Assessments on a Tax-Extra or Tax-Included Basis

From: Canada Revenue Agency

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-118R

DATE OF ISSUE

Issued March 1, 1994
Revised May 5, 1999

SUBJECT

ASSESSMENTS ON A TAX-EXTRA OR TAX-INCLUDED BASIS

LEGISLATIVE REFERENCE(S)

Sections 165, 221, 223, and 296 of the Excise Tax Act

NATIONAL CODING SYSTEM FILE NUMBER(S)

11620-1

EFFECTIVE DATE

March 1, 1994 for GST
April 1, 1997 for HST

TEXT

Issue and Decision:

The issue addressed by this policy statement is whether the Department should assess on a tax-extra or tax-included basis where a registrant fails to collect and account for the GST/HST on taxable supplies, other than zero-rated supplies. The Excise Tax Act (the Act) contemplates the application of the tax based on the value of the consideration for a taxable supply. Consequently, where GST/HST on a taxable supply has not been collected by the supplier as required under subsection 221(1) of the Act and accounted for in the supplier's net tax calculation, tax will be assessed on the value of the consideration for the supply.

Subsection 223(1) of the Act imposes disclosure requirements on a registrant who makes a taxable supply. Essentially, where the tax is charged on a tax-extra basis, the registrant must indicate the total amount of tax payable in respect of the supply. Where the tax is included in the amount charged for the supply, the registrant must indicate that the amount charged includes the tax payable in respect of the supply.

Where there are no contractual or common law restrictions that prevent the issuance of amended or additional invoices, the Department will continue to accept that disclosure of tax can occur after the fact. This position was adopted since subsection 223(1) of the Act is silent on the issue of timing and because many purchasers are agreeable to the extra charge, either because an ITC may be claimed or because they wish to maintain good relations with their supplier.

Determination of Fact

The determination of whether a tax-extra or tax-included assessment should be made is a question of fact to be resolved by the departmental auditor based on the facts and circumstances of the particular situation. Therefore, a decision to make a tax-extra or a tax-included assessment will be made on a case by case basis.

In determining whether a tax-extra or tax-included assessment should be made, such factors as the vendor's invoicing practices, industry practices and supporting documentation (i.e., invoice or sales agreement) will be pertinent.

Tax-extra Assessment

Where a registrant makes a taxable supply and does not account for the GST/HST in its net tax calculation, GST/HST will be assessed based on the value of the consideration for the supply. Therefore, it must be determined if the amount charged by the registrant represents consideration only or consideration and tax. Generally, the amount charged is determined to be the value of the consideration for the supply. As such, the Department will assess the tax based on the amount charged. This is referred to as a tax-extra assessment.

For GST/HST purposes, in arm's length transactions, the value of consideration is normally an amount declared by the supplier (i.e., the price charged by the supplier represents the value of consideration). The Department will generally accept that the amount established by the supplier and reflected in any relevant documentation (i.e., invoice or sales agreement) is the consideration for the supply and that the amount does not include the tax payable in respect of the supply, unless there is evidence to indicate otherwise, such as a court judgement. For example, a court may rule that it was reasonable for the purchaser to believe that the amount charged included the tax and that its obligation to pay tax was met. In such cases, the Department will take the position that the amount charged included the tax payable and assess on a tax-included basis.

Tax-extra assessments may be made in instances where the supplier indicated on the existing invoice or sale documentation or, where applicable, at the place where the supply was made that:

  1. prices shown or the goods/services supplied are GST/HST exempt;
  2. prices shown or the goods/services supplied are zero-rated; or
  3. any additional amounts, such as taxes or duties, that may be payable are the responsibility of either the recipient or the supplier.

Tax-extra assessments may also be made in instances where no disclosure whatsoever was made. For example, a tax-extra assessment would be made where the invoice or agreement is silent with respect to the tax payable and the supplier's records do not suggest that tax was included in the amount charged.

Tax-included Assessment

Where a registrant makes a taxable supply and does not account for the GST/HST in its net tax calculation, tax may be assessed on a tax-included basis if the facts and circumstances of the particular situation suggest that the amount charged by the registrant represented consideration and the applicable GST/HST. For example, if GST at 7% is payable in respect of a supply and it is determined that a tax-included assessment will be made, the GST would be assessed based on 7/107 of the amount charged.

Generally, tax-included assessments may be made in instances where the supplier indicated on the existing invoice or sale documentation or, where applicable, at the place where the supply was made that:

  1. prices shown include all taxes payable by the recipient; or
  2. prices shown or the goods/services supplied are GST/HST-inclusive where applicable.

It must be emphasized that it is always a question of fact whether the amount charged includes the GST/HST. The Department will not automatically assess on a tax-included basis just because a supplier states that the amount included the GST/HST. Information gathered from the supplier's records such as, normal profit margins may be used to determine the actual value of the consideration for a supply.

Tax-included assessments may also be made in instances where the supplier makes no disclosure whatsoever or makes an error in the disclosure. For example, where the supplier erroneously indicated on the invoice that the goods supplied were GST/HST exempt and the normal profit margins were respected in establishing a tax-inclusive price, a tax-included assessment may be made.

SAMPLE RULING #1

Statement of Facts

  1. The registrant's net tax calculation did not account for the GST/HST collectible on supplies of a particular line of vitamins to individual consumers.
  2. The registrant normally charges the GST/HST on a tax-included basis.
  3. The invoices issued for the vitamins did not indicate whether the GST/HST payable was included in the amounts charged.
  4. The registrant posted signs within the place of business to indicate that prices include the GST/HST where applicable.
  5. The registrant indicated that the price established and charged for the vitamins included the GST/HST.
  6. The Department has accepted the registrant's representation in lieu of performing an in-depth analysis of the registrant's pricing practices.

Ruling Given

The Department will assess the tax on a tax-included basis, plus any applicable penalty and interest.

SAMPLE RULING #2

Statement of Facts

  1. The registrant's net tax calculation did not account for the GST/HST collectible on supplies of a particular line of vitamins to individual consumers.
  2. The registrant normally charges the GST/HST on a tax-extra basis.
  3. The invoices issued for the vitamins did not indicate clearly the GST/HST payable for the supplies.
  4. The registrant has not posted signs within the place of business to indicate that the GST/HST will be added to prices, where applicable.
  5. The registrant indicated that the price established and charged for the vitamins did not account for the GST/HST as it was believed that the supplies were zero-rated.

Ruling Given

The Department will assess the tax on a tax-extra basis, plus any applicable penalty and interest.

SAMPLE RULING #3

Statement of Facts

  1. The registrant's net tax calculation did not account for the GST/HST collectible on supplies of a particular line of vitamins to individual consumers.
  2. The registrant normally charges the GST/HST on a tax-included basis.
  3. The invoices issued for the vitamins did not indicate whether the GST/HST payable was included in the amounts charged.
  4. The registrant has posted signs within the place of business to indicate that prices include the GST/HST where applicable.
  5. The registrant indicated that the price established and charged for the vitamins included the GST/HST.
  6. The Department has performed a cost analysis which demonstrates that the normal mark-up used by the registrant in pricing vitamins would not be met if a tax-included assessment was raised. In addition, the registrant could not justify a variance from the normal mark-up.

Ruling Given

The Department will assess the tax on a tax-extra basis, plus any applicable penalty and interest.

SAMPLE RULING #4

Statement of Facts

  1. The registrant's net tax calculation did not account for the GST/HST collectible on the supply of a service to a municipality on the assumption that the supply was exempt.
  2. The registrant normally enters into agreements for the supply of these services on a tax-included basis.
  3. The agreement entered into for the supply does not indicate clearly the GST/HST payable.
  4. The agreement specifically states that the amount charged includes all applicable taxes payable by the recipient.
  5. The registrant and the municipality have agreed to increase the amount payable identified in the agreement to account for the GST/HST and the agreement was amended to reflect this fact.

Ruling Given

The Department will raise a tax-included assessment based on the amount charged as adjusted by the registrant and the municipality, plus any applicable penalty and interest.

Rationale

The original agreement specified the amount payable, however, the agreement was amended to increase that amount. Where there are no contractual or common law restrictions that prevent the parties from amending the agreement, the Department will accept the amended agreement and the assessment will be made accordingly. Although a tax-extra assessment based on the original amount in the agreement would have provided the same result as a tax-included assessment of the adjusted amount, the facts of the particular situation do not support a tax-extra assessment. However, if the agreement was amended to disclose that the GST/HST was extra, a tax-extra assessment would have been made.

SAMPLE RULING #5

Statement of Facts

  1. The registrant's net tax calculation did not account for the GST/HST collectible on the value of consideration for the supply of a service to a municipality on the assumption that the supply was exempt.
  2. The registrant enters into agreements for the supply of these services on either a tax-included or tax-extra basis depending on the circumstances of the particular transaction.
  3. The agreement entered into for the particular supply does not indicate clearly the GST/HST payable and it could not be construed that the vendor assumed liability for the tax.
  4. The agreement does not mention anything about taxes.
  5. The registrant cannot get the municipality to agree to amend the agreement to reflect the application of the GST/HST.

Ruling Given

The Department will assess the tax on a tax-extra basis, plus any applicable penalty and interest.

Rationale

The facts in this particular situation support a tax-extra assessment.

If the supplier subsequently meets the disclosure requirements under subsection 223(1) of the Act through the issuance of an invoice and the amount assessed has been remitted, the supplier may attempt to sue the purchaser for the unpaid tax pursuant to section 224 of the Act.

Where applicable, the Department will reassess the supplier based on the court judgement or any additional facts revealed during the legal proceedings. For example, where the court rules that it was reasonable, given the facts of the particular case, for the purchaser to believe that the amount charged in the original agreement included the tax and that the purchaser's obligation to pay tax was met, a tax-included re-assessment may be made.

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