Manufacturers' Rebates (GST 300-7-6)
Notice to the reader:
Please note that the following GST Memorandum, although correct at the time of issue, has not been updated to reflect any subsequent legislative changes since the date of issue. As a result, some of the technical information this memorandum contains may no longer be valid. Please contact your GST/HST Rulings Centre for assistance.
GST memoranda 300-7-6
Ottawa, February 13, 1991
TAX ON SUPPLIES
VALUE OF SUPPLY
This memorandum in the "VALUE OF SUPPLY" sub-series explains for purposes of the Goods and Services Tax (GST) the value of rebates offered by suppliers in order to calculate the GST payable on consideration for supplies.
Excise Tax Act sections 123, 154 and 232, subsections 165(1) and 181(2)
The following definitions have either been taken from the Excise Tax Act as amended by S.C. 1990, c. 45 (Bill C-62) or represent departmental interpretations of terms relevant to the administration of that Act.
"Act" means the Excise Tax Act;
"commercial activity" means:
(a) any business carried on by a person;
(b) any adventure or concern of a person in the nature of trade; and
(c) any activity engaged in by a person that involves the supply of real property or of a right or interest in respect of real property by that person;
but does not include:
(d) any activity engaged in by a person to the extent that it involves the making of an exempt supply by the person;
(e) any activity engaged in by an individual without a reasonable expectation of profit; or
(f) the performance of any duty or activity in relation to an office or employment;
"consideration" may be money, a thing, a service, forbearance in the exercise of a right or anything else which induces the supplier to make the supply. Where consideration is monetary, the amount of the money will be used to calculate the tax. Where the consideration is non-monetary, the fair market value of the consideration at the time the supply was made will be used to calculate the tax;
"exclusive", in respect of the consumption, use or supply of property or a service, means all or substantially all of the consumption, use or supply of the property or service and "all or substantially all", in respect of the consumption, use or supply of property or a service by a financial institution, means all of the consumption, use or supply of the property or service;
"exempt supply" means a supply included in Schedule V to the Excise Tax Act;
"input tax credit" means a credit claimed by a registrant for the Goods and Services Tax paid or payable on any property or services consumed, used or supplied in the course of a commercial activity;
"person" means an individual, partnership, corporation, trust or estate, or a body that is a society, union, club, association, commission or other organization of any kind;
"property" means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money;
"recipient", in respect of a supply, means the person who pays or agrees to pay consideration for the supply or, if no consideration is or is to be paid for the supply, the person to whom the supply is made;
"registrant" means a person who is registered, or who is required to apply to be registered, under sections 240 and 241 of the Excise Tax Act;
"service" means anything other than:
(b) money, and
(c) anything that is supplied to an employer by a person who is or agrees to become an officer or employee of the employer in the course of or in relation to the office or employment of that person;
"small supplier", at any time, means a person who is at that time a small supplier under section 148 of the Excise Tax Act;
"supplier", in respect of a supply, means the person making the supply;
"supply" means, subject to sections 133 and 134 of the Act, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;
"tax" means the Goods and Services Tax payable under Part IX of the Excise Tax Act;
"taxable supply" means a supply that is made in the course of a commercial activity, but does not include an exempt supply;
"zero-rated supply" means a supply included in Schedule VI to the Excise Tax Act.
VALUE OF SUPPLY
1. In accordance with subsection 165(1) of the Act, every recipient of a taxable supply, other than a zero-rated supply, made in Canada is required to pay tax in respect of the supply equal to seven per cent of the value of the consideration for the supply.
2. Under Part IX of the Act, all supplies are either taxable supplies or exempt supplies. Exempt supplies are those supplies listed in Schedule V to the Act. Taxable supplies are subject to tax at either seven per cent or zero per cent (zero-rated). Zero-rated supplies are those supplies listed in Schedule VI to the Act.
