12 February 1996 GST/HST Interpretation 11650-10[3] - 6/106th Tax Factor for Claiming Input Tax Credits

Dear XXXXX

Thank you for your letter dated October 18, 1995, in which you request a GST ruling of sections 169 and 175 of the Excise Tax Act (the "ETA") in reference to our Policy Statement P-184: Credit Card Expenses and the Use of the 6/106ths Tax Factor as it relates to the XXXXX[.] Please be advised that the Department reserves the right not to issue a GST ruling when it considers that one would be inappropriate. In the case at hand, since XXXXX XXXXX is the credit card issuer representing the interest of its clients on a question concerning a GST related calculation which does not concern any proposed activity or set of activities of a specific client, we have decided not to provide you with a GST ruling. However, you will find below our interpretation of the issue based on the facts you provided and our current understanding of the ETA and its Regulations. For your information, we have enclosed from our GST Memoranda Series, chapter 1.4 - Goods and Services Tax Rulings which discusses the conditions under which the Department will issue a ruling or an interpretation in respect of Part XI of the ETA.

Statement of Facts:

In your letter you provide the following facts for our consideration:

1. an employer participating in the XXXXX (the "company") signs an account agreement with XXXXX which sets out the rights and obligations of the company;

2. XXXXX establishes an account in the name of the company and issues XXXXX cards on the company's account to qualified employees designated by the company (the "card members"). The card member's name appears on XXXXX card and, in most instances, the company's name will also appear on the XXXXX card;

3. in addition to the account agreement, there is also a card member agreement with XXXXX which sets out the rights and obligations of the card members;

4. XXXXX[.]

5. XXXXX[.]

6. the card member is liable to XXXXX for all charges made in connection with their XXXXX card as stated in XXXXX[.] References made to the company in this agreement are limited to the company's role in the issuance of a XXXXX card, the renewal or replacement and cancellation of a XXXXX card, and its responsibility for lost or stolen XXXXX cards;

7. furthermore, the liability of the card member is also reflected in XXXXX which says that the card member and the company:

"... agree to be liable jointly and severally for all charges incurred with the card issued to the applicant and to be bound jointly and severally by the terms and conditions of the agreement received with the card.";

8. the company's liability as set out in XXXXX states that, notwithstanding that the company is liable for all charges on its account whether or not the company receives a monthly statement, the company can request XXXXX to waive these charges (i.e., stated under XXXXX[)]. Moreover, this agreement allows the company the option to authorize card members to use the XXXXX card for personal charges. Under this option, both the company and the card member are jointly and severally liable for the personal charges except as provided under the Waiver of Liability section. It is stated in your letter that XXXXX cannot distinguish personal charges from business charges on the XXXXX card statement;

XXXXX

9. the terms and conditions of XXXXX are very similar to those of XXXXX in that the card members are liable for all charges made in connection with the XXXXX cards issued to them (i.e., provided under XXXXX References in the agreement are also made to the limited role of the company;

10. the liability of the card members is also pronounced in the XXXXX which says that: "... the undersigned individual applicant agrees to be solely liable for all charges incurred with the Card as provided in the terms and conditions of XXXXX[".]

11. as for the company's limited liability, XXXXX states under XXXXX section that: "... XXXXX will send monthly statements of charges to each XXXXX Cardmember, who will be solely responsible for all Charges made in connection with XXXXX Card issued to the XXXXX Cardmember. Except as hereinafter provided with respect to annual fees, the Corporation will not have any liability for any charges made on any XXXXX Card. If the Corporation elects to establish any one or more of the following billing options of Fee Central Billing, Airline Central Billing and/or Car Rental Billing and/or elects to establish a Treasurers Card Account, the Corporation shall be liable to XXXXX for these charges."

12. Since the company's liability is limited to specific circumstances, there is no Waiver of Liability section in the agreement;

Central Billing Options

13. both the joint and several liability account and the limited liability account have available the central billing options for the card members fee charges, the airline charges and the car rental charges. These options are available for all or some card members as designated in writing by the company from time to time. A company selecting any one of these options will receive from XXXXX a separate billing statement for all card member fees;

14. whether or not charges are centrally billed, the card members remain liable for the charges. If the company refuses to pay the charges, XXXXX will transfer those charges to the card member's monthly statement or request that the card member pay the company for the charges who, in turn, will pay XXXXX[.]

