29 January 2004 GST/HST Interpretation 49208 - Assessing Tax Payable Under Paragraph 296(1)(b) of the ETA - CN49208

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

Hello XXXXX:

This e-mail message is in response to your e-mail message XXXXX (with attachments) to Anne Kratz of the General Operations Unit. I have been asked to respond to your inquiry. Please note that the other issue you raised in your e-mail dealing with bad debts will be addressed in a separate memorandum.

Background Information:

A hypothetical registrant made a supply, taxable at the rate of 7%, to a hypothetical purchaser who was also registered for the GST. The purchaser used the supply in the course of its commercial activities.

The supplier reported the applicable GST and remitted their net tax in the appropriate reporting period. The purchaser claimed a full input tax credit on the purchase. However, the purchaser failed to pay the consideration and GST for the supply.

The supplier attempted, in vain, to collect the amounts due from the purchaser. However, after a reasonable amount of time, the supplier wrote-off the total consideration and GST as a bad debt in their books and records, and adjusted their net tax in accordance with subsection 231(1) of the ETA.

There was an audit of the purchaser that covered the period in which the bad debt was written-off by the supplier. The purchaser is neither insolvent nor bankrupt.

Question:

Should the purchaser be assessed for the input tax credit claimed on the GST that was never paid and was written-off by the supplier?

Some Comments:

We are pleased to provide you with the following general comments in response to your inquiry. We have not provided a ruling due to the general and hypothetical nature of your inquiry. Our comments should be viewed as observations rather than definitive statements.

Provided that the registrant has satisfied the conditions for claiming an input tax credit, the registrant purchaser should be entitled to the input tax credit claimed in relation to the tax that was payable, but was not paid. Subsection 169(1) of the ETA allows registrants to claim input tax credits for tax paid or payable.

Paragraph 296(1)(b) of the ETA does permit the Minister to assess a person (i.e., a purchaser) for tax payable. GST/HST Policy Statement P-112R addresses one scenario where the Minister may make an assessment of tax payable where a purchaser is insolvent.

As a general rule, the Canada Revenue Agency ("CRA") looks primarily to the supplier for the administration and enforcement of the GST/HST. In circumstances of potential revenue loss (e.g., the purchaser is insolvent or bankrupt), the Minister may exercise his/her authority under paragraph 296(1)(b) of the ETA and assess the purchaser in respect of the GST/HST not paid to a supplier. (see Policy Statement P-112R)[.]

It should be noted that the application of paragraph 296(1)(b) of the ETA is not restricted to the scenario outlined in GST/HST Policy Statement P-112R. The scenario presented in the policy statement is just one situation where we have identified potential revenue loss.

An assessment for tax payable under paragraph 296(1)(b) of the ETA should not be raised where the purchaser has in fact paid the tax to the supplier unless there is evidence of fraud or collusion. It is not the CRA's intention to collect the tax twice in respect of a taxable supply. However, it is our intention to collect the tax once. That being said, paragraph 296(1)(b) of the ETA does provide the Minister with the discretion to assess for any tax payable by a person under Division II, IV or IV.1.

It is arguable whether or not this hypothetical situation is realistic. That is to say, the supplier may not be ready to write-off their account receivable as a bad debt given that the purchaser is still solvent and not bankrupt. It is recognized that in your scenario, you state that the supplier attempted, in vain, to collect the amounts due from the purchaser. However, it is more likely that the supplier would pursue all measures necessary to get paid since the purchaser's business is ongoing. The supplier may consider undertaking legal action against the purchaser to recover the amounts due (e.g., seize the property of the purchaser).

Should you have any further questions, please contact me by telephone at (613) 954-9699, or check out our unit at: http://7.28.66.49/pl/organization/gst/division/GOBI/geneop-e.htm

Douglas Wood, CGA
Rulings Officer
General Operatons Unit
Excise and GST/HST Rulings Directorate