7 September 2004 GST/HST Ruling 50959 - S Application of the GST/HST to the Sale of Horses through Claiming Races

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.

Dear XXXXX:

This letter is in response to your letter XXXXX to XXXXX the XXXXX Tax Services Office concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to accounts receivable and labour & material payment bonds. Your letter has been forwarded to our office for reply.

Background

I understand that XXXXX spoke with you in regards to concerns raised in your letter, and that you would like an explanation of section 231 of the Excise Tax Act (ETA).

In the case at hand, a supplier of XXXXX products charged GST on its goods and services. The supplier accounted for the GST in relation to the supply in its net tax calculation, and remitted any positive net tax owing. The supplier was unable to collect the GST from its customer. The supplier's account receivable was not collectible from the customer and proceeds were paid to the supplier by the surety pursuant to a labour and material payment bond (net of the GST).

It is our understanding that the function of a labour & material payment bond is to guarantee that all claimants will be paid for labour and materials furnished to the principal for use on the project described in the bond.

Interpretation Requested

Can a supplier write-off an amount for accounting purposes where they will be receiving proceeds from a labour & material payment bonds with respect to the account receivable?

Interpretation Given

In the case at hand, the core issue relates to whether or not a person would be entitled to write-off an amount for accounting purposes where they will be receiving proceeds under a labour & material payment bond, rather than an interpretation issue relating to the ETA. In accordance with paragraph 20 of section 1.4 of chapter 1 of the GST/HST Memoranda Series (see attached), the Canada Revenue Agency ("CRA") will not rule where an issue to be considered involves an opinion on Generally Accepted Accounting Principles ("GAAP"). Nevertheless, we can provide you with the following general comments.

The term "bad debt" is not expressly defined in the ETA. Accordingly, if the supplier would be entitled to write-off an account receivable as a bad debt in accordance with GAAP, then it may use subsection 231(1) of the ETA, Bad Debt - deduction from net tax, provided all of the conditions in the provision are satisfied.

Policy statement P-058R - Recovery Of Bad Debts (see attached), addresses the scenario where a company is registered for the GST/HST and has credit insurance that covers losses sustained on accounts receivable which become bad debts. Policy statement P-058R presents an example of a situation where a company made a taxable supply of its product and accounted for and remitted the GST/HST related to the sale. The customer subsequently went into receivership and the company wrote-off the account receivable at its year-end.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series. Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9699.

Yours truly,

Douglas Wood, CGA
Rulings Officer
General Operations Unit
General Operations & Border Issues Division
Excise & GST/HST Rulings Directorate

2004/09/16 — RITS 51121 — East Indian Sweets