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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 157478
Business Number: […]
Dear [Client]:
Subject: GST/HST RULING
Merchandise returns
Thank you for your letter of October 17, 2013, concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to the return of merchandise by a retailer to its supplier. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia 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
Based on your letter, additional information you submitted by fax, as well as your telephone conversations with our office, we understand the facts to be as follows:
1. […] ([…][The Corporation]) was a GST/HST registrant corporation with its head office located in […][City 1, Province 1]. It was a wholesaler of a variety of home décor products to a number of retail businesses across Canada.
2. [The Corporation] normally purchased its merchandise from various suppliers located outside of Canada and then imported the merchandise into Canada for resale, with terms of delivery to its customer in one or more Canadian provinces. [The Corporation] charged the customer the GST/HST at the rate applicable in the province where the merchandise was delivered.
3. In some cases, legal delivery of [the Corporation’s] merchandise to its customer occurred at its supplier’s premises outside Canada, with the customer being responsible for importing the merchandise into Canada. This was the situation under an arrangement it had with […] ([…][the Retailer]) that was subject to the terms and conditions of a Purchase Agreement the parties entered into in [mm/yyyy].
4. According to the recitals of the Purchase Agreement, [the Retailer] and [the Corporation] agreed that the terms of the Purchase Agreement would govern all purchases of merchandise by [the Retailer] from [the Corporation] until the Purchase Agreement was terminated. Paragraph […] of the Purchase Agreement stated that each of [the Retailer] and [the Corporation] had the right at any time on at least [#] days’ written notice to the other party to terminate the Purchase Agreement. In accordance with section […], the Purchase Agreement would enure to the benefit of and be binding upon the parties and their respective successors and assigns.
5. Upon the execution and delivery of a purchase order by [the Retailer] that was accepted without exception or qualification by [the Corporation], the parties were deemed by section […] of the Purchase Agreement to have entered into a binding agreement with respect to the subject matter of the purchase order.
6. Section […] of the Purchase Agreement stated that title to and ownership of the merchandise would pass to [the Retailer] upon delivery of the merchandise to [the Retailer] at the delivery point specified in the applicable purchase order. All risks of damage to or loss, destruction, or deterioration of the merchandise would be borne by [the Corporation] until such merchandise had been delivered to [the Retailer] at the place specified in the applicable purchase order, at which point the same would pass to [the Retailer].
7. The Purchase Agreement also provided rules to address those situations where [the Retailer] wanted to reject previously purchased merchandise. Specifically, section […] of the Purchase Agreement included the following provisions:
8. Since most sales made to [the Retailer] under this arrangement were supplies made outside Canada, [the Corporation] did not charge [the Retailer] the GST/HST on those supplies. An exception to this was when [the Corporation] also supplied some of the same products from its own inventory held in Canada. In that case, [the Corporation] charged and collected the applicable GST/HST on the sale of the products to [the Retailer] based on the [Retailer] location where the products were shipped.
9. When [the Retailer] returned merchandise to [the Corporation], it issued a […]([…][Notice]) to [the Corporation] in respect of the merchandise. Consistent with section […] of the Purchase Agreement, the amount payable by [the Corporation] included the original price paid to [the Corporation] 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. As a GST/HST registrant, [the Retailer] charged [the Corporation] the GST/HST calculated on that total amount using the rate of tax applicable in the province in which it delivered the merchandise back to [the Corporation].
10. In your fax dated December 2, 2013, you provided our office with the following sample documentation in order to illustrate the purchase and subsequent return of merchandise by [the Retailer] under the Purchase Agreement:
- a purchase order dated [mm/dd/yyyy], issued by [the Retailer] to [the Corporation] for […][products] at a unit price of US$[…], with delivery terms FOB […][Origin];
- an invoice dated [mm/dd/yyyy], issued by [the Corporation] to [the Retailer] for the [products] at US$[…] each for a total of US$[…] with no GST/HST charged;
- a commercial invoice dated [mm/dd/yyyy], indicating [the Retailer] as the consignee and delivery being FOB [Origin]; and
- [Notice] dated [mm/dd/yyyy], listing various items of merchandise returned to [the Corporation], including one of the [products] with a “unit price” of US$[…].
11. The US$[…] unit price of the returned [product] consisted of the original US$[…] purchase price, plus all applicable amounts referred to in paragraph […] of the Purchase Agreement. [The Retailer] has charged the HST at 13% calculated on the entire unit price, as delivery of the merchandise to [the Corporation] took place in Ontario. Tax has also been calculated and charged on an additional handling charge, which applied to the entire [Notice] that included other returned merchandise as well.
