North Shore – Federal Court of Appeal finds that previously-collected HST is not “credited” by the supplier to the purchaser under ETA s. 232 unless the sum is put at the purchaser's disposal

A supplier (Menova) received substantial down payments 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 before refunding any amount shown on the credit memos. CRA considered that because the applicable portion of the previously-charged and collected HST thus had been credited through the adjustment shown on the credit memos, such HST was required to be added back to North Shore’s current HST return under ETA s. 232, thus effectively reversing the input tax credit previously claimed by North Shore.

Woods JA stated:

[T]he term “credit” in section 232 [means]: an operation by which a sum is put at the disposal of someone else. 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.

[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.

Neal Armstrong. Summary of North Shore Power Group Inc. v. Canada, 2018 FCA 9 under ETA s. 232(2) and 231(1).