31 August 2007 GST/HST Interpretation 92770 - TIB B-032R Registered Pension Plans

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a debit note which has been cancelled in its entirety.

All legislative references are to the Excise Tax Act (ETA) and the regulations there under, unless otherwise specified.

You have provided us with the following facts in both your current request as well as in a previous letter dated XXXXX.

1. ACo is registered for GST and supplies goods subject to 6% GST. ACo sells goods to numerous customers and collects the applicable GST. BCo is also registered for GST. Both ACo and BCo are monthly filers.

2. ACo sells $XXXXX worth of goods to BCo, charging a total of $XXXXX ($XXXXX plus $XXXXX GST). BCo pays ACo in full. There is a problem with the goods, and BCo later returns the goods to ACo under four different scenarios.

i) Situation 1: ACo pays a refund to BCo for the full $XXXXX. ACo issues a credit note to BCo for $XXXXX in recognition of the refund payment.

ii) Situation 2: BCo is indebted to ACo for $XXXXX in respect of other purchases and transactions at the time the goods are returned. ACo credits BCo with $XXXXX towards payment of BCo's $XXXXX existing debt to ACo. As a result, BCo's debt to ACo is reduced by $XXXXX to $XXXXX. ACo issues a credit note to BCo for $XXXXX in recognition of the credit.

iii) Situation 3: BCo is not indebted to ACo at the time the goods are returned. However, ACo issues a "credit note" to BCo for $XXXXX to acknowledge that the goods have been returned, and that ACo owes $XXXXX to BCo. There is no certainty that BCo will ever place any further orders or make any further purchases from ACo. If BCo does place an order in the near future, ACo will apply its $XXXXX indebtedness against the purchase price of the goods. If BCo does not make a purchase from ACo within some unspecified period of time (say 4 months), the parties will require ACo to issue a refund cheque for the $XXXXX amount owing to BCo.

iv) Situation 4: Same as Situation 3, except BCo issues a "debit note" to ACo for $XXXXX to acknowledge that the goods have been returned and that ACo owes $XXXXX to BCo.

You have provided us your views on the above four situations as follows:

Situation 1: The prerequisites to ss. 232(2) have been met, such that ss. 232(2) applies. That is, provided the credit note issued by ACo complies with paragraph 232(3)(a), ACo may deduct $XXXXX deduction in calculating its net tax, and BCo is required to add the $XXXXX to its net tax for their respective reporting periods in which the credit note is issued and received, respectively.

Situation 2: The prerequisites to ss. 232(2) have been met, such that ss. 232(2) applies. That is, provided the credit note issued by ACo complies with paragraph 232(3)(a), ACo may deduct $XXXXX in calculating its net tax. BCo is required to add $XXXXX to its net tax, for the respective reporting periods in which the credit note is issued and received.

Situation 3: The prerequisites to ss. 232(2) are not met unless and until such future time that ACo either (i) actually refunds the $XXXXX owing to BCo, or (ii) BCo becomes indebted to ACo, and ACo applies the $XXXXX owing to BCo (i.e. for the goods returned) in payment of BCo's indebtedness to ACo. Accordingly, ss. 232(3) does not potentially apply until such future time.

Situation 4: The same as Situation 3.

Interpretation Requested

This question relates to situation 3 and 4, stated above.

You would like to know whether a debit note that was issued could be cancelled in its entirety therefore adjusting any related tax consequences that initially occurred upon its issuance as it relates to section 232 of the ETA. You state that GST was remitted upon issuance of the debit note. If the debit note is subsequently cancelled, is it allowable to recover the tax that was remitted. To summarize the chain of events, relating to Situation 4 of the request letter, a debit note was issued to the vendor ACo by the purchaser of the taxable goods BCo. However for whatever reason, it is a fact that BCo is not able to have the debit note satisfied by ACo. The debit note should not have been issued had BCo known that ACo was not able to honour it either by a refund cheque or deduction from amounts owing.

Interpretation Given

As explained in our letter XXXXX, section 232 of the ETA permits an adjustment, refund or credit of the GST in two situations: where an excess amount of tax has been charged or collected; or where consideration for a supply is reduced at some time after the tax has been charged or collected, and the supplier adjusts, refunds or credits the tax charged on the original consideration.

The rules relating to refunds or adjustments of tax are set out in subsection 232(3) to allow not only credit notes issued by suppliers, but also debit notes issued by recipients, to be used to document the tax adjustment in prescribed form. The only prerequisite pursuant to paragraphs 232(2)(a) and (b) is that tax has been either charged or collected.

Subsection 123(1) of the ETA defines: "credit notes" and "debit notes" as follows:

"credit note" means a credit note issued under subsection 232(3);

"debit note" means a debit note issued under subsection 232(3);

Both the supplier and the recipient will have met their obligation by issuing the credit/debit note pursuant to the ETA, if all the requirements under SOR/91-44 Credit Note and Debit Note Information (GST/HST) Regulations have been met.

The ETA requires a credit/debit note in prescribed form per paragraph 232(3)(a) for documentary purposes where goods have been returned as described in situation 3 and 4. Where the supplier has reduced the consideration for a supply and adjusts, refunds or credits the tax charged or collected on the reduced consideration, paragraph 232(3)(a) of the ETA requires either a credit note to be issued by the supplier or a debit note to be issued by the recipient containing prescribed information for documentary purposes. In Scenario 4, if the supplier has reduced the consideration for the returned goods and the recipient has issued a debit note containing the prescribed information, both the supplier and recipient must account for the tax contained as part of the prescribed information on the debit note in their respective reporting periods in which the debit note was issued and received.

Under the rules set out in subsection 232(3) of the ETA, it would not be allowable to recover tax that was remitted if a debit note was cancelled.

If you require clarification with respect to any of the issues discussed in this letter, please call Michèle Lacasse, Officer, directly at (613) 954-9699.

Yours truly,

Owen Newell
Manager
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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