30 January 2002 GST/HST Interpretation 36768 - Supplies of Bottled Beverages By Bars and Similar Establishments

Dear XXXXX:

Thank you for your facsimile transmission of July 13, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies of beverages made by bars, lounges and similar establishments ("bars") in XXXXX. On XXXXX, the XXXXX GST/HST Rulings office issued an interpretation to you that section 226 of the Excise Tax Act (ETA) does not apply to supplies of beverages made by a bar or lounge to its customers. You have requested that our office reconsider the application of GST/HST to such supplies.

In XXXXX, it is our understanding that all beverage containers are subject to a deposit-refund system imposed under the XXXXX (XXXXX Regulations) XXXXX[.] A "beverage container" is defined in the XXXXX Regulations as "XXXXX" and a "beverage" is defined as "XXXXX"[.] Beverage containers for alcoholic beverages such as beer are subject to the deposit-refund system in XXXXX.

When bars in XXXXX purchase alcoholic beverages in filled and sealed containers from the XXXXX, they pay the deposits on these containers. You confirmed that the bottles used to supply beer to bars are the same class or kind as the bottles used to supply beer directly to consumers. Under the XXXXX Regulations, the deposit for a refillable beer bottle is 10 cents, including the HST, and is fully refundable. The deposit is paid when purchasing the beer in filled and sealed bottles, and a refund is received when the empty bottles are taken to a depot.

We understand that bars in XXXXX may sell beer to customers by the bottle. Under the XXXXX, a bar is required to open a beer bottle before it is served to the customer, and the alcohol must be consumed on the bar's premises. The bars often sell beer to customers for a single tax-included price. Such sales of beverages by the bars are not subject to the deposits imposed under XXXXX Regulations. XXXXX[.] As bars are selling the beverage for consumption on the premises, bars do not charge deposits to their customers. The beverage containers remain in the bar after the customers have consumed the beverages. The bars supply the used and empty beverage containers to depots or other collectors and receive the refund amount.

Interpretation Requested

Does the tax-included price for a beverage (i.e. an opened bottle of beer) sold by a bar in XXXXX include an amount in respect of a returnable container for purposes of section 226 of the ETA?

Interpretation Given

This is to confirm the interpretation provided by our XXXXX GST/HST Rulings office that section 226 does not apply to supplies of beverages by a bar in XXXXX. When a bar supplies a beverage (i.e. a bottle of beer) to a customer, the customer does not acquire the container used to supply the beverage. Under XXXXX's provincial liquor laws, a bar is required to open a bottle of beer before it is served to a customer, and the customer may not leave the licensed premises with the opened bottle. The container remains in the bar after the customer has purchased and consumed the beverage. That container is a returnable container under subsection 226(1) of the ETA even though the customer did not pay a deposit on it. But subsection 226(2) and the remaining provisions of section 226 do not apply to the supply of a beverage by a bar since there is no supply of the returnable container.

Explanation

Section 226 of the ETA outlines a simplified method for reporting GST/HST with respect to returnable containers, as defined in subsection 226(1): "In this section, "returnable container" means 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."

The definition in subsection 226(1) segregates beverage containers by class; only those classes of beverage containers that are ordinarily acquired by consumers filled and sealed, and for which the consumer may obtain a refund, are returnable containers. Generally a class is all the containers of one type in a province, where the size and material of the container, and the type of beverage it contains, are usually the distinguishing factors. For example, the bottles that are used to supply beer in XXXXX are a class of containers. These beer bottles are ordinarily acquired by consumers, are ordinarily acquired by consumers when filled and sealed, and are ordinarily supplied empty by consumers for consideration. A supply of beer is not included in Part III of Schedule IV to the ETA (zero-rated basic groceries). Therefore, a beer bottle in XXXXX meets the definition of a returnable container under subsection 226(1), and the beer bottles acquired by the bars, which are within this class of containers, are returnable containers for purposes of section 226 of the ETA.

The rules of the simplified method for reporting GST/HST with respect to returnable containers are outlined in subsections 226(3) and 226(4) of the ETA. Subsection 226(3) states: "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." Subsection 226(4) states: "Tax that is paid or that becomes payable by a registrant in respect of a supply or the bringing into a participating province of a returnable container shall not be included in determining an input tax credit of the registrant unless the registrant is acquiring the container or bringing it into the province, as the case may be, for the purpose of making a zero-rated supply of the container or a supply of the container outside Canada."

The purpose of the simplified method for returnable containers is to require certain registrants, such as wholesalers and retailers, to essentially ignore the GST/HST they charge and pay on the deposits and refunds for returnable containers for reporting purposes. The simplified method recognizes the fact that these registrants pay the same amount to their supplier as they charge to their customer - the amount of GST/HST that the registrant does not remit under the simplified method is equal to the GST/HST that the registrant cannot claim as an input tax credit.

The rules of the simplified method apply to all registrants except those who are specifically excluded in subsection 226(5) of the ETA: "Subsections (3) and (4) do not apply to a registrant in respect of a supply of a returnable container of a particular class made by or to the registrant where, at the time tax in respect of the supply becomes payable, the usual practice of the registrant is

(a) to charge consideration for supplies of filled and sealed containers of that class that exceeds the consideration the registrant pays to registrants for supplies of filled and sealed containers of that class;

(b) to charge consideration for supplies of empty containers of that class made to other registrants that exceeds the consideration the registrant pays or would pay to other registrants for supplies of empty containers of that class;

(c) to pay consideration for supplies of empty containers of that class received from persons who are not registrants that is less than the total of the consideration that the registrant charges for supplies of empty containers of that class and tax calculated on that consideration;

(d) to import filled and sealed containers of that class;

(e) to engage other persons to fill and seal containers of that class for the registrant; or

(f) to manufacture, produce or fill and seal returnable containers of any class."

The usual practice of a bar in XXXXX is not one of the situations outlined in subsection 226(5) of the ETA. Therefore, the bar is required to use the simplified method for reporting GST/HST set out in subsections 226(3) and 226(4).

When a bar in XXXXX supplies the empty containers to the depot, subsection 226(3) applies and the bar does not include the tax in the refund amount when determining its net tax. When a bar purchases beverages in filled and sealed returnable containers from the XXXXX, subsection 226(4) applies and the bar does not include the tax in the deposit amount when determining its input tax credits.

To apply the rules outlined in subsections 226(3) and 226(4) of the ETA to supplies of filled and sealed returnable containers, the supply of the returnable container must be segregated from the supply of the beverage it contains. This is accomplished by the deeming provisions of subsection 226(2): "For the purposes of this section, 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."

It is our interpretation that, considering the words of subsection 226(2), its purpose, and the purpose of section 226 as a whole, subsection 226(2) applies to a combined supply of a beverage and a returnable container only in very specific circumstances requiring that the provision of the returnable container be segregated from the provision of its contents so that the rules in subsections 226(3) and 226(4) are applied to the provision of the returnable container only.

These circumstances are not met when the bar supplies beverages in opened returnable containers to its customers. It is our view that when a bar sells a beverage to a customer, the bar is not providing both the beverage and the returnable container as contemplated under subsection 226(2); therefore, subsection 226(2) does not apply. Consequently, subsection 226(3) does not apply and the bar cannot reduce the amount of GST/HST on the supply of the beverage that must be reported and remitted.

You noted that the GST/HST Guide General Information for GST/HST Registrants and the GST/HST Technical Information Bulletin B-002, Coupons and Bottle Deposits outline our policy with respect to returnable containers. Both publications clearly state that the simplified rules apply to registrants who pay the same deposits or refunds to their suppliers as they charge to their customers, that the supplies of beverages to their customers are supplies in which the beverages and returnable containers are both sold to the customer, and that the customer will retain the container for a refund of the deposit. The policy outlined in these publications does not apply to supplies of beverages by the bars, as bars do not make supplies of beverages in returnable containers.

Section 226 also includes deeming provisions for specific situations, such as when a registrant begins or ceases to use the simplified method. Subsection 226(6) outlines deeming provisions for a registrant when subsection 226(3) ceases to apply to that registrant in respect of a returnable container owned by the registrant at that time, and for which the registrant was not entitled to claim an input tax credit because of subsection 226(4). Please note that this deeming provision for a change in practice does not apply to bars as subsection 226(3) has not ceased to apply to the bars. Subsection 226(6) only applies to a registrant who changes its normal practice with respect to the amounts that it charges or pays for returnable containers to one of the exceptions outlined in subsection 226(5). It does not apply to bars that have been incorrectly applying section 226 to their beverage sales. To correctly report and remit the GST/HST charged and collected on beverage sales is not a change in practice with respect to returnable containers, and therefore the bars cannot use the provisions of subsection 226(6) to override the simplified method.

You have provided a numerical example comparing the net HST under three scenarios: Case A, where in your view subsection 226(2) and hence subsection 226(3) applies to a supply of a beverage; Case B, where subsection 226(2) and hence subsection 226(3) does not apply to a supply of a beverage by a bar; and Case C, if section 226 did not exist. On this basis you concluded that subsections 226(2) and 226(3) should apply to beverage sales by bars. With respect to your example we would advise the following. First, your numerical example incorrectly removed the deposit altogether in Case C. The deposit-refund system is imposed under the XXXXX Regulations, not under section 226 of the ETA. In the absence of section 226, the deposits and refunds imposed under the XXXXX Regulations would remain taxable, and all registrants would follow the normal GST/HST reporting provisions. Second, the supplies of empty containers made by the bars were incorrectly excluded in all the cases of the example. Section 226 applies to supplies of both filled and sealed returnable containers and empty returnable containers. To compare the net HST in respect of returnable containers, all the relevant supplies made by the bars must be included.

We have provided below a similar example that demonstrates the net HST:

Case A - subsections 226(2) and 226(3) apply to supplies of beverages by bars

(incorrect application of these provisions)

Case B - subsections 226(2) and 226(3) do not apply to supplies of beverages by bars

(correct application of these provisions)

Case C - section 226 does not exist

Section 226 is only a simplified reporting method - it does not, and is not meant to, result in a benefit or disadvantage to any registrant. As the complete example demonstrates, the application of subsection 226(2) and hence subsection 226(3) to beverage sales by a bar results in an incorrect application of the provisions. This does not correspond to either the intention, or the actual words, of section 226 of the ETA. The correct interpretation, that subsection 226(2) and 226(3) do not apply to beverage sales by bars, results in the correct net tax amount.

The foregoing comments 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 Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

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