19 February 2002 General Information Letter 39187 - GENERAL INFORMATION LETTER Application of GST/HST to Supplies of Dutiable Spirits

Dear XXXXX:

I am writing to you concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of dutiable spirits.

Application of GST/HST to supplies of dutiable spirits

The application of s. 154 of the Excise Tax Act (ETA) is that the consideration for any supplies of dutiable spirits made prior to excise duty becoming payable will not include amounts of excise duty; whereas, consideration for supplies of dutiable spirits made after the duty on the spirits has become payable will include the amount of duty. Generally, excise duty becomes payable when spirits "are entered for consumption" (leave the in-bond warehouse).

Explanation:

•   Pursuant to the Excise Act (EA), spirits are subject to excise duty, ascertained and levied at production; however, the duty is subject to deferral mechanisms such as transfers "in-bond", which generally defer the time when duty becomes payable until the spirits are "entered for consumption";

•   Pursuant to sub. 165(1) of the ETA, taxable "supplies["] ("Supply" is defined at subsection 123(1) ETA to mean, "subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition." A "supply" necessarily involves more than one "person" and does not take place upon transfers within a single "person." In the context of this industry, "supply" will generally mean sale.)" of goods are subject to GST/HST calculated upon the value of the "consideration" for the supply;

•   Pursuant to s. 154, ETA, "consideration" includes any amount of excise duty that is "payable";

•   Canadian distillers, manufacturers and liquor boards are licencees under the EA and operate bonded warehouses;

•   Canadian distillers generally supply their products "in-bond" to manufacturers and provincial liquor boards, deferring the payment of excise duty until the spirits are "entered for consumption" (usually, when they leave the final bonded warehouse in the supply chain);

•   When spirits are "entered for consumption," excise duty becomes payable;

•   Where spirits are supplied in circumstances where the duty is not yet payable (e.g. while in bond), the GST/HST payable in respect of the supply is calculated on the value of the consideration for the supply, excluding excise duty (i.e. the amount invoiced);

•   Where spirits are supplied at a point in time after the excise duty becomes payable, the GST/HST payable is calculated on the value of the consideration for the supply that includes the duty.

Example of basic transactions and GST/HST consequences:

Transaction #1: Spirits supplied in-bond from distiller to liquor board. Duty is not payable.

GST/HST payable is calculated on the value of the consideration, excluding duty.

Transaction #2: Spirits transferred by liquor board to liquor board outlet. Spirits are "entered for consumption" and duty becomes payable.

No GST/HST is payable at this time as the spirits have not been supplied.

Transaction #3: Spirits supplied by liquor board outlet to consumer. Supply is made duty-paid.

GST/HST payable is calculated on the value of the consideration, including duty.

XXXXX For supplies made "in bond", invoices should indicate the amount payable for the spirits, plus an amount of GST/HST calculated upon this amount (duty-excluded amount).

Over-remittance of GST/HST

XXXXX In these circumstances, paragraph 232(1)(a) permits the XXXXX to issue a credit note to the recipient in respect of the excess amount of tax charged but not collected and make an adjustment on its return.

In order to make the adjustment, the rules set out at sub. 232(3) must be respected. In essence, there is a two-year time limit that begins to run on the date the amount was collected and the registrant (in this case, XXXXX) must issue a credit note within a reasonable time.

XXXXX For purchases made by XXXXX of spirits supplied at a point in time when duty is not payable (i.e. in-bond), XXXXX will remit to their suppliers an amount of GST/HST calculated upon the duty-excluded amount.

When the XXXXX supplies the spirits after the duty has become payable, GST/HST will be calculated and charged upon an amount including excise duty.

ITCs in respect of amounts paid that are in excess of GST/HST payable

XXXXX Technically, there should be no ITC available on the portion of the amount that is not GST/HST; however, if the person did pay the amount, the person is entitled to a rebate pursuant to s. 261 of the ETA and should file a s. 261 rebate application.

Administratively, to the extent that a rebate is available, there will be no tax consequences to XXXXX who have already claimed ITCs as opposed to claiming the rebate. Of course, XXXXX may also file an application for a s. 261 rebate if they never claimed ITCs. Rebates are subject to a two-year limitation period.

Implementation

Pursuant to discussions with the XXXXX XXXXX who have over-remitted amounts on account of GST/HST may complete the adjustment to their returns as set out above.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-952-9262.

Yours truly,

Sheena France
Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate