16 January 2002 GST/HST Interpretation 37133 - Refunding of HST on Non-refundable Airline Tickets

Dear XXXXX:

Thank you for your request of June 5, 2001, in which you forwarded an enquiry from an XXXXX regarding the refunding of HST on non-refundable airline tickets.

Interpretation Requested

XXXXX received a debit memo from an airline in respect of a non-refundable airline ticket that it had submitted to BSP for a tax refund. The flight that the ticket was issued for was Halifax to Toronto return from Ottawa. HST was collected on the ticket. We understand that the person who purchased the ticket did not use it and that XXXXX refunded the HST that was previously collected from the person on the non-refundable fare. XXXXX is of the view that there is no service to be taxed if the ticket is not used.

XXXXX has questioned whether there is a difference for GST/HST purposes between the situation involving the non-refundable airline ticket and where a person makes a payment to hold a taxable (other than zero-rated) good on the basis that the payment is non-refundable. XXXXX is of the view that HST would not apply to the purchase price of the good in this case if the person subsequently decided not to buy the good.

Interpretation Given

For GST/HST purposes, the entering into of an agreement to supply any service is treated as a supply of the service made at the time the agreement is entered into. Also, the actual provision, if any, of the service under the agreement is treated as being part of the supply of the service made at the time the agreement is entered into and not as a separate supply (Section 133 of the ETA).

The agreement for the supply of the passenger transportation service in the situation described would be considered to have been entered into when the ticket was purchased from XXXXX acting as an agent for the airline. Although the airline did not actually render the service (since the consumer did not exchange the ticket in order to board an aircraft), the airline is nevertheless deemed to have supplied the service when the agreement was entered into (i.e., at the time the ticket was purchased). HST would have consequently become payable on the consideration for the service on the earlier of the day on which it was paid or became due, whether or not the service was actually rendered (Subsection 168(1) of the ETA). If the purchaser paid the full price of the service when entering into the agreement for the service, the tax would have become payable on the service at that time.

A subsequent refund or adjustment of the GST/HST payable in respect of a supply can be made in certain circumstances. Specifically, where a supplier has charged or collected tax from a purchaser on the consideration for a supply and, for any reason, that consideration is subsequently reduced (for instance, where a supplier agrees to refund the consideration paid for a returned good), the supplier may refund or credit to the purchaser the portion of the GST/HST that was calculated on the amount by which the consideration was so reduced (Subsection 232(2) of the ETA). Where the amount is refunded or credited, the supplier must issue a credit note to the purchaser containing prescribed information and may, within a four year period, claim a deduction of that amount in determining its net tax for the reporting period in which the credit note is issued, provided the supplier has previously accounted for that tax (Subsection 232(3) of the ETA).

In a similar manner, a supplier may also refund or credit, within a two year period, an amount that has been collected as tax in excess of the tax that was collectible in respect of a supply (for instance, where tax is collected on a zero-rated supply) (Subsection 232(1) of the ETA).

It is important to keep in mind that the refunding or crediting of tax in both of the cases described above is discretionary and that it is only the supplier (the airline), and not the agent (the member) that may decide to do so. Therefore, if an agent is going to refund or credit the tax on behalf of a supplier, it may first want to ensure that the supplier is in agreement that the consideration for the supply has been reduced or that excess tax has been collected and, that a refund or credit of tax should be given.

In the case at hand, the terms of the ticket provided that the fare was not to be refunded and those terms were likely maintained by the airline, meaning that there would not have been a reduction of consideration. The airline may have issued the debit memo knowing that a refund or credit of the tax would not be allowed in the particular circumstances and that it would be unable to claim a corresponding net tax deduction. Even in a case where there has been a reduction of consideration or excess tax has been collected and a refund or credit of tax may be given, the airline may still issue a debit note for the tax refunded by the travel agent if there is insufficient documentation to support the claiming of a net tax deduction by the airline. In both of these cases, the recovery by the travel agent from the airline of the tax refunded to the purchaser is a private matter to be resolved between the travel agent and the airline.

In conclusion, to the extent that there was no reduction of the consideration for the flight and that the HST was properly collected on the flight, the airline, as the supplier, would not have been allowed to refund or credit the HST, as previously explained.

The payment of a non-refundable amount by a potential purchaser to hold a taxable (other than zero-rated) good is different from the one involving the non-refundable airline ticket in that it is more akin to a deposit. The CCRA considers a deposit to be an amount given by a recipient to a supplier as security for the performance of an obligation by the recipient. The amount may or may not be refundable to the customer.

A deposit given in respect of a supply is not considered as consideration paid for the supply unless and until the supplier applies the deposit as consideration for the supply (Subsection 168(9) of the ETA). Any applicable GST/HST will therefore only become payable on the deposit amount when it is applied as consideration for the supply.

If the deposit amount is refundable and is refunded by the supplier to the recipient, there are no tax consequences. If a non-refundable deposit for a taxable (other than zero-rated) supply, such as in the case described by XXXXX, is forfeited to a registrant, as a consequence of the breach, modification or termination of an agreement for the supply, it is treated as consideration paid for the supply in respect of which the deposit was made and is subject to tax (Subsection 182(1) of the ETA). Tax on the deposit is payable at the time of the forfeiture, calculated on a tax-included basis.

As you can see, although the situation involving the non-refundable airline ticket and that of the non-refundable deposit are not entirely the same, their GST/HST treatment is similar in that the non-refundable amount ultimately kept by the supplier in respect of the taxable (other than zero-rated) supply in either case (be it the consideration paid for the airline ticket or the forfeited deposit) is subject to tax.

The foregoing comments represent our general views with respect to the subject matter of your request. 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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series. Also enclosed for your information is the guide "General Information for GST/HST Registrants" which explains some of the issues addressed in this letter, including the issuance of credit notes and deposits.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 957-8223.

Yours truly,

Carolle Mercier
A/Technical Officer
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate