Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 145135
August 9, 2013
Subject: GST/HST INTERPRETATION - Section 181.1 - Requirement for Written Indication
Dear [Client]:
Thank you for your letter of May 29, 2012 concerning the application of section 181.1 with respect to early payment discounts. We apologize for the delay in our response.
HST applies at the rate of 15% in Nova Scotia, 13% in Ontario, New Brunswick, and Newfoundland and Labrador, and 12% in British Columbia. GST applies at the rate of 5% in the remaining provinces and territories.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
BACKGROUND
[...] ("the Manufacturer") supplies taxable (and not zero-rated) goods to various retailers in Canada.
The Manufacturer issues three types of invoices:
1. Traditional paper invoices. This format is now in very limited use. It allows the Manufacturer to make changes to the wording on the invoice.
2. Electronic data interchange (EDI) invoices - flexible template format. This format also allows the Manufacturer to make changes to the wording on the invoice.
3. EDI invoices - fixed template format. This format does not allow the Manufacturer to make any changes or additions to the wording on the invoice. It is used when customers require invoices to be in a prescribed template or format to fully integrate with their IT systems.
The Manufacturer offers early payment discounts to certain retailers. A typical discount would be 2% 10 d/s, net 30 d/s.
Certain retailers are applying the 2% discount not only to the amount of the purchase, but also to the corresponding tax. For example, if the Manufacturer were to issue an invoice for $100.00 plus $5.00 GST, the retailer may take an early payment discount of $2.10 (i.e., 2% of $105.00) instead of $2.00 (2% of $100). In such cases, although the manufacturer is required to remit $5.00 GST, it effectively receives only $4.90 GST.
The Manufacturer intends to treat its early payment discounts as rebates for the purposes of section 181.1. By applying section 181.1, the Manufacturer may be eligible to claim an input tax credit (ITC) under paragraph 181.1(e) equal to the portion of the early payment discount that is an amount on account of tax.
For section 181.1 to apply, among other things, the Manufacturer is required under paragraph 181.1(c) to provide written indication that a portion of each early payment discount is an amount on account of tax.
To meet this requirement, the Manufacturer has proposed the following treatments with respect to each of its three types of invoices:
1. Traditional paper invoice - The Manufacturer will update the invoices to include a statement advising that the discount includes the GST/HST. The Manufacturer will also provide a letter to its customers advising them of the change.
2. EDI flexible template - The Manufacturer will include wording in these invoices that the discount includes the GST/HST. As with the paper invoices, The Manufacturer will provide a letter to its customers advising them of the change.
3. EDI fixed template - The Manufacturer will send, by courier with proof of delivery, a letter to its customers advising them that the discount includes the GST/HST. The letter will note specifically that the letter is required because the customer's IT system has a fixed EDI template that does not allow the Manufacturer to provide written indication on each EDI invoice. The letter would be sent in advance before an ITC is claimed on a discount, and it would be sent again whenever any change in terms and conditions is made.
Interpretation Requested
Will the treatments proposed by the Manufacturer in respect of its invoices satisfy the requirement imposed under paragraph 181.1(c)?
Interpretation Given
In general terms, section 181.1 provides that, where a registrant pays a rebate to another person, and the conditions imposed in paragraphs 181.1(a) through (d) are met, the registrant may be eligible for an input tax credit in respect of the rebate under paragraph 181.1(e), and the person may be required to remit GST/HST in respect of the rebate under paragraph 181.1(f).
The term, "rebate", is not defined for purposes of section 181.1. However, in William E Coutts Co Ltd v The Queen [1999] 2900 ETC, the court established that, for the purposes of section 181.1, an early payment discount may, in appropriate circumstances, constitute a rebate. In addition, according to the same decision, when a person offers an early payment discount, and another person takes the discount, the person who offered the discount can be considered to have paid a rebate to the other person. At issue in this case is the application of paragraph 181.1(c) in respect of early payment discounts.
Paragraph 181.1(c) imposes the following condition: "...the registrant pays, at any time, a rebate in respect of the property or service to the particular person and therewith provides written indication that a portion of the rebate is an amount on account of tax..." The CRA has long held the position that, to satisfy this requirement, the written indication must be provided with the rebate at the time that the rebate is paid.
With regard to early payment discounts, where a registrant issues an invoice that 1) specifies the terms of an early payment discount and 2) provides written indication that a portion of the discount is on account of tax, it is our position that the registrant will satisfy the requirement for written indication imposed under paragraph 181.1(c). Where a method of invoicing does not allow the issuer to provide the written indication, and where there is no other practical means of providing such written indication at the time the discount is taken, the requirement imposed under paragraph 181.1(c) will not be met. It is not sufficient to provide such written indication by way of a letter intended to cover all such discounts on an ongoing basis.
With regard to the form and content of the written indication, in Tele-mobile Partnership Company v The Queen [2012] ETC 2893, the court took the position that the written indication must be clear enough that the recipient can easily discern that the rebate includes a GST/HST element, but it does not have to go so far as to break down the rebate into its two constituent parts (i.e., consideration and GST/HST).
As a final remark, we would like to emphasize that paragraph 181.1(c) requires the written indication to be provided with the payment of a rebate. Consequently, in the case of an early payment discount, if the discount is not actually taken (e.g., if the terms of the discount are not met), then the requirement in paragraph 181.1(c) will not be met, even if proper written indication is provided on the related invoice.
As you aware, the CRA is responsible for administering the GST/HST legislation as enacted by Parliament. Any legislative amendment that may lessen the requirements of section 181.1 is a matter of tax policy, which falls within the scope of the Department of Finance.
The foregoing comments represent our general views with respect to the subject matter of your letter. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 905-721-5183. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Richard Kwong
Special Provisions - General
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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