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 420

See Also

Greenfield Mining Services Inc. v. Agence du revenu du Québec, 2020 QCCQ 2869

registrant had established an honest and reasonable belief that it would not recover more than the written-down amount, with s. 232 not being relevant

The appellant (“Greenfield”) entered into a services contract with a junior Quebec mining company (“CRI”) to assist it in developing a nickel deposit. CRI started experiencing financial difficulties as a result of poor project management decisions by it and a low price of nickel, and Greenfield sued CRI for unpaid fees of around $15 million. After 30 months of unfruitful legal proceedings (reflecting successful tactics of CRI’s counsel) and incurring over $1 million in legal fees, Greenfield agreed to settle its action by agreeing to receive $7 million in instalments over a two-year period.

Greenfield then wrote down the receivable on its books accordingly, and claimed a credit under the Quebec equivalent of ETA s. 231 based on that part of the receivable having become a bad debt, which the ARQ was prepared to grant until it took the view that Greenfield should have issued a credit note to CRA for the reduction in the fee amount which, once done, would have given the ARQ the right to receive a refund of the applicable portion of the input tax refunds that had been claimed by CRI under the Quebec equivalent of ETA s. 232(3)(c).

After reviewing this evidence, Zaor JCQ found (at para. 68, TaxInterpretations translation) that (as per Rich at para. 15) Greenfield had made “an honest and reasonable” assessment that it would not “recover anything more than the $7 million dollars as agreed” and that a subsequent amendment of the settlement agreement with CRI was merely to achieve a catch-up for arrears by CRI in paying the agreed $7 million in instalments, rather than being an indication that recovery efforts by Greenfield were still ongoing.

She indicated that these findings were sufficient to allow Greenfield’s appeal, and noted (at para. 89) that “the Court cannot order CRI to repay excess amounts claimed as inputs”.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(3) - Paragraph 232(3)(c) implicit finding that ETA s. 231 trumps s. 232 218

North Shore Power Group Inc. v. The Queen, 2017 TCC 1, rev'd 2018 FCA 9

only supplier 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 298
Tax Topics - Excise Tax Act - Section 168 - Subsection 168(9) "deposit" for work being performed was not a deposit 167

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 200

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"

GST/HST Policy Statement P-029R, "Bad Debts Deduction When Accounts Receivable are Bought or Taken Back," 4 January 1999

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)

See Also

9267-9075 Québec Inc. v. The Queen, 2020 CCI 53

failure to remit GST on reporting a sale to an insolvent purchaser precluded a subsequent bad debt credit

The appellant (“9267”) sold domain names on September 2012 for $500,000, payable in instalments, plus GST and QST to another corporation (“9210”) that was owned equally by its individual shareholder and an unrelated individual. Only $25,000 in instalment payments under the first contract were made before 9210 started experiencing financial difficulties. In the autumn of 2013, a receiver was appointed, in March 2014 a bankruptcy proposal was made, and subsequently, the domain names were sold by 9210 for $5,000 to a company related to 9267.

The GST return for the reporting period of 9267 that included September 2012 was not filed until March 2016, with 9267 being assessed for the tax shown as collectible by it, and in September 2016, a return for the March 2014 to February 2015 reporting period claimed a credit under s. 231(1) for the uncollected GST (which the ARQ on behalf of CRA rejected).

Before concluding that 9267 was not entitled to the s. 231(1) credit, D’Auray J stated (at para. 42, TaxInterpretations translation):

… 9267 did not remit GST on the taxable supply, i.e., on the sale of its domain names to 9210, when it filed its return. Therefore, subsection 231(1) of the ETA does not apply in this case because the condition in paragraph 231(1.1)(b) is not met. Since this condition is not met, 9267 cannot use this provision.

Furthermore, she found that 9267 had not taken reasonable measures to pursue collection of its debt, including claiming under its security interest, and having its debt included in the debtor claims made against 9210 in connection with the receivership and bankruptcy proceedings.

She also noted that, in the absence of generating a credit under a specific provision such as s. 231(1), no claim could be made for the bad debt under s. 225(1).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 232 - Subsection 232(3) failure to credit the adjustment precluded a s. 232(3) deduction 203

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

Paragraph 232(1,1)(a)