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.
[Addressee]
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
Case Number: 137792
Business Number: [...]
November 28, 2011
Dear [Client]:
Subject:
GST/HST INTERPRETATION
GST/HST adjustments, refunds and credits
Thank you for your letter of August 2, 2011, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to tax adjustments, refunds and credits.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
We understand that [...] ([the Corporation]) is the owner and operator of retail stores. [The Corporation] is registered with the Canada Revenue Agency (CRA) for GST/HST purposes with Business Number [...].
Vendors of [the Corporation] (Vendors) are engaged in the business of providing tangible personal properties to [the Corporation] by way of sale. All vendors are registered with CRA for GST/HST purposes.
Written agreements are in place between [the Corporation] and the Vendors specifying financial arrangements and transactions. The following are the transaction details between [the Corporation] and the Vendors:
• The Vendors provide tangible personal property to [the Corporation] by way of sale
• The products purchased by [the Corporation] are used for resale
• [The Corporation] pays the vendors tax charged on the invoice and [the Corporation] claims Input Tax Credits (ITCs).
Subsequent adjustments to the invoices may be made for the following reasons listed below:
• price differences
• concealed damage
• concealed shortage
• damaged/defective merchandise
• promotional allowances
• freight allowances
RULINGS REQUESTED
1) You would like confirmation on the application of section 232 to the subsequent adjustments listed above.
2) If [the Corporation] and a Vendor have a written agreement that specifies [the Corporation] will initiate subsequent adjustments and not refund or credit the GST/HST that was previously paid, does section 232 apply?
3) Under ETA or audit requirements, are debit notes or credit notes required for claims with no GST/HST adjustments?
As outlined in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, a ruling provides CRA's position on specific provisions of the legislation as these relate to a clearly defined fact situation of a particular person, supported by relevant documentation such as contracts and other pertinent agreements. Alternatively, an interpretation provides a general explanation of how the law would apply without relating to any specific transaction. As you have not supplied us with any written agreements with the Vendors or sample adjustments, we are providing you with an interpretation of the relevant portions of the legislation in order to assist you in respect of [the Corporation's] entitlements and obligations under the law.
Interpretation Given
Under section 232 a supplier is permitted to adjust, refund or credit GST/HST in two situations: where an amount of tax in excess of tax collectible has been charged or collected; or where consideration for a supply is reduced some time after the tax has been charged or collected.
As stated in Memorandum 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act, a supplier is permitted to adjust, refund or credit GST/HST where consideration for a supply is reduced some time after the tax has been charged or collected. Where such a reduction in consideration has occurred:
• it must be given to the original recipient of the supply, or that person's agent;
• it must relate to an amount that has been collected or charged;
• it must also relate to the original supply; and
• it may be made for any reason (e.g., as a result of surpassing a certain volume of purchases) but must not depend on any action undertaken by the recipient or any supply made by the recipient.
Under subsection 232(2), where a particular person has charged to, or collected from, another person tax 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.
There is no requirement to issue a credit note or debit note unless a refund, adjustment or credit of the tax is made by the supplier to the recipient.
Nevertheless, when a supplier has refunded, adjusted, or credited an excess amount of tax on consideration that had been reduced, the supplier is required to issue a credit note, including prescribed information, within a reasonable time to the recipient, unless the recipient first issues a debit note to 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 is received or the debit note is issued by the recipient, to the extent the amount has been included in determining an input tax credit claimed by the recipient in a return filed for the reporting period or a preceding reporting period of the recipient.
The information that is required for credit and debit notes are found under the Credit Note and Debit Note Information (GST/HST) Regulations. The following prescribed information must be included on all credit and debit notes:
a) a statement or other indication that the document is a credit or debit note;
b) the name of the supplier or an intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number of the supplier or the intermediary;
c) the name of the recipient or name of the recipient's business or the name of the recipient's duly authorized agent or representative;
d) the date on which the note is issued; and
e) unless the note is issued in respect of a patronage dividend or for a total amount that includes both the consideration and the tax for more than one supply, the amount of the adjustment, refund or credit of tax for which the note is issued.
Memorandum 12.2 states that a reduction in consideration may occur under the following circumstances:
• when some or all of the consideration is returned;
• as a result of surpassing a certain volume of purchases, i.e., a volume rebate;
• where goods delivered are found to be substandard; or
• where goods are returned to the supplier for a full or partial refund of the consideration.
Similarly, reductions in consideration for concealed damage, concealed shortage, damaged/defective merchandise and freight allowances are reductions in consideration that may be considered to fall under subsection 232(2), provided the other conditions of this subsection are met.
Another reason given above for a reduction in consideration is a "promotional allowance". For purposes of section 232.1, the term "promotion" means efforts, activities or actions that directly or indirectly inform, persuade and influence the acceptance, distribution and sale/purchase of a product.
Section 232.1 applies where:
• a particular registrant (i.e. a reseller)
• acquires particular tangible personal property (i.e. specific goods) [from a supplier such as the manufacturer of the property or an intermediary such as a wholesaler]
• exclusively for supply by way of sale for a price in money (i.e. resale) in the course of the reseller's commercial activities; and
• another registrant (e.g. the manufacturer of the property) who has made taxable supplies of the property by way of sale to the reseller or to another person (e.g. an intermediary such as a wholesaler)
- pays to, or credits in favour of, the reseller, or
- allows as a discount on, or as a credit against, the price of any property or service supplied by that registrant to the reseller
an amount in return for the promotion of the particular tangible personal property by the reseller.
GST/HST Policy Statement P-243, Promotional Allowances provides a listing of activities for which the allowances paid by the supplier would generally fall within the meaning of promotion for purposes of section 232.1. For example, this listing includes a temporary price reduction program, which is an amount paid by a supplier to a reseller to temporarily reduce the selling price of a product that has been acquired by the reseller for resale.
Whether any particular price difference may be either a reduction in consideration under subsection 232 or a promotional allowance which is subject to section 232.1, would be determined by a review of the related documentation.
Where an allowance meets the requirements of section 232.1, it is deemed not to be consideration for a supply by the reseller to the other registrant. This is the case, whether or not the tax is adjusted or a debit or credit note is issued.
The tax treatment of the promotional allowance will depend on whether the supplier chooses to refund, adjust or credit the tax on the reduction in consideration in accordance with subsection 232(2). As mentioned previously, pursuant to subsection 232(3), a credit or debit note must be issued if the supplier chooses to refund, adjust or credit the GST/HST previously charged or collected, permitting the supplier to adjust their net tax and requiring the purchaser to add that amount to its net tax to the extent it claimed an ITC for the amount.
Although not applicable in the scenario discussed above, it should be noted that in the case where tax on the discounted property or service has not already been charged or collected and the promotional allowance is being credited on the original invoice, the allowance is deemed to be a rebate for purposes of section 181.1. Tax applies on the price net of the promotional allowance and no credit or debit note need be issued.
The foregoing comments represent our general views with respect to the subject matter of your request. These 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 Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (902) 426-6940. 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,
Nancy Jardine
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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