5 November 2001 GST/HST Interpretation 4604 - Tax on Pay Telephone Calls

This is in reply to your letter of September 29, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to pay telephone calls.

Interpretation Requested

1) Where the total amount of coins deposited in a coin-operated telephone, that does not provide change, exceeds the specified price for a telephone call XXXXX on what amount does tax apply?

2) Based on the rounding rule for coin-operated telephones under subsection 165.1(1) of the Excise Tax Act (ETA), what is the amount of tax, XXXXX that applies where XXXXX cents is deposited in a coin-operated telephone?

Interpretation Given

Question #1

As you know, under subsections 165(1) and (2) of the ETA, the tax payable in respect of a taxable supply is calculated based on the value of the consideration for the supply. Subsection 165.1(1) of the ETA sets out a special rule for calculating the amount of tax payable with respect to the supply of a telecommunication service where the consideration for that supply is paid for by depositing coins in a coin-operated telephone.

Subsection 123(1) of the ETA, defines "consideration" as including any amount that is payable for a supply by operation of law. Paragraph 153(1)(a) of the ETA further provides that where the consideration for a supply is expressed in money, the value of that consideration is equal to the amount of that money.

The definition of consideration in subsection 123(1) of the ETA was added for greater certainty to reflect the fact that amounts can become payable for a supply by operation of law in the absence of a contract. Specifically, it removes any doubt that such amounts that clearly would be consideration for a supply if there were a contract, are treated as consideration for GST/HST purposes.

We would first like to point out that the meaning of consideration for GST/HST purposes is not limited to what is specifically listed as being included within the meaning of that term under subsection 123(1) of the ETA, but is rather broad enough to include any amount paid for a supply whether or not it is payable by law.

With respect to the specific issue in question, generally, the consideration for a supply for GST/HST purposes is the amount that is paid or payable in respect of the supply. Where a particular supply is made by a supplier as a direct result of a particular payment of money being made to the supplier, the amount of that payment will generally be included in the amount of the consideration paid for that supply, subject to certain specific exclusions. In other words, the consideration for a supply will generally include any amount that the recipient pays in order to receive the particular supply, and this amount may vary from recipient to recipient.

In this case, the terms for the supply of the telecommunication service for which coins are deposited into the coin-operated telephone include a specified price and the fact that no change is provided. This is analogous to stating that the amount of coins that must be deposited in order for a telecommunication service to be supplied is either an amount equal to the specified price or, if the recipient does not have that exact amount, a higher amount based on the particular combination of coins that the recipient is willing to deposit into the coin-operated telephone. As such, the amount of coins that is deposited is the amount that is considered to have been paid for the particular telephone call.

Therefore, if the total amount deposited in the coin-operated telephone exceeds the specified price and that excess amount is not refunded or credited to the recipient, the total amount deposited (excluding such amounts as any applicable GST/HST) is consideration paid for that supply. The recipient who deposits the higher amount in this case has simply agreed to pay that higher amount for the supply based on the terms of the transaction that are understood at the outset by the parties.

Although the amount that is actually deposited in the coin-operated telephone would generally be viewed as the consideration for the supply, it is of course necessary to establish whether tax is also included in the total amount deposited. For instance, tax may not apply to the supply of the telecommunication service as a result of the rounding rule explained below.

Question #2

As you know, subsection 165.1(1) of the ETA provides that where the consideration for the supply of a telecommunication service is paid by depositing coins in a coin-operated telephone, the tax payable in respect of the supply is equal to zero if the amount deposited for the supply is $0.25 or less. In any other case, the tax is equal to the actual amount of tax calculated under subsections 165(1) and (2) of the ETA, except that if that total is equal to a multiple of $0.05 plus a fraction of $0.05, the fraction may be disregarded if it is less than $0.025 and if that fraction is equal to or greater than $0.025, the fraction is deemed to be an amount equal to $0.05.

Subsection 165.1(1) of the ETA, which became effective April 1, 1997, and its predecessor, subsection 165(3), which had become effective April 23, 1996, were introduced to modify the tax-free thresholds for pay telephone calls. The previous treatment of pay telephone calls had raised a fairness issue in relation to the tax treatment of coin-operated machines in general. Specifically, there was no tax charged on a pay telephone call costing less than 70 cents and paid for in coins, while other registered vendors using coin-operated machines were generally required to account for tax on their supplies regardless of the value.

Although the treatment of pay telephone calls was modified to reduce the tax-free threshold to zero to provide for a more equitable treatment with other coin-operated devices, a special 5 cent rounding rule for the tax on pay telephone calls reflecting industry practice was nevertheless maintained under current subsection 165.1(1) of the ETA. As a result of this rounding rule, the amount of tax in respect of an identical amount that is deposited in a coin-operated telephone and another coin-operated device will not be the same.

Our interpretation of subsection 165.1(1) of the ETA continues to be that the 5 cent rounding rule for the tax on pay telephone calls applies where the tax calculated in accordance with subsections 165(1) and 165(2) of the ETA is greater or less than 5 cents. XXXXX If you have any questions or concerns, please do not hesitate to contact me at (613) 954-9700.