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Proposed Amendments to the Excise Tax Act: 2
- News Release 2002-108 - Draft Amendments -

Explanatory Notes to Draft Amendments

Agents

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177

Section 177 of the Excise Tax Act deals with supplies made by agents, including auctioneers, on behalf of principals. The rules stipulate which party is required to account for and remit tax respecting these supplies.

Subsection 177(1.1) provides for an election in cases where an agent who is a registrant makes a supply (otherwise than by auction) on behalf of a principal who is required to collect tax in respect of the supply. Subsection 177(1.1) allows the agent and the principal to elect jointly to have the agent report and remit the tax as if it were collectible by the agent.

Election for Agent to Account for Tax

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177(1.1)

Paragraph 177(1.1)(a) provides that, if the election under subsection 177(1.1) between a

principal and an agent is made in respect of a supply, the tax collectible in respect of the

supply is to be included in the net tax calculation of the agent and not of the principal.

This paragraph is amended to also provide that sections 222 and 232 apply as if the tax, or any amount charged or collected as or on account of tax, were collectible, charged or collected, as the case may be, by the agent and not by the principal. As a result of the addition of the reference to section 222, amounts collected by the agent as or on account of tax are deemed to be held in trust by the agent for the Crown separate and apart from other funds of the agent. The reference to section 232 ensures that, if the agent has charged to, or collected from, a customer an excess amount of tax, or reduces the consideration and tax collectible in respect of a supply, and provides a refund, credit, or adjustment in accordance with section 232, the agent can claim the deduction under that section.

Existing paragraph 177(1.1)(b) provides that the principal and the agent are jointly and severally liable for all obligations arising upon or as a consequence of the tax on the supply becoming collectible or any failure to account for or remit the tax. Wording changes are made, for clarification purposes only, to reflect the fact that there is no obligation for a supplier to remit tax collectible in respect of a supply per se but rather the remittance obligations under the GST are with respect to a positive amount of net tax, or to any repayment required under section 230.1 of an over-payment of a net tax refund, that is reasonably attributable to the supply.

In addition, paragraph 177(1.1)(b) is amended to provide that the agent and principal are also jointly and severally liable with respect to any claims the agent may make under section 231 or 232 (i.e., in respect of bad debts or price or tax adjustments relating to the supply).

The amendments to paragraph (1.1)(b) ensure that the principal and the agent are jointly and severally liable for all obligations (including any interest or penalty) arising as a consequence of an underpayment of net tax, or an overpayment of a net tax refund, that results from the agent erroneously claiming or over-claiming a deduction under section 231 or 232.

New subparagraphs 177(1.1)(b)(v) and (vi) ensure that, if the agent claims bad debt relief under subsection 231(1) relating to the supply, the agent and principal are jointly and severally liable for a determined amount in respect of the GST on the supply if all or part of the bad debt is subsequently recovered. In the event of a recovery, subsection 231(3) requires the agent to add back to net tax an amount determined by that subsection.

New paragraph 177(1)(c) provides that the agent must include the consideration for the supply in the calculation of the agent’s threshold amounts under subsections 249(1) and (2), which are relevant to the determination of the agent’s reporting periods. Accordingly, the consideration is not included in determining the principal’s threshold amounts under those subsections.

Subsection 177(1.1) is also amended to harmonize it with the civil law applicable in the province of Quebec by adding a reference to a principal and agent being "solidarily" liable. This is equivalent to the common law concept of joint and several liability.

The amendments to paragraph 177(1.1)(a) apply to supplies made after Announcement Date.

The amendments to paragraph 177(1.1)(b) apply, in the case of elections under subsection 177(1.1) made after Announcement Date, to any supply in respect of which the election applies, including supplies that are made before that date if the principal and agent so elect after Announcement Date. In the case of elections made on or before Announcement Date, the only amendments to paragraph 177(1.1)(b) that apply retroactively are those relating to the agent’s claims for bad debt relief. This coincides with the retroactive coming into force of the amendments to the bad debt provisions in section 231, which apply to supplies made after April 23, 1996 and allow an agent to claim any deduction under section 231 relating to those supplies (see commentary on amendments to section 231).

New paragraph 177(1.1)(c) applies to supplies made after Announcement Date.

