Time of Liability (GST 300-6)

Notice to the reader:

Please note that the following GST Memorandum, although correct at the time of issue, has not been updated to reflect any subsequent legislative changes since the date of issue. As a result, some of the technical information this memorandum contains may no longer be valid. Please contact your GST/HST Rulings Centre for assistance.

GST memoranda 300-6

Bill C-62, the proposed legislation on the Goods and Services Tax, received third reading and was passed by the House of Commons on April 10, 1990. Although this Bill has not yet received Royal Assent, Revenue Canada would like to help businesses and organizations prepare for the tax. Accordingly, the information contained in this memorandum, although subject to change, is being provided at this time for your convenience.

Ottawa, September 14, 1990. TAX ON SUPPLIES TIME OF LIABILITY

This general memorandum in the "TAX ON SUPPLIES" series explains the timing of liability for payment of the proposed Goods and Services Tax (GST).

The following sub-series of memoranda will provide detailed information on the timing of liability for payment of the GST:

GST 300-6-1 General Rule
GST 300-6-2 Cash Payments
GST 300-6-3 Invoiced Supplies
GST 300-6-4 Agreements in Writing
GST 300-6-5 Real Property
GST 300-6-6 Continuous Supplies
GST 300-6-7 Progress Payments
GST 300-6-8 Deposits
GST 300-6-9 Consignment Sales
GST 300-6-10 Coin-operated Machines
GST 300-6-11 Override Rule
GST 300-6-12 General Contracts
GST 300-6-13 Construction Contracts
GST 300-6-14 Holdbacks
GST 300-6-15 Value Not Ascertainable
GST 300-6-16 Combined Supplies

LEGISLATIVE REFERENCES

Excise Tax Act - sections 123, 152, 168, 170, 221, 225 and 231, subsections 165(1), 173(1), 228(1) and 238(1)

Income Tax Act, paragraphs 6(1)(a) and 6(1)(e), subsections 15(1) and 15(1.4)

DEFINITIONS

The following definitions have either been taken from the Excise Tax Act (as amended by Bill C-62) or represent departmental interpretations of terms relevant to the administration of that Act.

"Act" means the proposed Excise Tax Act as amended by Bill C-62;

"consideration" may be money, a thing, a service, forbearance in the exercise of a right or anything else which induces the supplier to make the supply. Where consideration is monetary the amount of the money will be used to calculate the tax. Where the consideration is non-monetary, the fair market value of the consideration at the time the supply was made will be used to calculate the tax.

"invoice" includes a statement of account, a bill and any other similar record, regardless of its form or characteristics, and a cash register slip or receipt;

"person" means an individual, partnership, corporation, trust or estate, or a body that is a society, union, club, association, commission or other organization of any kind;

"property" means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money;

"personal property" means property that is not real property;

"real property" includes

(a) in respect of property in the Province of Quebec, immovable property and every lease thereof,

(b) in respect of property in any other place in Canada, messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, and

(c) a mobile home;

"recipient" in respect of a supply, means the person who pays or agrees to pay consideration for the supply or, if no consideration is or is to be paid for the supply, the person to whom the supply is made;

"residential condominium unit" means a residential complex that is, or intended to be, a bounded space in a building designated or described as a separate unit on a registered condominium or strata lot plan or description, or a similar plan or description registered under the laws of a province, and includes any interest in land pertaining to ownership of the unit;

"sale", in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property;

"supply" means, subject to sections 133 and 134 of the Act, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;

"tax" means the Goods and Services Tax payable under Part IX of the Excise Tax Act;

"taxable supply" means a supply that is made in the course of a commercial activity, but does not include an exempt supply.

TIME OF LIABILITY

1. Under the Act, all supplies are either exempt supplies or taxable supplies. Exempt supplies are those supplies listed in Schedule V to the Act. Taxable supplies are all supplies which are not exempt supplies. Pursuant to section 165 they are subject to tax at either 7% or 0%, ("zero-rated supplies"). Zero-rated supplies are those supplies specifically listed in Schedule VI to the Act.

2. Under subsection 165(1) of the Act, the recipient of a taxable supply, (other than a zero-rated supply), is required to pay 7% of the consideration for the supply.

3. Generally, pursuant to subsection 221(1), the supplier of a taxable supply is required, as agent of Her Majesty in right of Canada, to collect the tax payable by the recipient. There are some cases, however, where the supplier is not required to collect tax, (for example, pursuant to subsection 221(2), on sales of real property to registrants).

4. The obligation to pay and the obligation to collect usually occur at the same time.

5. All persons making taxable supplies in Canada in the course of commercial activities are required to collect and account for the tax collectible on those supplies unless they are "small suppliers". Small suppliers as defined by section 148, are those persons whose revenues from taxable supplies do not exceed $30,000 per year and who are not registered.

