9 September 1997 GST/HST Interpretation HQR0000225 - GST on Returnable Containers

Dear XXXXX :

Thank you for your facsimile of May 21, 1996 addressed to Mr. Mitch Bloom concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the purchase of aluminum cans and plastic soft drink containers by a scrap metal company. Your letter has been forwarded to me for a response. We apologize for the delay in responding to your request.

In your facsimile, you state that a scrap metal company may buy aluminum cans and plastic soft drink bottles from the public by the pound. You also state that aluminum cans and plastic soft drink bottles are not refilled, resealed or reused by soft drink companies. In my reply I am assuming that all transactions occur in XXXXX I am also assuming that the aluminum cans were used as containers for either beer or soft drinks (or some other product taxable at 7% other than beer).

Interpretation Requested

In your facsimile you wish to know:

1. whether aluminum cans and plastic soft drink bottles as described above would come within the definition of returnable containers found in section 226 of the Excise Tax Act (ETA); and

2. whether a scrap metal company that purchases such aluminum cans and plastic soft drink bottles from non-registrants would be entitled to a notional input tax credit (NITC) pursuant to subsection 176(1) of the ETA.

Interpretation Given

Based on the information provided, plastic soft drink bottles and aluminum soft drink cans supplied in XXXXX are not returnable containers, as that term is defined for the purposes of section 226 of the ETA. A scrap metal company that purchases plastic soft drink bottles and aluminum soft drink cans may be entitled to claim a notional input tax credit, but only if the scrap metal company resells the same cans or bottles for consideration that is less than or equal to the consideration paid for the cans or bottles.

Aluminum beer cans supplied in XXXXX are considered to be returnable containers for the purposes of section 226 of the ETA. A scrap metal company that purchases aluminum beer cans from consumers would be entitled to claim NITCs on such purchases only if one of the conditions listed in subsection 226(5) of the ETA is satisfied.

In response to your first question, in order for a beverage container to be considered a "returnable container" for the purposes of section 226 of the ETA, pursuant to subsection 226(1) the container must meet the following four conditions:

1. it must not be a usual container for a zero-rated beverage (such as unflavoured milk);

2. it must be ordinarily acquired by consumers;

3. when acquired by consumers, the container must be ordinarily filled and sealed; and

4. it must be ordinarily supplied empty by consumers for consideration.

Aluminum soft drink cans and plastic soft drink bottles meet the first three of these criteria. It cannot be said, however, that such containers supplied in XXXXX meet the fourth criterion. When considering whether a container is ordinarily supplied empty by consumers for consideration, all means of disposal of the beverage container by the consumer must be considered. In the case of aluminum soft drink cans and plastic soft drink bottles in XXXXX the vast majority of them are either disposed of as waste by the consumer or are recycled by a municipal recycling authority. Rarely, if ever, does a consumer in XXXXX receive consideration for the supply of these containers. Thus aluminum soft drink cans and plastic soft drink bottles supplied in XXXXX are not returnable containers for the purposes of section 226 of the ETA.

Aluminum beer cans supplied in XXXXX are subject to a refundable deposit, so a large proportion of such cans would be supplied empty by consumers for consideration. Thus aluminum beer cans are considered to be "returnable containers" for the purposes of section 226 of the ETA.

In response to your second question, subsection 176(1) of the ETA states that where a registrant is a recipient of a supply of a used container and tax is not payable in respect of the supply, the registrant is deemed to have paid GST in respect of the supply of the used containers, and is thus eligible to claim an NITC, if the following conditions are met:

1. the registrant is the recipient of a supply by way of sale of a used container that was not used to contain a zero-rated product;

2. tax is not payable by the registrant in respect of the supply;

3. the used containers are acquired for the purpose of consumption, use or supply in the course of commercial activities of the registrant; and

4. the registrant pays to the supplier consideration for the supply that is not less than the total of the consideration that the registrant charges for supplies by the registrant of the same kind of container and the tax on that consideration.

The last condition says, in other words, that the registrant must pay for the empty containers the same amount or more as the amount (including tax) that the registrant receives when resupplying the same containers to someone else (such as a bottle deposit or the original supplier). This last condition applies unless the container is a "returnable container" (as that term is defined in section 226 of the ETA) of a kind that is not supplied by the registrant when filled and sealed. If the container is a "returnable container", then only the first three conditions must be met in order to be eligible to claim an NITC.

In the present case, the aluminum soft drink cans and soft drink bottles are not "returnable containers" as defined in section 226 of the ETA for the reasons given above. The last condition described in the previous paragraph must therefore be met for the scrap metal company to be eligible for an NITC. Thus whether or not the scrap metal company is eligible to claim an NITC depends on what is done to the aluminum cans and plastic bottles by the scrap metal company after they are purchased from consumers. If the scrap metal dealer melts down, compresses or otherwise processes the containers then it is not eligible to claim an NITC, as there cannot be a subsequent resupply of the used containers as required. If the scrap metal dealer subsequently resupplies the same containers to a third party for consideration (including tax) that is greater than the consideration paid to the consumer, then no NITC can be claimed. If, however, the scrap metal company resupplies the same containers to a third party for consideration (including tax) that is less than or equal to the consideration paid to the consumer, then the scrap metal company may claim an NITC (assuming that all of the other conditions in subsection 176(1) listed above have been met).

Aluminum beer cans in XXXXX are considered to be "returnable containers" pursuant to section 226 of the ETA, so the purchase of aluminum beer cans is not subject to the fourth condition found in subsection 176(1) of the ETA described above. Thus the scrap metal company would be deemed to have paid tax in respect of the purchase of aluminum beer cans as long as the other three conditions are met. If the scrap company is deemed to have paid tax pursuant to subsection 176(1) of the ETA, then subsection 226(4) of the ETA would apply to deny the NITC to the scrap company, unless one of the exceptions listed in subsection 226(5) of the ETA applies. In particular, subparagraph 226(5)(c) of the ETA states that subsection 226(4) of the ETA does not apply to a transaction if, at the time of the transaction, it is the usual practice of the scrap dealer to pay less for the purchase of the beer cans from non-registrants than the consideration that the scrap dealer charges for the resupply of those same beer cans. Note that if the scrap metal dealer melts down, compresses or otherwise processes the beer cans before their subsequent resupply then paragraph 226(5)(c) of the ETA cannot apply to the transaction.

In summary, the scrap metal dealer can claim an NITC on the purchase in XXXXX of aluminum beer cans only if the following conditions are met:

•   the first three conditions for the application of subsection 176(1) of the ETA listed above are satisfied; and

•   one of the exceptions listed in subsection 226(5) of the ETA applies so that subsection 226(4) of the ETA does not apply to the transaction.

Pursuant to paragraph 169(4)(a) of the ETA, all claims for NITCs must meet the documentary requirements set out in the Input Tax Credit Information (GST/HST) Regulations.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8253.

Yours truly,

Gregory Smart
A/Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Legislative References: s. 226, 176(1)