April 10, 1995
File 11665-4-1(rs)
XXXXX
This is in reply to your E-mail of November 25, 1994 with respect to audits conducted on XXXXX , XXXXX and their XXXXX franchisees.
The Department's interpretation of the activities undertaken by XXXXX and their franchisees is stated in a letter addressed to XXXXX of your office dated June 1, 1994. The letter deals specifically with the agreement that exists between XXXXX and the XXXXX franchisees. As stated in the letter, XXXXX is an arrangement whereby XXXXX and the franchisee collectively provide XXXXX services. Accordingly, XXXXX and the franchisee are required to collect and account for their portion of the GST paid or payable on the supply of XXXXX services to the client.
You have stated that XXXXX is collecting and remitting the full GST on the taxable portion of the XXXXX services (i.e., the tax payable on the portion of the service provided by XXXXX and the tax payable on the portion of the service provided by the franchisee). Further, some XXXXX franchisees have been audited and assessed to account for the tax collectible by franchisees for their portion of the services provided. You indicate that most of the assessments raised are being appealed.
XXXXX have asked you whether it would be possible to reconsider the assessments raised against the franchisees in light of the fact that XXXXX have accounted for the entire amount of GST. You are requesting our input on this matter. XXXXX have also indicated that it may be more suitable to require each party to begin accounting for their share of tax after XXXXX
XXXXX has collected an amount as or on account of tax equal to the total GST payable on tax discounting XXXXX provided by both XXXXX and the franchisee. Pursuant to subsection 222(1) of the Excise Tax Act (ETA), XXXXX is deemed to hold the amounts collected as or on XXXXX portion of the taxable supply and the amounts that relate to the franchisee's portion of the supply) in trust for Her Majesty until such amounts are remitted to the Receiver General or withdrawn under subsection 222(2) of the ETA. Withdrawals may be made for any input tax credits claimed in a return or any amounts that may be deducted from net tax and are claimed in a return as and when the return is filed. Given that subsection 225(1) of the ETA requires that amounts collected as or on account of tax during a reporting period must be included in a person's net tax calculation for the period, XXXXX is required to account for the total amount collected including the portion relating to the services provided by the franchisees. As indicated in our previous letter, the franchisee, as a joint provider of XXXXX , is required to collect its portion of the tax payable in respect of these services. Irrespective of the fact that XXXXX has collected and accounted for the total tax collectible for the supplies, the franchisee is required to account for its portion of the tax collectible in its net tax calculation and remit any positive amounts of net tax. It should be noted that it is not the Department's intention to collect tax twice on the same supply. To address a similar situation, the Department has issued a policy statement regarding the remittance of tax by a third party. Essentially, this policy provides that, where the Department is satisfied, a third party who collects an amount including GST instead of the original supplier may account for the tax in its net tax calculation and the original supplier will not have to account for and remit the tax. The statement refers to two situations where this policy could be applied, the attornment of rents and the sale of lease stream payments. GST Rulings and Interpretations would support a decision to apply the above policy in this case provided that the Department is satisfied that XXXXX is properly accounting for and remitting the GST. According to the information provided, you have determined that this condition has been met. As such, the Department should not raise future assessments against franchisees where it can be determined that the Department has received the correct amount of GST. The franchisees should be made aware that the Department reserves the right to raise assessments to account for the tax collectible for their portion of the discounting services. This right may be exercised in situations where it is determined that XXXXX has not accounted for and remitted the tax. Additionally, if XXXXX continues to collect its portion of the tax and the franchisee's portion it may be appropriate to continue to have XXXXX account for the total tax payable on the discounting services. It may also be appropriate to request a letter from XXXXX stating their intention to account for the total tax payable on the discounting services as provided for under the policy for third party remittances. XXXXX should provide XXXXX franchisees, who are located throughout Canada, with a copy of this letter for their records in case of future audits conducted by other district offices. XXXXX franchisees who have been previously assessed may wish to contact their local district office to have the assessments reviewed in light of the application of the third party remittance policy.
Should you wish to include portions of this letter in your response to XXXXX , we would be pleased to provide an electronic version of this document. I hope that this proves of assistance to you. Please contact Robert Smith at 941-3971 should you require any further information.
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
c.c.: Marcel Boivin
Dave Caron
Roland Gendreau
XXXXX
Sherry Moran
XXXXX
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