XXXXX
XXXXX
XXXXX
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Policy and Legislation Branch
Our unit received an e-mail on March 25, 1998 from the Business Window unit of the XXXXX Tax Service Office, concerning the Streamlined Accounting Quick Method (the "Quick Method") prescribed by the proposed Streamlined Accounting (GST/HST) Regulations (the "Regulations"). This memorandum is in response to the query made by the XXXXX Tax Service Office XXXXX[.]
The comments in this memorandum reflect the current proposed amendments to the Regulations that were tabled on November 26, 1997. Also, as the transactions discussed in this memorandum are taking place in a non-participating province, XXXXX the HST implications have not been discussed.
Statement of Facts
1. Vendors who are registrants receive used clothing and other tangible personal property from non-registrants and sell the tangible personal property in a consignment type setting.
2. As the vendors' purchases are almost exclusively from non-registrants, the input tax credits (the "ITCs") of the vendors are minimal relative to the ITCs of other retailers.
Interpretation Requested
1. The XXXXX T.S.O. reviewed the Regulations and found that it appears that registrants selling used clothing and other tangible person property in a consignment type setting can elect to use the Quick Method. The XXXXX T.S.O. would like confirmation that these registrants are eligible to use the Quick Method.
2. The purchases made by the registrants are almost exclusively from non-registrants. Thus, the XXXXX T.S.O. concludes that if the registrants can elect to use the Quick Method and the 2.5% remittance rate applies, the implied ITCs incorporated in this remittance rate are an overstatement of the registrants' actual ITCs. If the registrants can elect to use the Quick Method, XXXXX T.S.O. would like to know if it is the 2.5% Quick Method remittance rate that applies.
3. The XXXXX T.S.O. also requested that we determine if this consignment type setting is actually an agency relationship. If it is, then the XXXXX T.S.O. would like to know if the 2.5% Quick Method remittance rate applies.
Interpretation Given
Answer to Request 1:
Subsection 227(1) of the Excise Tax Act provides that a registrant (other than a charity) who is a prescribed registrant may elect to determine its net tax for a reporting period during which the election is in effect by a prescribed method. Subsection 16(1) of the Regulations outlines the prescribed registrants who are eligible to file an election to use the Quick Method. Generally, a "prescribed registrant" is a person that is a "specified registrant" in a reporting period and whose "total threshold amount" for the reporting period is $200,000 or less.
The "total threshold amount" for a reporting period as defined in subsection 2(3) of the Regulations is generally the total consideration and tax in respect of worldwide taxable supplies made by the registrant and its associates (other than goodwill, supplies of financial services, sales of real property, capital assets and eligible capital property) that became due, or was paid without becoming due, in the "threshold period" for the reporting period. The "threshold period" for a reporting period under subsection 15(3) of the Regulations corresponds to the fiscal year preceding the fiscal year that includes the reporting period if the Quick Method election was in effect at the beginning of the fiscal year that includes the reporting period. If the election was not in effect at the beginning of the fiscal year, the "threshold period" corresponds to the four fiscal quarters ending in one of the last two fiscal quarters preceding the fiscal quarter in which the election is to become effective.
A "specified registrant" is defined in subsection 15(1) of the Regulations and generally excludes the following persons:
• accountants, or bookkeepers;
• financial consultants;
• lawyers (or law offices)
• actuaries;
• notaries public;
• listed financial institutions;
• audit services;
• tax preparation services, or tax consultants;
• local authorities designated as municipalities, or municipalities;
• not for profit public colleges, school authorities or universities;
• hospital authorities;
• charities; or
• non-profit organizations with at least 40% government funding in the year (i.e., qualifying non-profit organizations).
The registrants who are selling used clothing and other tangible personal property on a consignment basis are not specifically excluded from being a "specified registrant" as described in subsection 15(1) of the Regulations. Consequently, they are not restricted from filing an election to use the Quick Method provided they meet the other criteria outlined in subsection 16(1) of the Regulations.
Answer to Request 2:
A consignment is an arrangement whereby the consignor, transfers the possession of tangible personal property, but not the ownership, to a consignee, who supplies the property to another. If the consignee does not or cannot resupply the property, the consignee is free to return the property to the consignor. Normally, there are no tax consequences to a consignment until the consignee sells the property to someone other than the supplier or the consignor is considered to supply the property to the consignee. Generally, the Department considers that there are two transactions for tax purposes: the supply of the property from the consignor to the consignee and the supply of the property from the consignee to another person (the customer).
If the consignor is a registrant, the consignee pays tax on the price the consignor charges the consignee, and the consignee collects tax from the customer based on the consignee's selling price. If the consignor is not a registrant, the consignor will not charge tax to the consignee. When the consignee returns any unsold items to the consignor, the consignee does not have to pay tax on these items since the consignor never sold them to the consignee.
Subsection 17(1) of the Regulations generally provides that a registrant who is using the Quick Method must calculate its net tax for a reporting period by applying the appropriate Quick Method remittance rate for the reporting period to the portion of the "net specified supplies" for the reporting period that are subject to that rate.
The Quick Method remittance rate of a registrant for a reporting period that applies in respect of a supply is determined under subsection 15(5) of the Regulations. There are two basic remittance rates for eligible supplies that are made in non-participating provinces through a permanent establishment in a non- participating province: 2.5% and 5%. For a registrant to use the 2.5% remittance rate, in respect of these supplies, the cost to the registrant, in the threshold period for the particular reporting period, of all tangible personal property (excluding basic groceries and purchases for which tax was not required to be paid) acquired by the registrant for the purpose of supply by way of sale by the registrant must generally be equal to at least 40% of the "basic threshold amount" for the reporting period, excluding basic groceries. The "basic threshold amount" as defined in subsection 2(2) of the Regulations means the total of all consideration (other than consideration that is attributable to goodwill) that became due or was paid without becoming due, and tax that became collectible, in the threshold period for the reporting period for taxable supplies made in Canada. Excluded from the "basic threshold amount" are supplies of financial services, supplies by way of sale of real property, capital assets or eligible capital property of the registrant and supplies of tangible personal property that the registrant is deemed to have sold in its capacity as an auctioneer.
The draft regulations relating to the GST/HST tabled on November 26, 1997, proposed an amendment to subsection 15(5) of the Regulations that revises the cost of the tangible personal property that is to be used to determine the registrant's eligibility to use the 2.5% Quick Method remittance rate. As shown in the previous paragraph, this amendment proposes to also exclude the cost of property for which tax was not required to be paid. This proposed amendment is generally effective for the purpose of determining the net tax of a registrant for reporting periods ending on or after April 1, 1997. However, the Quick Method remittance rate for a reporting period of the registrant that ends before or includes July 1, 1997, and that applies in respect of a supply for which the consideration is paid or becomes due before July 1, 1997, is to be determined without excluding the cost of tangible personal property for which tax was not required to be paid.
The XXXXX T.S.O. has stated that the vendors in question purchase tangible personal property almost exclusively from non-registrants. To the extent that tax would not be required to be paid on these purchases, subject to the current proposed amendments explained above, the purchases cannot be included in the cost calculation used to determine whether the 2.5% Quick Method remittance rate is applicable. Consequently, subject to the proposed coming-into-force provisions, it is possible that the cost of tangible personal property to the registrant, in the threshold period for the reporting period in respect of which the remittance rate is being determined will be less than 40% of the basic threshold amount for the reporting period.
A comment from the XXXXX T.S.O. states that the implied ITCs incorporated into the 2.5% Quick Method remittance rate may result in an overstatement of a vendor's actual ITCs. In some cases, the use of the 5.0% Quick Method remittance rate may also result in the implied ITCs being an overstatement of ITCs that could have otherwise been claimed. It should be noted that the Quick Method prescribed remittance rates take into consideration, the approximate amount of tax payable on operating expenses and inventory purchases. Since the Quick Method is a method of calculation based on an approximation of tax payable, it may be more favourable to some registrants and not to others.
Answer to Request 3:
As you know, in general terms, the question of agency deals with the relationship between parties when one person (the "agent") is used by another (the "principal") to perform certain tasks on its behalf. The words "agent" or "agency" are not defined in the Act. It is the Department's position that a person will be considered and treated for GST/HST purposes as an agent based on fact and the principles of law.
The information provided by the XXXXX T.S.O. does not provide enough information to determine if the case in question is an agency relationship. Since we have not been provided with enough facts to determine if the vendor is acting as an agent on behalf of the non-registrant, we cannot comment on the nature of the relationship between the vendor and the non-registrant. Retail stores selling used clothing on consignment are not normally acting as an agent for the consignor. However, the following draft policy should assist in determining if an agent relationship in fact exists: Policy P-182, Determining the Meaning of the Terms "Agent" and "Agency" as used in relevant sections of the Excise Tax Act and identifying those Factors that may be used to Determine the Likelihood of Agency.
The net tax for a reporting period during which a Quick Method election is in effect, is generally calculated under subsection 17(1) of the Regulations by applying the applicable Quick Method remittance rate for the reporting period to the portion of the "net specified supplies" for the reporting period to which that rate applies. "Net specified supplies" under subsection 15(5.1) of the Regulations are partly calculated in reference to "specified supplies" which are defined under subsection 15(1) of the Regulations. The draft regulations relating to the GST/HST that were tabled on November 26, 1997, proposed an amendment to the definition of "specified supply". The definition of "specified supply" is proposed to be revised to specifically exclude "a supply deemed under subsection 177(1) or subsection 177(1.2) of the Act to have been made by a registrant acting as an agent for another person." This proposed amendment applies to supplies made after November 26, 1997.
In certain circumstances, subsections 177(1) and 177(1.2) generally deem a supply of tangible personal property made by an agent or auctioneer on behalf of a principal to have been made by the agent or auctioneer and not the principal. Consequently, any supply deemed to have been made by the vendor in question as an agent under subsection 177(1) will not qualify as a "specified supply" for purposes of using a Quick Method remittance rate. The registrant will therefore be required to account for tax at the full rate on these supplies where applicable.
Should you require clarification on the above or any other GST/HST matter, please do not hesitate to contact me at (613) 954-8814.
Victoria Szabo
A/Rulings Officer
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
| c.c.: |
Dave Caron
Patrick McKinnon |
| Legislative References: |
227, 168, 177 |
| NCS Subject Code(s): |
11705-6 |
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