28 June 2002 GST/HST Ruling 39493 - AND INTERPRETATION Section 178.6 of the Excise Tax Act

Dear XXXXX:

Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to buying groups in general, and more specifically, whether your client's supplies are considered to be pass-through supplies for purposes of section 178.6 of the Excise Tax Act (the ETA).

Our understanding of the facts is as follows:

1. XXXXX (the "Buyer") is a corporation incorporated under the Business Corporation Act (Ontario) by Articles of Incorporation dated XXXXX;

2. The Buyer was formed by XXXXX ("CANCO A") and XXXXX ("CANCO B") for the purpose of carrying on a business of sourcing and purchasing food products, including private label products, packaging, smallwares, foodservice equipment and ancillary products and services (collectively referred to as "the products") from various suppliers for re-sale to the Buyer's customers;

3. CANCO A is a taxable Canadian corporation and a public corporation within the meaning of the Income Tax Act. CANCO A carries on business in Canada as a food services provider and as a franchisor of food services businesses. CANCO A and its franchisees will be customers of the Buyer;

4. CANCO B is a taxable Canadian corporation and a wholly-owned indirect subsidiary of XXXXX whose shares are listed on the XXXXX. CANCO B and its wholly-owned direct and indirect Canadian subsidiaries carry on food services businesses in Canada and will be customers of the Buyer;

5. CANCO A and CANCO B deal with each other at arm's length;

6. CANCO A is also the controlling shareholder of XXXXX, another taxable Canadian corporation that directly and indirectly through subsidiary corporations also carries on business in Canada as a food services provider and as a franchisor of food services businesses. This third corporation and its franchisees will also be customers of the Buyer;

7. The Buyer will purchase and acquire title to the products and will be liable as principal for the payment to the suppliers of the price of the products acquired. The Buyer will re-sell the products to its customers at a price equal to the price charged by the suppliers;

8. The Buyer may subsequently receive rebates, allowances or similar cash amounts (collectively referred to as "rebates") from the suppliers. Such rebates shall be for the account of the Buyer and will be distributed as outlined in various agreements described below. It is not intended that the franchisees, who are customers of the Buyer, participate in such distributions;

9. Under the XXXXX Agreement with each of its customers, all of the Buyer's customers will benefit over the term of their participation in the buying group arrangement by obtaining lower prices for the products at the time the supplies are made, i.e., prior to the payment of rebates by the suppliers, and/or better terms of supply than would otherwise be available to the customers if they were making their purchases individually on their own directly from the suppliers;

10. Under the XXXXX Agreement, the Buyer will appoint the customer as its agent to make purchases of the products from the suppliers on its behalf. Arrangements with the suppliers will provide that the Buyer will take title and that the suppliers will issue their invoices to the Buyer for the price of the products. The suppliers will be authorized and directed to deliver the products directly to the Buyer's customers together with a copy of the particular supplier's invoice for those products;

11. Under the terms of the XXXXX Agreement, the copy of the suppliers' invoices issued to the Buyer but delivered to the customers will be deemed to constitute invoices from the Buyer to the customers, and the customers will be authorized and directed to pay the invoice amounts directly to the suppliers on behalf of the Buyer;

12. The Buyer's revenue will consist of membership fees and rebates;

13. CANCO A, on behalf of itself and the other taxable corporation, and CANCO B and its wholly-owned direct and indirect Canadian subsidiaries agree to pay the Buyer an annual membership fee. The membership fees paid to the Buyer will approximately equal the Buyer's operating costs including bad debts;

14. Where a customer of the Buyer fails to pay a supplier on the Buyer's behalf, the Buyer will pay the supplier directly and will incur a bad debt if the amount is not ultimately recovered from the customer. These bad debts will be funded through additional membership fees charged to CANCO A or CANCO B, as the case may be;

15. The Buyer will distribute its rebate revenue on a yearly basis to its voting shareholders pro rata as set out in XXXXX of the Shareholders Agreement. The distribution is intended to be in accordance with the sales volumes for each product or with each supplier generated by each voting shareholder; and

16. Franchisees will not participate in the distribution of rebate revenue. In accordance with XXXXX of the Shareholders Agreement, CANCO A and the third corporation referred to in fact #6 above are entitled to additional rebates in respect of purchases made by their respective franchisees.

