Section 231

Subsection 231(1) - Bad Debt — Deduction From Net Tax

Cases

North Shore Power Group Inc. v. Canada, 2018 FCA 9

no bad debt credit under s. 231 for a s. 232 credit which becomes bad

A supplier (Menova) received substantial down payments respecting its sale of solar array projects, and then became insolvent before earning more than a fraction of the down payments. Menova then issued credit memos to the business customer (North Shore) for the value of the unperformed work, and was petitioned into bankruptcy before refunding any amount shown on the credit memos. Before going on to find that North Shore was not required to add the HST, which had thus been purportedly “credited” to it, to its net tax, Woods JA stated (at para. 41):

By subsections 225(1) and 228(2) of the Act, tax collectible must be remitted by a supplier if it is collectible, even if it is never collected. However, relief is provided to the supplier in subsection 231(1) if the amount collectible becomes a bad debt. There is no such relief provided for credit in section 232 which becomes a bad debt.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(2) no sum is credited to the purchaser if no sum is placed at its disposal 394

See Also

North Shore Power Group Inc. v. The Queen, 2017 TCC 1

only suplier can claim the credit

The appellant (North Shore) paid half (or approximately $3.0 million plus HST) of the purchase price for various solar array projects to the supplier (“Menova”). Menova only completed approximately 1/5 of the work, and issued “Credit Memos” (including HST) to North Shore late 2010 and in 2011 to reflect the work for which it had been paid but had not performed. North Shore made additions to its net tax under s. 232(3)(c) to reflect the HST in these credit memos. However, Menova was insolvent and was petitioned by North Shore into bankruptcy on June 29, 2012. North Shore sought to effectively reverse the s. 232(3)(c) additions to its net tax by claiming bad credits under s. 231. CRA's ultimate position was that the s. 232(3)(c) additions and s. 231 credits were valid and invalid, respectively. North Shore ultimately accepted that the s. 231 credits claimed were invalid. In accepting this concession (and before going on to accept the CRA position), Bocock J stated (at para. 26):

North Shore was neither a “supplier” nor did it make a “taxable supply”. Factually, North Shore was a recipient who received a taxable supply.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(3) HST imposed on a customer through the issuance to it of a credit note by an insolvent supplier 284
Tax Topics - Excise Tax Act - Section 168 - Subsection 168(9) "deposit" for work being performed was not a deposit 159

Vivaconcept International Inc. v. The Queen, 2013 TCC 336

no requirement to pursue collection from insolvent company/write-off requirement satisfied

The appellant, a registrant in the events management business, invoiced a customer (Flora) for a total of $1,769,694 including GST of $103,440 for services rendered (and invoiced, see para. 22) over a 12-month period ending on October 2006, but was unable to collect anything as Flora was determined to be insolvent in November 2006. Flora made a settlement offer to its creditors in February 2007, which the appellant accepted, but no payments were made thereunder.

After Revenue Quebec indicated (at the end of 2008) that it would deny the appellant's claim (made for its quarterly reporting period ending on 31 January 2007) under s. 231 on the basis that the situation instead had called for a claim under s. 232 (apparently based on viewing the February 2007 agreement as an adjustment to the consideration), the appellant (in January 2009) entered into a write-off agreement with Flora, issued a credit note to Flora, and claimed a credit under s. 232(3) for the GST of $103,440 in its return for the reporting period ending on 31 January 2009. Revenue Quebec considered that the credit note had not been issued "within a reasonable time," as required by s. 232(3).

After stating (at para. 19) (TaxInterpretations translation) that the jurisprudence indicated "that the creditor need not have taken proactive measures if it reasonably and sincerely believed that recovery was impossible," Tardif J concluded (at para. 30) that in light of Flora's known insolvency, it was appropriate at the effective time of the bad debt claim to consider the debt to be irrecoverable and that any expense or effort to recover it would have been "a pure waste of energy and money." Respecting the "write-off" branch of s. 231(1), he stated (at para. 39) that "a contemporaneous document recording the decision to write-off the debt appears essential to the application of section 231," and (at para. 40) that here, the preponderance of evidence indicated the satisfaction of the write-off requirement.

