10 April 2007 GST/HST Ruling 85379 - GST on holdback amounts

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 applied pursuant to section 232 of the Excise Tax Act (ETA) to four different scenarios which you have outlined.

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

You have provided us with the following facts:

1. ACo is registered for GST and supplies goods subject to 6% GST. ACo sells goods to numerous customers and collects the applicable GST. BCo is also registered for GST. Both ACo and BCo are monthly filers.

2. ACo sells $10,000 worth of goods to BCo, charging a total of $10,600 ($10,000 plus $600 GST). BCo pays ACo in full. There is a problem with the goods, and BCo later returns the goods to ACo under four different scenarios.

i) Situation 1: ACo pays a refund to BCo for the full $10,600. ACo issues a credit note to BCo for $10,600 in recognition of the refund payment.

ii) Situation 2: BCo is indebted to ACo for $20,000 in respect of other purchases and transactions at the time the goods are returned. ACo credits BCo with $10,600 towards payment of BCo's $20,000 existing debt to ACo. As a result, BCo's debt to ACo is reduced by $10,600 to $9,400. ACo issues a credit note to BCo for $10,600 in recognition of the credit.

iii) Situation 3: BCo is not indebted to ACo at the time the goods are returned. However, ACo issues a "credit note" to BCo for $10,600 to acknowledge that the goods have been returned, and that ACo owes $10,600 to BCo. There is no certainty that BCo will ever place any further orders or make any further purchases from ACo. If BCo does place an order in the near future, ACo will apply its $10,600 indebtedness against the purchase price of the goods. If BCo does not make a purchase from ACo within some unspecified period of time (say 4 months), the parties will require ACo to issue a refund cheque for the $10,600 amount owing to BCo.

iv) Situation 4: Same as Situation 3, except BCo issues a "debit note" to ACo for $10,600 to acknowledge that the goods have been returned and that ACo owes $10,600 to BCo.

You have provided us your views on the above four situations as follows:

Situation 1: The prerequisites to ss. 232(2) have been met, such that ss. 232(3) applies. That is, provided the credit note issued by ACo complies with paragraph 232(3)(a), ACo may deduct $600 deduction in calculating its net tax, and BCo is required to add the $600 to its net tax for their respective reporting periods in which the credit note is issued and received, respectively.

Situation 2: The prerequisites to ss. 232(2) have been met, such that ss. 232(3) applies. That is, provided the credit note issued by ACo complies with paragraph 232(3)(a), ACo may deduct $600 in calculating its net tax. BCo is required to add $600 to its net tax, for the respective reporting periods in which the credit note is issued and received.

Situation 3: The prerequisites to ss. 232(2) are not met unless and until such future time that ACo either (i) actually refunds the $10,600 owing to BCo, or (ii) BCo becomes indebted to ACo, and ACo applies the $10,600 owing to BCo (i.e. for the goods returned) in payment of BCo's indebtedness to ACo. Accordingly, ss. 232(3) does not potentially apply until such future time.

Situation 4: The same as Situation 3.

Interpretation Requested

You would like to know the interpretation in each of the four situations outlined above.

Interpretation Given

Section 232 of the ETA permits an adjustment, refund or credit of the GST in two situations: where an excess amount of tax has been charged or collected; or where consideration for a supply is reduced at some time after the tax has been charged or collected, and the supplier adjusts, refunds or credits the tax charged on the original consideration.

The rules relating to refunds or adjustments of tax are set out in subsection 232(3) to allow not only credit notes issued by suppliers, but also debit notes issued by recipients, to be used to document the tax adjustment in prescribed form. The only prerequisite pursuant to subsection 232(a) and (b) is that tax has been either charged or collected.

Subsection 123(1) of the ETA defines: "credit notes" and "debit notes" as follows:

"credit note" means a credit note issued under subsection 232(3);

"debit note" means a debit note issued under subsection 232(3);

Both the supplier and the recipient will have met their obligation by issuing the credit/debit note pursuant to the ETA, if all the requirements under SOR/91-44 Credit Note and Debit Note Information (GST/HST) Regulations have been met.

The issuance of a credit/debit note is for documentary purposes and whether a credit or debit is satisfied or ever acted upon is a business contractual matter between suppliers and recipients.

Our views with respect to the four situations are:

Situation #1:

ACo is correct in issuing a credit note to BCo for $10,600 ($10,000 plus $600 GST) in recognition of returned goods pursuant to subsection 232(2) and (3). Subsection 232(2) applies because there has been a reduction in the consideration on which Division II tax has been collected and an adjustment to Division II tax is therefore required. A note should be issued in prescribed form pursuant to SOR/91-44 Credit Note and Debit Note Information (GST/HST) Regulations.

Where the tax credited has already been remitted by the supplier as part of the supplier's net tax for the period or a preceding reporting period, the supplier is allowed to deduct such amount in determining the net tax for the period in which the credit note is issued. Conversely, the recipient of the credit note is required to add the tax amount credited in determining the net tax of the recipient for the reporting period in which the credit note is issued to the extent the tax amount in question had previously been deducted in calculating the recipient's net tax.

Situation #2:

ACo is correct in issuing a credit note in prescribed form pursuant to subsections 232(2) and (3) of the ETA.

As explained above, the supplier may adjust its net tax remittance for the reporting period in which the credit note is issued. Conversely, the recipient must adjust its net tax return for the reporting period in which the credit note is issued.

Situation #3:

As in situations 1 and 2, ACo is correct in issuing a credit note to acknowledge that goods have been returned by BCo and that a tax adjustment is required pursuant to subsection 232(2) and (3) of the ETA. The note must be in prescribed form and will serve to meet documentary requirements under the ETA. Subsection 232(2)(a) and (b) refers to the adjustment of tax in circumstances where it is charged but not collected or where the tax calculated was collected and to be refunded or credited. There is no mention of repayment of the consideration for a supply as this is a contractual matter between suppliers and recipients.

The reporting rules in this situation are similar to those in Situation #2.

Situation #4:

The issuance of a debit note is allowed in accordance with the ETA. BCo has met the documentary requirements of the ETA under subsection 232(3) by providing a prescribed debit note to ACo in consideration of the returned goods.

Where the recipient issues a debit note for the amount of the tax, the recipient must include the amount of the tax included on the debit note in its net tax calculation for the reporting period during which the debit note is issued. Conversely, the supplier may deduct the amount of tax from its net tax remittance for the reporting period in which it received the debit note.

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.

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 Michèle Lacasse, Rulings Officer, directly at (613) 954-9699.

Yours truly,

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

2007/04/17 — RITS 86353 — Foreign Convention and Tour Incentive Program