dictionary of the English                                     part of a payment.

Language, 1997

Gage Canadian Dictionary,                                  The return of part of the money

1997                                                                                         paid; partial refund; discount.

[14]          I am satisfied from these definitions that the word "rebate" may include "discount" but the word is used in paragraph 181.1(b) in the context of "paid a rebate". Could one reasonably say "paid a discount"? According to the Concise Oxford Dictionary, "paid" is the past participle of "pay" and would ordinarily indicate a transfer of money. If the customer had paid the full invoiced price of $107.00 and the Appellant had then paid the amount of $2.14 to the customer to give effect to the 2% discount in the invoice, there would be no disputing the fact that the Appellant had "paid a rebate" to the customer. Referring to paragraph 5 of the ASF, it is the terms stated on the Appellant's invoice which permit the two payments (full invoiced price from customer to Appellant; and 2% rebate from Appellant to customer) to be short-circuited into a single payment of 98% of the full invoiced price if the customer is satisfied that the single payment will be received by the Appellant by the 10th day of the following month.

[15]          The GST legislation took effect on January 1, 1991. As its name implies, it is a tax on the transfer of goods and services. Unlike a retail sales tax, it is a value-added tax and applies to all commercial transfers of goods and services prior to and at the retail level. The legislation provides an "input tax credit" to registrants to avoid double taxation. I regard the terms of the Appellant's invoices as standard commercial practice: 2% discount if paid by the 10th day of the following month, otherwise full invoiced price due on the last day of the following month. I cannot imagine that the GST legislation drafted and enacted in the last decade of this century, and applying to almost all business transactions, was intended to ignore or interfere with standard commercial practice.

[16]          The terms on the Appellant's invoice are part of the overall contract between the Appellant and its customer. If the customer paid at least 98% of the full invoiced price by the 10th day of the following month, the customer would earn the 2% discount or rebate and the Appellant would be obliged to write off the remaining 2% in its books and records. According to the Respondent's argument, the Appellant and its customer would have to make two payments like the ones described in paragraph 14 above before the Appellant could claim that the customer was "paid a rebate" within the meaning of paragraph 181.1(b). Having regard to the many invoices issued by the Appellant alone, the Respondent's position is an unwarranted interference with the standard commercial practice of short-circuiting two payments into one. If the Appellant's invoicing policy is multiplied by all businesses in Canada with a similar invoicing policy, the Respondent's position is even more unreasonable.

[17]          In paragraph 7 above, I stated that I would discuss section 181.1 in two phases and later apply the formula in paragraph 181.1(e). Set out below is the rule in paragraph 181.1(e) modified by substituting "Appellant" for supplier and "customer" for particular person:

(e)            where the customer is a registrant who was entitled to claim an input tax credit in respect of the acquisition of the property or service, the customer shall be deemed to have made a taxable supply and to have collected, at the particular time, tax in respect of the supply equal to the amount determined by the formula

                                                                A x B/C x D

where

A              is the tax fraction,

B              is the input tax credit that the customer was entitled to claim in respect of the acquisition of the property or service,

C              is the tax payable by the customer in respect of the acquisition of the property or service, and

D              is the amount of the rebate paid to the customer by the Appellant.

[18]          Although the interpretation of paragraph 181.1(e) was not put to me in argument, I shall attempt to construe the formula as it applies to the example in paragraphs 5 to 9 of the ASF in order to determine the result.

                A              the tax fraction is defined in section 123 as 7/107.

                B              the customer (as a registrant) was entitled to claim an input tax credit                       of $7.00

                C              the tax payable by the customer was $7.00 under section 161.

                D              the amount of the rebate was $2.14.

According to my arithmetic, the formula in paragraph 181.1(e) would produce the following result:

                                                7/107 x $7.00/$7.00 x $2.14 = 14 ¢

Under paragraph 181.1(e), the customer is deemed to have collected tax equal to 14 ¢ . In paragraph 9 above, I applied the rule in paragraph 181.1(d) to the example in paragraphs 5 to 9 of the ASF and concluded that the Appellant was deemed to have paid tax of 14 ¢ and would therefore have an input tax credit of 14 ¢ . If my interpretation of the rules in paragraphs 181.1(d) and (e) is correct, the tax deemed to be paid by the Appellant (14 ¢ ) is equal to the tax deemed to be collected by the customer (14 ¢ ) when the Appellant and the customer are both registrants.

[19]          I am anxious to apply the rules in paragraphs 181.1(d) and (e) to the example in paragraphs 5 to 9 of the ASF because the Respondent argued that the Appellant's claim in this case involved an opportunity for a windfall gain at the expense of the public purse. I do not see how Revenue Canada suffers by granting the input tax credit claimed by the Appellant. Consider the steps in sequence:

1.              On June 1st, the Appellant shipped goods and sent an invoice for $107 ($100 for goods plus $7 for GST) offering a 2% discount for early payment.

2.              On July 8th, the Appellant received $104.86 with respect to its invoice for $107.00 and the Appellant accepted the amount $104.86 as payment in full giving effect to the 2% early payment discount.

3.              On July 31st, the Appellant remitted $7.00 to Revenue Canada with respect to its invoice for $107.00 sent on June 1st. The Appellant complied with section 161.

4.              Under the rule in paragraph 181.1(d), the Appellant is deemed to have paid GST of 14 ¢ when it paid the rebate (i.e. granted the discount of $2.14 by accepting early payment as payment in full).

5.              Under the rule in paragraph 181.1(e), the customer is deemed to have collected GST of 14 ¢ when it was paid the rebate (i.e. was granted the discount by the Appellant accepting early payment).

If the Appellant claims an input tax credit of 14 ¢ as a result of the deemed payment of tax in step 4 (i.e. precisely what the Appellant claims in this case), and if the customer remits GST of 14 ¢ as a result of the deemed collection in step 5, steps 4 and 5 would be a wash.

[20]          According to paragraphs 6, 7 and 8 of the ASF, the Appellant credited its GST payable account in the amount of $7.00 upon issuing the invoice on June 1st; and the Appellant then remitted $7.00 in GST on July 31st. By that date (July 31st), the Appellant knew that it had collected GST of only $6.84 on July 8th. The ASF is based on a hypothetical example and not on one or more actual transactions from the Appellant's business but I must accept the facts as agreed between the parties. If the Appellant remitted GST of $7.00 on the full invoiced price of the goods or services ($100.00) pursuant to section 161, and if the Appellant in fact received from the customer as consideration for the goods or services an amount ($98.00) less than the full invoiced price, why should the Appellant not have the input tax credit (14 ¢ ) under paragraph 181.1(d)? As between the Appellant and Revenue Canada, the net tax after such input tax credit would be $6.86 ($7.00 less 14 ¢ ) which is precisely 7% of the consideration ($98.00) actually paid by the customer.

[21]          If the Appellant does not have the input tax credit of 14 ¢ under paragraph 181.1(d) after remitting tax of $7.00 on the full invoiced price ($100.00) in compliance with section 161, and after receiving from the customer a total amount of $104.86, the Appellant's net proceeds of sale would be only $97.86 ($104.87 less $7.00) and Revenue Canada would retain tax of $7.00. Far from receiving a windfall gain, the Appellant's actual proceeds of sale ($97.86) would represent a discount of more than 2% on the invoiced price of the goods or services, and Revenue Canada would receive as tax more than 7% of the Appellant's actual proceeds or sale. This extraordinary result would occur just because the Appellant complied with section 161. If the Appellant had remitted $6.86 on July 31st (rather than $7.00), then the Appellant would achieve a financial advantage (perhaps a windfall) if it also obtained an input tax credit of 14 ¢ under paragraph 181.1(d), but this supposition is not consistent with paragraph 7 of the ASF which states that the Appellant remitted $7.00, and I must accept the facts as agreed between the parties.

[22]          The ASF does not state what the customer did about GST reporting and input tax credits in the example in paragraphs 5 to 9. If the customer claimed an input tax credit of only $6.86 as seems likely on a total payment of $104.86, and if upon receiving the discount (rebate) the customer is deemed to have collected tax of 14 ¢ under paragraph 181.1(e) with a corresponding obligation to remit, the customer would end up with a net input tax credit of only $6.72 which would be a detriment to the customer. In the absence of any facts in the ASF with respect to the customer's GST reporting and input tax credits, I will not be distracted by speculation on the customer's GST position when I am required to apply the legislation only to the Appellant's sale transaction. If the Appellant collected and remitted GST on the full invoiced price as it was obliged to do under section 161, and if on the same sale transaction the Appellant paid a rebate by granting a discount to the customer, I fail to see why the Appellant should not be entitled to the input tax credit in paragraph 181.1(d).

[23]          Section 161 is part of a series of sections (152 to 164.2) which are concerned with determining consideration. These sections are important because the 7% GST is based on "the value of the consideration for the supply". See subsection 165(1) quoted in paragraph 6 above. Section 181.1 is part of a series of sections (181, 181.1 and 181.2) which are concerned with coupons, rebates and gift certificates. The rules in paragraphs 181.1(d) and (e) apply only at the time when the discount is granted (i.e. the acceptance of the early payment which triggers the discount or rebate) and those rules deem the Appellant to have paid tax and its customer to have collected tax. Basically, section 181.1 permits the tax to be adjusted on both sides of the sale transaction.

[24]          From a common sense point of view, the tax should be adjusted if the actual consideration is adjusted. This is a simple recognition of commercial reality. In The Queen, Bronfman Trust, 87 DTC 5059, Dickson C.J.C. delivered the judgment for the majority and stated at page 5067:

... Assessment of taxpayers' transactions with an eye to commercial and economic realities, rather than juristic classification of form, may help to avoid the inequity of tax liability being dependent upon the taxpayer's sophistication at manipulating a sequence of events to achieve a patina of compliance with the apparent prerequisites for a tax deduction.

