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.
DATE July 8, 2013
FROM Jill McDonald
Rulings Officer
GST/HST Rulings
78 Richmond Street, Oshawa ON
TO [Addressee]
SUBJECT : GST/HST INTERPRETATION
181.1 Manufacturers' Rebates and 232 Credit and Debit Notes
Thank you for your [correspondence] of May 30, 2012, regarding the application of sections 181.1 and section 232 of the Excise Tax Act (ETA). We apologize for the delay in our response.
The Harmonized Sales Tax (HST) applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia. The Goods and Services Tax (GST) applies in the rest of Canada at the rate of 5%.
Facts
We understand from your memo that you would like clarification on the application of section 181.1 and section 232 with respect to what we have summarized into two scenarios.
Scenario 1
Corp A, a registrant, made a taxable sale of tangible personal property to Corp B, another registrant, in a non-participating province. Corp A charged GST on the sale and included this amount in determining its net tax. Corp B claimed a full input tax credit (ITC) for the tax charged.
Later, Corp A reduced the consideration on the sale and refunded to Corp B the portion of the tax that was calculated on the amount by which the consideration was reduced. At the time of refund, Corp A notified Corp B in writing that a portion of the refund was an amount on account of tax. Corp A did not issue a credit note to Corp B, and Corp B did not issue a debit note to Corp A.
Scenario 2
Corp A, a registrant, made a taxable sale of tangible personal property to Corp B, another registrant, for $100,000 in a non-participating province. Corp B resold the property to Corp C, which may or may not be a registrant, for $200,000, also in a non-participating province.
Both sales were subject to GST at 5% and provincial sales tax (PST) at 8%. Corp A collected and remitted GST of $5,000 and PST of $8,000 on the sale to Corp B, and Corp B collected and remitted GST of $10,000 and PST of $16,000 on the sale to Corp C. Corp B claimed full ITCs for the GST charged by Corp A. If Corp C was a registrant and used the property in the course of its commercial activities, then we can assume that it claimed full ITCs for the GST charged by Corp B. If Corp C was not a registrant, it would not have claimed ITCs.
After the sale, Corp A paid to Corp C a rebate in the amount of $1,130 and indicated in writing that the rebate included both GST ($50) and PST ($80).
INTERPRETATION:
Under subsection 232(2), 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, the particular person may, in or within four years after the end of the reporting period of the particular person in which the consideration was so reduced,
(a) where tax calculated on the consideration or part was charged but not collected, adjust the amount of tax charged by subtracting the portion of the tax that was calculated on the amount by which the consideration or part was so reduced; and
(b) where the tax calculated on the consideration or part was collected, refund or credit to that other person the portion of the tax that was calculated on the amount by which the consideration or part was so reduced.
Furthermore, subsection 232(3) provides, in part, that where an amount of tax is refunded, credited, or adjusted under subsection 232(2), a credit note or a debit note shall be issued between the supplier and the recipient, containing prescribed information pursuant to section 3 of the Credit Note and Debit Note Information (GST/HST) Regulations (the Regulations).
Please note that the credit note or debit note can be written in a memorandum, an invoice or in a letter as long as the prescribed information listed in the Regulations is contained in the document.
Where a credit note or debit note is properly issued, the supplier is entitled to deduct the amount of the tax refund, credit or adjustment when determining its net tax for the reporting period in which the credit note or debit note is issued to the extent that the amount has been included in determining the net tax for that reporting period or a preceding reporting period of the supplier.
The recipient, if a registrant, is required to add the amount of the tax adjusted, refunded, or credited when determining its net tax for the reporting period in which the credit note or debit note is issued to the extent that the amount has been included in determining an ITC claimed in a return filed for that reporting period or a preceding reporting period of the recipient.
Where a supplier refunds, adjusts, or credits an amount of tax to a recipient after a rebate under Division VI has been paid to, or applied to a liability of, the recipient before the day the credit note or debit note is issued, the recipient is required to pay any excess amount back to the Receiver General. The excess amount is equal to the difference between the rebate received and the amount of the rebate, if any, to which the recipient would have been entitled if the amount of tax that was refunded, adjusted or credited by the supplier had never been charged or collected from the recipient in the first place.
