14 March 2000 GST/HST Interpretation 27041 - Deposits

Dear XXXXX

This letter is further to the conference call with participants from the XXXXX Office and as well, my letter dated January 11, 2000, regarding the XXXXX[.]

Background Information

XXXXX has proposed to raise an assessment against the XXXXX as a result of timing differences related to when tax is considered payable. My previous letter concerned whether a particular document was an invoice to determine if consideration is deemed due under paragraph 152(1)(a) of the Excise Tax Act (ETA). This letter discusses whether an amount is regarded as a deposit under subsection 168(9) of the ETA.

Interpretation Requested

Will the Canada Customs and Revenue Agency (CCRA) accept an amount paid equaling the total of consideration and tax as a deposit under subsection 168(9) of the ETA and if so, under what circumstances?

Interpretation Given

An amount paid equaling the total of both the consideration and the tax to become due may be regarded as deposit. The definition of the term "deposit" adopted by the CCRA states that a deposit is an amount given by a recipient as security for the performance of an obligation by the recipient. The amount may or may not be refundable to the customer. There is no limit to the amount that may be agreed upon as a deposit.

Just because a payment is called a deposit does not necessarily mean that it is a deposit. It is a question of fact and substance. For example, a payment will not be regarded as a deposit where the supplier:

1. gives possession of a good to a customer;

2. requires the payment equal to the consideration and tax; and

3. calls the amount paid a deposit.

If there is no apparent business reason for calling a payment a deposit and there is evidence that the sole reason of the practice is to delay the remittance of tax, the CCRA will not consider the amount as a deposit.

However, the CCRA accepts the current business practice where suppliers, to ensure customer satisfaction, treat amounts paid as deposits. In essence, although the deposit is taken to ensure the purchaser fulfils its obligations, the reality of the market place is that supplier's policy of complete customer satisfaction will override the customer's purchase obligations. Consequently, despite the deposit, the supplier's policy allows the customer to not accept the goods, for almost any justifiable cause at the time of delivery.

In general, a payment required by the supplier to help insure the completion of a sale will be considered a deposit where it is identified and accounted for as a deposit (e.g. not recorded as a sale and no sales commissions is recognized until after acceptance of delivery). As indicated above, the CCRA will accept the payment as a deposit even if the only obligations of the purchaser are to inspect the goods delivered, pay any outstanding balance, if any, and finalize the sale by accepting the goods. Usually this means that the customer must accept to purchase the goods, unless there is a justifiable reason as allowed by the original contract or supplier's customer satisfaction policy.

An interesting observation is that if the CCRA was to require the remittance of an amount as tax any time a deposit included a sum calculated for future tax payable, there may be an unintended revenue gain. For example, assume there is a nonrefundable deposit of $107 which is calculated by the supplier as 25% of the future amount to be paid by the recipient (i.e. purchase price of $400 x 1.07 x 25%). In this example, for whatever reason, the customer decides to forfeit the deposit. The application of section 182 would require the remittance of $7.00 GST on the amount forfeited.

If the CCRA had stated that a portion of the amount paid was collected as tax, (instead of just an amount identified to calculate the agreed upon deposit), twice as much tax (i.e. $14) would be received on the deemed consideration of $100.

Should you have any further questions or require clarification on the above issue please feel free to contact Dave Caron, Mgr., General Operations Unit at (613) 952-0301.

Yours truly,

Adrien Venne
Director
General Operations and Border Issues Division