[25]          In The Queen v. Sentinel Self-Storage Corporation et al, [1996] 2895 ETC, the primary issue was whether the taxpayer (Sentinel) should have collected and remitted GST with respect to a $10.00 forfeited discount in rental fees paid by defaulting tenants of self-storage facilities. Linden J.A. delivering judgment for the Federal Court of Appeal stated:

... Parliament saw fit to exempt both late payment penalties and prompt payment discounts in relation to "tangible personal property or services", as specified in section 161 of the Act, ...

Because section 161 did not apply to the facts in Sentinel Self-Storage, the above comment is obiter. I should have thought that section 161 is not an exempting provision. In my opinion, its purpose is to establish a fixed amount of consideration so that a supplier would know the value of consideration on which to collect the GST whether the supplier offers an early payment discount or charges a late payment penalty.

[26]          I do not look on section 161 as excluding the possibility of a tax adjustment under section 181.1 in appropriate circumstances. Adapting the facts from the example in paragraphs 5 to 9 of the ASF, consider the following situation:

1.              On June 1st, a manufacturer ships goods to its customer for $100.00 plus 7% GST for $7.00 making a total invoiced amount of $107.00 with the same payment terms as on the Appellant's invoices.

2.              On July 8th, the customer pays the total invoiced amount of $107.00 within the early payment discount period.

3.              On July 31st, the manufacturer remits the $7.00 GST to Revenue Canada.

4.              On August 5th, the customer writes to the manufacturer requesting the benefit of the 2% discount because the total invoiced amount was paid before July 10th.

5.              On August 20th, the manufacturer mails a cheque for $2.14 to the customer as a 2% discount for early payment.

In the above situation, I would conclude that the manufacturer had "paid a rebate" to its customer on August 20th when it mailed the cheque for $2.14. I would also conclude that the manufacturer was entitled to an input tax credit of 14 ¢ under paragraph 181.1(d) on the tax it was deemed to have paid when it paid the rebate. There is no doubt that the manufacturer complied with section 161 when issuing the invoice for the amount of $107.00 but I fail to see why the manufacturer's compliance with section 161 should deny it the right to an input tax credit under paragraph 181.1(d).

[27]          If the above situation is changed so that the customer pays 98% of the total invoiced amount on July 8th because it knows it is within the early payment discount period and the manufacturer remits the full $7.00 GST to Revenue Canada in compliance with section 161, is there any reason why the manufacturer should not have the input tax credit under paragraph 181.1(d) just because it and its customer have short-circuited two payments into one?

[28]          I will allow this appeal and hold that the Appellant is entitled to input tax credits in the amount of $288,699 as referred to in the pleadings. To decide otherwise, would cause the GST legislation to interfere unduly in standard commercial practice. Also, it would cause an inequitable financial hardship to the Appellant because (referring to the example in paragraphs 5 to 9 of the ASF) Revenue Canada would receive and retain tax of $7.00 on a transaction which was effected at $98.00; and the excess tax (14 ¢ ) would come out of the proceeds of sale and reduce such proceeds from $98.00 to $97.86. The appeal is allowed, with such costs as permitted under the law and the rules of the Court.

Signed at Ottawa, Canada, this 17th day of May, 1999.

"M.A. Mogan"

J.T.C.C.

COURT FILE NO.:                                                 96-4665(GST)G

STYLE OF CAUSE:                                               William E. Coutts Company Ltd., o/a

                                                                                Hallmark Cards & Her Majesty the Queen

PLACE OF HEARING:                                         Ottawa, Ontario

DATE OF HEARING:                                           July 16, 1998

REASONS FOR JUDGMENT BY:                      The Honourable Judge M.A. Mogan

DATE OF JUDGMENT:                                       May 17, 1999

APPEARANCES:

Counsel for the Appellant:                                  Michael Kaylor

Counsel for the Respondent:                              Wayne Lonsdale

COUNSEL OF RECORD:

For the Appellant:                

Name:                                                                      Michael Kaylor

Firm:                                                                        Lapointe Rosenstein

For the Respondent:                                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

96-4665(GST)G

BETWEEN:

WILLIAM E. COUTTS COMPANY LTD.,

o/a HALLMARK CARDS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on July 16, 1998, at Ottawa, Ontario, by

the Honourable Judge M.A. Mogan

Appearances

Counsel for the Appellant:                    Michael Kaylor

Counsel for the Respondent:                Wayne Lonsdale

JUDGMENT

          The appeal from an assessment made under the Excise Tax Act notice of which is dated January 11, 1995 and bears number 05E-01521 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to an input tax credit in the amount of $288,699.96 with respect to the period under appeal. The Appellant is awarded such costs as are permitted under the law and the rules of the Court.

Signed at Ottawa, Canada, this 17th day of May, 1999.

"M.A. Mogan"

J.T.C.C.