9 February 1996 GST/HST Interpretation 11755-11 - Application of GST to Transactions Involving Early Payments and Advance Payments

                                                                        Telephone #: (613) 954-8585

                                                                        Fax #: (613) 990-1233

                                                                        File #: 11755-11(glr)

                                                                        s. 161

Dear XXXXX

I refer to your facsimile message of March 30, 1994, addressed to Mr. Don Gagnon, Special Sectors Division, GST Rulings and Interpretations, and your telephone conversation with Mr. Ken Mathews of my staff on July 12, 1994, concerning the application of the Goods and Services Tax (GST) to transactions involving early payments and advance payments. Please accept my apologies for the delay in this response.

In your message you presented the following scenarios:

1. A normal business transaction for the supply of tangible personal property or a service whereby a supplier would offer a discount if the invoice is paid within a time period specified on the invoice. For example, a 2% discount if the invoice is paid within 15 days.

Your understanding of the above transaction is that, pursuant to section 161 of the Excise Tax Act, the GST would be payable on the full amount regardless of whether a customer takes advantage of the discount offered by the supplier.

2. A customer has a contract with a supplier for the supply of tangible personal property or a service and a fixed regular amount is payable each and every month under the contract. In addition, the supplier has granted the customer a discount which varies according to the number of months of payments in advance it (the supplier) receives. For example, assume that the contract calls for a monthly payment of $100,000. Also assume that the supplier is willing to provide the customer with a discount if payments are made in advance according to the following scale:

You enquired if, under the above contract, the GST is based on the monthly payment of $100,00 or if the tax is based on the discounted amount.

Interpretation Given

In both scenarios described above, the supplier is offering its customer (the recipient) a discount from the invoice price, or the contracted price, if the recipient pays within a certain time period, either prior to the due date or in advance. Concerning situation 2, the discount will fluctuate depending upon when the early payment is made.

The Department's position is that, notwithstanding the fact the recipient of the supply of the tangible personal property or service may obtain a discount for an early payment or advance payment, the provisions of section 161 apply. As a result, the value of the consideration is not affected by the discount. Therefore, in scenario 1, the GST applies to the amount of the consideration shown on the invoice. In scenario 2, the GST applies to the gross amount to be paid under the contract, prior to any discount the supplier may subsequently allow.

The foregoing comments represent our general views with respect to the subject matter of your message. Unannounced 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 Section 1.4 of the GST Memoranda Series, do not bind the Department with respect of a particular situation.

If you have any questions or require further information, please contact Mr. Mathews at (613) 952-9585 or Ms. Sara Nixon at (613) 954-4397.

Yours sincerely,

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Policy and Legislation Branch