Early/Late Payments (GST 300-7-8)
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 300-7-8
Ottawa, February 11, 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) how early and late payments should be valued in order to calculate the GST payable.
Excise Tax Act sections 123, 154 and 161, subsection 165(1)
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;
"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;
"invoice" includes a statement of account, a bill and any other similar record regardless of its form or characteristics and a cash register slip or receipt;
"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;
"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;
"tangible personal property" includes all objects or things that may be touched, felt or possessed, and that are movable at the time the supply is made, other than money and real property;
"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.
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 100/107 is used to calculate the value of the consideration for the supply.
6. A supplier of tangible personal property (e.g., goods) or services may offer his/her customers a discount for early payment of an invoiced amount. Conversely, a supplier may impose a penalty if payment of an invoiced amount is made late.
Discount for Early Payment
7. Where the value of the consideration for a supply shown on an invoice is reduced if the consideration for the supply is paid within a time period specified on the invoice, the reduction is generally referred to as a "discount for early payment".
8. Where an invoice requires payment for a supply of tangible personal property or service and there is an offer of a discount for early payment, section 161 of the Act provides that the consideration due is deemed to be the amount of the consideration shown on the invoice. The tax is payable on the full invoiced amount, regardless of whether or not the customer subsequently takes advantage of the discount and pays less than the invoiced amount.
9. An exception to this general treatment occurs where the amount invoiced to the customer is already net of the early payment discount. In this situation the tax is payable on the invoiced amount which is the reduced amount.
10. The following is an example of how the general early payment discount would work. A supplier invoices a customer for $50 and on the invoice the supplier wrote "Take four per cent off the price shown if payment is made within 30 days of purchase". Tax is payable on $50 even if the customer took advantage of the offer and only paid $48.
11. To illustrate the exception to the general rule, a customer receives an invoice with instruction to pay $108 if the payment is made by March 23, or to pay $118 if payment is made after March 23. The GST would be payable on the reduced invoiced amount of $108 even if payment is made after the March 23 due date.
Penalty for Late Payment
12. A penalty for late payment occurs where a supplier of tangible personal property or services charges the recipient of the supply an additional amount if payment for the supply is not made within a reasonable period of time specified on the invoice.
13. Where consideration is payable pursuant to an invoice and the invoice includes a clause which stipulates that an additional amount will be charged if payment is not received within a reasonable period specified on the invoice, then pursuant to section 161 of the Act, the consideration due is deemed to be the amount of the consideration for the supply shown on the invoice. The tax will be payable on the value of the consideration shown on the invoice whether or not the penalty is imposed for late payment.
14. For example, a customer receives an invoice for $200, and on the invoice the supplier has included the clause, "If payment is not made within 30 days of purchase, two per cent of the amount shown on this invoice will be added for each 30 days this invoice is outstanding". Tax will be payable on the $200 invoiced even if the customer paid the supplier 60 days late and eventually paid $208.
15. Situations may arise where the consideration shown on an invoice includes an amount to compensate the supplier for payments that are not received on time. In this case, tax will be payable on the invoiced amount which includes the penalty and section 161 of the Act would not apply. For example, if a customer receives an original invoice for $100 with notification that this amount includes a $5 penalty, the tax would be payable on $100.
16. Additional information on price adjustments may be found in GST MEMORANDUM 300-7-19, "PRICE REDUCTIONS AND CREDIT NOTES".
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, 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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