6 June 2002 GST/HST Interpretation 38666 - Application of GST to Recycling Fees Charged on Returnable Containers

Dear XXXXX

Thank you for your letter of January 7, 2002, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to recycling fees charged on returnable beverage containers XXXXX.

XXXXX

The Provincial Legislation imposes fully refundable deposits on the containers when beverages are sold. The brand owners collect these deposits when they sell beverages to retailers, and the retailers collect these deposits when they sell beverages to consumers. The deposit is refunded when a consumer returns the used and empty container to a retailer or a depot.

XXXXX

The brand owners charge any container recycling fee, in addition to the deposit, when they sell the beverages to retailers. The retailers in turn charge the container recycling fee, in addition to the deposit, when they sell beverages to consumers. The container recycling fee is not refunded when the consumer returns the used and empty container.

XXXXX

Prior to that date, the brand owners included the container recycling fee in the price of the beverage. The retailers were also encouraged to show the container recycling fee as a separate line item on receipts issued to consumers. Most brand owners and retailers now show the container recycling fee separately.

Interpretation Requested

1. Is the container recycling fee charged by a retailer when selling a beverage subject to GST at 7%, such as cola, additional consideration for the beverage, and subject to GST at 7%?

2. Is the container recycling fee charged by a retailer when selling a beverage that is a zero-rated basic grocery, such as juice, additional consideration for the beverage, and zero-rated?

XXXXX

Interpretation Given

Section 137 of the Excise Tax Act (ETA) deems that where tangible personal property of a particular class is supplied in a covering or container that is usual for that class of property, the covering or container shall be deemed to form part of the property so supplied. When a brand owner or retailer makes a supply of the beverage in a beverage container, the container is deemed to form part of the beverage, and all amounts charged are consideration for the beverage. When the supply of the beverage is taxable at 7%, the container recycling fee will be taxable at 7%. When the supply of the beverage is zero-rated, the container recycling fee will be zero-rated.

Section 226 of the ETA outlines simplified reporting rules for returnable containers. Subsection 226(1) defines a "returnable container" to mean a beverage container (other than a usual container for a beverage the supply of which is included in Part III of Schedule VI) of a class that

(a) is ordinarily acquired by consumers;

(b) when acquired by consumers, is ordinarily filled and sealed; and

(c) is ordinarily supplied empty by consumers for consideration.

Subsection 226(2) deems that where a person supplies a beverage in a returnable container,

(a) the provision of the container shall be deemed to be a supply separate from, and not incidental to, the provision of the beverage;

(b) section 137 does not apply to deem the container to form part of the beverage; and

(c) the consideration for the supply of the container shall be deemed to be equal to that part of the total consideration for the beverage and the container that is reasonably attributable to the container.

Subsection 226(2) ensures that the simplified reporting rules in subsections 226(3) and 226(4) are applied only to the tax in respect of the returnable container when a beverage in a returnable container is supplied.

Under subsection 226(3) of the ETA, tax that is collected or that becomes collectible by a registrant in respect of a supply of a returnable container shall not be included in determining the net tax of the registrant. Under subsection 226(4), tax that is paid or that becomes payable by a registrant in respect of a supply of a returnable container shall not be included in determining an input tax credit of the registrant (unless the registrant is acquiring the container for the purpose of making a zero-rated supply of the container or a supply of the container outside Canada). Subsections 226(3) and 226(4) generally do not apply to registrants who usually charge a greater consideration for returnable containers than they pay, or who import, manufacture, produce, or fill and seal returnable containers.

The containers for XXXXX beverages sold XXXXX are returnable containers under section 226 of the ETA, except those that are containers for beverages that are zero-rated basic groceries under Part III of Schedule VI to the ETA. The simplified rules in subsections 226(3) and 226(4) will apply to the retailers XXXXX, but not to the brand owners. When a brand owner makes a supply of a beverage taxable at 7%, such as cola, to a retailer, the container recycling fee is taxable at 7%. The deposit and the container recycling fee are deemed to be consideration for the supply of the container made to the retailer. The retailer does not include the tax in respect of the container recycling fee (or the deposit) in determining its input tax credits. When the retailer makes a supply of the beverage in the returnable container to a consumer, the container recycling fee remains taxable at 7%. The deposit and the container recycling fee are deemed to be consideration for the supply of the container made by the retailer. The retailer does not include the tax in respect of the container recycling fee (or the deposit) in determining its net tax.

XXXXX Proposed Amendments:

The Department of Finance tabled a Notice of Ways and Means Motion on February 8, 2002, to amend the ETA provisions for returnable containers. Under these proposed amendments, a refundable deposit for a returnable container is not subject to tax.

All references are to the proposed amendments to the ETA included in the Notice of Ways and Means Motion of February 8, 2002, unless otherwise noted.

Subsection 226(1) defines the terms used in section 226. A "returnable container" in a province means a beverage container of a class of containers that

(a) are ordinarily acquired by consumers;

(b) when acquired by consumers, are ordinarily filled and sealed; and

(c) are ordinarily supplied in the province used and empty by consumers for consideration.

A "returnable container charge," in relation to a returnable container containing a beverage that is supplied at that time in a province, means the total of all amounts, each of which is charged by the supplier

(i) as an amount in respect of recycling in the province,

(ii) to recover an amount equivalent to the amount referred to in subparagraph (i) that was charged to the supplier, or

(iii)  to recover an amount equivalent to the amount charged to the supplier by another supplier for the purpose referred to in subparagraph (ii) or in this subparagraph;

and "recycling," in respect of a province, means

(a) the return, redemption, reuse, destruction or disposal of returnable containers in the province or of returnable containers in the province and other goods; or

(b) the control or prevention of waste or the protection of the environment.

The "refund" in a province for a returnable container, means, in part, the amount, or the minimum amount, that must be paid in certain circumstances to a person of a class that includes consumers for a used and empty returnable container under an Act of the legislature of the province in respect of recycling.

Subsection 226(2) outlines deeming provisions that apply when a supplier makes a taxable supply (other than a zero-rated supply) of a beverage in a filled and sealed returnable container and charges a returnable container charge in respect of the container. The consideration for the supply of the beverage is deemed to be equal to the consideration for the supply as otherwise determined less the returnable container charge. When the returnable container charge exceeds the refund for the returnable container, the supplier is further deemed to have made a taxable supply in the province of a service in respect of the container for consideration, separate from the consideration for the beverage, equal to the amount by which the returnable container charge exceeds the refund for the container.

The containers for XXXXX beverages XXXXX are returnable containers under section 226. However, subsection 226(2) only applies when the supply of a beverage in a returnable container is taxable at 7%. The brand owners and retailers charge the deposit and the container recycling fee as amounts in respect of the "recycling" of the container. The total of both amounts is the "returnable container charge" when a brand owner or a retailer supplies a beverage in the returnable container. The refundable deposit imposed under the Provincial Legislation is the "refund" for a returnable container. Subsection 226(2) deems that when a brand owner or a retailer makes a supply of a beverage in a returnable container, the deposit and the container recycling fee are not part of the consideration for the beverage. Subsection 226(2) further deems that the container recycling fee will be consideration for a taxable supply of a service in respect of the returnable container. The brand owner or retailer will not charge GST on the deposit, but will charge GST at 7% on the container recycling fee.

When the supply of a beverage in a returnable container is zero-rated, subsection 226(2) will not apply. The brand owner or retailer will not charge GST on the container recycling fee or the deposit pursuant to section 137 of the ETA.

XXXXX Section 226 is proposed to come into force on May 1, 2002, and applies to supplies for which consideration becomes due, or that is paid without having become due, on or after that day, except for subsections 226(4), (6) and (7), which do not apply to supplies for which consideration is paid or becomes due on or before July 15, 2002.

For supplies of beverages taxable at 7% for which consideration is due or is paid on or after May 1, 2002, the brand owners and the retailers will not charge tax on the refundable deposit, but will continue to charge tax on the container recycling fee.

XXXXX The foregoing comments represent our general views with respect to the subject matter of your letter and the proposed amendments to the Excise Tax Act as they relate to the subject matter of your letter. Any change to the wording of these proposed amendments or any future 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) 957-8253.

Yours truly,

Jacqueline Russell
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate