Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
XXXXX
XXXXX
XXXXX
XXXXX
Case Number: 99082
December 9, 2008
Dear XXXXX:
Subject:
GST/HST INTERPRETATION
Application of GST to Group Discounts
Thank you for your letter of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the buying arrangements of OPCO and its Members. We apologize for the delay in our response.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Based on your letter, telephone conversations, and subsequent facsimiles of XXXXX, our understanding of the facts is as follows:
1. OPCO is an incorporated company and is a GST/HST registrant.
2. OPCO supplies memberships to XXXXX (the Members) and charges an annual membership fee to the Members. The Members are not shareholders of OPCO and deal at arm's length with OPCO. OPCO charges and accounts for GST on the membership fee.
3. Membership in OPCO entitles the Members to purchase XXXXX (the Products) from various suppliers (the Suppliers) at a discount based on the volume purchased by the Members as a group. The Products include zero-rated supplies XXXXX, and supplies of items that are subject to the 5% GST, XXXXX.
4. The Members' entitlement to purchase the Products at a discount flows from the XXXXX (the Agreements) that OPCO has entered into with the Suppliers. Section 1 of the Agreement indicates that the Supplier will send invoices and statements in the name of the Member, but statements will be sent to OPCO for payment. OPCO will issue a cheque for payment in full, less the agreed discounts as per Schedule "B" of the Agreement.
5. Under Schedule B of the Agreement, the Supplier will provide:
(a) A XXXXX% monthly cash discount to OPCO to cover group administration fees (the XXXXX% Discount);
(b) a monthly cash/volume discount to Members (the Member Discount); and
(c) an annual volume incentive discount to OPCO based on group purchases (the Annual Discount).
6. The Agreement allows the Supplier and OPCO to specify the percentage of a Member Discount, the percentage given as an Annual Discount and the purchase amount at which it applies.
7. Under paragraph 7(a) of the Agreement, XXXXX
8. The Members order and receive the Products directly from the Suppliers. The Suppliers invoice the Members directly for the full list price of the Products purchased, without applying any discount, and charge GST where applicable.
9. Each month, the Suppliers send individual statements to OPCO for each Member, reflecting the monthly purchases of the Member.
10. OPCO invoices each Member for its monthly purchases from the Suppliers. You provided an example of the monthly invoice that OPCO sends to the Members. The invoice lists the purchases by product type and Supplier. For each Supplier, the invoice indicates the gross purchases amount, the GST included in that amount, the amount eligible for the Member Discount, the Member Discount rate, the amount of the Member Discount, the net amount due, and the GST/HST registration number of the Supplier. The Member Discounts in the sample invoice vary from XXXXX to XXXXX% depending on the Supplier.
11. The Members send their payment for the Products purchased from the Suppliers to OPCO. The payment is equal to the net amount of OPCO's invoice (the gross purchases amount from the Suppliers including any GST, less the Member Discounts).
12. Under the Agreement, OPCO agrees to remit the payment for the Products sold to the Members, to the Suppliers, after OPCO receives payment from its Members. OPCO deducts the XXXXX% Discount from the payment received from the Members, and remits the balance to the Suppliers.
13. At the end of the year, OPCO receives the Annual Discounts, which do not include GST, from the Suppliers. The Annual Discounts are distributed in full to the Members by OPCO on a proportionate basis.
14. For accounting purposes, OPCO records sales and cost of goods sold as follows:
Sales:
i) the gross purchase amounts billed to its Members before the Member Discounts;
ii) the Member Discounts and the XXXXX% Discounts received from the Suppliers (i.e., the amounts allowed as a credit);
iii) the Annual Discounts received from the Suppliers; and
iv) the membership fees charged to the Members.
Cost of goods sold:
i) the gross purchase amounts charged by the Suppliers before the Member Discounts;
ii) the Member Discounts allocated to the Members; and
iii) the distributions of the Annual Discounts to the Members.
15. OPCO is not a buyer for GST/HST purposes, and cannot apply to use the buying group method described in section 178.6.
