15 December 2006 GST/HST Ruling 83781 - Supplies of an admission made by the City XXXXX

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:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to discounts provided by one of your suppliers (the supplier) to XXXXX (the recipient) for taxable supplies of goods by way of sale.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Based on the information provided, we understand that the supplier provides the recipient with the choice of four payment options when it purchases goods from the supplier. Once the recipient has selected an option, there is no further choice with respect to when payment for the goods is required to be made.

Depending on the terms of payment option selected by the recipient, the supplier offers a discount from the price of the goods that decreases in amount as the payment term increases under the various pre-authorized debit options. For example, for purchases of a particular good, the supplier offers a discount of $XXXXX from the price of the good if one pre-authorized debit option is chosen, $XXXXX if a longer pre-authorized debit option is chosen and $XXXXX if an even longer pre-authorized debit option is chosen.

Two sample invoices from the supplier to the recipient were provided with the incoming request. In Example A, the recipient has chosen to pay the supplier by pre-authorized bank debit within zero days (i.e., immediately) of the delivery date of the goods. The supplier's sample invoice quotes a unit price that is reduced by the retailer price adjustment resulting in a net price. The Product Total Amount for all goods purchased is determined by the number of units of goods purchased at the net price. It has been noted that the GST has been calculated on the Total Amount prior to the net price being adjusted to the net net price brought about by the $XXXXX discount from the pre-authorized bank debit option.

In Example B, the recipient has chosen to pay immediately by pre-authorized debit. The supplier's sample invoice quotes a gross unit price that is reduced by the retailer price adjustment resulting in a net unit price. The Product Total Amount for all goods purchased is determined by the number of units of goods purchased at the net unit price. The Product Total Amount, the applicable GST and PST based on this amount, less the discount determines the Net Amount due to the supplier. Again it has been noted that the GST has been calculated on the Product Total Amount before the $XXXXX payment discount.

Ruling Requested

You requested a ruling as to whether the discounts given by the supplier to the recipient are early payment discounts to which section 161 of the ETA applies. The Canada Revenue Agency reserves the right not to issue a ruling when a determination on a question of fact is required. It is a question of fact whether a particular discount is an early payment discount that falls within section 161. However, we are pleased to offer the following interpretation.

Interpretation Given

Section 161 of the ETA establishes how the tax is calculated in situations where the supplier offers a discount option to the recipient, and the recipient, subsequent to the issuance of the invoice, exercises that option. Under this section, where a recipient pays a reduced amount in respect of the amount of the consideration for a supply of tangible personal property or services within a specified time (all of which are shown on the invoice), for the purposes of determining the supplier's tax liability, the consideration originally charged on the invoice is deemed to be the amount of the consideration for determining the tax liability. In other words, the supplier is required to include in its net tax calculation the GST originally charged on the invoiced amount regardless of whether the recipient subsequently exercises its option of paying early at a reduced amount pursuant to the terms of payment as specified on the invoice.

In the case at hand and, based on the information provided, once the recipient has chosen a payment option prior to making a purchase, the discount is determined and there is no opportunity for the recipient to pay the supplier a reduced amount of consideration if the invoice is paid within a specified period of time.

Subsection 232(2) of the ETA applies where the supplier has charged or collected tax and subsequently reduces the consideration for any reason. This also does not apply as the discount is offered at the time the recipient chooses a payment term, which is before the supplier charges and collects the tax. In this respect, the discount is a price discount that reduces the original sales price of the goods or, in other words, a negotiated or agreed upon price for the goods rather than a subsequent reduction in the consideration or a deferred price adjustment.

As noted on the sample invoices, the supplier is required under the provisions of the ETA to charge GST on the unit price for the goods minus the retailer price adjustment and the discount (i.e., the consideration for tax purposes on both invoices A and B should be $XXXXX less $XXXXX or $XXXXX). The tax in both examples should be $XXXXX and not $XXXXX as shown. The calculation of GST in the manner illustrated on the sample invoices is not in accordance with subsections 165(1) and 153(1) of the ETA.

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, Goods and Services Tax Rulings, 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 613-954-7931.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/12/19 — RITS 85787 — Direct Sellers' Sales Aids