8 August 2001 GST/HST Interpretation 36741 - Early Payment Discount

Dear XXXXX:

Thank you for your letter of July 9, 2001 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to early payment discounts.

It is your understanding that in a situation where a supplier offers a 2% discount for early payment of an invoice for the supply of a service, then the discount should be calculated on the amount of money invoiced for the supply of the service excluding the GST/HST calculated on the amount of money paid for the service. It is your understanding that the discount for early payment of the invoice should not be calculated on the consideration paid for the service plus the GST/HST paid on that consideration.

Interpretation Requested

You request a ruling as to whether a discount for the early payment of an invoice should be calculated on the invoiced amount net of the GST/HST.

Interpretation Given

A ruling, for GST purposes, provides the Canada Customs and Revenue Agency's (CCRA's) position on specific provisions of the Excise Tax Act (ETA) as these provisions relate to a clearly defined fact situation of a specific person or persons.

The CCRA is unable to issue a GST/HST ruling when a request is general in nature and does not relate to a specific set of facts and to specific persons. However, we are pleased to provide you with the following general interpretation concerning the application of the GST/HST to early payment discounts.

A supplier of property or services may offer customers a discount for early payment of an invoiced amount. Conversely, a supplier may impose a penalty if payment of an invoiced amount is late.

Section 161 of the ETA provides that where tangible personal property or services are supplied and the amount of the consideration for the supply shown in the invoice in respect of the supply may be reduced if the amount thereof is paid within a time specified in the invoice or an additional amount is charged to the recipient by the supplier if the amount of the consideration is not paid within a reasonable period specified in the invoice, the consideration due shall be deemed to be the amount of consideration shown on the invoice.

Therefore, tax is payable on the amount initially invoiced, regardless of whether the customer paid the amount initially invoiced, took advantage of the discount and paid a lower amount than that invoiced, or paid late and paid an amount higher than that invoiced. A registered supplier would be obligated to account for tax on this basis and a registered recipient's input tax credit would be based on this same calculation.

The terms of a prompt payment discount (i.e., whether the discount will apply to a GST-included amount) are a private matter to be determined by the parties to the transaction. The rules in section 161 of the ETA have no bearing on whether the discount the recipient receives is $2 (2% of $100) or $2.14 (2% of $107). For example, if the amount invoiced in respect of a supply that is taxable at 7% is $100, and the invoice contained terms that provided the recipient with a 2% discount on $100 if payment is made within 30 days, the tax payable in respect of the supply will be $7. If the customer takes advantage of the discount, the customer will pay $98 plus tax of, in this example, $7. Similarly, if a registered supplier charges $5 for late payment of property or services invoiced at $100, the tax payable is still $7. The customer will pay $105 plus tax of $7.

An exception to this general treatment occurs where the amount invoiced to the customer is already net of the early payment discount. For example, if a supplier issues an invoice to the customer with instructions to pay $108 if the payment is made by March 23, or to pay $118 if payment is made after March 23, the tax payable would be calculated on the reduced invoice amount of $108 even if payment is made after the March 23 due date.

Please note that these rules do not apply to supplies of real property or to rentals.

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.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0419.

Yours truly,

Anne Kratz
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate