15 February 2002 GST/HST Ruling 36705 - Application of the GST to Supplies of Dutiable Spirits

Dear XXXXX:

Thank you for your letter of July 3, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction(s) described below.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions, based upon XXXXX letter and discussions with both XXXXX and XXXXX, is as follows:

•   XXXXX, XXXXX and the XXXXX are licencees under the EA and operate bonded warehouses;

•   XXXXX and XXXXX supply their products "in-bond" to the XXXXX;

•   It has always been the practice of XXXXX and XXXXX to invoice Canadian Liquor Control Boards and to include GST based on the duty and excise tax paid value of the goods shipped;

•   XXXXX;

•   XXXXX;

•   Consequently, as at July 3, 2001, this had resulted in excess cash outflow of approximately XXXXX to XXXXX and XXXXX.

Transaction(s)

•   XXXXX and XXXXX supply their products "in-bond" to the XXXXX;

•   XXXXX and XXXXX remit to the CCRA, GST based on duty-paid value of goods sold to the XXXXX;

•   XXXXX.

Ruling Requested

In your letter dated July 3, 2001, you request our agreement with the following:

1. On sales to the XXXXX, that XXXXX and XXXXX remit GST based only on the value of the goods, excluding excise taxes, until such time when the New Ruling is issued by the CCRA;

2. If the New Ruling requires remittance of GST on the full value of goods sold, XXXXX and XXXXX agree to remit to the CCRA the shortfall in GST as it is collected from the XXXXX;

3. The CCRA waives its rights to charge interest and penalty on the shortfall in GST.

Pursuant to my telephone conversations with XXXXX, you would also like to know how to recoup the money remitted to the CCRA on account of GST, not yet collected from the XXXXX.

Ruling Given

Application of GST/HST to supplies of domestic dutiable spirits:

Based on the facts set out above, we rule that the application of GST/HST to supplies of domestic dutiable spirits, based upon the application of s. 154 of the Excise Tax Act (ETA), is such that 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.

For supplies made "in-bond" (at a point in time when duty is not yet payable), invoices should indicate the amount payable for the spirits, plus an amount of GST/HST calculated upon this amount (duty-excluded amount). Based upon the information provided above, you supply spirits to the XXXXX "in-bond", prior to duty becoming payable, the GST/HST on these supplies should therefore be based upon a duty-excluded amount of consideration.

Over-remittance of GST/HST

You have remitted an amount on account of GST/HST in excess of the amount collected from the recipient of the supply, where the recipient has paid a lesser amount of GST/HST in accordance with the ETA. Under these circumstances, paragraph 232(1)(a) permits the supplier to issue a credit note to the recipient and make an adjustment on its return (an adjustment at line 107 of the GST/HST 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 charged or collected and the registrant (in this case, XXXXX) must issue a credit note within a reasonable time.

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 Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

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" 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.

For the above-noted reasons, XXXXX and XXXXX, should have been invoicing and remitting GST calculated on the duty-excluded amount for supplies at a point in time when duty was not yet payable. The portion of XXXXX and XXXXX remittances that exceeds the GST calculated upon the duty-excluded amount paid for the supply was an amount remitted in error.

Example of basic transactions and GST/HST consequences:

Transaction #1: Domestic 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: Domestic spirits supplied in-bond from distiller to manufacturer. Duty is not payable.

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

Transaction #3: Excise duty becomes payable for spirits in bond (e.g. deficiencies). No GST/HST is payable as the spirits have not been supplied.

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

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