Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings
Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 107777
October 28, 2008
Subject:
GST/HST INTERPRETATION
Application of section 181.1 of the ETA to early payment discounts
XXXXX
We are writing in reply to your XXXXX, and further to our telephone conversation on XXXXX and your XXXXX, concerning the application of section 181.1 of the Excise Tax Act to early payment discounts and the criterion in paragraph 181.1(c) that the issuer of a rebate provide "written indication" that the rebate includes GST/HST.
All legislative references are to the Excise Tax Act ("ETA") and the regulations thereunder, unless otherwise specified.
Effective January 1, 2008, the rate of the GST has been reduced from 6% to 5% and the rate of the HST from 14% to 13%. The new rates apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules will apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at http://www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.
You describe the following scenario:
• A Canadian retailer ("Retailer") and a Canadian supplier ("Supplier"), both GST/HST registrants engaged in commercial activities, enter into a contract ("Contract") covering the supply of certain goods.
• Transactions between the Supplier and Recipient are conducted using Electronic Data Interchange (EDI). As such, the Supplier's invoices are issued in electronic form and no paper invoices are exchanged between the parties.
• A XXXXX cash discount on the goods may be taken by Retailer, subject to the terms of payment stipulated in the Contract.
• The Contract requires the discounts to be calculated on the "gross amount" of the vendor's invoice. Specifically, the excerpt of the Contract included in your letter states under the heading, "XXXXX", as follows:
XXXXX.
• The EDI invoices contain references to the subject cash discounts. For example, an EDI invoice dated July 17, 2008, would bear payment terms as:
XXXXX.
• In the above example, the EDI invoice is issued under the auspices of the Contract such that the payment terms would confer a XXXXX gross cash discount if the payment is received by July 27, 2008, otherwise full payment would be required by August 16, 2008.
Interpretation Requested
You wish to know whether an EDI invoice issued by the Supplier, in tandem with the reference in the Contract to the "gross amount", is sufficient to satisfy the requirement in paragraph 181.1(c) that the Supplier provide "written indication" that a discount taken by the Retailer includes an amount on account of tax.
You suggest XXXXX that the reference in the Contract to the words "gross amount" is sufficient for the related EDI invoices to meet the requirements of paragraph 181.1(c). In this regard, you XXXXX that the word, "gross" is standardized term understood to be an amount that includes GST/HST and that, on this basis, both the Supplier and Retailer are implicitly aware that the amount of an EDI payment falling within a particular discount period includes an amount on account of tax. As such, you contend that the discount, to the extent that it qualifies as a rebate under section 181.1, is a GST/HST included amount in respect of which the Retailer must account for tax under subsection 181.1(f), while the Supplier is eligible for a corresponding input tax credit ("ITC") under paragraph 181.1(e).
INTERPRETATION AND ANALYSIS
Legislation
Section 161 generally provides that an early payment discount does not reduce the value of the consideration for a supply of property or services for purposes of calculating tax. As such, GST/HST is payable on the full invoiced amount, regardless of whether or not the customer subsequently takes advantage of the discount.
Section 181.1 applies to certain rebates paid in respect of property or services. Briefly, this section provides that where a registrant makes a taxable supply of property or a service (other than a zero-rated supply) and pays a rebate in respect of the property or service to the purchaser, the registrant may, subject to the parameters delineated in section 181.1, claim an input tax credit ("ITC") equal to the tax fraction of the rebate.
In the Tax Court of Canada (TCC) decision in William Coutts Company Ltd. V The Queen [1999] 2900 ETC, the judge ruled that a supplier was entitled to an ITC in respect of the early payment discounts it gave its customers on the basis that the discounts (which met the requirements of section 161 of the ETA) also met the requirements of section 181.1 of the ETA applicable to rebates.
Subject to paragraph 181.1(e), an ITC may be available in respect of rebate paid by a registrant supplier 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 therewith provides written indication that a portion of the rebate is an amount on account of tax, and
(d) subsection 232(3), pertaining to refunds or adjustments of tax, 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 when the rebate was paid. The ITC is equal to the tax component of the rebate.
Where written indication is given that the rebate includes an amount on account of tax, the rebate recipient (if 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) is deemed to have made a taxable supply to the supplier of the property or service (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 rebate recipient is required to account for the amount of the rebate that is on account of tax, to the extent that the recipient claimed an ITC or a Division VI rebate of in respect of that amount. However, where no written indication is provided with the rebate, the issuer of the rebate is not entitled to claim an ITC and the rebate recipient is not required to account for any tax that might be included in the rebate amount.
Position
The purpose of the "written indication" required by paragraph 181.1(c) is to enable the rebate recipient to ascertain its obligations, if any, under paragraph 181.1(f) above. Assuming that a particular rebate includes an amount on account of tax, written indication to that effect is necessary in order to avoid a situation whereby a registrant claims an ITC for the tax included in the rebate but the rebate recipient, not having been made aware that tax was included, is unable to comply with its obligations under paragraph 181.1(f). In effect, paragraph 181.1(c) precludes the registrant from claiming an ITC in cases where the registrant has not provided written indication that the amount of the rebate includes tax. In such a case, the rebate recipient would not be required to account for any tax ostensibly included in the rebate.
On this basis, the intent of the legislation is not to accord the registrant an ITC under paragraph 181.1(e) where the registrant's communication to the rebate recipient regarding the latter's potential tax obligations under paragraph 181.1(f) are not made clear. The Department of Finance explanatory notes to section 181.1 support this intent by using the words "notification" or "notify" in reference to the registrant's obligation to provide written indication that a particular rebate includes an amount on account of tax.
It is our position that, where tax is included in the rebate, an unambiguous statement to this effect must be provided to the rebate recipient such that the recipient is able to clearly discern its obligations under paragraph 181.1(f). The reference to the "gross amount" in the aforementioned excerpt of the Contract does not bear such attributes. Assuming that the remainder of the Contract is silent on the issue, the Supplier would not be entitled to an ITC under paragraph 181.1(e), nor would the Retailer be required to account for tax pursuant to paragraph 181.1(f).
In a follow-up XXXXX to me on XXXXX, you advised that the Supplier makes the following request of the Retailers:
XXXXX.
You ask whether the Supplier's request is sufficient to satisfy the requirements of paragraph 181.1(c).
If the Supplier wishes to claim an ITC under paragraph 181.1(e), it must, among other things, comply with the provisions of paragraph 181.1(c), which require that it indicate in writing (at the time that the discount is provided) that a portion of the rebate is an amount on account of tax. Here, the Supplier has not indicated that a portion of the rebate includes tax; rather it has issued a request to determine whether the Retailer is treating the subject discounts as a tax included amount. It is our opinion that the requirements of paragraph 181.1(c) are not satisfied in this situation, thus precluding the Supplier from claiming an ITC and relieving the Retailer from the obligations stipulated in paragraph 181.1(f).
The foregoing comments represent our general views with respect to the subject matter of your request. Those comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification on any of the issues discussed in this letter, please call me at 613-952-8816.
Yours truly,
Paul Hawtin
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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