Interpretation Requested
You would like to know the following:
1. Should OPCO be accounting for the XXXXX% Discount as being GST-included? Alternatively, is the XXXXX% Discount not subject to GST since it is related to the net cost of zero-rated supplies of property or because the amount of the Suppliers' invoices already contain GST where applicable on the full supply before the XXXXX% Discount is applied?
2. With respect to the Annual Discounts that are received by OPCO from the Suppliers at the end of each year and distributed to Members, does GST apply, or are the Annual Discounts not subject to GST because they relate to zero-rated supplies of property?
3. What amounts should OPCO report as sales on line 101 of its GST/HST return?
Interpretation Given
Although you did not ask about the GST treatment of the Member Discounts, we would like to clarify how the GST applies to these amounts.
Member Discounts
The Suppliers provide the Member Discounts to the Members under the Agreement. OPCO deducts the Member Discount from the monthly invoices it sends to each Member. The Member Discount reduces the consideration payable to each Supplier by each Member. However, the amount of GST, if any, is not adjusted by OPCO or the Supplier.
The Member Discounts are price adjustments to the consideration payable for the supplies made by the Suppliers to the Members. This is because the Agreement specifies that the Member Discounts are being provided by the Suppliers to the Members, even though the discount passes through OPCO.
As stated in Memorandum 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act, a supplier is permitted to adjust, refund or credit GST/HST where consideration for a supply is reduced some time after the tax has been charged or collected. The reduction in consideration must be given to the original recipient of the supply, or that person's agent, and must relate to an amount that has been collected or charged. A reduction in consideration must also relate to the original supply and may be made for any reason (e.g., as a result of surpassing a certain volume of purchases) but must not depend on any action undertaken by the recipient or any supply made by the recipient.
Under subsection 232(2), where a particular person has charged to, or collected from, another person tax calculated on the consideration or a part thereof for a supply and, for any reason, the consideration or part is subsequently reduced, the particular person may, in or within four years after the end of the reporting period of the particular person in which the consideration was so reduced,
(a) where tax calculated on the consideration or part was charged but not collected, adjust the amount of tax charged by subtracting the portion of the tax that was calculated on the amount by which the consideration or part was so reduced; and
(b) where the tax calculated on the consideration or part was collected, refund or credit to that other person the portion of the tax that was calculated on the amount by which the consideration or part was so reduced.
When a supplier refunds, adjusts, or credits an excess amount, or tax on consideration that has subsequently been reduced, to another person (i.e., the recipient), the supplier is required to issue a credit note including prescribed information within a reasonable time to the other person, unless the other person first issues a debit note to the supplier.
A credit or debit note must contain prescribed information pursuant to the Credit Note and Debit Note Information (GST/HST) Regulations. The following prescribed information must be included on all credit and debit notes:
(a) a statement or other indication that the document is a credit or debit note;
(b) the name of the supplier or an intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number of the supplier or the intermediary;
(c) the name of the recipient or name of the recipient's business or the name of the recipient's duly authorized agent or representative;
(d) the date on which the note is issued; and
(e) unless the note is issued in respect of a patronage dividend or for a total amount that includes both the consideration and the tax for more than one supply, the amount of the adjustment, refund or credit of tax for which the note is issued.
A Supplier is not required to refund, adjust, or credit the tax under subsection 232(2) when it provides the Member Discounts. As indicated in Memorandum 12.2, it is at the discretion of the supplier whether tax is refunded, adjusted or credited. However, it is expected that a refund, adjustment or credit of the tax will usually be given in instances where the customer is a non-registrant.
Generally, Members that are GST/HST registrants may account for the tax paid or owing with respect to purchases of Products for consumption, use or supply in the course of their commercial activities when claiming input tax credits on their GST/HST returns.
XXXXX% Discount Retained by OPCO
The Agreement indicates that OPCO is providing management and purchasing services for its Members, and not purchasing the Products from the Suppliers. The Members pay an annual membership fee separately on which OPCO charges GST.