6. Registrants are required to account for tax on a periodic basis according to subsection 238(1). Under section 225, all of the tax collectible during the person's reporting period must be included in determining the net tax for that reporting period.

7. Further information concerning the liability to pay and collect tax may be found in GST MEMORANDUM 300-1, "LIABILITY FOR TAX".

GENERAL RULE

8. The general rule under subsection 168(1) is that tax is payable by the recipient on the earlier of the day that consideration for a taxable supply is paid or the day that consideration becomes due. Subsection 221(1) operates to make tax collectible by the supplier at the same time that it is payable by the recipient.

Consideration Paid

9. Consideration is considered to be "paid" when the supplier receives the money, property or service which is consideration for the supply. In the case of a post-dated cheque, for example, the supplier has accepted as payment an instrument that will not become negotiable until after the post-date. On or after the post date the supplier can present the cheque to the bank to be honoured at which time the supplier is paid.

Consideration Becomes Due

10. Under subsection 152(1), consideration or a part thereof for a taxable supply, is deemed to become due on the earliest of the following days:

a) the day that the supplier first issues an invoice in respect of the supply;

b) the date of the invoice;

c) the day when, but for an undue delay, the supplier would have issued an invoice in respect of the supply; and

d) the day that consideration is due pursuant to an agreement in writing.

11. The word "invoice" has a broad meaning as defined by subsection 123(1). Under this broad definition, any record of a supply which sets out the goods or services which make up the supply, along with the consideration due or paid for the supply, will be considered to be an invoice. Generally, an invoice is issued after an agreement to make a supply is entered into. An invoice may, however, be issued in advance of the time that goods or services are provided. As a general rule, an invoice reflects an underlying obligation to make payment. Thus, a simple estimate for car repairs would not normally qualify as an invoice for the work to be done because there would be no supply of the work, no agreement to make a supply and no obligation to pay the estimated amount.

12. For more information concerning invoices and written agreements, please refer to GST MEMORANDUM 300-6-3, "INVOICED SUPPLIES" and GST MEMORANDUM 300-6-4, "AGREEMENTS IN WRITING".

13. Due to the definition of "net tax" in subsection 225(1), registered suppliers are required to account for tax within the reporting period during which the tax became collectible, regardless of whether it was actually collected.

14. Where a supplier has accounted for tax collectible and subsequently writes off all or part of the consideration for the supply as a bad debt, the supplier is entitled to deduct the tax fraction (7/107ths) of the amount written off in the reporting period during which the debt was written off under subsection 231(1).

EXCEPTIONS

15. Certain kinds of transactions are excepted from the general timing rule.

Leases

16. Pursuant to subsection 152(2), where taxable property is supplied by way of lease, licence or similar arrangement under an agreement in writing, tax will be payable on the earlier of the day that consideration is paid and the day that consideration is due pursuant to the written agreement. Thus, in this situation, the issuance of an invoice, would not trigger tax at a date earlier than the day an amount is paid or becomes due under the terms of the lease.

17. More information concerning leases is available in GST MEMORANDUM 300-6-4, "AGREEMENTS IN WRITING".

Coin Operated Devices

18. Pursuant to section 160, where taxable supplies are made by way of a coin operated device, (for example a laundry machine or a video game machine), the recipient of the supply will be deemed to have received the supply, paid the consideration for the supply and paid any tax with respect to the supply when the recipient inserts the coins into the machine. The supplier will be deemed to have collected the tax when the money is removed from the machine. The amount removed will be a tax-included amount.

19. Additional information is available in GST MEMORANDUM 300-6- 10, "COIN OPERATED DEVICES".

Partial Payments

20. Under subsection 168(2), where consideration for a taxable supply is paid or becomes due on more than one day, tax will be payable, (and, therefore, collectible by the supplier), on the earlier of day that partial payment is made or becomes due. The tax payable will be calculated only on that partial payment. For example, if a recipient agrees with a supplier that the supplier is to provide services worth $100, with $25 to be paid in advance and $75 to be paid after the completion of the service, tax would be payable on $25 at the time that payment is made or becomes due and tax would be payable on the $75 when that payment is made or becomes due. This provision makes it clear that tax is not payable on the whole consideration for a supply in such a case.

Override Rules

21. Subsection 168(3) introduces override rules to the rules found in subsections 168(1) and 168(2). In certain circumstances, (discussed under the three following subheadings), tax will become payable where consideration has not been paid or become due. These rules have no application with respect to supplies of intangible personal property and limited application to supplies of services.

Tangible Personal Property

22. Under paragraph 168(3)(a), where a recipient takes ownership or possession of tangible personal property by way of sale, (otherwise than a sale to which paragraph 168(3)(b) or (c) applies), and any consideration for the supply has not been paid or become due by the end of the month following the month in which ownership or possession was transferred, tax will be payable on that day. The tax payable will be calculated on any consideration not paid or due by that day.

23. Under subsection 123(1) of the Act, "sale", in respect of property includes any transfer of the ownership of the property and a transfer of possession of the property under an agreement to transfer ownership of the property.

24. Conditional sales, (sales where possession of property is transferred but ownership passes only after certain conditions are fulfilled, for example on full payment of the purchase price by the recipient), and instalment sales, (sales where the ownership of the property transfers immediately, but the property is paid for in instalments), are both "sales" for the purposes of the override rule. To illustrate; a supplier delivers a television on June 15, 1991 on a conditional sales basis. The recipient agrees to pay the supplier $50.00 per month for the television for 12 months for a total of $600.00. Ownership of the television will pass to the recipient after the final payment is made. On June 15, 1991, the recipient pays $50.00 and pays the same amount on July 15, 1991, tax will be payable on each of these amounts as they are paid or become due. At the end of July, (the end of the month following the month in which delivery occurred), $500.00 is still owing on the television. Tax will become due on $500.00 at the end of July.

Consignments

25. Where a recipient of consigned goods (or tangible personal property taken on a similar sale or return basis) supplies that property to a person other than the supplier or takes ownership of that property and any consideration for the supply has not been paid or become due by the end of the month following the month in which the recipient supplied that property to another or took ownership, tax will be payable on that day. The tax payable will be calculated on any consideration not paid or due by that day. [paragraph 168(3)(b)]

26. A consignment is an arrangement whereby the supplier, (consignor), transfers the possession of property, but not the ownership, to a particular person, (consignee). The consignee can, in turn, supply that property to a third person. If the consignee does not or cannot resupply the property, the consignee is free to return the property to the consignor. Normally, there are no tax consequences to a consignment until the consignee sells the property to someone other than the supplier or the consignee takes ownership of the property. At that time, the consignor is deemed to supply the property to the consignee.

27. Generally, there are two transactions for tax purposes, the supply from the consignor to the consignee and the supply from the consignee to another person. If the consigned property is taxable, these transactions will be subject to tax at the time that payment is made or becomes due for the supply. Where, at the end of the month after the month in which the consignee supplied the property or acquired ownership of the property, payment is not made or has not become due from the consignee to the consignor, tax will become payable on any amount outstanding at that time.

Construction Contracts

28. Paragraph 168(3)(c) applies to supplies made under a written agreement to construct, renovate, alter or repair real property, a ship or a marine vessel. The rule only applies to ships and marine vessels where the work on the vessel is to take more than three months to complete. Tax will be payable on the supply at the end of the month following the month in which the supply was substantially (90%) completed. The tax will be calculated on the value of the consideration or part consideration, which has not been paid or become due by that day.

29. The override rule in paragraph 168(3)(c) does not apply to holdbacks governed by subsection 168(7). These are discussed in paragraphs 39 and 40 of this memorandum.

30. For more information concerning the above rule and its application, please refer to GST MEMORANDUM 300-6-11, "OVERRIDE RULE".

Real Property

31. There are two different rules with respect to tax payable under Division II on sales of real property, one for residential condominium units and another for all other kinds of real property.

32. Where possession of a residential condominium unit is transferred to the recipient after 1990 and before the condominium complex in which the unit is situated is registered, pursuant to paragraph 168(5)(a), tax will be payable on the sale on the earlier of the day that ownership of the unit transfers to the recipient and the day that is sixty days after the complex is registered as a condominium.

33. Where any other kind of real property is sold, paragraph 168(5)(b) operates to make tax be payable on the earlier of the day that possession or ownership transfers to the recipient under the agreement for the sale.

34. For more information on the timing of tax in real property transactions, please refer to GST MEMORANDUM 300-6-5, "REAL PROPERTY".

Value Unascertainable

35. According to subsection 168(6), when, at the time tax becomes payable pursuant to subsection 168(3) or 168(5) in respect of a supply, it is not possible to determine the value of all or part of the consideration for the taxable supply, tax will be payable on any part of the consideration that is ascertainable at that time and tax on the amount that is not ascertainable will be payable on the day the amount can be ascertained.

36. For more information concerning the application of this rule, please consult GST MEMORANDUM 300-6-15, "VALUE NOT ASCERTAINABLE".

