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Subsections 221(2), 228(4) and Section 261
11695-7-2(PM); 11685-8(PM)
XXXXX June 14, 1995
This is in response to a memorandum of November 9, 1994, from XXXXX of your staff to Dave Caron of my staff seeking comments regarding a case involving the purchase of farmland by XXXXX . We apologize for the delay in replying.
Statement of Facts
Our understanding of the relevant facts may be summarized as follows:
1. In an Offer To Purchase dated December 10, 1992, XXXXX who is registered for GST, offered to purchase pasture land for XXXXX from the XXXXX (the "Estate"), who is not registered for GST. In a counter offer made on the same day, the Estate accepted the offer with the following addition: XXXXX is sale price, and in addition purchaser must pay GST". Apparently, as set out in a letter dated November 18, 1993, from the Estate's lawyer to an Executor of the Estate, "The purchasers refused to accept that condition and in fact indicated by telephone conversation to me that they would let the sale go and not purchase, if they had to be responsible for the Goods and Services Tax." The Counter Offer was signed by the Executors of the Estate but was not signed by XXXXX The accepted Offer to Purchase, dated December 10, 1992, does not include the addition made by the Estate nor does it indicate whether GST was included or not in the purchase price. A clause in the Offer to Purchase stated that "the purchaser acknowledges that taxes, tax credits, payments and mortgage interest rate may be subject to revision".
2. The Estate's lawyer prepared and sent a cheque for XXXXX to the Estate's accountant. Upon receiving the cheque, the accountant advised the lawyer that the liability was XXXXX As a result, the cheque for XXXXX was cancelled. The Estate's accountant filed a non-personalized GST return dated April 6, 1993, for the period ending 93/03/31 on behalf of the Estate showing a sale of XXXXX
3. Following a request from XXXXX the vendor's lawyer sent a letter to the XXXXX on April 15, 1993, confirming "that the GST paid was XXXXX The letter further confirmed "that the purchase price of the within land was XXXXX and included GST of XXXXX
4. After receiving the letter from the Estate, XXXXX claimed an ITC for the amount of XXXXX on his GST return for the period ending 93/06/30.
5. The Estate was subsequently informed that they were not responsible for collecting the GST on the sale as the purchaser was a 2registrant. The Estate filed a rebate application for tax paid in error on September 1, 1993, and the rebate was denied on December 13, 1993. A letter from Audit to the Estate stated: "It has been determined that the sale of the land was for XXXXX GST included. The purchaser paid you XXXXX plus XXXXX GST. Subsequently you remitted the GST to the Receiver General. There are no provisions in the Act to allow you to claim a rebate on the amount remitted to the Receiver General."
6. In a letter dated November 18, 1993, to XXXXX an executor of the estate, the vendor's lawyer confirmed that "The purchase price therefore was set and agreed on as XXXXX and the GST was included in the price, to be paid and remitted by the vendors, the estate, to Excise Tax Canada, which was done. We confirm that the GST paid was XXXXX The purchase price of the land was XXXXX and GST of XXXXX for a total purchase price of XXXXX
7. XXXXX filed a GST 60 for the period ending 93/12/31 regarding the acquisition of real property for XXXXX and GST of XXXXX and claimed an offsetting ITC.
8. In a letter dated May 11th, 1994, to XXXXX , the law firm representing the Estate requested repayment of the XXXXX remitted by the Estate. A ruling letter dated July 29, 1994, from XXXXX , the AUM of the auditor who had denied the rebate, stated: "the purchaser, being a registrant, is required to remit any tax payable on the purchase of non-residential property directly to the Receiver General, not to the supplier, and is to file a GST 60 "Goods and Services Tax Return for Acquisition of Real Property" covering the transaction. The vendor is eligible to file a general rebate application (GST189E) in accordance with subsection 261(1) of the Act to claim back the XXXXX paid to the Department as an amount paid in error."
9. On September 22, 1994, the Estate filed a second rebate application in the amount XXXXX
Interpretation
Because he was registered, XXXXX was required to self-assess the tax on the purchase of the land. Subsection 221(2) of the Excise Tax Act (ETA) states in part that a supplier cannot collect the GST on a taxable sale of real property where the recipient is registered. Subsection 228(4) instead requires the purchaser of the property to file a special return, form GST 60 Goods and Services Tax Return for Acquisition of Real Property, and to pay the tax directly to the Receiver General.
The Estate was not authorized to collect GST on the sale of the land by reason of ss. 221(2). If GST was collected by the Estate it will be considered to be an amount collected as GST in error that must be remitted. XXXXX will be considered to have paid an amount as tax in error for which a rebate is available under section 261 of the ETA.
The Estate
Whether an amount has been collected as GST under an agreement is a question of fact which must be resolved on a case by case basis. The key piece of evidence to be examined in making such a determination is the agreement. Also, any documents which are collateral to the agreement may be used to clarify the intention of the parties.
The wording of the Offer to Purchase in this case does not provide any confirmation of whether GST was included in the purchase price of the land or not. However, the letter of April 15, 1993, from the Estate's lawyer to XXXXX coupled with the fact that the Estate remitted based on a GST-inclusive price provide conclusive evidence in our view that the purchase price for the land was XXXXX including GST of XXXXX A GST-inclusive purchase price is further substantiated by the letter of November 18, 1993, from the lawyer of the Estate to one of the executors of the Estate. This letter confirms that the purchase price was "set" and "agreed on" as XXXXX and that the GST was included in the price.
Because the purchase price collected did in fact include GST and because the Estate was not authorized to collect GST as our agent by reason of ss. 221(2), we agree that the Estate collected GST in error of XXXXX As you indicate, ss. 225(1) requires the GST collected in error by the Estate to be included in the net tax calculation for the reporting period in which it was collected. Subsection 228(2) in turn requires any positive amount of net tax to be remitted to the Receiver General. The Estate would appear to have satisfied the requirements of both subsections 225(1) and 228(2).
The Estate has applied for a rebate of the XXXXX they remitted to the Receiver General in relation to the sale. Section 261 provides a rebate to a person who has paid or remitted an amount as or on account of tax where the amount was not payable or remittable by the person. In this case, as indicated previously, the Estate remitted net tax that was required to be remitted under the legislation. Consequently, the Estate is not entitled to a rebate under s. 261 for the net tax of XXXXX that was remitted by them.
The Estate may refund or credit to the purchaser the amount of the tax collected in error. If so, the Estate may then take a corresponding deduction in the net tax for the reporting period in which the credit note is issued. However, because the Estate must first refund or credit the amount collected in error before it may take a deduction in net tax, the Estate would not be any further ahead by refunding or crediting the amount.
XXXXX
Because the Estate collected an amount as GST in error from XXXXX , it follows that XXXXX would be entitled to a rebate under s. 261 for that amount. However, XXXXX appears to have claimed an ITC for this amount in his GST return for the period ending 93/06/30. Under s. 169, an ITC may only be claimed for "tax", which is defined under s. 123 to be tax that is actually payable under Part IX of the ETA. Consequently, XXXXX was not entitled to claim an ITC for the amount paid as tax in error to the Estate.
Subsection 296(4.1) provides that in assessing the net tax or tax payable of a person, the Minister may offset an unentitled ITC claimed by the amount of an unclaimed section 261 rebate that would be available for that same amount. The Department's normal practice is not to use the discretion to offset under ss. 296(4.1) where a registrant has claimed an ITC for tax paid in error to a supplier, but rather to disallow the ITC and encourage the purchaser to seek a refund of the amount from the supplier. This is because there is a potential for revenue loss to the extent that the purchaser may subsequently seek a refund from the supplier after receiving the benefit of the offset under ss. 296(4.1).
Although it would be an available course of action in this case, we would not recommend that XXXXX be encouraged to seek a refund of the amount from the Estate. Based on an erroneous interpretation, the Estate has applied for a rebate a second time under s. 261 in order to recover the amount they mistakenly believe was remitted in error. In this context, encouraging XXXXX to seek a refund from the vendor in our view would simply be a further source of irritation for the Estate. You may consequently want to use the ministerial discretion available under ss. 296(4.1) to offset the unentitled ITC taken by the amount of the rebate to which XXXXX would be entitled.
We have drafted a policy proposal to address the situation where a purchaser who was required to self-assess under ss. 228(4) has instead paid tax in error to the supplier and claimed an ITC for that amount. Recognizing that the unentitled ITC claimed could be offset by the amount of the available s. 261 rebate, the proposed policy would be to not assess the purchaser for amounts owing and to not require the unfiled GST 60 to be filed provided the supplier has remitted the GST collected in error. No further action would be required on the part of the purchaser. However, to address the risk of the purchaser returning to the supplier for a refund, the purchaser would have to agree in writing not to seek a refund or adjustment from the vendor and under ss. 298(7) waive the four year time limit for any tax and penalty and interest regarding the transaction should a refund or adjustment be subsequently obtained.
We trust that this information will be of assistance to you. For additional information, please do not hesitate to contact Dave Caron, Manager, Administration and Enforcement Provisions at 952-0301 or Patrick McKinnon at 952-8813.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
c.c.: D. Caron
P. McKinnon
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