Section 232

Two individuals (Tremblay and Cyr), who wished to acquire a condo unit in a building (“265”) which was still under construction by the taxpayer (“CILI”) agreed with CILI to acquire another unit in an already completed building (“260”) and move there on condition that, when the 265 unit became available, they would acquire the 265 unit at no loss, if a purchaser had not been found for the 260 unit by a specified date. When that date arrived, and the 260 unit had not yet been sold, CILI, and Tremblay and Cyr, entered into a “deed of retrocession” pursuant to which the original sale was annulled, the purchase price returned to Tremblay and Cyr, and they acquired the 265 unit from CILI.

In order that CILI could meet the sales threshold imposed by the bank for advancing a loan tranche, CILI also agreed with the son of its principal to sell the model condo suite to him for rental by him back to it, on the condition that CILI would take back the unit from him once a third-party purchaser had been secured. Later the next year, when the purchaser was secured, the unit was returned to CILI pursuant to a deed or retrocession, and the purchase price refunded to the son.

On both sales, CILI collected the applicable QST, refunded such QST on the retrocession, and claimed a credit for such refunded tax pursuant to QSTA s. 448 et seq. (similar to ETA s. 232), which the ARQ refused on the grounds that the retrocessions represented second taxable supplies of the two units, rather than evidencing annulments of the previous sales.

Before allowing CILI’s appeal, Fournier JCQ stated (at paras. 74, 76, 78-79, 89-90, and 120, TaxInterpretations translation):

A resolutory condition thus has the effect of destroying the contractual link existing between the parties by extinguishing it as if it had never existed. …

With regard to [the 250 unit], the condition to be fulfilled was the construction of [the 265 unit] which was actually carried out, thus having the effect of destroying the contractual link existing between the parties in question. extinguishing it as if it had never existed, without the need for other formalities and by the sole effect of the law. …

As for [the model unit], the resolutory condition that had to be fulfilled was to find a new buyer, which materialized on August 21, 2014.

In this case also the fulfillment of the condition had, following the application of the law, the effect of destroying the contractual link existing between the parties by extinguishing it as if it had never existed. …

In other words, the resolution which operates automatically is valid between the parties even in the absence of the registration of a deed, such as the deed of retrocession, in the office for the registration of real estate rights.

But since a deed of retrocession concerns the transmission or extinction of a real immovable right, it must be registered in the land registry and its registration aims, among other things, to publicize to third parties the resolution of the sale. …

Since the court has concluded that we are in the presence of a single supply for which the consideration, following the resolution of the sales, was reduced to nil, QSTA section 448 applies, especially since it is not disputed that the requirements of QSTA section 449 are satisfied.

Using Lord Reed’s simplified facts, the invoice to an investment fund of its manager included VAT of £100 based on a UK VAT provision which was later determined to have improperly treated (contrary to the EU Directive) the manager’s services as taxable rather than exempt. The manager claimed input tax (i.e., an ITC) of £25 in the same mistaken belief that it was making taxable supplies, and remitted £75 to HMRC. Recovery of the £75 from HMRC was now statute-barred.

Lord Reed held that the fund had no common law claim of £75 against HMRC for unjust enrichment given inter alia that the manager’s supposed £75 remittance obligation to HMRC had been independent of its £100 charge to the fund in the sense that the former was triggered by the provision of its services rather than the receipt of the £100 from the fund. However, the fund had a valid £25 claim for unjust enrichment against the manager.

Customers of the taxpayer, which operated bingo clubs, paid a fee entitling the customer to take part in a number of games of bingo, forming a session, and to receives a book of cards. Each of which could be used for one of the games. Although commercial gambling was not governed by specific VAT provisions, the jurisprudence had recognized (para. 9): “It is … only the net sum retained by the promoter after deduction of winnings which may be included in the taxable amount for VAT purposes.” As funds used to top up the prize money did not reduce the taxable turnover, the taxable turnover was lower if participation fees were calculated on a session by session basis, rather than a game by game basis.

HMRC issued a “business brief” stating that bingo promoters who (like the taxpayer) had been calculating participation fees on a game-by-game rather than session-by-session basis, could make a claim for having overpaid VAT, which the taxpayer did. However, it was precluded by statute from going back more than three years with its refund claims. However, pursuant to article 90 of the Principal VAT Directive, there was no such time limitation where a repayment of VAT was claimed based on there being “a decrease in consideration for a supply.” The taxpayer unsuccessfully argued that where there had been a change from one method of calculating the consideration for its supplies (the game by game basis) to another method (the session by session basis), thereby producing a lower taxable amount, the adoption of the new method involved a “decrease in consideration.” Lord Legatt stated (at para. 48):

What is required … is a change in the consideration actually received by the supplier. … All that has happened is that the taxpayer has had second thoughts about how the consideration received at the time of the supply should be analysed for tax purposes.

Before so concluding, he noted (at para. 30) that it was “clear that there can be only one correct method of calculating the taxable element of fees charged to customers for playing cash bingo and … this was the session by session method and not the game by game method.” Since there was only one correct method, on this basis as well the taxpayer’s claim that its switch in method entailed a decrease in the consideration payable by it foundered.

In 2012, a company (“9267”) sold domain names to another corporation (“9210”) that was owned equally by its individual shareholder and an unrelated individual for cash consideration to be paid in instalments. However, it did not file its GST return for that year until 2016, at which time 9210 was insolvent, and most of the purchase price was still owing. The tax so reported was assessed accordingly. Also in 2016, it filed its GST return for its taxation year beginning in 2014 in which it claimed a bad debt deduction for the unpaid GST.

After confirming the denial of the s. 231(1) bad debt credit, D’Auray J also found that no credit was available under s. 232(3). She rejected arguments that the purchase contract had been rescinded and further indicated (at para. 53, TaxInterpretations translation):

What is clear from North Shore is that for the purposes of section 232, a credit or debit note is not sufficient, there must be an amount made available to the buyer under the note.

Here no such note had been issued, let alone one that satisfied the North Shore requirement or that set out the particulars required by Regulation.

A Canadian corporation (“GEM”) reduced, effective December 31, 2009, the quantum of management fees which it had previously charged to four nursing home subsidiaries. This reduction was effected by adjustment to the fee amounts and HST thereon in its books of account, but with no credit notes being issued by it – but it nonetheless claimed input tax credits equal to the HST amount on such fee reductions. In confirming CRA’s denial of these ITCs, Sommerfeldt J stated (at para. 98):

[T]he issuance by a supplier of a credit note in a situation such as this is critical, as it enables the recipient to ascertain whether the supplier will reduce or refund (as the case may be) the GST/HST, or whether it will be necessary for the recipient to apply for a rebate of tax under section 261 of the ETA. The issuance of a credit note, where required by paragraph 232(3)(a) of the ETA, is not a mere procedural formality….

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 initially assessed on the basis that the sums received by North Shore were deposits, but thereafter its 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, so that the sole issue was whether the Credit Memos constituted credit notes under s. 232(3).

North Shore had argued (at para. 30):

A mere recording of the credit does not meet the test. …[T]here was no amount set aside or provision made by Menova, the debtor, under the Credit Memos, to honour the credit.

In rejecting this submission, Bocock J first referred (at para. 33) to the ordinary meaning of “credit note,” e.g., “A note issued by a business indicating that a customer is entitled to be credited by the issuer with a certain amount,” and then stated (at para. 37):

The Credit Memos were factually sufficient to provide a clear indication of a credit being established in writing to the detriment of Menova and to the benefit of North Shore. …

This case is summarized in greater detail under s. 231(1). In brief, the appellant claimed a bad debt credit under s. 231 with respect to the GST in a customer receivable. After Revenue Quebec indicated that it would deny this claim on the basis that the situation instead engaged s. 232 (apparently based on the acceptance by the appellant of a proposal made by the customer to its creditors almost 23 months previously), the appellant thereupon issued a credit note to the customer, and claimed a credit under s. 232(3) for the GST in its return for the related reporting period. Revenue Quebec considered that the credit note had not been issued "within a reasonable time," as required by s. 232(3). Tardif J first found that the appellant was entitled to the s. 231 credit.

Respecting the "reasonable delay" issue arising under s. 232(3) in the alternative, Tardif J stated (at para. 55) that "it is true that a delay of 23 month is relatively long," but found that it was reasonable in the circumstances as the appellant did not find out that Revenue Quebec was denying its bad debt claim until shortly before issuing the credit note. The appeal was allowed.

For income tax planning reasons, the registrant followed a practice of not claiming input tax credits ("ITCs") for a number of successive monthly reporting periods ("Deferral Periods") and then, in its return for the reporting period following that grouping of Deferral Periods (the "ITC claim return"), claimed ITCs for the Deferral Periods.

Suppose that in a Deferral Period, the registrant was invoiced $1,070 including GST, and received credit notes (e.g., respecting order shortfalls) for $107 including GST. In its ITC claim return, it claimed ITCs of $70-$7, or $63 for that Deferral Period. Later, on the advice of KPMG, the registrant claimed ITCs for a further $7 (the "Residual ITC") in a return for a reporting period subsequent to that for which it filed the ITC claim return. (In fact, the Residual ITCs were claimed in returns for five different reporting periods within the s. 225(4) ITC-barring periods in respect of a three-year period of Deferral Periods commencing in 2000, and totaled $3,910,610.)

In finding that the registrant was entitled to the Residual ITCs, D'Auray J found (at para. 20) that "except for section 232…there are no provisions in the Act that require a registrant to make an adjustment to an ITC as a result of a credit note or debit note being received," so that (reverting to the above example) the registrant was entitled to ITCs of $70 for the Deferral Period as that was the month in which it was invoiced for the related supplies (see ss. 168(1) and 152(1)); and (at para. 26-27) that "additions to net tax will be required pursuant to paragraph 232(3)(c)…only if the appellant has claimed ITCs in respect of credited tax in the same, or a preceding, reporting period as the one in which the credit…notes were issued or received," whereas here the registrant instead claimed such ITCs in subsequent reporting periods.

The registrant, when it paid volume rebates to customers, was found by McArthur J to be thereby reducing the consideration on the previous sales for purposes of s. 232(2) (stating at p. 85-5 that "volume rebates...[are] a mechanism which reduces the consideration paid by the customer to the manufacturer"). However, it was not obligated under s. 232(2) to rebate GST under s. 232(3) when the consideration was so reduced (as the word "may" only gave it the "option" of doing so), and it did not do so. Accordingly, for purposes of former s. 181.1, s. 232(3) did not apply to the volume rebates.