17 December 2007 GST/HST Interpretation 93296 - Foreign Convention and Tour Incentive Program

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 Goods and Services Tax (GST)/Harmonized Sales Tax (HST) as it applies to bad debt pursuant to subsection 231(1) of the Excise Tax Act (ETA).

All legislative references are to the ETA and the regulations thereunder, unless otherwise specified.

Effective January 1, 2008, the rate of the GST will be reduced from 6% to 5% and the rate of the HST from 14% to 13%. The new rates will apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules will apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

Interpretation Requested

You would like the Canada Revenue Agency to provide a written interpretation confirming that the retailer is eligible to claim a deduction from net tax for the GST component of accounts written off as bad debts by the retailer.

Background

The facts as we understand them are as follows:

•   The retailer in the normal course of business makes taxable supplies to consumers and remits GST in respect of the supplies.

•   In certain cases, payment of the supplies is made by way of a credit card issued from a financial institution.

•   The use of the credit card creates an initial debt between the consumer and the financial institution. The consumer is required to make payments to the financial institution in respect of the debt.

•   Under the credit agreement, payments made by the consumer are applied first to any applicable interest and then to principal amounts (i.e., the consideration for the supply and applicable taxes).

•   Under the agreement between the retailer and the financial institution, the financial institution may transfer specifically identified principal amounts to the retailer.

•   The principal amounts transferred to the retailer consist of specifically identifiable consideration and GST and provincial tax components.

•   The retailer will make attempts to collect the debt from the consumer, but may be required to write-off certain accounts from its books of account.

Interpretation Given

Based on the statement of facts you provided, our opinion is as follows:

When a supplier extends credit, and is then unable to collect from the recipient, the supplier is allowed to claim back the uncollected tax as a deduction from net tax under section 231 of the ETA.

However, many suppliers, such as large retailers do not extend credit to customers. In many cases, financial institutions provide credit to the retailers' customers by way of a deferred credit card arrangement. If a customer elects to pay by using the retailer's deferred payment plan, the customer fills out an application for the credit card, which is issued by the financial institution.

Credit is being extended by the financial institution at the time of the sale to the customer and the sales amount to the retailer is paid in full. At that point in time, the financial institution acquired the right to be paid. Under the ETA this would be an exempt supply. Any losses on a bad debt would be incurred by the financial institution and not the retailer.

When a retailer purchases the uncollected receivables from the financial institution, they are purchasing an exempt supply. The legislation is clear that no tax is charged on an exempt supply; therefore, the retailer in these circumstances cannot claim a deduction from net tax.

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 Michèle Lacasse, Officer, directly at 613-954-9699.

Yours truly,

Owen Newell
Manager
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2007/12/10 — RITS 91183 — Travel Agency