Continuous Supplies

37. Pursuant to subsection 168(4), where taxable supplies of property such as water, electricity, natural gas or steam are made available to recipients on a continuous basis by means of a wire, cable, pipeline of other conduit and the supplier invoices the recipient regularly for the supply, section 168(3), (the override rule described above) will not apply. This means that where a supplier bills for natural gas, for example, tax will not become payable on the gas delivered until the supplier actually invoices the recipient, or the recipient pays, whichever is earlier.

38. For more information concerning the timing of tax on continuous supplies, please refer to GST MEMORANDUM 300-6-6, "CONTINUOUS SUPPLIES".

Holdbacks

39. It is common in the construction industry to require that a certain percentage of payments due to contractors for completed work be held back by the recipient for a period of time. Subsection 168(7) excludes such amounts from the application of the general timing rule.

40. Under subsection 168(7), where the recipient of a taxable supply retains part of the consideration for that supply pending full and satisfactory performance of the supply in accordance with either federal or provincial laws or as required under the terms of a written agreement for the construction, renovation or alteration of, or repair to any real property, ship or other marine vessel, no tax is payable on the amount required to be held back until the day that the holdback is paid out or the day the holdback is required to be paid out, whichever is earlier.

41. Information on holdbacks is available in GST MEMORANDUM 300- 6-14, "HOLDBACKS".

Deposits

42. Where a person gives a deposit in respect of a supply, (other than an amount in respect of a covering or container in respect of which section 137 applies to deem the covering or container to be part of the property supplied), that deposit is not considered to be consideration for the supply unless and until the supplier applies the deposit against the consideration for the supply or the deposit is forfeited.

43. Additional information on deposits is available in GST MEMORANDUM 300-6-8, "DEPOSITS".

Combined Supplies

44. Subsection 168(8) establishes rules for determining the nature of a supply in order to determine when tax is payable. This rule applies only where a supply is any combination of service, personal or real property and the consideration for each element is not separately identified (i.e. there is one all-inclusive price).

45. Paragraph 168(8)(a) provides that if one element of the supply has a greater value than each of the other elements then the supply shall be deemed to be a supply of that element alone and the time at which tax becomes payable will be determined accordingly.

46. In any other case, according to subparagraph 168(8)(b)(i), if one of the elements is real property the supply shall be deemed to be of real property for the purpose of determining when tax becomes payable.

47. In any other case, (i.e. there is no supply of real property), subparagraph 168(8)(b)(ii) provides that the supply of all the elements shall be deemed to be a supply only of a service.

Employee and Shareholder Benefits

48. Pursuant to subsection 173(1), where a registrant makes available any property or service to an employee or shareholder, (other than property or service in respect of which the registrant was not entitled, by reason of subsections 170(1) or 170(2), to claim an input tax credit), such that a taxable benefit arose to the employee or shareholder under paragraph 6(1)(a) or 6(1)(e) or subsection 15(1) or 15(1.4) of the Income Tax Act, the registrant will be deemed to have made a supply of that property or service. Tax, therefore, will be payable and collectible on that supply. The tax will be calculated on the value which must be included in the employee's or shareholder's income under the Income Tax Act. The consideration for the supply is deemed to become due, in the case of employee benefits, on the last day of February in the year following the year in which the benefit occurred and, in the case of shareholder benefits, on the last day of the registrant's taxation year in which the property or service was made available. The registrant, therefore, is required to account for the tax in the registrant's reporting period which includes that day.

Imports

49. Where a person imports goods into Canada, tax is payable at the same time as customs duties are payable or would be payable if the goods were subject to such duties.

50. Where a person imports services or intangible property, such as intellectual property, for use otherwise than exclusively in the course of commercial activities, that person is required to self-assess for tax on the earlier of the day that consideration for the supply is paid or becomes due.

51. Additional information on imported goods and services is available in GST MEMORANDUM 300-8, "IMPORTED GOODS" and GST MEMORANDUM 300-9, "IMPORTED SERVICES".

NOTE: This memorandum contains general information and is provided for convenience and guidance in applying the Excise Tax Act and Regulations. Readers should refer to the legislation and/or contact the nearest Revenue Canada Excise office if interpretation problems occur.

REFERENCES

OFFICE OF RESPONSIBILITY:

Policy and Legislation

LEGISLATIVE REFERENCES:

Excise Tax Act as amended by Bill C-62

HEADQUARTERS FILE:

N/A

SUPERSEDES GST MEMORANDUM:

N/A

OTHER REFERENCES:

N/A

SERVICES PROVIDED BY THE DEPARTMENT ARE AVAILABLE IN BOTH OFFICIAL LANGUAGES.

THIS MEMORANDUM IS ISSUED BY TECHNICAL INFORMATION, EXCISE BRANCH UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE, CUSTOMS AND EXCISE.

Date modified:

2002-08-08