13 January 2003 GST/HST Ruling 6067 - Input Tax Credit Entitlement on Early Payment Discounts

Dear XXXXX:

Thank you for your enquiry regarding the application of the Goods and Services Tax (GST)/ Harmonized Sales Tax (HST) to early payment discounts, subsequent to the Tax Court of Canada decision in William Coutts Company Ltd. [v.] The Queen [1999] 2900 ETC. We apologize for the delay in responding to your enquiry.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

1. XXXXX makes taxable supplies XXXXX to its customers.

2. XXXXX offers some of these customers a cash discount for early payment. Such discounts are offered via XXXXX invoices. Two sample invoices were submitted and the early payment discount was shown in both invoices as XXXXX XXXXX[.] Your submission XXXXX explains the expression as meaning "XXXXX discount if paid within XXXXX days". No other terms or conditions apply to this discount.

3. The terms and conditions offered in the two sample invoices are representative of the terms and conditions associated with early payment discounts offered by XXXXX.

4. XXXXX has not provided its customers with a written indication that a portion of the early payment discount is an amount on account of tax.

5. To date, XXXXX has not claimed an input tax credit ("ITC") equal to 7/107 of these discounts.

Ruling Requested

1. Can XXXXX claim an ITC in respect of early payment discounts given to its customers?

2. Is XXXXX allowed to go back four (4) years and claim an ITC for early payment discounts allowed to customers in previous years?

Ruling Given

Based on the facts set out above, we rule that:

1. XXXXX may not claim an ITC in respect of early payment discounts given to its customers.

2. XXXXX may not claim an ITC in respect of early payment discounts given to its customers in the four years prior to receipt of this ruling.

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

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.

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 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.

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 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 Tax Court of Canada 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 provision's requirements are met. It is important to note that section 181.1 did not require the aforementioned written notification prior to 1993 (the period to which the Tax Court of Canada decision refers); section 181.1 was amended to include this requirement with respect to rebates paid after 1992. In light of the Tax Court of Canada 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 under section 181.1 are met in respect of the discount. Based on the information provided, it appears that section 161 applies to the early payment discounts offered by XXXXX and that these discounts would be considered rebates for purposes of section 181.1. Notwithstanding, no ITC could be claimed in respect of these early payment discounts pursuant to section 181.1, as XXXXX did not provide written notification to its customers, at the time that the early payment discounts were provided, that the discounts included an amount on account of tax.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 954-1433.

Yours truly,

Bao Tran
Specialty Tax Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate