18 November 1999 GST/HST Interpretation HQR0001976 - Time of Liability for GST/HST

Dear XXXXX

Thank you for your letter of September 28, 1999, concerning the time the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) is payable in respect of a taxable supply of a manual with a one year subscription to receive updates to the manual and the subsequent annual renewal of the subscription.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Interpretation Requested

In your letter you presented two situations and your analysis of the application of the GST/HST to those situations. For ease of reference, both situations are summarized as follows:

Situation #1

1. Customers willing to accept a 30-day free trial, receive the product which is a manual, a letter and a document which is clearly identified as an invoice for the product (hereafter referred to as "the document").

2. The letter specifies that the manual is provided on a free 30 day trial basis and the document stipulates that there is a 30 day review.

3. The letter instructs the customer to pay the enclosed invoice if, at the end of the 30 day period, the customer chooses to keep the manual and receive the updates or return the manual by ordinary post.

4. The document contains the date that the manual was sent to the customer, identifies the supplier and the customer and indicates an invoice number, an amount for the GST and the total amount payable in respect of the taxable supply of the manual which includes a one year subscription to receive updates to the manual.

5. The amount payable indicated on the document is not carried into the supplier's financial records unless and until payment is received.

6. The customer may pay for the manual by sending a cheque payable to the supplier or provide information for credit card payment. In the latter case, the customer signs the area on the document that authorizes the credit card payment and returns the document to the supplier.

7. There is no requirement for the customer to sign the document or the letter to indicate that the customer is accepting the offer to purchase the manual.

8. With respect to manuals that are returned, no credit notes are issued pursuant to section 232 of the Excise Tax Act (the ETA) and no bad debt adjustments are taken pursuant to section 231 of the ETA as the revenue and the GST/HST are never recognized in the supplier's records.

Situation #2

1. Subscription renewals are sent out automatically to customers upon the expiry of their subscriptions for the updates to the manual.

2. The offer to renew the subscription is sent in the format of a letter which invites the customer to renew the subscription and continue receiving updates to the manual and indicates that the accompanying document is an invoice for the renewal of the subscription. The document is clearly identified as a renewal invoice (hereafter referred to as "the renewal document").

3. The renewal document contains the date that the offer to renew the subscription was sent to the customer, identifies the supplier and the customer and indicates an invoice number, an amount for the GST and the total amount payable in respect of the taxable supply of a one year subscription renewal to receive updates to the manual.

4. The amount payable indicated on the renewal document is not carried into the supplier's financial records unless and until payment is received.

5. The customer may pay for the subscription renewal by sending a cheque payable to the supplier or provide information for credit card payment. In the latter case, the customer signs the area on the renewal document that authorizes the credit card payment and returns the renewal document to the supplier.

6. There is no requirement for the customer to sign the renewal document or the letter to indicate that the customer is accepting the offer the renew the subscription.

7. With respect to subscriptions that are not renewed (i.e., no payments are received in respect of the renewal document), no credit notes are issued pursuant to section 232 of the ETA and no bad debt adjustments are taken pursuant to section 231 of the ETA as the revenue and the GST/HST are never recognized in the supplier's records.

You have requested that we provide you with an interpretation regarding the application of GST/HST in respect of "invoices" that are never paid in situation #1 and "renewal invoices" that are never paid in situation #2. In addition, you have asked when does the GST/HST become payable and, consequently, when is the supplier required to include the tax in its net tax calculation.

Interpretation Given

Based on the information provided above, the document and the renewal document are explicitly identified as invoices and, on the surface, contain all the characteristics of an invoice. However, in each situation, there is no underlying obligation to pay for the manual or the subscription for updates to the manual in respect of which these documents are issued at the time that they are issued by the supplier. As such, it is our view that the document in situation #1 and the renewal document in situation #2 are not invoices for GST/HST purposes. This view is consistent with the CCRA's position as published in paragraph 12 of GST Memorandum 300-6-3.

Where the manuals are returned and the amounts are not paid in situation #1 or the subscriptions are not renewed in situation #2 (i.e., payment is not received in respect of the renewal documents), there are no GST/HST consequences as there are no supplies made by way of sale by the supplier in respect of the manuals or the subscription renewals in these cases.

With respect to the manuals that are purchased by the customers and the subscriptions that are renewed, the document issued in respect of the offer to purchase the manual and the renewal document to renew the subscription do not trigger the provisions of paragraph 152(1)(a) of the ETA given that neither of these documents are invoices for GST/HST purposes. At the time the documents were issued, there was no underlying obligation to pay the amounts indicated on the documents. When the client takes ownership of the manual or renews the subscription and pays the amount owing, the documents do not suddenly become invoices for GST/HST purposes. In addition, the documents are not viewed as agreements in writing. As such, the consideration payable in respect of the taxable supply of the manual or the subscription for updates to the manual is not deemed to become due on a particular day under the provisions of subsection 152(1).

Subsection 168(1) of the ETA provides that GST/HST is payable by the recipient of a taxable supply on the earlier of the day that consideration for the supply is paid and the day the consideration for the supply becomes due.

In certain circumstances such as the delivery of tangible personal property on an approval basis, the provisions of subsection 168(3) of the ETA override the provisions of subsection 168(1) of the ETA. However, subsection 168(3) does not apply in respect of the sale of the manual or the subscription to the updates given that the consideration is paid by the recipient before the date that the GST/HST would be deemed to be payable under that subsection.

Therefore, in accordance with subsection 168(1) of the ETA, the GST/HST is payable on the day that the consideration is paid as the consideration does not become due on an earlier date in both situations. Consequently, the supplier is required to collect the GST/HST on the date that the consideration is paid and include that amount in the net tax calculation for the reporting period during which the GST/HST was collected. For example, if the supplier files GST/HST returns on a calendar month basis and the manual and accompanying documentation are sent to the customer on March 15, and paid by the customer on April 15, the supplier would include the corresponding GST/HST paid by the customer in the return for the month of April which is due at the end of May.

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/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

I trust that the above information is satisfactory and addresses your concerns. Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2488.

Marcel R. Boivin
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate