20 January 2006 GST/HST Interpretation 64676 - Proposed Law Section 178.8 of the Excise Tax Act

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)/Harmonized Sales Tax (HST) to amounts held back on purchases of goods and services.

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

We understand that, when XXXXX acquires goods and services, it is stipulated in the contract with the supplier that a percentage of the payment will be held back by XXXXX pending satisfactory performance of the contract.

Ruling Requested

You would like to know if XXXXX is required to pay the GST on the consideration for the supply before or after the holdback amount is deducted.

Interpretation Given

In accordance with section 1.4 of the GST/HST Memoranda Series, a ruling can only be issued with reference to a clearly defined fact situation of a particular person. Rulings are issued on request and where the person has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services and property involved, the parties involved in all the transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. We are pleased to offer you the following interpretation.

The general timing of liability rule under subsection 168(1), is that tax is payable by the recipient of a taxable supply on the earlier of the day the consideration for the supply is paid and the day that consideration for the supply becomes due.

Subsection 168(2) provides that the tax is payable by the recipient on the earlier of the day a partial payment is made and the day a partial payment becomes due.

Under subsection 152(1), consideration for a taxable supply, or a part thereof, is deemed to become due on the earliest of the following days:

•   the day the supplier first issues an invoice in respect of the supply for that consideration or part;

•   the date of that invoice;

•   the day the supplier would have, but for an undue delay, issued an invoice in respect of the supply for that consideration or part; and

•   the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.

An invoice is a document which either notifies a recipient of the obligation to pay or records payment. An invoice may give the terms of payment. The invoice may itemize or describe the goods or services being supplied and state the consideration due or paid for the supply.

Tax will be calculated on the face value of the invoice in accordance with subsection 152(1). Generally, an invoice is issued after, or as a record of, an agreement to make a supply or when the supply is made.

When a written agreement (other than a supply by way of lease, licence or similar arrangement) to provide property or service states that the recipient is required to pay consideration, or any part, on specified dates and an invoice is also issued, subsection 152(1) determines when the tax is payable.

If an invoice is issued or dated prior to the date payment is required, pursuant to subsection 152(1), the consideration is deemed to become due on the earlier of the invoice date and the day the invoice was issued. If an invoice is issued or dated subsequent to the payment date stipulated in the agreement, under subsection 152(1), the consideration is deemed to become due on the date specified in the agreement which, in turn, is the date tax is payable based on subsection 168(1).

Under subsection 168(7), where the recipient of a taxable supply retains part of the consideration for that supply pending full and satisfactory performance of the supply, or a part thereof,

(a) in accordance with either federal or provincial laws, or

(b) as required under the terms of a written agreement for the construction, renovation or alteration of, or repair to any real property,

tax is payable on the amount held back on the earlier of the day that the holdback is paid out and the day the holdback period expires pursuant to the written agreement or applicable legislation.

Should XXXXX acquire construction services, the construction contractor may invoice the XXXXX as follows:

In this example, the construction contractor would be required to remit GST of $7,000 with its return for the period in which the invoice was issued. XXXXX would be required to pay the GST of $7,000 and, if eligible, could claim an ITC of $7,000 at that time.

Alternatively, the construction contractor might invoice XXXXX as follows:

In this example, the construction contractor is required to remit tax of only $6,300 with the return for that reporting period. The remaining $700 of GST on the contract will be payable when the holdback is paid by XXXXX or becomes due. The holdback must be withheld pursuant to either federal or provincial legislation or required under the terms of a written agreement for the construction, renovation or alteration of, or repair to any real property.

It should be noted that holdbacks that are part of agreements for the acquisition of tangible personal property and not real property, and where there is no federal or provincial law requiring the holdback, would not meet the requirements of subsection 168(7). Such holdbacks do not defer the time at which GST becomes payable. In such cases, subsection 168(7) does not apply and the tax is payable on the earlier of the day the consideration is paid and the day the consideration becomes due in respect of the supply.

However, if the supplier collects an amount as tax or on account of tax before it becomes payable, the supplier must remit that tax with the supplier's return for the reporting period in which the tax was collected.

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

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