Section 168

The Appellant charged annual time share maintenance fees to its individual members in October of each year, but charged its two members who were corporate developers on a monthly basis. In assessing the Appellant for various October reporting periods in respect of GST that the Appellant had not charged on the maintenance fees, CRA included the annual amount of the fees charged to the developers. D’Arcy J found that this method did not comply with s. 168(1).

The European VAT rules had a prepayment rule broadly similar to ETA s. 152(1), which Lord Drummond Young noted (at para. 46) had been interpreted by the European Court of Justice so as to only apply where there is “precise identification of the goods and services that are to be supplied.” He found that this test was not satisfied for a genealogical website, whose customers would purchase credits that could be applied during specified time periods to download historical records (e.g., birth and death records) whose number was determined in accordance with parameters that were subject to change by the site – and with a significant number of the credits never being applied in the periods in question.

Since the prepayment rule did not apply, there was only a taxable supply of services when the credits were applied by downloading particular records rather than at the time of the prior purchase of the credits.

Wong J quoted with approval the comments in Tendances et Concepts as to what was a deposit, but then found that, given the lack of probative documentary evidence provided by the taxpayer, none of the amounts assessed by the Minister had been established to be deposits.

The auditing firm (“DMCL”) for the appellant (“IHI”) obtained the agreement of IHI, as evidenced by a December 7, 2007 email sent by DMCL to IHI, to fix the audit fee at a level higher than that originally estimated. In the meantime, some payments by IHI (including an initial “retainer” of $25,000) had been made in round figures, without any indication that GST at 6% had been added. About six months later, DMCL prepared an invoice which added GST at the post-2007 rate of 5%.

After noting that essentially noting (at para. 45) that “the Tendances et Concepts case may not carry as much weight now, given that it was based on a previous French version of the ETA, in which arrhes was used as the French equivalent for the English deposit” and that (notwithstanding North Shore Power) IHI’s making of interim payments could have been consistent with their being deposits, Sommerfeldt J stated (at para. 54):

[T]he payment structure set out in [the] email of December 7, 2007 has a broad similarity to the payment structure in North Shore Power. Accordingly, it may be arguable that, by December 11, 2007, the three payments made by IHI to DMCL may have been contractually characterized or recharacterized as payments on account of DMCL’s fee.

A supplier (Menova) received substantial down payments (described as “deposits”) 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.

CRA’s position was that the HST included in the credit memos was required to be added back to the net tax of North Shore (thereby effectively reversing the input tax credits previously claimed by North Shore). Before accepting this position, Bocock J first noted that the down payments were not deposits, stating (at para. 24):

There was no payment of earnest money to guarantee the completion of the contracts. The sizeable partial payments were meant to fund the considerable costs connected with the solar panels. The Contracts, although describing the moneys paid as deposits were nonetheless structured as partial payments, half due on execution and the balance due on delivery. …

The registrant was in the business of manufacturing kitchen and bathroom furniture. Its usual business terms required customers to pay 30% up front, 60% on completion and 10% on delivery. The registrant contended that the 30% payment was a deposit, and therefore exempt from GST collection.

Hogan J. reviewed at length the distinction between a deposit and a down payment in common law, and the related distinction between an arrhes and an accompte in Quebec civil law, and concluded (at paras. 45-46):

In my view, a "deposit" or "arrhes," within the meaning of the Act, is:

• security for the performance of the contract;
• retained by the vendor in the case of default by the purchaser, contrary to a down payment;
• refundable or not;
• subsequently applied as a reduction of the sale price;
• an amount on request prior to entering the contract;
• is akin to a means of withdrawal;
• is akin to a penalty clause or prepaid liquidated damages; and
• a set, invariable, minimum amount.

In order to determine whether an amount is a "deposit" or "arrhes" within the meaning of the Act, the following questions must be posed:

• Does the contract specify the nature of the first payment?
• Is the amount intended to secure performance of an obligation?
• Is the amount paid prior to or after the signing of the contract?
• Does a penalty clause already exist?
• Has the tax been calculated on the amount requested?
• Does it represent a relatively small or substantial amount compared to the total value of the contract?
• Have the parties set any terms respecting exercising their right of withdrawal?

Hogan J. found that the 30% was a down payment. The registrant's contracts had a separate penalty clause for early termination, which were to vary based on the costs the registrant incurred before the termination, and did not stipulate that on breach the deposit represented liquidated damages. Moreover, the registrant collected only 30% of the GST-exclusive contract price, whereas a deposit when forfeited would have been required by s. 182 to include the GST collectible on that amount.

Deposits received by a guest house were subject to VAT by virtue of s. 5(1) of the Value Added Tax Act 1983 (which provided that where a person receives a payment in respect of a supply it shall, to the extent of the payment, be treated as taking place at the time the payment is received), based on a finding that the deposit became the property of the guest house at the time of receipt.