21 September 2000 GST/HST Interpretation 31611 - Accounting of GST/HST by Third Parties

Dear XXXXX:

Thank you for your letter of June 5, 2000, with attachments, concerning the liabilities for the accounting and remittance of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST).

In accordance with GST/HST Memoranda Series Section 1.4, an application ruling can only be issued with reference to a clearly defined fact situation of a particular registrant. Rulings are issued upon request and where the registrant has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of services or property involved, the parties involved in all transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. As discussed, we are pleased to issue you the following interpretation.

It is our understanding that third party retailers will be given an opportunity to sell electricity to consumers. You have provided us with a copy of the XXXXX which outlines the process to "settle" the accounts of consumers under three different settlement and billing options as well as the accounts of retailers. The nature of your request focuses on the second option which is "Distributor-Consolidated Billing". Under this option, the distributor bills the consumer for the distribution services and the electricity which is charged and collected on behalf of the retailer.

Although the XXXXX addresses the settlement processes, there is no information in your submission with respect to the actual supplies that are being made. For example, it is not clear under the Distributor-Consolidated Billing option whether the supplies of electricity and distribution services to the consumer are made by XXXXX (the distributor), the third party retailer (the retailer) or jointly by both parties. It appears that the retailer is supplying electricity to the consumer and that the distributor is providing distribution (i.e., the delivery) services to the consumer. There is no clear indication that the distributor is supplying electricity to the retailer, who subsequently supplies the electricity to the consumer. It is noted that no documentation has been submitted with respect to the agreement entered into by the retailer and the consumer which may provide information with respect to the nature of the supplies being made.

In your submission you provide the following example:

It is our understanding that you propose to treat the GST in the following manner:

-    the distributor will issue an invoice to the consumer that will include a charge for distribution services in respect of the electricity ($400.00) and an amount charged on behalf of the retailer in respect of the electricity supplied by the retailer ($500.00);

-    the distributor will charge GST on the total amount of the invoice ($900.00) which includes the amount charged on behalf of the retailer. The GST charged on behalf of the retailer will be included in the distributor's net tax calculation and any positive amount of net tax will be remitted by the distributor;

-    the distributor credits the settlement account of the retailer by the amount charged in respect of the electricity ($500.00) and debits the retailer's settlement account by the cost of the power which was incurred by the distributor ($490.00). In other words, in this example, the balance of $10.00 in the settlement account is payable to the retailer;

-    the net difference payable to the retailer is being viewed as not attracting GST; and

-    the distributor will claim an input tax credit (ITC) for the GST payable on the acquisition of the power.

Interpretation Requested

You have specifically requested that we confirm your understanding of the application of the GST when the Distributor-Consolidated Billing option is chosen.

Interpretation Given

The interpretation is based on the following assumptions:

-    the nature of the supplies being made to the consumer are that of separate supplies of electricity by the retailer and distribution services by the distributor, both of which occur simultaneously;

-    given that the submission indicates that the distributor always pays for the purchase of power and that the distributor is claiming an ITC for the GST payable in respect of the acquisition, it is assumed that the distributor supplies the electricity it acquired to the retailer who, in turn, supplies the electricity to the consumer;

-    the distributor is not an agent of the retailer; and

-    the distributor is accounting for the GST collectible by the retailer in the distributor's net tax calculation as the amounts become collectible by the retailer.

Pursuant to the provisions of subsection 225(1) of the Excise Tax Act (the "ETA"), a person is required to include in its net tax calculation all amounts of GST collected including amounts collected on behalf of a third party, otherwise than as agent of the third party, in its net tax calculation unless the amounts were accounted for in the person's net tax calculation for a preceding reporting period. As such, the distributor is required to include in its net tax calculation the GST collected on behalf of the retailer.

It should be noted that subsection 225(1) of the ETA also provides that amounts of tax that became collectible by a person during a reporting period are required to be included in the person's net tax calculation for that reporting period. However, where an amount of tax is charged by a person on behalf of a third party, there is no requirement under the legislation that the person account for the tax in its net tax calculation. Only the third party (i.e., the supplier) is required to account for the tax that is collectible and not yet paid in its net tax calculation. In other words, while the distributor is required to account for the GST that is collectible on its supplies of distribution services made in a particular reporting period even where the amounts are not yet paid by the consumer, the distributor is only required to account for amounts of tax charged on behalf of a retailer at the time that those amounts are actually collected by the distributor.

