TELEPHONE 954-8585
FACSIMILE 990-1233
11715-1, 11720-1(sn)
Dear Mr. XXXXX
Further to your letter of December 12, 1995 wherein you request clarification as to certain parts of a GST Application Ruling issued by the Department to you on behalf of XXXXX the following summarizes our comments.
Issues to be Clarified
Verbatim from your letter of December 12, 1995, the following are the matters requiring clarification:
1. With respect to paragraph 1 of the Application Ruling, we wish to clarify that XXXXX are both indirectly owned by the same corporation;
2. We make reference to (i) paragraph 9 of the Application Ruling wherein you state that the first entry in the accounting records is "the initial debit to an asset account and the initial credit to accounts payable" in the books of XXXXX and (ii) paragraph 10 which states that "after recording the initial acquisition entry into its books XXXXX immediately transfers title to XXXXX.".
From a practical perspective the first entry is a debit to inventory and a credit to accounts payable in XXXXX books. XXXXX will record a purchase at the end of the month in which XXXXX records the payable in respect of such purchase. Accordingly, the reference to the "initial" acquisition entry into the XXXXX books is misleading and does not reflect the actual sequence in which the accounting entries will be made. In this regard, we have enclosed herewith for your perusal a revised draft of the actual entries that will be used by XXXXX in connection with the accelerated payments program and would ask you to revise the GST Application Ruling accordingly;
4. At paragraph 13 of the Application Ruling it is stated that XXXXX "... retains for itself a smaller percentage ..." of the discount earned. This is not necessarily the case since XXXXX percentage is based on a formulated amount which could exceed fifty percent (50%) of the discount earned. Accordingly, we would ask you to delete the reference to "smaller" in paragraph 13;
5. You will note from your review of the enclosed revised accounting entries to be used by XXXXX in connection with the accelerated payments program that the entries now reflect a GST included amount. Would you please confirm that the accounting entries now proposed by XXXXX in connection with the accelerated payment program will not affect the ruling given in the GST Application Ruling dated December 5, 1995.
Discussion
The background information provided in your letter of August 31, 1995, included a statement that "XXXXX have not elected and do not intend to elect under either sections 150 or 156 of the Excise Tax Act ("the Act"). In subsequent discussions as to the purpose of this statement and whether or not the two corporations in fact qualified to file either of the elections, the ownership of XXXXX was verbally provided as further background information. As a consequence, our initial Statement of Facts included a point that XXXXX were each XXXXX owned subsidiaries of parent corporations who were themselves both owned by the same corporation and we then determined that XXXXX were closely related corporations for purposes of the Act. You have now advised that although XXXXX are both indirectly owned by the same corporation, that indirect ownership is not as was described in our initial Statement of Facts. Information as to the exact nature of the indirect ownership has not been provided.
The change in the description of the ownership of XXXXX will have no impact on our Ruling. Since the specific details of the correct indirect ownership of XXXXX have not been provided to us, we can no longer comment as to whether or not XXXXX are closely related corporations for purposes of the Act.
The second matter on which clarification has been requested, is our interpretation and description of certain journal entries to be used by XXXXX to record the transactions on which we were asked to rule.
A sample set of journal entries for the books of the two companies, was included for our review, in your August 21, 1995 letter. The first journal entry was described as "Recognize purchase by XXXXX and the second journal entry was described as "Recognize immediate sale to XXXXX[".] Given those descriptions and our understanding of the transactions, our interpretation of the journal entries, as stated in our Ruling, was that the entry to record the acquisition of the service or the property in the books of XXXXX came as a result of a sale from XXXXX and that therefore, by necessity, XXXXX would have previously recorded the acquisition of the service or property in its own books. You have now advised that XXXXX only records its acquisition of the service or property in its books, at month end and that the journal entry to record the acquisition in the books of XXXXX could in fact occur before that time. Your letter of December 12, 1995 also makes reference to a revised draft of the actual journal entries to be made by the two companies, which is provided for our review and revised comments, if necessary.
With respect to the two journal entries which we have been asked to revisit, as discussed, the revised journal entries provided, are identical to those initially presented to us. Whether the first journal entry is made to the books of XXXXX as we stated, or to the books of XXXXX as you have now indicated, has no impact on our Ruling. As stated in our Ruling, the supply by the supplier of possession of the good or service to XXXXX and title to the good or service to XXXXX and the immediate transfer of title to the good or service from XXXXX is one supply made under one agreement entered into by all three parties, with XXXXX being the recipient of the supply. The actual mechanics of recording the receipt of that supply in the books of XXXXX does not determine the substance of the transaction and therefore how GST would be applied to it.
The third matter for clarification is with respect to our description of the discount retained by XXXXX as being "a smaller percentage" of the early payment discount earned by XXXXX[.] You have stated that the amount of the discount retained by XXXXX is based on a formulated amount which could exceed fifty per cent of the early payment discount earned by XXXXX[.] Our use of the term "smaller percentage" was in reference to the total amount of the early payment discount earned by XXXXX XXXXX can retain any percentage of that early payment discount, provided it is less than (i.e. smaller) or equal to, the total early payment discount earned, and be within the current wording of our Ruling. In the event that the amount retained by XXXXX was larger than the early payment discount earned by XXXXX we would require more information with respect to the circumstances surrounding such a transaction before we could include such a transaction within the context of the present Ruling.
The final matter requiring clarification is the change made to the draft journal entries to reflect the GST component of each entry. Our Ruling would not change as a result of the inclusion of GST in the journal entries.
As the comments in this correspondence are an extension of our initial Ruling of December 5, 1995, they are subject to the general limitations and qualifications outlined in the GST Memorandum Series (1.4). We are bound by that ruling and these additional comments provided that none of the issues is currently under audit, objection or appeal, that there are no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transactions for which you requested a ruling.
Should you require any further assistance in this matter, please contact one of the members of the Application Tam in the Taxing Provisions Unit. They are: Ken Mathews (613) 952-9585 and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations 2637(GEN)
Mitch Bloom (signoff)
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