It should be noted that the rules under new subsection 177(1.11) permitting billing agents to also use the election under subsection 177(1.1) apply only to supplies made after Announcement Date.

Election for Billing Agent and Revocations

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177(1.11) and (1.12)

Subsection 177(1.11) Election for Billing Agent to Account for Tax

New subsection 177(1.11) applies where a supplier engages a registrant to act as a billing agent respecting supplies made by the supplier. The registrant in this case acts as the supplier's agent in charging and collecting consideration and tax respecting the supply, but does not act as the supplier's agent with respect to the making of the supply.

New paragraph 177(1.11)(a) deems the billing agent to also act as agent in making the supply just for the purposes of enabling the supplier and the agent to apply subsection 177(1.1). If all other conditions of subsection (1.1) are met, the supplier and agent may make an election under that subsection. This amendment gives billing agents the same option for accounting for tax as in the case of agents who make supplies on behalf of suppliers.

The deeming rule under paragraph 177(1.11)(a) does not apply for all purposes of Part IX of the Act. However, new paragraph 177(1.11)(b) provides that, in the event that the supplier and the billing agent do make the election under subsection 177(1.1), the agent is deemed to have acted as agent in making the supply on behalf of the supplier for purposes of all provisions that refer to a supply in respect of which such an election has been made. For example, subparagraph (b)(iii) of the description of element A of the net tax formula for charities under subsection 225.1(2) refers to supplies made on behalf of another person for whom the charity acts as agent and in respect of which the charity has made an election under subsection 177(1.1). That element in the formula would therefore also apply where the charity acted only as a billing agent and made the election.

As a result of a principal and their billing agent making the election under subsection 177(1.1) in respect of a supply, the billing agent must report and remit the tax in respect of that supply and is the only person entitled to claim bad debt relief respecting the supply under section 231 (see commentary on amendments to that section). Similarly, if a price or tax adjustment is made under section 232 in respect of the supply, only the billing agent is entitled to the corresponding deduction under section 232.

In addition, the supplier and the billing agent are jointly and severally liable under paragraph 177(1.1)(b) for obligations arising from the requirement to account for or remit net tax attributable to the supply, from the claiming of deductions by the billing agent under section 231 or 232 and from the requirement to account for or remit amounts attributable to the additions to net tax required by subsection 231(3) resulting from a recovery of bad debts in respect of the supply.

Principals and their billing agents may make elections under subsection 177(1.1) only with respect to supplies made after Announcement Date.

Subsection 177(1.12) Joint Revocation

New subsection 177(1.12) provides for the joint revocation of an election made under subsection 177(1.1) by a principal and their agent with respect to any supply.

The revocation must be with respect to a particular supply or supplies that are made on or after the effective date specified in the revocation. The agent and principal can backdate a revocation so as to accommodate, for example, a situation where the parties had originally made the election to have the agent report the tax on the supplies in question but the supplier in fact reported the tax.

If an election is revoked with respect to a supply, the election is deemed never to have been made in respect of that supply. Therefore, the agent also thereby revokes the agent's entitlement to claim bad debt deductions under section 231 and deductions under section 232 with respect to that supply. The principal would instead be so entitled if all the conditions were met by the principal.

New subsection 177(1.12) takes effect on Announcement Date.

Bad Debts - Deduction from Net Tax

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231

Section 231 provides for bad-debt relief when a debt relating to a taxable supply (other than a zero-rated supply) is written off in the supplier's books of accounts.

Bad Debt Deduction

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231(1) and (1.1)

Existing subsection 231(1) provides that only the supplier can claim bad debt relief respecting a taxable supply and only if the supplier reports the tax payable in respect of that supply and establishes that the consideration and tax payable have become in whole or in part a bad debt. Therefore, under the existing legislation, where the supplier and their agent have jointly elected under subsection 177(1.1) to have the agent report the tax payable in respect of a supply made by the supplier, neither the agent nor the supplier can claim bad debt relief in respect of the GST on that supply.

Subsection 231(1) is amended to deal with the case where the joint election under subsection 177(1.1) has been made by the supplier and the agent (see commentary on amendments to subsection 177(1.1)). In this case, the amendments to subsection 231(1) permit an agent who has reported the tax respecting a supply to claim bad debt relief for that supply.

