9 June 2003 GST/HST Interpretation 43523 - Assessment of GST on Purchasers Under Paragraph 296(1)(b) of the Excise Tax Act (the "ETA")

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX

Interpretation Requested

1. Can the CCRA proceed with an assessment against a person if the person is under protection of a CCAA Plan of Arrangement?

2. Where the CCAA deems the outstanding debts owed to suppliers who have filed claims pursuant to the CCAA to be satisfied in whole, does this prevent a supplier from writing off the outstanding amount in their books of account as a bad debt and claiming relief under section 231 of the ETA?

Interpretation Given

1. It is the CCRA's view that even where proof of claim may not have been filed by the CCRA pursuant to the Companies' Creditors Arrangements Act (CCAA), assessments raised pursuant to paragraph 296(1)(b) of the ETA are valid assessments. Furthermore, the CCRA may raise such assessments for tax payable against a person regardless of agreements made by the person and their suppliers under the CCAA to consider the person's debts to the suppliers as satisfied.

Section 11 of the CCAA, does not prevent an assessment from being raised as the raising of assessments is an administrative function and is not the commencement of a proceeding or legal action. In absence of any enforcement steps under Subdivision e of Division VIII of Part IX of the ETA, an assessment is merely a statement of an amount owing. This is reinforced in Coopers & Lybrand Ltd. v Bank of Montreal [1993] G.S.T.C. 36 whereby Judge Orsborn at paragraph 38 stated in part; "The assessment ... is issued by the Minister of National Revenue (the Minister) pursuant to subsection 296(1) of the Act. It represents a formal notification to the tax debtor of the amount to be owing and breaks that amount down into taxes, interest, penalties and other specified categories. The assessment itself, does nothing other than provide information to the debtor."

2. It is also the CCRA's position that where the CCAA deems the outstanding debts owed to suppliers who have filed claims pursuant to the CCAA to be satisfied in whole, a supplier is not prevented from writing off the outstanding amount in their books of account as a bad debt and claiming relief under section 231 of the ETA.

In certain circumstances, companies who have filed for protection under the CCAA and their creditors, come to agreements whereby the creditors would receive certain assets "in full satisfaction" of their claims. With respect to the GST payable on supplies made to the CCAA protected company, the agreement of the suppliers must be taken to relate to their rights to sue under section 224 of the ETA. Having accounted for or remitted the tax payable by the CCAA protected company, but not having collected the tax, the suppliers were entitled to bring an action to recover the tax from the CCAA protected company "as though it was a debt due to the supplier".

It is important to note in this regard that, while section 224 conveys an entitlement to sue, and, effectively, the right to make a claim under the CCAA, it does not deem the unrecovered tax to be a debt due to the supplier. The tax was to be collected by the suppliers under section 221 of the ETA in their capacity as agents of the Crown; it remains tax payable to the Crown. Hence, when the suppliers' claim arising from section 224 of the ETA may be fully satisfied under the CCAA agreements, the tax liability is not.

With this understanding that the suppliers' obligations as agents of the Crown have not been extinguished by the acceptance of these arrangements under the CCAA, the fact that a debt is deemed to be fully satisfied under a CCAA Plan of Arrangement does not preclude the creditor from writing off the amount of the debt that remains outstanding in its books of account as a bad debt and claiming relief under section 231 of the ETA.

Furthermore, the classification of an amount as a bad debt remains a question of fact to be examined on a case-by-case basis and from an accounting perspective that is consistent with generally accepted accounting principles. Paragraph 3020.10 of the Canadian Institute of Chartered Accountants Handbook states that "An account or note receivable should be written off as soon as it is known to be uncollectible or should be written down to its estimated realizable value as soon as it is known that it is not collectible in full". For income tax purposes, Interpretation Bulletin IT-442R states in paragraph 6: "There are no specific conditions that must be met before a debt may be classed as a bad debt. Such a decision should be made only after determined efforts to collect the debt have been unsuccessful or there is clear evidence to indicate that it has in fact become uncollectible".

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 Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact Owen Newell, Manager of the General Operations Unit, at (613) 952-0301.

Yours truly,

John Sitka
Director
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate