16 January 1995 GST/HST Interpretation 11585-1, 11755-1, 11783-2 - Business Office Incentive

Dear XXXXX

We are writing in reply to XXXXX telefax dated November 22, 1994, wherein he requested our consideration of an issue where a car dealer offers a business office incentive to a car purchaser who agrees to allow the car dealer the opportunity of arranging the financing for the new vehicle.

Our understanding of the situation is as follows:

•   XXXXX assigns a conditional sales contract for a vehicle to XXXXX . All payments due by the vehicle purchaser under the agreement are made to the XXXXX , unless otherwise notified by the XXXXX .

•   XXXXX receives amounts from the XXXXX for their services of arranging for the financing of a vehicle purchase. These amounts are called dealer reserve and are paid out when vehicles are sold.

•   Sometimes XXXXX pays out part of the reserve amount to the customer as an incentive to make the sale. XXXXX pays the amounts out every month over a period of one year.

•   The vehicle purchaser can only cash the cheques if he/she does not pay out the financing arranged for him/her prior to the thirteenth month of the conditional sales contract.

•   If the car purchaser pays out or re-arranges the financing on the vehicle and causes any charge back of the dealer incentive paid by the XXXXX to XXXXX , the vehicle purchaser agrees to repay to XXXXX , the amount of the money charged back to XXXXX . Any unused cheques must be returned to XXXXX without recourse.

•   XXXXX states that this incentive does not represent a specific interest reduction on the funds borrowed but is simply a refund of part of the original price for the vehicle.

•   However, the original sales agreement is not amended and a credit note is not produced. The only documentation available is a cheque requisition prepared by the sales manager.

It is a question of fact, generally to be established by the terms of the written or other documentation, whether the payment is in fact an incentive to the car purchaser to agree to borrow from the financial institution specified by XXXXX or a deferred price adjustment by the dealer and eligible for treatment under subsection 232(2) of the Act. Technical Information Bulletin B-042 sets out four criteria which the payment must meet to qualify as a deferred price adjustment:

1) the payment must be a reduction in consideration which occurs at some point in time after the GST has been charged or collected;

2) the payment must be given to the original purchaser of the supply;

3) the payment must be a reduction in consideration which relates to the original supply; and

4) the payment may be made for any reason, but must not depend upon any action undertaken, or supply made, by the recipient.

Based on the documentation submitted, it is our view that the incentive provided to the vehicle purchaser is not a reduction in price of the vehicle. XXXXX is therefore not entitled to a tax adjustment under subsection 232(2) of the Act.

It is also our view that the incentive represents consideration for the supply by the vehicle purchaser of agreeing to borrow from the XXXXX specified by XXXXX . XXXXX has arranged the financing of the new vehicle through XXXXX . Furthermore, the vehicle purchaser is entitled to the incentive only if he/she does not pay or re-arrange the financing on the vehicle prior to the thirteenth month of the conditional sales contract. When the vehicle purchaser agreed to borrow the money from the XXXXX and to adhere to the conditions, he/she was making a supply to XXXXX , which is regarded as being a taxable supply. The incentive is consideration for that supply, therefore the incentive cannot also be the price reduction described above. In the documentation provided, the vehicle purchaser is not a registrant, so she is not required to collect and account for GST on the supply made to the car dealer. Therefore, XXXXX would not be permitted to claim an ITC because tax was not paid.

Should you have any further questions, please do not hesitate to contact Roy Osudar at (613) 952-9220 or Ginette Bouchard-Forgues at (613) 957-8221.

J. Sitka
A/Director
Financial Institutions and Corporate Reorganizations Division
GST Policy and Legislation