Ss. 231(1)
File: 11610-4(rl)
XXXXX
District Manager
Interpretation and Services
District Excise/GST Office XXXXX
April 19, 1995
Dear XXXXX
Thank you for your fax dated February 3, 1995 concerning the use of a calculation method based on a formula for determining net tax adjustments for bad debts. You requested our opinion on whether a ruling issued by your office is correct.
Statement of Facts
1. XXXXX ("the company") requested a ruling to your office on the use of a formula for calculating its bad debt adjustment.
2. The company has a number of accounts receivable that it has determined to be uncollectible.
3. The company is writing off the uncollectible accounts as bad debts
4. The company has determined that the bad debts include amounts which are neither consideration for a taxable supply nor GST.
5. The company wishes to make a net tax adjustment based on subsection 231(1) of the Excise Tax Act ("the Act").
6. The company proposes to use a formula for calculating the input tax credit, as follows:
Total GST Charged at the Rate of 7% X Amount for Write-Off
Total Revenue Billed
where:
• Total Revenue Billed includes Retail Sales Tax, and
• Amount for write-off includes amounts other than consideration and GST.
Issue
You required our opinion on whether the ruling issued by your office is correct. The ruling is as follows:
"The proposed formula cannot be used to calculate the adjustment outlined in subsection 231(1) of Part IX of the Excise Tax Act. Subsection 231(1) requires the company to establish that the tax or the consideration for a supply, in whole or in part, has become a bad debt. As the account balances relate to more than one supply and include items which are neither, the formula does not achieve this result."
The Department's Position
The Department's position, in respect of the use of a formula for calculating a bad debt adjustment, is in concordance with the ruling issued by your office. The Department's position is to allow bad debt adjustments only when the registrant has a supporting document that is specifically related to a specific bad debt. The Department requires this information to establish that the consideration and tax have become in whole or in part a bad debt.
A formula is rejected because it would be extremely laborious for the Department to review each fact situation and to verify the reasonableness of the formula.
In addition, the Department's position is consistent with the bad debt guidelines for the VAT jurisdictions of the United Kingdom and New Zealand and all Canadian provinces who provide for bad debt relief, which includes XXXXX . Both VAT jurisdictions and all the Canadian provinces who provide for bad debt relief, designate that a supporting document specifically related to the debt is required to substantiate the claim.
Therefore, the Department will not allow the use of a formula, regardless of the formula's reasonableness, to calculate the amount of a bad debt adjustment. The registrant is required to have the supporting document that is specifically related to the bad debt to be entitled to make a bad debt adjustment.
If you require any information, please do not hesitate to contact Raymond Labelle at (613) 952-8815.
H.L. Jones
Director
General Applications Division
XXXXX
| c.c.: |
M. Matthews
G. Preston
R. Labelle |
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