Amended subsection 231(1) repeats the existing condition that it must be established not only that all or part of the debt in respect of the supply has become a bad debt, but also that the supplier has written the bad debt off in its books of account. Amended subsection 231(1) makes it clear that bad debt relief can be claimed if all or any part of the total of the consideration and tax payable respecting a taxable supply becomes a bad debt. If it is only a part of that total that is written off as a bad debt, regardless of whether that part is attributable entirely to tax, entirely to consideration or to a mixture of tax and consideration, a deduction under subsection 231(1) can be claimed equal to a fraction of the amount written off.

The reporting requirements under existing subsection 231(1) are set out in new subsection 231(1.1). The rules are amended to provide that the "reporting entity", as defined in new subsection 231(5), must report the tax. If the election under subsection 177(1.1) has been made, the reporting entity is the agent. If the election under subsection 177(1.1) has not been made, the reporting entity is the supplier.

New subsection 231(1.1) repeats the conditions found in the existing post-amble to subsection 231(1) with the necessary modifications to reflect the fact that either the supplier or an agent of the supplier may be the “reporting entity” that is required to report the tax in respect of a supply in their return. It is the same reporting entity that must also satisfy the requirement to remit any positive amount of net tax reported in that return.

These amendments apply to supplies made after April 23, 1996, the date on which the election under subsection 177(1.1) generally came into effect. It should be noted as well that a special transitional rule is provided under subsection 2(6) of the draft legislation to extend in some circumstances the period allowed for an agent, who has made a supply on behalf of a supplier and who has elected under subsection 177(1.1) with the supplier, to claim a deduction for a bad debt that was written off on or before Announcement Date. This extension of the limitation period recognizes that the existing denial of a bad debt deduction to both the supplier and their agent was an unintended consequence of unrelated amendments that were made to the agency rules in section 177 that generally applied to supplies made after April 23, 1996. The agent may claim the deduction for a debt that was written off on or before Announcement Date within the usual limitation period set out in subsection 231(4) of the Act except that, if that usual period has already expired or ends less than one year from Announcement Date, the transitional rule extends the limitation period so that the agent has a full year from Announcement Date to file a return in which the agent claims the deduction.

Recoveries and Limitations on Claiming Deductions

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231(3) to (5)

Subsection 231(3) Recovery of Bad Debt

Subsection 231(3) deals with the situation where a person has claimed bad debt relief under subsection 231(1) in respect of a debt relating to a taxable supply and all or part of that debt is subsequently recovered. The subsection requires that an amount be added to net tax equal to a fraction of the amount recovered.

The amendments to subsection 231(3) reflect the fact that the supplier who recovers the debt previously written off is not necessarily the same person who claimed the bad debt deduction. The deduction may have been claimed by the supplier’s agent if the supplier and the agent had made an election under subsection 177(1.1) in respect of the supply to which the bad debt relates.

The amendments also clarify that, when there is a recovery of a particular amount at any time, the amount that is included in element A of the formula for determining the addition to net tax for the period is that amount recovered at that point in time. This clarification reflects the fact that partial recoveries may occur at different times, each of which would result in a separate addition under subsection 231(3).

These amendments to subsection 231(3) apply to bad debts relating to supplies made after April 23, 1996.

Subsection 231(4) Limitation Period

Subsection 231(4) sets out the limitation period for claiming bad debt deductions under section 231. Amendments are made to this provision to reflect changes to subsection 231(1) that provide that the “reporting entity” for a supply (as defined in new subsection 231(5)) is the person entitled to claim bad debt relief respecting a bad debt that has been written off in the supplier's books of accounts. The reporting entity is the agent of the supplier where an election under subsection 177(1.1) has been made.

This amendment to subsection 231(4) applies to bad debts relating to supplies made after April 23, 1996. However, the reference to “the supplier” in the context of who writes off the bad debt in their books of account is read as a reference to the person claiming the bad debt deduction in the case of a deduction under former subsection 231(2). That subsection dealt with a case where the purchaser of a debt wrote off the debt in its books of account and was entitled to claim the bad debt deduction.