Your questions are:

1. whether a company, at their option, is permitted to use the 6/106th tax factor for claiming input tax credits in respect of expenses incurred and charged by card members on their XXXXX cards;

2. whether a direct payment made by a company to XXXXX for expenses incurred by card members on their XXXXX cards is considered to be a reimbursement for purposes of section 175 of the ETA; and,

3. whether draft Policy Statement P-184: Credit Card Expenses and the Use of the 6/106ths Tax Factor will be revised to take into account the information provided by XXXXX in their submission with respect to XXXXX cards.

Department's Position:

Response to Questions #1 and 3 above:

We have recently revisited draft Policy Statement P-184 and have received approval from our Policy Review Committee to revise the said policy. Please note that the following information provided to you is in draft form since it has not yet received final approval from the Department of Justice's Legal Services for Revenue Canada.

The Department will permit the use of the 6/106ths tax factor for claiming input tax credits on XXXXX card expenses if all the following conditions are satisfied:

1. there must be a signed agreement between the company, the card member and the credit card issuer stating that the card member is solely or jointly and severally liable with the company for the payment of all charges (e.g., purchases of goods and services, credit card fees, etc.) made in connection with the XXXXX card issued to the card member;

2. the company must have reimbursed the card member for goods and services recorded on the XXXXX card statement which are all or substantially all (90% or more) taxable supplies acquired in Canada by the card member; and,

3. the documentary evidence used to calculate the input tax credit must satisfy the information requirements prescribed by Regulations made under paragraph 169(4)(a) of the ETA.

For your information, the following documentary evidence rules will govern the claiming of input tax credits where a XXXXX card is used by a registrant to purchase goods and services:

(a) where a credit card receipt is issued in conjunction with another component of supporting documentation, both components must be obtained by the registrant prior to the return being filed;

(b) where no other supporting documentation is issued in conjunction with a credit card receipt (e.g., gasoline service stations and hospitality industry), the credit card receipt will constitute sufficient supporting documentation to claim an input tax credit provided it meets all the documentary and information requirements prescribed by Regulations made under paragraph 169(4)(a) of the ETA; and,

[(]c) the credit card statement does not constitute sufficient documentary evidence to claim an input tax credit since the statement does not meet all the documentary and information requirements prescribed by Regulations made under paragraph 169(4)(a) of the ETA.

Response to Question # 2 above:

Section 175 of the ETA states that, where an employer, partnership or charity (hereafter referred to as the "person") reimburses an employee, a member of a partnership, or a volunteer who gives services to the charity (hereafter referred to as the "individual") for expenses incurred by the individual on behalf of the person and the amount reimbursed includes GST, the tax is considered to have been paid by the person. Accordingly, where the person is a GST registrant, the person is eligible to claim an input tax credit pursuant to section 169 of the ETA equal to the GST included in the amount reimbursed by the person.

For GST purposes, an amount is considered to be a reimbursement (i.e., Policy Statement P-075: Allowances and Reimbursements) if the payment by the person to the individual is to repay the individual for purchases made on behalf of the person's business. Where an amount paid by an person satisfies this condition, the amount must also meet the following criteria before it is considered a reimbursement:

•   the amount must be fully accounted for by the individual (i.e., with supporting documentation such as invoices or records of account); and,

•   the amount must be an expense incurred by the individual for purposes of gaining or producing income for the person.

Therefore, where the amount paid by the person meets the aforementioned conditions and the reimbursement includes GST, the tax will be considered to have been paid by the person by virtue of section 175 of the ETA. Accordingly, the person may be entitled to an input tax credit pursuant to section 169 of the ETA equal to the tax included in the amount reimbursed by the person.

Having said this, the Department will consider a direct payment made on account by the company to the credit card issuer to be a reimbursement as long as the liability for payment does not rest entirely with the company (i.e., considered a reimbursement where the card member is solely or jointly and severally responsible with the company for payment of the company credit card charges). More specifically, the Department is of the opinion that the company is still (indirectly) reimbursing the card member since the card member is the individual who incurred the charges and is at all times, liable to the credit card issuer for payment.

Conversely, where the company is solely responsible for all charges and makes the necessary payments on account to the card issuer, the transaction cannot be construed as a reimbursement to the card member since the amount does not satisfy the conditions to be considered a reimbursement under Policy Statement P-075. Accordingly, the 6/106ths tax factor approach could not be used in the circumstance to calculate the company's input tax credit entitlement.

This interpretation is based upon our current understanding of the ETA and Regulations thereunder in their present form and does not take into account the effects of any future amendments thereto or future changes in interpretation.

Further, while we trust that our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.

If you require further information, please contact Michael Matthews, A/Manager, ITC and Co-ordination Unit at (613) 952-8806 or Paul Lafond, Policy Officer, at (613) 954-9700.

Yours truly,

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations

Attachment

GAD #: 2526 (GEN)