22 November 1996 GST/HST Interpretation 1996-11-22 - Sections 232 and 261 of the ETA

Dear XXXXX

Thank you for your letter of August 9, 1996, wherein you request a listing of contact names for each of Revenue Canada's Tax Services Offices (TSO) to whom you can refer XXXXX agents and government entities needing information and/or assistance in claiming a Goods and Service Tax (GST) refund on purchases of XXXXX XXXXX. In addition, you seek clarification with respect to the recovery of amounts paid as GST by government entities on purchases for which documentation evidencing a provincial purchase is not provided at the time of sale.

In your letter, you state that XXXXX, through its XXXXX agents, will not charge and collect GST on purchases of XXXXX sold to provincial government bodies where proper certification and documentation is provided at the time of sale as indicated in GST Memorandum 500-6-2. Where evidence to support not charging tax on the sale is not provided, the GST is collected and remitted to Revenue Canada following normal business practices.

In certain instances, a provincial government entity may subsequently determine that it has paid an amount as GST on the purchase. The provincial government entity then returns to the XXXXX agency with the required information and requests a refund of the amount it paid as tax. I understand that the XXXXX agents have refunded the amount collected as tax to the provincial government entity in some cases. You indicate that you have referred concerned government bodies to Revenue Canada and suggested that, in instances where amounts have been paid as tax in error, they file a General Application for Rebate of Goods and Services Tax (form GST 189), as allowed for under section 261 of the Excise Tax Act. This is based on the fact the purchase did not follow the guidelines set out in GST Memorandum 500-6-2. We understand that you have been advised by a number of government bodies and your XXXXX agents that the Department has declined to process such refunds suggesting that it is XXXXX obligation to provide the refund for such amounts. You are seeking clarification of the issue.

We offer the following comments.

Because section 125 of the Constitution Act, 1867 provides the provinces with immunity from taxation, provinces are entitled to tax relief at point of sale on their purchases. Federal-Provincial Reciprocal Taxation Agreements (RTA), which have been entered into between Canada and most of the provinces, set out the circumstances under which provincial purchases are relieved of GST. The intent of the RTAs is that only purchases paid for directly with Crown funds are relieved of tax.

The Excise Tax Act does not require provinces to provide vendors with documentary evidence to support their entitlement to tax relief on their purchases. However, for administrative purposes, the Department does require vendors making taxable supplies to provincial governments to maintain supporting evidence when such sales are made. Memorandum 500-6-2, which outlines the application of GST to sales and purchases by provincial governments, states that "A supplier must charge tax on taxable sales to any purchaser who does not provide such evidence."

Where a XXXXX agent sells XXXXX on behalf of XXXXX it is XXXXX which is seen as the supplier of the XXXXX and is required to account for GST collectible on the supply. As such, it is XXXXX, rather than its XXXXX agent, which is the supplier of XXXXX and accountable for any GST collectible.

If XXXXX collects an amount as tax on XXXXX it sells through a XXXXX agent to a government body, it is required to be included in XXXXX net tax for the reporting period in which it was collected.

If a XXXXX agent collects an amount as GST on the sale of an XXXXX to a provincial entity on behalf of XXXXX for which it is later determined by the provision of documentary evidence that no GST was payable, XXXXX as the supplier of the XXXXX may, under section 232 of the Excise Tax Act, refund or credit the provincial entity the excess amount collected as GST. This is the Department's preferred approach to resolving the matter.

Subsection 232(1) of the Excise Tax Act provides that a supplier who has collected an excess amount as tax may refund or credit that amount within four years after the end of the reporting period in which the amount was collected. Where the supplier refunds or credits the excess amount, subsection 232(3) of the Excise Tax Act, requires the supplier to issue a credit note to the recipient of the supply, containing prescribed information, for the amount of the refund or credit. The supplier is allowed to deduct the excess amount refunded or credited in determining the net tax for the reporting period in which the credit note is issued to the extent that it has been included in determining the supplier's net tax for the reporting period or a preceding reporting period.

I should point out that the Notice of Ways and Means Motion dated April 23, 1996, proposed to reduce the time limit under subsection 232(1) for making a refund, credit or adjustment to two years after the day the excess amount was charged or collected. The proposed time limit would apply to amounts charged or collected as tax after June 1996, and would also apply to amounts charged or collected as tax before July 1996 unless the amounts are refunded, credited or adjusted before July 1998.