Under the Agreement, the Supplier provides the XXXXX% Discount to OPCO to cover group administration fees. The XXXXX% Discount is retained by OPCO from the Members' monthly payments when OPCO forwards the monthly payments to the Supplier. OPCO is making a taxable supply of administration services under the Agreement, and the XXXXX% Discount is the consideration for that supply.
Under subsection 165(1), every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply.
A "recipient" of a supply of property or a service is defined in subsection 123(1). Where consideration for the supply is payable under an agreement for the supply, the recipient is the person who is liable under the agreement to pay that consideration. The Supplier is the person who is liable under the Agreement to pay the XXXXX% Discount, and as such, is the recipient of the taxable supply made by OPCO.
Whether the GST is included in the XXXXX% Discount paid by the Suppliers, or whether the GST is in addition to the amount paid, is a decision determined by the parties to the transaction; the Agreement does not specify whether the XXXXX% Discount includes any applicable GST. Although the consideration for the supply (i.e., the XXXXX% Discount) is calculated as a percentage of the consideration for the supplies of Products made by the Suppliers to the Members, the GST status of these supplies has no bearing on the tax status of the supply of administrative services under the Agreement.
OPCO may choose to charge and account for the GST on a tax-included or tax-extra basis. Whichever method OPCO chooses to use to charge and account for the GST, subsection 223(1) imposes disclosure requirements on a GST/HST registrant that makes a taxable supply. OPCO is responsible for ensuring that the disclosure requirements are met when making a taxable supply. If the GST is included in the amount charged for the supply, OPCO must indicate in an invoice or receipt or in a written agreement that the amount charged includes the tax payable in respect of the supply. If the GST is charged on a tax-extra basis, OPCO must indicate the consideration payable and the total amount of tax payable in respect of the supply of services.
Annual Discounts
The Suppliers provide the Annual Discounts, which do not include GST, to OPCO at the end of each year, based on the volume of Products sold by the Suppliers to the Members. OPCO deducts the Annual Discounts from the January payments to the Suppliers, and passes the Annual Discounts in full to the Members on a proportional basis.
Similar to the Member Discounts, the Annual Discounts are price adjustments to the consideration payable for the supplies made by the Suppliers to the Members, even though the discount passes through OPCO.
As indicated in the section on Member Discounts, a Supplier is not required to refund, adjust, or credit the tax under subsection 232(2) of the ETA when it provides a discount to a Member; this also applies to the Annual Discount. Given that the Annual Discounts only pass through OPCO to the Members, OPCO is not required to charge and account for GST on these amounts.
Total Sales and Other Revenue
GST/HST registrants are required to enter their "total sales and other revenue" on line 101 of Form GST34, Goods and Services Tax/Harmonized Sales Tax Return for Registrants.
OPCO is providing management and purchasing services for its Members; OPCO does not purchase and resell Products to its Members. OPCO should not include the purchases made by its Members on line 101, as these are not sales or revenue of OPCO.
Line 101 should only include the sources of income for OPCO, which we understand to include the following: the annual membership fees charged to Members and the XXXXX% Discounts.
If OPCO is providing additional property and/or services, total sales and revenue from these property and/or services should be recorded on line 101 of Form GST34 as well. For example, the group membership letter you provided indicates that OPCO offers an optional group insurance plan to the Members; any associated revenue should be included in line 101.
Additional Comments on Input Tax Credits
A GST/HST registrant must obtain sufficient documentary evidence, such as an invoice, receipt, or a written agreement for the purposes of claiming an input tax credit (ITC). Generally, all of the documentary requirements outlined in the Input Tax Credit Information (GST/HST) Regulations must be included in the supporting documentation in order to enable a GST/HST registrant to claim an ITC in its return.
OPCO, a Supplier, or a Member, as a GST/HST registrant, must obtain sufficient documentation for substantiating an ITC claim for GST/HST paid or payable. Eligibility to claim an ITC is based on the facts of a given situation and subject to verification by the CRA at the time of audit.
The foregoing comments represent our general views with respect to the subject matter of your request. 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 (613) 952-7909. 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,
Jacqueline Russell, CGA
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
UNCLASSIFIED
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