3. Generally, the supplier (other than a small supplier) is required to collect, as agent of Her Majesty in right of Canada, the tax payable by the recipient in respect of the supply. There are some cases, however, where the supplier is not required to collect the tax payable in respect of a supply (e.g., in respect of a sale of real property to a recipient who is registered and the supply is not a supply of a residential complex made to an individual).
4. The tax payable or collectible in respect of a supply will be calculated on the value of the consideration for the supply.
5. In general, consideration is the amount, net of GST or any tax prescribed under section 154 of the Act, that is paid or payable to a supplier in respect of the supply. Where GST is included in the amount that is paid or payable in respect of a supply, the consideration fraction of 100/107ths is used to calculate the value of the consideration for the supply.
6. For the purposes of this memorandum, a supplier is the person who pays a rebate in respect of a taxable supply (other than a zero-rated supply) of property or service.
7. For the purposes of this memorandum, a rebate means a partial refund of the consideration paid for a supply.
8. Paragraph 181(2)(a) of the Act applies where a supplier pays a rebate to a particular person in respect of a supply of property or service, taxable at the rate of seven per cent, made by the supplier and acquired by the particular person whether from the supplier or from another person. For example, this provision will apply where a supplier (e.g., a manufacturer or other third party) pays a rebate to a person where that person acquires the supply directly from the supplier or from another person such as a retailer.
9. Where a rebate is paid in these circumstances, the supplier is treated as having received from the particular person a supply of a service, taxable at the rate of seven per cent, for use exclusively in a commercial activity of the supplier and as having paid tax in respect of that supply.
10. A supplier who has paid a rebate is deemed to have paid tax in respect of the deemed supply of a service equal to the tax fraction (i.e., 7/107ths) of the rebate at the time the rebate was paid to the recipient. The rebate is treated as a tax- included amount and a registered supplier is eligible to claim an input tax credit for the tax deemed to be paid in respect of the deemed supply of service. For example, a manufacturer pays a rebate of $1,070 to a person who has purchased its product from a retailer. The manufacturer is eligible to claim an input tax credit of $70 ($1,070 x 7/107) for the reporting period in which the rebate is paid.
11. The provisions under subsection 181(2) of the Act apply only in respect of rebates related to taxable supplies other than zero-rated supplies, and where a credit note has not been issued pursuant to subsection 232(3) of the Act. Section 232 of the Act outlines the rules relating to credit notes in respect of the adjustment, refund or credit of tax.
12. Additional information on tax adjustments and credit notes may be found in GST MEMORANDUM 500-2-4, "CALCULATION OF LIABILITY", and GST MEMORANDUM 300-7-19, "CREDIT NOTES AND PRICE REDUCTIONS".
13. The tax payable in respect of a supply is calculated on the full price of the taxable goods or services, without reflecting the rebate. Thus, any rebate that is received, whether at the time of sale or at any time after the sale, can only be applied to the total purchase price including the tax. For example, a consumer purchases a car from a car dealer for $14,000 plus $980 GST for a total cost of $14,980. The manufacturer of the car provides for a rebate of $1,070 in respect of the purchase. The car dealer applies the rebate against the total GST-included cost so that the consumer pays $13,910 ($14,980 - $1,070).
14. If the person receiving the rebate is a registrant who is entitled to claim an input tax credit, or "rebate" of tax, in respect of the supply to which the rebate relates, that person is deemed to have made a taxable supply of a service and to have collected tax in respect of that supply. The tax deemed to have been collected and that must be accounted for by the person is based on the following formula:
A x B/C x D
A is the tax fraction (7/107ths),
B is the input tax credit of, or the rebate of tax to, the particular person in respect of the acquisition of the property or service,
C is the total tax payable by the particular person in respect of the acquisition of the property or service by the particular person, and
D is the amount of the rebate paid to the particular person by the supplier;
(that is, Tax = 7/107ths x % of ITC or Tax Rebate Claimable on the Taxable Supply x Supplier's Rebate).
15. Rebates may be received at the time of sale or some time after the sale. The timing of the rebate has implications for all parties to the transaction. These implications are discussed in the following paragraphs of this memorandum.
Time of Sale Rebates
16. Some rebates may be applied by the person receiving the rebate to the consideration paid or payable for the supply at the time the goods or service is purchased. In this case, the person receiving the rebate will be charged tax on the full consideration for the supply without taking the rebate into account. The rebate is subsequently applied to reduce the total amount paid or payable in respect of the supply (i.e., the consideration plus the tax).
17. For example, a computer retailer sells a computer to a non- registered customer for $6,000 plus $420 GST ($6,000 x 7%). The retailer informs the customer that the manufacturer is offering a rebate of $535 on the computer which is applied to its total GST- included price such that the consumer owes the retailer $5,885 ($6,420 - $535). The computer retailer collects $420 GST from the purchaser. The manufacturer is eligible for an input tax credit for $35 ($535 x 7/107) in respect of the rebate given to the purchaser. Although the purchaser is charged tax on the full amount, the rebate includes an amount in respect of the GST such that the net effect is that the purchaser pays an amount which is equivalent to tax being charged on the price less the rebate exclusive of tax [($6,000 - $500) x 1.07 = $5,885].
18. If the recipient of the rebate is also a registrant, an input tax credit may be claimed for the GST paid on eligible business purchases. For example, a registrant pays $1,000 (GST- included) to purchase photocopy paper from the person who provides the office supplies. The manufacturer of that paper is giving a $50 rebate to persons who purchase at least $1,000 worth of photocopy paper. However, the registrant is only going to use half of the paper in his commercial activities, while the rest is for personal use. The registrant will be entitled to claim an input tax credit of 50 per cent of the tax paid on the purchase of the photocopy paper (i.e., $1,000 x 7/107 x 50% = $32.71). However, the registrant must also remit the $1.64 ($50 x 7/107 x 50%) considered to be tax collected in respect of the deemed taxable supply of a service to the manufacturer.
After Sale Rebates
19. Rebates that are offered some time after the sale often require the recipient of the supply to meet certain conditions in order to receive the rebate. Instructions on how to receive the rebate generally accompany the goods or services purchased and may include an application form to be filled out and returned to the supplier.
20. Under this type of rebate method, the recipient of the supply continues to pay tax on the full purchase price. If the supplier then pays the rebate to the recipient of the supply, the supplier will be able to claim an input tax credit equal to 7/107ths of the rebate. If the recipient of the rebate is a registrant, then the registrant will account for the tax based on the formula described in paragraph 14 of this memorandum.
21. For example, a non-registered customer purchases a package of batteries from a hardware store for $5 plus $0.35 GST ($5 x 7%). The purchaser opens the package of batteries and finds a form to fill out and mail to the manufacturer for a $2 rebate. The manufacturer receives the rebate application and sends the purchaser a cheque for $2. In this case, the hardware store collects $0.35 GST ($5 x 7%) from the purchaser. The manufacturer is eligible to claim an input tax credit of $0.13 ($2 x 7/107) in respect of the rebate paid to the purchaser. Since the purchaser is a non-registrant, the purchaser does not have to remit the GST on the deemed supply of a taxable service to the manufacturer.
22. Additional information on input tax credits may be found in GST MEMORANDUM 400-1, "GENERAL RULES".
NOTE: This memorandum is not a legal document. It contains general information and is provided for convenience and guidance in applying the Excise Tax Act and Regulations. If interpretation problems occur, please refer to the legislation or contact the nearest Revenue Canada Excise office.
OFFICE OF RESPONSIBILITY:
Policy and Legislation
Excise Tax Act as amended by Bill C-62
SUPERSEDES GST MEMORANDUM:
SERVICES PROVIDED BY THE DEPARTMENT ARE AVAILABLE IN BOTH OFFICIAL LANGUAGES.
THIS MEMORANDUM IS ISSUED BY TECHNICAL INFORMATION, EXCISE BRANCH UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE, CUSTOMS AND EXCISE.
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