12. Due to a corporate amalgamation that became effective on [mm/dd/yyyy], [the Corporation’s] GST/HST registration was cancelled at that time. […] ([…][the Successor Corporation]) is the successor corporation for the amalgamation and continues to operate the wholesale business, reporting its GST/HST using its own registration number. It is our understanding that [the Successor Corporation] and [the Retailer] continue to do business under the same terms and conditions provided in the original Purchase Agreement outlined above.
RULING REQUESTED
Does the return of merchandise by [the Retailer] to [the Successor Corporation] (and previously [the Corporation]) in Canada constitute a supply of that merchandise by [the Retailer] on which it is required to charge and collect the GST/HST from [the Successor Corporation]?
RULING GIVEN
Based on the facts set out above, we rule that the return of merchandise by [the Retailer] to [the Successor Corporation] (and previously [the Corporation]) in Canada in accordance with section […] of the Purchase Agreement constitutes a supply by way of sale of that merchandise made in Canada by [the Retailer] on which it is required to charge and collect the GST/HST from [the Successor Corporation].
EXPLANATION
When a purchaser returns tangible personal property (TPP) to a supplier for a full or partial refund of the consideration for the original sale of that TPP, subsection 232(2) may apply to allow the supplier the option of refunding or crediting the purchaser the amount of the GST/HST applicable to the amount refunded or credited. Where no tax was payable on the original supply because the supply was made outside Canada, there would be no tax implications to the return of the TPP.
Alternatively, where a “return” of TPP is a supply by way of sale of the TPP made by the original purchaser back to the original supplier, the transaction would generally be subject to the GST/HST where the supply is made in Canada and the original purchaser is a GST/HST registrant.
The preamble of subsection 232(2) contains the criteria that must be met in order to apply the provision and reads as follows:
Where a particular person has charged to, or collected from, another person tax under Division II calculated on the consideration or a part thereof for a supply and, for any reason, the consideration or part is subsequently reduced…
Paragraph 6 of GST/HST Memorandum 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act 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, paragraph 10 of Memorandum 12.2 further states that “a reduction in consideration is not considered to have occurred if the goods are sold back to the original supplier. To be considered a reduction of consideration, it must be evident that the goods are being returned to the supplier rather than being sold to the supplier.”
Two terms defined in subsection 123(1) are important in characterizing a transaction in the circumstances you have provided. A “supply” is defined to mean, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. The definition of “sale”, in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property.
Therefore, any “return” of TPP to a supplier generally constitutes a sale where ownership of the TPP passed to the customer at the time of the original supply, since there would be a subsequent transfer of ownership back to the original supplier at the time of the “return.”
It should be noted that where the original supply from [the Successor Corporation] to [the Retailer] was made outside Canada (the majority of cases), subsection 232(2) would not apply regardless of how the “return” is viewed, since no tax was charged or collected by [the Successor Corporation]. However, it could potentially apply to those less common situations noted in your letter where [the Successor Corporation] sold merchandise to [the Retailer] that had been held as inventory and supplied by [the Successor Corporation] in Canada.
In the case of [the Retailer’s] “returns” of merchandise to [the Successor Corporation], section […] of the Purchase Agreement contains a number of terms such as return, refund, reject, and repay. Further, [the Retailer] issues [the Successor Corporation] a [Notice] when requesting payment from [the Successor Corporation]. These terms in the Purchase Agreement, when considered on their own, may indicate that the transaction could be viewed as a return of TPP that is contemplated by subsection 232(2).
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.
Based on these facts, the merchandise is not being “returned” by [the Retailer] to [the Successor Corporation] and therefore, the payment by [the Successor Corporation] of the amount specified on the related [Notice] is not a reduction of the consideration for the original supply of the merchandise within the context of subsection 232(2). Rather, the provision of merchandise by [the Retailer] to [the Successor Corporation] in accordance with section […] of the Purchase Agreement is a sale of the merchandise made by [the Retailer] and since it delivers the merchandise to [the Successor Corporation] in Canada, [the Retailer] is required to collect the GST/HST on the sale at the rate applicable in the province in which delivery takes place (assuming the supply is not a zero-rated supply).
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
If you require clarification with respect to any of the issues discussed in this letter, please call Graham Leflar, Rulings Officer, directly at 306-975-4733. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Catherine Séguin-Ouimet
Manager
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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