10 December 2007 GST/HST Interpretation 91183 - Bad Debt Recoveries

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.

Dear XXXXX:

Thank you for your fax XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to supplies made by your travel agency.

Effective January 1, 2008, the rate of the GST will be reduced from 6% to 5% and the rate of the HST from 14% to 13%. The new rates will apply to supplies for which the GST/HST is paid on or after January 1, 2008, without having become payable before that date. Specific transitional rules will apply to certain supplies, for example, real property. For more information on the transitional rules for the reduction of the GST/HST rate, please refer to GST/HST Notice 226, Proposed GST/HST Rate Reduction in 2008 on the CRA Web site at www.cra-arc.gc.ca/E/pub/gi/notice226/README.html.

Statement of Facts

You are operating a travel agency in XXXXX. You are registered for GST/HST purposes. All of your clients are Canadian residents. You have provided the following scenarios:

Scenario 1:

You sell a group of travellers a trip purchased from a Canadian tour operator XXXXX. XXXXX quotes you a net price for the trips. The net price does not include an amount for your commission for your services. Therefore, you include a mark-up in the price of the trips sold to your customers. You obtain your customers' credit card information and forward them to XXXXX who will process the credit card payments. XXXXX keeps an amount for the net price of the trips and pays you the remainder without adding an extra amount for GST/HST.

Scenario 2:

You sell a flight that is included as part of a cruise package.

Scenario 3:

You have received a commission from a tour operator located in XXXXX who has paid GST at 6% on the commission.

Ruling Requested

You would like to know how the GST/HST applies in Scenarios 1 to 3.

Interpretation Given

In accordance with section 1.4 of the GST/HST Memoranda Series, an application ruling can only be issued with reference to a clearly defined fact situation of a particular person. Since all the relevant facts cannot be determined, I cannot provide you with a ruling. If at a later date, you provide us with a copy of the agreements, invoices, itineraries and all the relevant facts, we would be in a position to issue a ruling. However, I am pleased to provide you with the following interpretation.

A travel agency usually acts as an agent for other travel service providers (or principals), such as airlines, hotels and tour operators, and is paid a commission for its services. At times, a travel agency is considered to be a principal supplier and earns a mark-up on the resale of its travel services.

Commission:

Generally, the services supplied in Canada by a travel agency of acting as an agent for other travel service providers (or principals) for which it is paid a commission is subject to GST at 6% or HST at 14% unless it is zero-rated, in which case it is subject to tax at 0%. The HST applies at the harmonized rate of 14% to taxable (other than zero-rated) supplies that are made in a participating province (New Brunswick, Nova Scotia and Newfoundland and Labrador).

In general, a travel agency's service will be considered to have been supplied where it is performed. If the travel agency's service is performed in whole or in part in Canada, the service will be considered to have been supplied in Canada and generally subject to GST at 6% unless it is zero-rated or supplied in a participating province. For HST purposes, if all or substantially all (90% or more) of the Canadian element of a travel agency's service is performed in a participating province, that service is considered to have been supplied in that province and subject to HST at 14% unless it is zero-rated.

A travel agency must charge, collect and account for tax on its commission (unless it is zero-rated). A commission is an amount of money that a travel agency receives for its services of acting as an agent. There are two zero-rating rules that may apply to a situation where the agency is paid a commission.

First, if a travel agency provides a service to a non-resident person, its commission is zero-rated when:

•   the service is in respect of a zero-rated sale of exported goods or services to the non-resident; or

•   the service is in respect of a sale made outside Canada by or to the non-resident.

See examples 1 to 3 in our GST/HST guide RC4036, GST/HST Information for the Travel and Convention Industry, copy enclosed.

Second, if a travel agent provides a supply of a zero-rated passenger transportation service, the commission it receives for this service is zero-rated. For further details, see GST/HST guide RC4036, under the title "Passenger Transportation Services" starting at page 13.

For example, a travel agency located in XXXXX sells a 14% HST taxable domestic airline ticket for $1,000 on behalf of an airline and receives a 10% commission. The agency's commission would be subject to HST at 14% as the service of selling the ticket is performed in a participating province.

In this case, the agent would collect $1,140 ($1,000 ticket price plus $140 in HST) from the passenger on behalf of the airline for the sale of the ticket. The agent would be required to collect $14 in HST from the airline on the agent's $100 commission and this would be required to be included in the agency's net tax as follows:

HST : $100 x 14%  $14

Net tax:  $ 14

Mark-Up:

As stated earlier, at times, a travel agency will be considered to be a principal supplier and earns a mark-up on the resale of travel services and products. The manner in which a travel agency accounts for GST/HST as a principal supplier is different than when a travel agency is acting for a travel service provider and is paid a commission.

As a principal supplier, a travel agency must charge, collect, and account for tax on its taxable supplies (other than zero-rated). For instance, if a travel agency makes a taxable supply of a passenger transportation service, for example, a round trip flight from XXXXX NB to XXXXX ON and the travel agency acted as a principal in purchasing it from a supplier for $900 plus HST and marking it up for resale to the passenger for $1,000 plus HST, the travel agent's net tax would be:

HST : $1,000 x 14% = $140 (charged to customer)

Input tax credit (ITC): $900 x 14%  = $126 (claimed on purchase)

Net tax:      $ 14

Note, an ITC means an amount of GST/HST that a registrant has to pay on its business expenses that the registrant can claim in its net tax calculation. A registrant means a person who is registered or is required to register for the GST/HST.

As a principal supplier of travel services, a travel agency may act as a tour operator. For GST/HST purposes, a tour operator means a person that, in the ordinary course of a business of the person, packages or sells tours that are ultimately sold to, or are for the use of, either a group of travelers or an individual traveler. Outfitters or owners of a lodge, hotel, or motel may be tour operators if they package tours for sale in the ordinary course of their business. A tour operator does not include travel agents selling tour packages on behalf of a tour operator. A tour package means a combination of two or more services, or of property and services, that includes transportation services, accommodation, a right to use a campground or trailer park, or guide or interpreter services when the property and services are supplied together for an all-inclusive price. There are special rules for calculating how much GST/HST to charge on taxable supplies of tour packages. For details and for examples on how to account for tax on tour packages, see the section entitled "Tour Operators" starting on page 16 of our GST/HST guide RC4036.

As a principal supplier of travel services, a travel agency may sell passenger transportation services. For information, see the GST/HST guide RC4036 under the title "Passenger Transportation Services" starting at page 13.

Scenario 1:

Since you did not receive an amount of commission (e.g., may be expressed as a percentage of sale price) from XXXXX as compensation for your services of acting as its agent in this scenario, this may be a mark-up situation. See the section entitled "Mark-up" above. However, you should confirm with XXXXX the nature of your relationship.

Scenario 2:

In this scenario, you sell a flight that is included as part of a cruise package. You have not provided sufficient information to determine what is being supplied. This scenario may be a commission or a mark-up situation.

Scenario 3:

In this scenario, you have received a commission from a tour operator located in XXXXX who has paid GST at 6% on the commission.

In general, a travel agency's service will be considered to have been supplied where it is performed. If the travel agency's service is performed in whole or in part in Canada, the service will be considered to have been supplied in Canada and generally subject to GST at 6% unless it is zero-rated or supplied in a participating province. For HST purposes, if all or substantially all (90% or more) of the Canadian element of a travel agency's service is performed in a participating province, that service is considered to have been supplied in that province and subject to HST at 14% unless it is zero-rated.

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 Excise Tax Act, 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 613-954-9700. 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,

Michèle Routhier
GST/HST Rulings Officer
Services and Intangibles Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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