Subsection 231(5) Meaning of "applicable provincial tax" and "reporting entity"

New subsection 231(5) sets out the definition of "applicable provincial tax" for the purposes of the formulae in amended subsections 231(1) and (3). The meaning of this expression is unchanged from its meaning within existing subsections 231(1) and (3). An "applicable provincial tax" is a tax, duty or fee that is imposed under a provincial act and that is prescribed by the Taxes, Duties and Fees (GST/HST) Regulations. The most common of these provincial taxes are the general sales taxes of the provinces.

New subsection 231(5) also adds the definition of "reporting entity", which defines who (i.e., the supplier or their agent) is required to meet the reporting conditions for claiming a bad debt deduction.

New subsection 231(5) takes effect on April 24, 1996.

Transitional Rule

Subsection 2(6) of the draft legislation extends in certain circumstances the limitation period for an agent to claim a bad debt deduction under section 231 in relation to a supply that the agent accounted for pursuant to an election made under subsection 177(1.1) jointly with the supplier/principal. The extension of the limitation period may apply to supplies made before Announcement Date in respect of which a bad debt was written off on or before Announcement Date. Specifically, the deadline for claiming the deduction is extended to the day that is one year after Announcement Date if the usual four-year limitation period under subsection 231(4) has either already expired by Announcement Date or would expire earlier than one year after that date.

Consequential Amendments to the Streamlined Accounting (GST/HST) Regulations

Calculation of Net Tax under Quick Method

17(1)

Subsection 17(1) of the Streamlined Accounting (GST/HST) Regulations sets out the formula that certain registrants utilize if they elect to use the Quick Method to calculate their net tax under Part IV of the Regulations. Element B of that formula lists amounts that must be included in the net tax calculation. Existing paragraph (b) of element B provides that a registrant must include all amounts that are required to be added to net tax under Division V of Part IX of the Act. Existing paragraph (b) applies only to those supplies that the registrant itself has made.

Paragraph (b) of element B of the formula in subsection 17(1) of the Regulations is amended to also apply to supplies that the registrant did not make but in respect of which the registrant acted as agent and has accounted for tax under section 177 of the Act. As a result, if a registrant has acted as agent and was entitled to claim a bad debt deduction, that registrant is required to include all amounts that may be required to be added to net tax by subsection 231(3) of the Act relating to the recovery of that bad debt.

Element C of the formula in subsection 17(1) of the Regulations lists amounts that may be deducted in calculating net tax under the Quick Method. Existing paragraph (b) of element C allows a registrant to deduct amounts that may be deducted from net tax under Division V of Part IX of the Act. Existing paragraph (b) applies only to those supplies that the registrant itself has made.

Paragraph (b) of element C is amended to also apply to supplies that the registrant did not make but in respect of which the registrant acted as agent and has accounted for under section 177 of the Act. In respect of these supplies, the amendment therefore permits the registrant to reduce its net tax by those amounts that are deductible under subsection 231(1), in respect of bad debt relief, and 232(3), in respect of refunds, credits or adjustments of amounts on account of tax collected from, or charged to, a customer.

These amendments apply to the determination of net tax for reporting periods ending after Announcement Date.

Calculation of Net Tax under Special Quick Method for Public Service Bodies

21(1)

Subsection 21(1) of the Streamlined Accounting (GST/HST) Regulations sets out the formula that a public service body utilizes if it elects to use the Special Quick Method to calculate its net tax under Part V of the Regulations. Element C of the formula in subsection 21(1) lists those amounts that may be deducted in calculating net tax. Existing paragraph (b) of element C permits a public service body to deduct those amounts that may be deducted from net tax under Division V of Part IX of the Act. Existing paragraph (b) applies only to specified supplies that the public service body has itself made.

Paragraph (b) is amended to also apply to specified supplies that the public service body did not make but in respect of which the public service body acted as agent and has accounted for tax under section 177 of the Act. In respect of those supplies, the amendment permits the public service body to reduce its net tax by those amounts that are deductible under subsection 231(1), in respect of bad debt relief, and 232(3), in respect of refunds, credits or adjustments of amounts on account of tax collected from, or charged to, a customer.

This amendment applies to the determination of net tax for reporting periods ending after Announcement Date.

- News Release 2002-108 - Draft Amendments -