The disposition of the "reasonable delay" issue is summarized below under s. 232(3). The appeal was allowed.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(3) 23 month delay acceptable 192

Ministic Air Ltd. v. The Queen, 2008 TCC 296

debt not written off a recipient not at arm's length

The appellant was not entitled to a credit under s. 231(1) in respect of the GST of approximately $170,000 owing to it as there was "little evidence as to the actual measures taken by the appellant to collect any specific debt" (para. 12), there was no evidence of the debt having been written off in the reporting period in question (although, at para. 14, the finding in Burkman v. The Queen, [1997] G.S.T.C. 98, "that a written note, as opposed to a journal entry, could satisfy the requirement that the debt must be written off in the books of account, in circumstances where no ledger existed" was accepted.) Furthermore, 1/3 of the appellant's receivable was owing by the holder "Garden Hill") of 98% of its shares. In this regard, Bowie J rejected the appellant's submission (at para. 20) that the provisions of ITA s. 251(2) (adopted for ETA purposes by ETA s. 126(2)) "simply raise a rebuttable presumption that the appellant and Garden Hill did not deal at arm's length, and that this presumption is rebutted by the evidence that the appellant's policy was to provide service to Garden Hill and its members at the same commercial rates that it charged to all its other customers."

McCool v. The Queen, 2005 TCC 357 (Informal Procedure)

writing off notation required

In finding that the appellant, a criminal lawyer, had not satisfied the "writing off" requirements of s. 231(1) in respect of amounts owing to him by the Ontario Legal Aid Plan, Bonner J stated (at para 6):

[A] bad debt cannot be considered to have been written off in a person's books of account unless and until a notation is made in those books that the particular debt has been written off. …A journal entry ought to be made to clear out each worthless receivable. Otherwise, subsection 231(3) would be impossible to enforce.

Administrative Policy

P-084R "Forgiven Debts Considered Bad Debts" 8 March 1999

[F]orgiven debts pursuant to an arrangement under the Companies' Creditors Arrangement Act are considered to be bad debts as opposed to reductions of consideration. As such, the provisions of section 231 of the ETA apply to forgiven debts as opposed to the provisions of section 232 of the ETA.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(2) 48

B-042 "Refund, Adjustment or Credit of GST"

Policy Statement P-029R "Bad Debts Reduction when Accounts Receivable are Bought or Taken Back"

GST Policy Statement P-029, dated September 4, 1992 "Assignment of Accounts Receivable"

A registrant is entitled to claim a deduction pursuant to the provisions of subsection 231(1) of the Act in situations where the receivable has been transferred, such as by way of assignment, and the registrant has been required to buy or take back the receivable, provided the other requirements of the subsections have been met (i.e., the registrant had charged, collected, remitted and accounted for the GST on the sale and subsequently found that it could not collect i.e., bad debt)."

Articles

Sabrina Wong, Sania Ilahi, "Tax Implications of Asset Securitizations", 2015 CTF Annual Conference Report

Advantages of sale to securitization trust on recourse basis (p. 12:25)

P-029R [states]:

...It is the Department's position that where a person agrees to buy or take back a receivable, in whole or in part, that was previously transferred to a third party, the person may claim a deduction under subsection 231(1) of the Excise Tax Act provided the conditions have been met.

...It is therefore advisable to sell trade receivables on a recourse basis, which allows any bad debts to be transferred back to the original supplier to claim the bad debt adjustment. However, this condition may be at odds with the accounting provisions that limit the recourse by an SPE to the assignor... .

Steven D'Arcy, "Tax Paid in Error", Canadian GST Monitor, No. 136, 31 January 2000, p. 1.

Subsection 232(1.1)

Administrative Policy

18 September 2017 Interpretation 176502

credit not available for tax assessed on audit

A registrant is reassessed for GST/HST that it did not charge on an invoice to a customer which declared bankruptcy prior to the reassessment and is unable to pay the invoice. Can the GST/HST amount assessed under s. 296(1)(d) satisfy the requirements for a credit under s. 231(1), given the reporting requirement under s. 231(1.1)? CRA responded:

[T]he supplier would not be in a position to claim a deduction under subsection 231(1.1) if it only learned the amount of the tax after an audit, since it could not have already reported it on its return nor paid the amount of tax owed.

However, section 232 does appear to offer a solution where the consideration is reduced. Where the supplier issues a credit note to the customer (which is now bankrupt) to relieve it of that debt, the supplier would be entitled to claim a deduction if all conditions set out in paragraph 232(3)(b) are met.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(2) credit can be generated by issuing credit note to bankrupt customer 154