Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-029R

Date of Issue

September 04, 1992

Revised January 04, 1999

Subject

Bad Debts Deduction When Accounts Receivable are Bought or Taken Back

Legislative Reference(s)

Section 231 of the Excise Tax Act(ETA)

Nationl Coding System File Number(s)

11610-4, 11783-2

Effective Date

January 1, 1991 for the GST

April 1, 1997 for the HST

Text

Issue and Decision

A person may assign or otherwise transfer its accounts receivable as a form of financing or as security. Sometimes a person assigns its accounts receivable on a recourse basis to a third party and later buys or takes back those receivables.

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 Actprovided the conditions have been met.

Subsection 231(1) provides that where a person reports the tax collectible in respect of an arm's length taxable supply (other than a zero-rated supply) on its GST/HST return for the appropriate reporting period, remits the net tax remittable on that return, and subsequently writes off all or part of the consideration and tax for the supply as a bad debt, the person may, in determining its net tax for the reporting period in which the bad debt is written off, deduct an amount determined in accordance with the formula set out in that provision.

Note that, if the debt is later recovered, in whole or in part, subsection 231(3) will apply, and therefore the person will be required to add an amount to its net tax for the reporting period in which the recovery is made.

SAMPLE RULING

Statement of Facts

1. ABC Corporation sells office equipment to retailers. To attract customers, ABC offers a payment plan which allows its customers to purchase equipment with no down payment. Payments are to be made over a 12 month period. Possession and ownership of the equipment is transferred to the customer at the time of sale.

2. In accordance with subsection 168(3), tax in respect of the sale is payable on the last day of the calendar month immediately following the month in which the ownership and possession of the equipment is transferred to the customer. ABC must account for the tax in the appropriate reporting period.

3. To finance this arrangement, ABC has entered into a written agreement (the "Agreement") with XYZ financing under which ABC assigns, for consideration, receivables from its customers. The customers are informed of the transfer and instructed to make payments to XYZ. The terms of the Agreement clearly give XYZ the right to require ABC to buy back the receivable from XYZ at a price set out in the Agreement.

4. On January 7, 1998, Echo Office Supplies ("Echo") purchased office equipment from ABC. Echo made no payment at the time of the sale but agreed to make monthly payments over a 12 month period. The sales invoice clearly indicated a charge for GST/HST. The tax became payable on the last day of February, 1998, and was included by ABC in calculating its net tax for the appropriate reporting period. ABC remitted its net tax for the reporting period accordingly.

5. On January 31, 1998, ABC assigned the receivable, including the tax component, to XYZ on terms (as stated in the Agreement) which gave XYZ the power to require ABC to buy back the receivable should XYZ, at its discretion, determine the receivable to be uncollectible.

6. As of June 1, 1998, Echo had not yet made any payments. Consequently, on that date, XYZ exercised its right under the Agreement to require ABC to buy back the receivable, and ABC reacquired the receivable from XYZ.

7. ABC reviewed the situation, attempted to collect the outstanding consideration and tax, and determined there to be no reasonable prospect of collecting any part of the receivable from Echo. Consequently, it wrote off the amount of the receivable as a bad debt.

Ruling Given

ABC may make a deduction under subsection 231(1) for the purpose of determining its net tax for the period in which the receivable was written off its books. The amount of the deduction must be determined in accordance with the formula set out in that provision.