Ruling Requested

Do the products, as described above, meet the definition of pass-through supplies as provided for in subsection 178.6(1) of the ETA.

Ruling Given

Based on the facts above, we rule that the supplies of the products as described under fact #2 above that are made by the suppliers to the Buyer and that are, in turn, supplied by the Buyer to its customers are pass-through supplies for purposes of section 178.6 of the ETA.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and transactions for which you requested a ruling.

Additional Interpretation Given

As such, the Buyer may apply to use the buying group accounting method as set out in subsection 178.6(5) of the ETA if all or substantially all of the supplies of property or services made by the Buyer are pass-through supplies. It is recognized that in addition to the pass-through supplies made by the Buyer, the Buyer is supplying services and rights to the customers for which CANCO A and CANCO B and its wholly-owned direct and indirect Canadian subsidiaries are paying a fee that is described in the XXXXX Agreement as a membership fee.

An application for the designation of the Buyer as a buyer for purposes of the buying group method of accounting for the GST/HST under subsection 178.6(5) of the ETA should be forwarded to the Buyer's local tax services office for consideration.

It is important to note that where a person is designated by the Minister as a buyer for purposes of section 178.6 of the ETA, the buyer and the ultimate recipients, i.e., the Buyer's customers, are jointly and severally liable for the payment of the GST/HST in respect of the supplies made by the original suppliers, i.e. the suppliers of the products. As such, a buyer could be assessed for tax payable pursuant to subsection 296(1) of the ETA where the ultimate recipient has not paid the tax. For instance, if an ultimate recipient has claimed ITCs for tax payable in respect of the products, subsequently encounters financial difficulty and is unable to pay the tax, the Canada Customs and Revenue Agency (the CCRA) could raise an assessment against the buyer to recover the unpaid tax. In such cases, the buyer would be required to pay the tax, however, the buyer would not be entitled to recover the tax paid pursuant to the assessment. Even where the buyer pays the tax on behalf of the ultimate recipient, the buyer is not entitled to ITCs in respect of the products supplied by the suppliers as the supplies made to the buyer and by the buyer to the ultimate recipients are deemed not to have occurred for GST/HST purposes pursuant to paragraph 178.6(5)(d) of the ETA. Furthermore, where the buyer is unable to recover the tax from the ultimate recipient, the buyer would not be able to claim a bad debt adjustment under section 231 of the ETA due to the application of above noted paragraph.

In addition to the above, where an amount is refunded, adjusted, or credited to a purchaser, after the tax has been charged or collected, as a volume rebate for simply surpassing a certain volume of purchases, it is the CCRA's position that the amount is a reduction of consideration for purposes of subsection 232(2) of the ETA. Where the supplier refunds, adjusts or credits the tax in respect of the reduction in consideration, the supplier is required to issue a credit note, unless the purchaser issues a debit note, containing prescribed information for the amount of the refund, adjustment or credit.

Under the buying group method, if the supplier issues a credit note in respect of a reduction in consideration to the buyer, the buyer is deemed to have received the note on behalf of the ultimate recipients (i.e., the customers of the Buyer in your case). As such, the ultimate recipients are required to add an amount to their net tax calculation to the extent that they have previously claimed an ITC. The ultimate recipients are also required to make a net tax adjustment where the buyer issues to the supplier a debit note in respect of the refund, adjustment or credit.

If a refund, credit or adjustment of tax is not made, a credit note, or debit note, need not be issued for GST/HST purposes, and there will be no corresponding adjustment to the net tax of either the supplier or the ultimate recipients.

The foregoing comments subsequent to the above ruling represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 CCRA 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) 952-8813.

Sincerely,

Marcel R. Boivin
A/Manager
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate