1 May 1998 GST/HST Interpretation 1998-05-01[2] - XXXXX Energy Performance Contracts Additional Consideration for the Supply Subsequent Reductions in Consideration

This memorandum is in response to your e-mail of September 4, 1997, and your subsequent telephone calls, where you requested our views on amounts refunded or credited by XXXXX to its customers, as part of energy performance contracts. XXXXX from XXXXX requested that you reconsider the position taken in your interpretation of March 17, 1997, with respect to this matter. I apologize for the delay in responding to your request.

Background Information

•   XXXXX is engaged in energy performance contracts with its customers. XXXXX energy performance contracts include a guarantee that it will implement energy measures that will reduce the customer's energy bills by a specific dollar amount. This dollar amount is determined after surveying and documenting all base year conditions, and identifying measures that will reduce this base year usage, given that no other changes are made to the customer's facility.

•   XXXXX analyses utility bills on an ongoing basis, and at the end of each year, a reconciliation is provided which compares actual energy savings to date versus the estimated energy savings to date.

•   If the guaranteed energy savings are not achieved (i.e., actual energy savings are less than estimated energy savings), then XXXXX must refund, or credit the customer for the amount of the shortfall.

•   If energy savings are overachieved in a subsequent year (i.e., actual energy savings are greater than estimated energy savings), then the customer must pay or credit to XXXXX the amount of the overage, up to, but not exceeding any previous shortfalls paid to them by XXXXX

Position:

 XXXXX fax of XXXXX , 19 XXXXX stated in part, "We do not think this should be classed as a taxable transaction as the tax portions have already been handled. ..." "This part is really as simple as making good on a promise." XXXXX position is that amounts refunded, or credited to their customers, when there is a shortfall in energy savings, are similar to liquidated damages, and are not price adjustments.

Technical Interpretation Services' Interpretation:

"Based on the information provided, it appears that when guaranteed savings are not achieved, there would have been an overcharge for the services provided. Hence the refund to the customer." The remainder of the interpretation discussed subsections 232(2) and 232(3) of the ETA.

Headquarters' Interpretation:

We concur with your interpretation that subsection 232(2) of the ETA applies when actual energy savings are less than estimated energy savings, and XXXXX is required XXXXX , to refund or credit an amount to the customer for the shortfall. The amount subsequently refunded or credited to the customer would be regarded as a reduction in consideration, to which subsection 232(2) of the ETA would apply.

 XXXXX has described the amounts paid or credited to its customers (i.e., in the event that actual energy savings are less than estimated energy savings) as being similar to "liquidated damages". It is our position that it is not the name or label attached to a transaction that necessarily defines the transaction. It is the substance of the transaction that defines what it is. Upon review of the XXXXX it is our view that these amounts are more in the nature of price adjustments, rather than "liquidated damages".

Page 2 of the interpretation of March 17, 1997, stated in part, "... it appears that when the guaranteed savings are not achieved, there has been an overcharge for the services provided." It may have been more appropriate not to have characterized the initial amounts invoiced as an overcharge. Our position is stronger if it is explained that the tax originally paid, pursuant to the XXXXX was properly payable at that time. Consequently, a refund or credit to the customer, as provided for under paragraph 23.6 of the XXXXX , would be regarded as a subsequent reduction in consideration, under subsection 232(2) of the ETA.

As discussed, because the supplier XXXXX is not required to refund, adjust, or credit the tax under subsection 232(2) of the ETA, it may be appropriate to emphasize the point that XXXXX would have the option of not refunding, adjusting, or crediting the tax, when it subsequently reduces the consideration for the supply to its customers. From a customer service perspective, this option may not be desirable for the customer if the customer does not have the means to recover the tax paid through an input tax credit or a rebate.

When actual energy saving are greater than estimated energy savings in a subsequent year, and the customer is required (i.e., under paragraph XXXXX to refund or credit XXXXX for the amount of the overage, up to, but not exceeding any previous shortfalls paid to them by XXXXX this amount would be regarded as additional consideration for the supply, to which the general imposition rules under the ETA would apply.

I trust that these comments will be of some assistance to you in responding to XXXXX Should you have any questions, please contact me at (613) 954-9699.

Legislative References: Subsection 232(1), (2), (3) of the ETA

Subject Code(s): 11755-22