30 December 1998 GST/HST Interpretation HQR0001002 - Subsection 177(1.1) of the Excise Tax Act

XXXXX

Thank you for your letter of December 15, 1997, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to bad debts within the context of agency relationships. We apologize for the delay in responding to your request.

Facts

•   An agent, who is a registrant and who is not an auctioneer, and a principal, who is required to collect tax in respect of a supply otherwise than as a consequence of paragraph 177(1)(d) of the Excise Tax Act (the "Act"), jointly elect under subsection 177(1.1) of the Act, to require the tax collectible on the supply to be included in the agent's net tax rather than the principal's net tax as if the tax were collectible by the agent.

•   The agent, in making the taxable supply in the course of its commercial activities on behalf of the principal, includes the tax collectible on the supply in its net tax and remits any positive amount of net tax.

•   The supply is not a zero-rated supply.

•   The agent records an accounts receivable in its books and records for the consideration and the tax payable by the recipient.

•   At a future date, the accounts receivable is determined to be uncollectible; the agent writes off the bad debt in its books of account in accordance with generally accepted accounting principles.

•   The supply is made after April 23, 1996.

•   The principal, the agent and the recipient are dealing at arm's length.

Interpretation Requested

You have asked for clarification of the last two paragraphs of our October 30, 1997, letter to you (case HQR0000654) concerning bad debt relief within the context of agency relationships. It is your opinion that the agent should be entitled to recover the GST/HST portion of the bad debt pursuant to section 231 of the Act.

Interpretation Given

As stated in our October 30, 1997, letter to you, for a person to be eligible for a net tax deduction pursuant to section 231 of the Act, certain conditions must be met. These conditions include: (1) the person must have made a taxable supply, other than a zero-rated supply, for consideration and (2) the supplier and the recipient of the taxable supply must have dealt at arm's length.

We have carefully reviewed your comments outlining your opinion that the agent can be seen as the person who makes the taxable supply and your comments concerning "all obligations" of the principal and the agent. Our interpretation remains that where the election is made under subsection 177(1.1) of the Act, the tax collectible in respect of the supply made on behalf of the principal is considered to have become collectible by the agent under paragraph 177(1.1)(a) for the single purpose of requiring it to be included in the agent's net tax. More specifically, the agent does not make, nor is the agent deemed to have made, the taxable supply to which the bad debt relates. Therefore, the wording of the subsection does not, as you have suggested, result in the agent assuming any rights with respect to the making of the supply. Consequently, under the current legislation, the agent is not eligible for a net tax deduction in respect of the bad debt that is written off as the agent does not meet the conditions of section 231 of the Act.

Furthermore, pursuant to section 231 of the Act, in order for a person to claim a net tax deduction in respect of a bad debt, the person must report the tax collectible in respect of the supply in the person's return for the reporting period in which the tax became collectible and must remit all net tax as reported in that return. Consequently, the principal is not eligible to claim the bad debt deduction as the principal neither reports the tax collectible in its return nor remits the tax collectible.

The Department of Finance is responsible for modification of legislation. If you wish to pursue this issue further, we suggest that you approach Rainer Nowak, Chief of Real Property and Financial Institutions, Sales Tax Division, Department of Finance. It is our understanding that you have already spoken with Rainer Nowak concerning this issue.

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 Department with respect to a particular situation.

We regret that our response cannot be more favourable. Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Marcel Boivin at 613-954-2488.

Yours truly,

Victoria Szabo
Goods Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch