2 October 2006 GST/HST Interpretation 81650 - Independent Medical Examinations and Other Independent Assessments

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 XXXXX concerning the application of the Goods and Services Tax (GST) to holdbacks arising under agreements for the supply of construction services.

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

Effective July 1, 2006, the rate of the GST has been reduced from 7% to 6% and the rate of the HST from 15% to 14%. The new rates apply to supplies for which the GST/HST is paid on or after July 1, 2006, without having become payable before that date. Specific transition rules apply to certain supplies, for example, real property. For more information on the transition rules for the reduction of the GST/HST rate, please refer to Reduction in the Rate of the GST/HST - Questions and Answers (http://www.cra-arc.gc.ca/agency/budget/2006/gstrateqa-e.html) on the Canada Revenue Agency (CRA) Web site.

We understand that:

XXXXX (the Company) entered into a number of agreements with various suppliers (e.g., sub-contractors, etc.) for the provision of construction services to your Company.

Prior to July 1, 2006, the suppliers of these construction services issued invoices to your Company, as recipient of such services, charging GST payable at a rate of 7% on the total consideration for the services.

With respect to each of these invoices, your Company withheld XXXXX% of the total consideration as a holdback amount in accordance with the XXXXX Act XXXXX.

Also, with respect to each of these invoices, your Company withheld payment of the GST charged in respect of the holdback amount. For instance, if the supplier invoiced $XXXXX plus $XXXXX GST, your Company withheld $XXXXX (excluding GST) as a holdback amount and paid $XXXXX plus 7% GST of $XXXXX to the supplier.

For each of these invoices, the holdback period will expire and the holdback amount will become due and payable by your Company to the supplier XXXXX days after the issuance of the invoice.

For all such holdback amounts that become payable on or after July 1, 2006, your Company intends to pay GST at a rate of 6%. For instance, where the holdback amount was $XXXXX (excluding GST), your Company intends to pay $XXXXX plus GST of $XXXXX on or after July 1, 2006.

Since your Company was invoiced GST on such holdback amounts at a rate of 7%, this will leave a balance outstanding equal to 1% of the particular holdback amount.

Interpretation Requested

1. You would like to know whether GST will apply at a rate of 6% in respect of such holdback amounts that become payable on or after July 1, 2006.

2. Also, you would like to know whether your suppliers in such circumstances are entitled to an adjustment equal to 1% of the particular holdback amount.

Interpretation Given

1. Based on the information provided, the amounts your Company has held back are legislatively sanctioned. As a result, the GST calculated on the holdback amount becomes payable on the earlier of the day the holdback is paid or the day on which the holdback period expires. Where both of these days occur on or after July 1, 2006, the GST at the reduced rate of 6% will apply to the holdback amount.

2. In circumstances where your supplier has invoiced the GST at a rate of 7% on a holdback amount that is subject to the GST at a rate of 6%, the supplier may, within two years after the day the GST was charged, adjust the amount of GST charged.

In accordance with subsection 232(3), where the supplier adjusts the GST that they overcharged your Company and either the supplier issues the required credit note or your Company issues the required debit note containing the information required to substantiate the adjustment, the supplier may deduct the amount of the adjustment from their net tax, provided the supplier had previously included the overcharged amount in its net tax.

If your Company had claimed an input tax credit in respect of the overcharged amount of 7%, then the amount of the adjustment must be added to your Company's net tax for the reporting period in which the credit or debit note is issued, in accordance with subsection 232(3).

However, if your Company only claimed an input tax credit of 6%, then no adjustment to your net tax will be required as a result of the issuance of a credit or debit note.

For more information on adjustments for GST/HST overcharged or collected in error as well as other GST/HST adjustments, such as price adjustments or adjustments for returned goods, refer to GST/HST INFO SHEET GI-018, which may be found on the CRA Web site at http://www.cra-arc.gc.ca. Click on GST/HST, Forms and Publications, and then GST/HST Information Sheets.

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 CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

For your convenience, find enclosed a copy of GST/HST Memorandum 1.4, Goods and Services Tax Rulings.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 954-8852.

Yours truly,

Daryl Hooley
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

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