Where a credit note or debit note is not properly issued, or is not issued at all, the supplier is not entitled to deduct, and the recipient is not required to add, the amount of the tax refund, credit or adjustment when determining its net tax for the reporting period in which the credit note or debit note is issued.
Section 181.1 applies to certain rebates paid in respect of property or a service. Under this section, a registrant may claim an ITC in respect of the tax fraction of a rebate paid by the registrant where:
(a) the registrant makes a taxable supply in Canada of property or a service that is not a zero-rated supply,
(b) a particular person acquires the property or service, either from the registrant or from another person,
(c) the registrant pays, at any time, a rebate in respect of the property or service to the particular person and provides written indication that a portion of the rebate is an amount on account of tax, and
(d) subsection 232(3) does not apply to the rebate.
Where these conditions are met, paragraph 181.1(e) provides that the registrant may claim an ITC for the reporting period that includes the time the rebate was paid. The ITC is calculated by multiplying the amount of the rebate by the appropriate "tax fraction". Where the supply in respect of which the rebate is paid was made in a non-participating province and was therefore subject only to the GST under subsection 165(1) at the rate of 5%, the tax fraction is equal to 5/105.
Where the particular person (i.e., the recipient of the rebate) is a registrant who was entitled to claim an ITC or Division VI rebate in respect of the acquisition of property or service to which the rebate relates, the particular person will be deemed to have made a taxable supply of the property or service to the registrant (i.e. the issuer of the rebate) and to have collected tax in respect of the deemed supply pursuant to paragraph 181.1(f). The particular person is required to account for the amount of the rebate that is on account of tax, to the extent that they claimed an ITC or a Division VI rebate in respect of that amount.
The CRA has taken the position that, generally, section 232 applies to refunds paid or credited by a supplier directly to a recipient in respect of a supply made by the supplier to that recipient, and section 181.1 applies to rebates paid by a supplier to third parties with whom the supplier was not dealing directly (e.g., rebates paid by a manufacturer to consumers in respect of property originally supplied by the manufacturer to a distributor or other intermediary). As noted in our discussion of section 181.1 above, if subsection 232(3) applies, then section 181.1 cannot apply by virtue of paragraph 181.1(d).
Scenario 1
In Scenario 1, the refund of consideration and tax would come within subsection 232(2), and therefore subsection 232(3) applies. However, since a credit note or debit note was not properly issued in respect of the refund, Corp A was not entitled to deduct the amount when it determined its net tax for that reporting period and Corp B was not obligated to include the amount in its net tax for that reporting period. In this Scenario, since subsection 232(3) applies, section 181.1 cannot apply because of the condition imposed under paragraph 181.1(d).
Scenario 2
In Scenario 2, section 232 does not apply as Corp A paid the rebate to Corp C, a third party with whom Corp A had not dealt directly. However, all of the conditions for the application of section 181.1 appear to have been met. Thus, Corp A was entitled to an ITC of $53.81, which is equal to $1,130, the amount of the rebate, multiplied by 5/105, the applicable tax fraction. The legislation does not contemplate situations where the coupon value may include provincial sales tax (Footnote 1).
The impact of section 181.1 on Corp C will depend on whether Corp C is a registrant. If Corp C is a registrant, then it is required to remit $53.81, the amount of the rebate that is on account of tax. If Corp C is not a registrant, then it is not required to account for tax on the amount of the rebate.
Should you have further questions or require clarification on the above or any other GST/HST matter, please contact me at (905)721-5203 or GST/HST Rulings at 1-800-959-8287.
Footnotes:
1. We understand that a manufacturer would not normally be permitted under provincial legislation to reimburse PST to a third party from whom it did not collect PST. Consequently, by providing written indication that part of the rebate was on account of PST, Corp A may have simply been referring to an amount that represents the value of the PST and not the PST itself.[...], a manufacturer cannot reimburse GST to a third party from whom it did not collect GST either, but where a manufacturer provides written indication that part of the rebate is an amount "on account of tax", the deeming provisions in section 181.1 effectively treat that amount as though it were tax.
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