3 April 1998 GST/HST Interpretation HQR0000505[1] - Amount Paid as Tax in Error

                                                                        GST/HST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Road
Vanier, Ontario
XXXXX                                                                                 K1A 0L5

Dear XXXXX

Thank you for your letter of January 14, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) and the recovery of amounts paid as tax in error. We apologize for the delay in responding to your letter.

It is your understanding that amounts paid as tax in error are recoverable by way of deduction from monthly GST/HST remittances. This would include scenarios where GST has been miscalculated or applied at a rate in excess of 7% for goods taxable at 7% or in excess of 0% for zero-rated goods. Your understanding is based on the application of subsection 296(4.1) of the Excise Tax Act (the "Act") and the GST Technical Information Bulletin B-042.

In addition, you have addressed situations where, as a result of confusion with respect to the place of supply rules, suppliers may charge HST at 15% for taxable supplies that should only be subject to GST at 7%. It is your view that suppliers could simply charge 15% HST on the understanding that recipients could claim input tax credits (ITCs) for the 15% tax even if the supply is only taxable at 7%, subject to the conditions for claiming ITCs (e.g., documentary requirements). This would alleviate the need for suppliers to spend time determining the application of the place of supply rules and relieve recipients from seeking adjustments from suppliers.

Interpretation Requested

You would like confirmation that any amounts paid in error as or on account of GST/HST may be claimed as ITCs in determining GST/HST net tax remittances.

Interpretation Given

A recipient may not claim as an ITC, an amount which has been paid in error as or on account of GST/HST. Pursuant to section 169 of the Act, an ITC can only be claimed for tax paid or payable. Subsection 123(1) of the Act defines "tax" as being tax payable under Part IX of the Act. This would include actual amounts that are payable under the legislation at rates of 7% or 15%.

Where a recipient has paid an amount as or on account of tax in error, the recipient may either seek a refund or credit of the amount from the supplier or apply for a rebate of the amount under section 261 of the Act. An application for such a rebate must generally be filed within two years from the day the amount in question was paid.

Subsection 296(2.1) of the Act, which applies to assessments made on or after July 1, 1996, deals with the rebate offset provisions previously addressed, in part, by subsection 296(4.1) of the Act. More specifically, subsection 296(2.1) of the Act provides that, generally, in assessing a person's net tax, or an amount payable under Part IX of the Act, any unclaimed rebate, that would have been payable to the person had it been claimed in an application filed on the due date for the net tax or amount payable, must be applied against the person's net tax or the amount payable, as the case may be. As such, where an ITC claimed for an amount paid as tax in error is denied in assessing a person's net tax, but the person would be entitled to a rebate of that amount under section 261 of the Act, the Minister would be required to offset the net tax outstanding by the amount of the rebate.

As a result, where a recipient has claimed an ITC for an amount paid as GST/HST in error and the recipient would be entitled to a rebate of that amount, the recipient is not required to request that the Department adjust its net tax for the reporting period in which the unentitled ITC was claimed. Should the net tax for the reporting period in which the unentitled ITC was claimed be assessed, the unentitled ITC would be denied and the amount of the unentitled ITC would be offset by the available rebate. As such, the recipient would not incur any penalty or interest charges with respect to the unentitled ITC. The recipient cannot file a rebate application under section 261 of the Act for the amount offset under the provisions of subsection 296(2.1). Similarly, the recipient cannot seek a refund or credit of the amount from the supplier.

It should be noted that the Department does not condone the practice of suppliers charging tax at a higher rate than is actually applicable simply due to a lack of awareness or understanding of the GST/HST legislation. Suppliers are expected to make every effort to determine the proper application of the GST/HST to their supplies before the tax is charged. In this respect, they should contact Revenue Canada if there is any doubt as to the application of the GST/HST.

Regarding your comment about the ITC documentary requirements applying to amounts claimed as ITCs in error, we would like to confirm that the requirements as outlined in subsection 169(4) of the Act are not applicable with respect to amounts paid as tax in error for rebate purposes. However, as outlined in subsection 286(1) of the Act, persons are required to maintain adequate books and records in English or French to enable verification of the amount of the rebate.

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) 952-8814.

Yours truly,

Victoria Szabo
A/Rulings Officer
General Operations Unit
General Operations and Border Issues Unit Division
GST/HST Rulings and Interpretations Directorate

Casework Number:                 HQR0000505