We understand that a distributor may wish to account for the GST charged on behalf of a retailer on a collectible basis to facilitate the accounting of the tax by both itself and the retailer. As indicated above, it is assumed that the distributor will account for the GST on behalf of the retailer as the GST becomes collectible. In accordance with the Agency's policy in respect of third party remittances, the retailer's liability for the tax is only extinguished when the amount is accounted for and remitted by the distributor. By accounting for the tax on a collectible basis, the retailer's liability is extinguished at the same time it is incurred, assuming that the retailer and the distributor's reporting periods coincide. As such, the retailer avoids any penalty and interest implications that may have arisen otherwise.

Therefore, in the above example, the distributor will account for GST in the amount of $63.00 (7% of $900.00) in its net tax calculation. In addition, the distributor will claim an ITC in the amount of $34.30 in respect of the acquisition of electricity. Furthermore, the distributor is required to account for the GST payable on the supply of electricity to the retailer. Based on the submission it appears that the electricity is supplied to the retailer at cost. As such, GST of $34.30 payable by the retailer must be included in the distributor's net tax calculation.

In settling the retailer's account, the account is credited with $500.00 (the amount charged on its behalf for the supply of electricity to the consumer) and debited with $524.30 (the amount payable to the distributor for the acquisition of power). In this case, the retailer is required to pay the distributor a net balance of $24.30. The retailer can claim an ITC of $34.30 (the GST payable on the acquisition of electricity) provided that the conditions for claiming ITCs are met and the documentary requirements are satisfied. After claiming the ITC and paying the distributor, the retailer has a net balance of $10.00.

In summary, the net tax for the distributor and the retailer would be as follows taking into account only the example provided above:

Although your request does not specifically address the issue of consumer non-payment, it is noted that the XXXXX stipulates that a distributor may use any means that are available under the law to mitigate consumer non-payment risk. Furthermore, it is indicated that any partial payment made by a consumer must be allocated to the distribution charge and electricity charge based on the ratio of the amounts billed to the consumer.

Where an amount billed to the consumer remains unpaid and is subsequently written-off as a bad debt, the following information addresses the GST consequences that would result in the above example and under the same assumptions. Generally, subsection 231(1) of the ETA allows a person who has made a taxable supply (other than a zero-rated supply) to deduct an amount in determining its net tax equal to the amount of tax that relates to the amount written-off as a bad debt. The intent is to provide relief to a supplier who has remitted an amount of tax that was never paid by the recipient. Where the $963.00 in the above example remains unpaid and the amount is written-off as a bad debt, the distributor may claim a bad debt adjustment in calculating its net tax only in respect of the tax payable on the taxable supply made by the distributor (i.e., the distribution services). In applying the mathematical formula included in subsection 231(1) of the ETA to determine the amount of the adjustment, the distributor could claim a deduction of $28.00. This is the amount of tax that was payable by the consumer in respect of the supply of distribution services made by the distributor. No bad debt adjustment can be made by the distributor to account for an amount of tax that was included in its net tax calculation in respect of GST charged on behalf of the retailer where the amount charged on behalf of the retailer is subsequently written-off as a bad debt. It should be noted that based on the wording of subsection 231(1) of the ETA, the retailer is also prevented from claiming a bad debt adjustment given that the tax in respect of the supply has not been accounted for in the retailer's GST return.

We have also noted that the XXXXX addresses billing errors, where the consumer is over billed, the distributor will make the necessary adjustment for amounts erroneously billed within a six-year period. With respect to the GST, subsection 231(1) of the ETA, will allow the distributor to make an adjustment to its net tax for amounts charged or collected as or on account of tax that are in excess of the amount that is collectible, including amounts charged on behalf of a retailer. Such adjustments are limited to two years after the day the amount was so charged or collected. Adjustments may also be made under subsection 232(2) of the ETA where the consideration for a supply is subsequently reduced. In these cases, adjustments may be made within four years of the end of the GST reporting period in which the consideration was reduced. It should be noted that adjustments under section 232 can only be made if the conditions under the respective provisions are met and credit or debit notes containing prescribed information are issued.

The foregoing comments represent our general views with respect to the subject matter of your submission. 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. For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 954-2488.

Sincerely,

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

Enclosure