I should also point out that for supplies made after April 23, 1996, the Notice of Ways and Means Motion also proposed amendments to the Credit Note Information Regulations for section 232 of the Excise Tax Act. Specifically, the proposed amendment provides that where there is an intermediary such as a XXXXX agency in respect of the supply, the credit note may contain the name of the intermediary or the name under which the intermediary does business, and the registration number assigned under section 241 of the Excise Tax Act to the intermediary. Note that this proposed amendment would only affect the information that may be contained on the credit note and that it would still only be XXXXX who would be able to refund or credit an amount and take a deduction in net tax under section 232 of the Excise Tax Act in this case.

I would like to confirm to you that because section 232 of the Excise Tax Act is discretionary, XXXXX is therefore under no legal obligation to refund or credit the amounts it has collected as tax through its XXXXX agents from provincial bodies.

During our telephone conversation of September 17, 1996, you expressed concern that for audit purposes, it is sometimes difficult for XXXXX to obtain the documentation it requires to support that a sale by one of its XXXXX agents was made to a provincial entity. XXXXX agents do not always retain the necessary documentation on file for this purpose. For this reason, it is my understanding that XXXXX is hesitant to reimburse its XXXXX agents for amounts collected as tax that they have refunded to provincial entities. In this instance, XXXXX has suggested that its XXXXX agent seek a refund from the Department.

To support the non-applicability of GST to a transaction and adjustments to XXXXX GST returns under section 232 of the Excise Tax Act, appropriate documentation must be obtained by XXXXX from its XXXXX agents. XXXXX, as the supplier of XXXXX, may therefore want to ensure that its XXXXX agents are aware of this requirement. In order for XXXXX to use section 232 of the Excise Tax Act for transactions of this type that have already taken place and for which the XXXXX agent no longer has the necessary documentation on file to substantiate that tax was not applicable on the particular supply, the necessary documentation should be sought from the provincial entity concerned.

I would like to confirm to you that the XXXXX agents may not apply for a rebate under section 261 of the Excise Tax Act in respect of the amounts collected as tax that they have refunded to a provincial entity on behalf of XXXXX. The XXXXX agents are not considered to have paid an amount as tax in error that would give rise to a rebate under section 261 of the Excise Tax Act. The amounts refunded by the XXXXX agents to the provincial entities are simply a refund of an amount they have charged as tax in error on behalf of XXXXX.

As XXXXX is the supplier of the XXXXX, its XXXXX agents may want to seek a reimbursement, from XXXXX, of amounts that they have refunded to provincial entities on behalf of XXXXX. This is a matter to be resolved between XXXXX and its XXXXX agents.

Where section 232 of the Excise Tax Act is available, the simplest way for a purchaser to recover an amount paid as tax in error is to seek a refund from the supplier. However, the ability to refund or credit the amount under section 232 of the Excise Tax Act may not always be available such as where there is insufficient documentation to support the fact that an excess amount as tax was charged.

Should a provincial entity pay an amount as tax in error on the purchase of an XXXXX as it will when no documentary evidence is provided at the time of sale to the XXXXX agent who is acting on behalf of XXXXX, it may always apply for a rebate of that amount under section 261 of the Excise Tax Act. This provision of the Excise Tax Act provides authority for a rebate of an amount paid as tax in error by a person, where it is found that the amount was not payable.

Provided the provincial government entity that applies for a rebate under section 261 of the Excise Tax Act can demonstrate that it has in fact paid an amount as tax in error, the rebate will be paid to the provincial entity. Where this is the case, the provincial entity should not, as your letter indicates, be referred back to XXXXX for a refund.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and, in accordance with the guidelines set out in GST Memorandum Series Section 1.4, do not bind the Department with respect to a particular transaction.

We hope this information will serve to clarify the Department's position in this matter. As requested, we have attached a listing of contact names for each of the Department's TSOs across Canada, as well as for XXXXX.

Should you have any questions, please call me at (613) 954-7952.

Yours truly,

Lynn F. Renner
Policy Officer
Special Sectors
Governments Unit GST Rulings & Interpretations

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