7 January 2003 GST/HST Ruling 39592 - Ruling Request Regarding Account Handling Charges

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transactions described below. We apologize for the delay in responding.

Statement of Facts

Our understanding of the facts is as follows:

1. XXXXX is a GST/HST registrant, has its head office in XXXXX and provides XXXXX services to persons who reside in XXXXX.

2. No mention is made of the account handling charge on overdue accounts in the contract between XXXXX and its customers. XXXXX does not charge interest on overdue accounts.

3. If a customer's account becomes overdue, XXXXX sends a XXXXX notice to the customer, stating that, unless payment of the account is made in full within XXXXX days of the date of the notice, XXXXX, the account will be referred to a collector and a $XXXXX handling fee will be charged to the customer's account.

4. If the customer pays the overdue account in full within the XXXXX days given for payment, the account handling charge is not levied and no interest or other penalty is levied as a consequence of the late payment. If the case is referred to a collector, the account handling charge is levied. The collector either collects the outstanding amount of consideration and tax in full, plus the $XXXXX account handling charge and $XXXXX in GST with respect to that charge, or XXXXX and initiates collection action for those amounts.

5. The account handling charge represents only partial recovery of the amount charged by the collector to XXXXX for its services.

Ruling Requested

Is the account handling charge subject to GST?

Ruling Given

Based on the facts set out above, we rule that the account handling charge falls under subsection 182(1) of the ETA. Consequently, XXXXX must remit 7/107 of the total amount it collects from customers with respect to the account handling charge.

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 transactions for which you requested a ruling.

Explanation

The account handling charge is not consideration for a supply, and is not specifically a late payment penalty that would fall under section 161 of the ETA. However, where the account handling charge is levied as a consequence of an overdue account being referred to a collector, the charge is being levied as a consequence of a breach (i.e., non-payment) of an agreement for the making of a taxable supply. Consequently, any amounts that are actually collected with respect to the account handling charges fall under subsection 182(1) of the ETA, which deems 7/107 of any amount actually collected as a result of the account handling charges to be GST.

If you have any further questions or require clarification on the above matter, please contact me at (613) 952-9211.

Yours truly,

Don Dawson
Corporate Reorganizations Unit
Financial Institutions & Real Property Division
Excise and GST/HST Rulings Directorate