21 June 2000 GST/HST Interpretation 31883 - Application of Proposed Section 222.1 of the Excise Tax Act

Recently there have been discussions with representatives from the Assessment and Collections Branch to review certain issues regarding the application of the GST/HST to the assignment of an account receivable and the provisions relating to bad debts. This is to confirm our discussions on the CCRA's interpretative position.

Proposed section 222.1 of the Excise Tax Act (ETA) deals with situations where a supply gives rise to an account receivable and the resulting debt is subsequently supplied by way of sale or assignment to another person. The proposed amendment has the effect of relieving the purchaser/assignee of the account receivable of any GST/HST liability for the tax content of the account receivable which would arise upon the subsequent collection of the debt. The supplier who made the supply that gave rise to the account receivable is required to account for the tax in its net tax calculation and remit any positive amount of net tax.

As indicated in our recent discussions, in order for proposed section 222.1 of the ETA to apply, there needs to be a supply of the account receivable to a purchaser/assignee. In the case of an account receivable given as security for a loan or some other debt, section 134 of the ETA deems the transfer not to be a supply for GST/HST purposes. As such, it is the CCRA's position that proposed section 222.1 of the ETA does not apply where an account receivable is provided as security for a loan. Furthermore, where a bank or other lender exercises its right to collect the account receivable, the lender is liable for the GST/HST (i.e., the tax content of the account receivable) it collects to the extent that the original supplier has defaulted in meeting its obligations to account for the tax in its net tax calculation and remit any positive amount of net tax. The amounts collected by the lender are included in the amounts deemed under section 222 of the ETA to be held in trust.

With respect to the impact of selling an account receivable that was previously written off as a bad debt and for which a net tax deduction was made pursuant to subsection 231(1) of the ETA, we would like to confirm our existing interpretative position. Where an amount previously written off as a bad debt is subsequently sold to another person, any proceeds from the sale will be regarded as a recovery of the bad debt for purposes of subsection 231(3) of the ETA. Consequently, the supplier will have to account for tax based on the application of the formula under subsection 231(3) of the ETA.

I trust that this information is satisfactory. Should you wish to discuss these issues further, please do not hesitate to contact Dave Caron, Manager, General Operations, at 952-0301.

A. Venne
Director
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
Policy and Legislation Branch