15 January 2003 GST/HST Interpretation 32645 - Input Tax Credit Entitlement on Early Payment Discounts

XXXXX

Thank you for your enquiry concerning the impact of the Tax Court of Canada (TCC) decision in William Coutts Company Ltd. [v.] The Queen [1999] 2900 ETC on the treatment of early payment discounts under the Excise Tax Act (the "ETA"). We apologize for the delay in responding to your enquiry.

As discussed, we are unable to issue a ruling with regards to your general enquiry as rulings can only be issued with regard to a clearly defined fact situation of a particular person. However, we are pleased to provide you with the following interpretation of sections 161 and 181.1 of the ETA as they generally apply to early payment discounts in light of the cited TCC decision.

Interpretation Requested

Whether a supplier may claim an input tax credit ("ITC") in respect of early payment discounts given to its customers. As background to your request, you presented an example and submitted the above referenced TCC decision in which the judge ruled that a supplier was entitled to an ITC in respect of the early payment discounts it gave its customers on the basis that the discounts (which met the requirements of section 161 of the ETA) also met the requirements of section 181.1 of the ETA applicable to rebates.

In your example, a supplier provided a taxable supply (though not a zero-rated supply) to a recipient. An early payment discount falling under section 161 was given to the customer. The early payment discount provided to the customer was equal to $XXXXX, based on a XXXXX % discount on the invoiced amount of $XXXXX ($XXXXX plus $XXXXX GST). The supplier sought to claim an ITC of $XXXXX in respect of the discount paid to the customer. No written notification was provided by the supplier to the recipient that the discount included an amount on account of tax.

Interpretation Given

All references are to the Excise Tax Act.

Section 161 applies to early payment discounts (as well as to charges for late payments). This section generally provides that an early payment discount does not reduce the value of the consideration for a supply of tangible personal property or services for purposes of calculating the GST/HST payable and collectible. As such, GST/HST is payable on the full invoiced amount, regardless of whether or not the customer subsequently takes advantage of the discount and pays less than the invoiced amount. Enclosed for your perusal is GST Memoranda 300-7-8 entitled "Early/Late Payments" which contains detailed information on early payment discounts.

Section 181.1 applies to certain rebates paid in respect of property or services. This section generally provides that where a registrant makes a taxable supply in Canada of property or a service (other than a zero-rated supply) and the registrant pays, at any time, a rebate in respect of the property or service to another person who acquired the property or service from that registrant or another person, the registrant may claim an ITC for the reporting period that includes the time when the rebate was paid equal to: the tax fraction in respect of the rebate (7/107 for GST or 15/115 for HST) x the rebate amount. However, such an ITC can only be claimed where subsection 232(3) does not apply to the rebate and the registrant has provided written notification with the rebate that the rebate includes an amount on account of tax. Such notification enables the rebate recipient to ascertain whether they have an obligation to account for tax included in the rebate amount pursuant to paragraph 181.1(f).

Subsection 232(3) is applicable where a supplier chooses to adjust, refund or credit tax where the tax has been erroneously charged or collected or where the consideration for a supply upon which tax has been charged or collected has been subsequently reduced (for example, in the case of volume discounts). Subsection 232(3) does not apply to early payment discounts falling under section 161 pursuant to subsection 232(4).

Where written notification is given that the rebate includes an amount on account of tax, the rebate recipient (if a registrant who was entitled to claim an input tax credit or Division VI rebate in respect of the acquisition of property or service to which the rebate relates) is deemed to have made a taxable supply to the supplier of the property or service (i.e. the issuer of the rebate) and to have collected tax in respect of the deemed supply pursuant to paragraph 181.1(f). The rebate recipient is required to account for the amount of the rebate that is on account of tax, to the extent that they claimed an ITC or a Division VI rebate in respect of that amount. However, where no written indication is provided with the rebate, the rebate may be ignored for GST/HST purposes (i.e. the issuer of the rebate is not entitled to claim an ITC and the rebate recipient is not required to account for tax included in the rebate amount).

The TCC decision to which you refer clarifies that while section 161 applies to early payment discounts, such early payment discounts may also be considered rebates for GST/HST purposes. Consequently, section 181.1 may also apply to early payment discounts where all the requirements of section 181.1 are met. It is important to note that while section 181.1 did not require written notification that the rebate included an amount on account of tax prior to 1993 (the period to which the TCC decision refers), this provision was amended to include this requirement for rebates paid after 1992. In light of the TCC decision, it is our position that an early payment discount falling under section 161 may also be considered a rebate that falls within section 181.1, and where the requirements of section 181.1 are met, including the requirement for the supplier to indicate in writing (at the time that the discount is provided) that the discount includes an amount on account of tax, the supplier may claim an ITC in respect of the early payment discount it paid to the purchaser.

It is a question of fact whether a particular discount falls within section 161 and whether the requirements of section 181.1 are met in respect of the discount. As the discount described in your example is an early payment discount to which section 161 applies, it would also be considered a rebate for purposes of section 181.1. However, since written notification stating that the early payment discount includes an amount on account of GST/HST was not provided with the discount (i.e. at the time that the discount was taken), the requirements of section 181.1 are not met. Accordingly, the supplier is not entitled to an ITC of $XXXXX in respect of the early payment discount paid to its customer, and there is no requirement for the customer to account for GST/HST on the discount it received.

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

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9213.

Yours truly,

Susan Kissner
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate