28 February 2000 GST/HST Interpretation 25850 - Deposits

Dear XXXXX

Thank you for your facsimile transmission of January 10, 2000 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to deposits.

XXXXX

Interpretation Requested

The situation for which you are requesting an interpretation is as follows:

A person (XXXXX is in the business of leasing space for social functions. An initial deposit is made several months (i.e. up to 18 months) prior to having the space made available. Halfway through, a second deposit is payable. A final payment is made at the date of the event. The two deposits are made in good faith. The purpose of these deposits is to provide ongoing assurance to the person of the customer's good faith that the space will be occupied for the event. Obviously, as the date of the availability of the space approaches, the marketability if the space is diminished, as most parties which would be interested in leasing space, would require more lead time. The person does not recognize income until the social function takes place.

It is your interpretation that these multiple payments do indeed constitute deposits as the amount of the deposit required to assure realization of the initial contract will increase as the contract date approaches. It is purely for marketing reasons that the person does not require the entire amount up front.

You are requesting an interpretation under the following three independent scenarios whether each of the following would constitute a deposit or a prepayment:

1. The license agreement states that the deposit is not refundable.

2. The license agreement states that the deposit is refundable.

3. The license agreement states that the deposit is not refundable. In actual practice, however, the person exhibits flexibility and if the space in question can be rented out, the person provides a partial refund or issues a credit for the licensing of future space.

Interpretation Given

For purposes of the Excise Tax Act (ETA), a deposit is an amount given by a recipient as security for the performance of an obligation by the recipient. This amount may or may not be refundable.

In accordance with section 168 of the ETA, where a person gives a deposit in respect of a supply (other than an amount in respect of a covering or container governed by section 137), that deposit is not regarded as consideration for the supply unless and until the supplier applies the deposit against the consideration for the supply. The GST will be payable by the recipient at the time the supplier applies the deposit against the consideration fort the taxable supply.

If the deposit amount is refundable and is refunded by the supplier to the recipient, there is no tax consequences.

Some deposits are not refundable. If the person making the deposits fails to fulfill an obligation secured by the deposit, the person to whom the deposit was paid will keep the amount deposited. In this situation the deposit is forfeited.

If a deposit is forfeited to a registrant because of a breach, modification or termination of an agreement to make a taxable (other than zero-rated) supply, then the deposit is deemed to be consideration for the supply and to be paid at the time of the forfeiture. Tax on the deposit is payable at the time of the forfeiture, calculated on a tax-included basis. Thus, if a sale of goods to a consumer is canceled and, as a result, the consumer forfeits his or her deposit on the goods, 7/107ths of the forfeited deposit is treated as tax collected by the supplier on the sale.

When an agreement states that the deposit is not refundable and in actual practice, the person exhibits flexibility and provides a partial refund, the portion of the deposit retained would then be considered to be a forfeiture and tax would be payable at the time of the forfeiture on the amount. The portion of the amount refunded would be treated as a refundable deposit and therefore have no tax consequences.

When a credit is issued towards the licensing of future space the amount remains on account as a deposit, rather than treated as a forfeiture, since the agreement would have been amended (most likely verbally) to allow for this treatment.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-0419.

Yours truly,

Catherine Séguin
General Operations Unit
General Operations & Border Issues Division
Excise and GST/HST Rulings Directorate