Many distributors and manufacturers provide their customers or third-party purchasers rebates on their products or services. When a GST/HST registrant pays a rebate with respect to services or products on which GST/HST is applied, the manufacturer or distributor may be able to claim a portion from the rebate as input tax credit (ITC). For example, a third-party purchaser paid $1000 plus GST for an iPhone, and the manufacturer provided a rebate of $105 and made it clear that the rebated included the GST amount. In that case, the manufacturer would be entitled to claim $5 for an input tax credit.
The Canada Revenue Agency requires manufacturers to provide written indication to claim ITC
Under section 181.1 of the Excise Tax Act, a registrant may claim an input tax credit, where
- The registrant made a taxable supply (other than a zero-rated supply) of a property or service;
- A particular person acquired the property or service from the registrant or someone else,
- The registrant has paid a rebate in respect of the supply, and
- With the rebate, the registrant provides written indication that part of the rebate is on account of tax.
In general, the Canada Revenue Agency (CRA) takes the position that written indication must be provided that a portion of the rebate is an amount on account of tax. This requirement would be met if the manufacturer’s invoice specifies that. However, if a manufacturer’s invoice does not mention such information and there’s no other practical methods to provide this indication, the CRA will likely deny the ITC claim from the manufacturer.
Case law requires the written indication must be more than a simple opportunity to figure out the GST amount
The seminal case regarding s.181.1 of the Excise Tax Act is Tele-Mobile Company Partnership v The Queen, 2013 FCA 149. In this case, Telus provided its customers with a contract term discount when they purchased a new phone or switched from a month-to-month plan to a longer-term contract. The discount was applied to the phone’s cost, but Telus also provided another billing credit when its customers could not receive a point-of-sale discount. Telus then claimed ITC on the discount applied to a phone purchase and the billing credit. The CRA had no issue with the ITC claim on phone purchases but denied the ITC on the billing credits. The experienced Canadian tax litigation lawyer acting for Telus then appealed to the Tax Court of Canada.
The Tax Court judge reviewed the evidence and found that a recipient of the invoice from Telus could interpret it as Telus may have mistakenly charged $5 for GST. Therefore, the judge concluded that Telus failed to meet the written indication standard:
- The Telus invoice is confusing. A “written indication” should be clear. It is not – to anyone. It invites the recipient to assume the credit has been offset against the price, yet then goes on to calculate the GST as though the credit were applied after the GST attached to the price.
Telus then appealed to the Federal Court of Appeal, but Justice Mainville sided with the Tax Court. Although Telus provided an opportunity for its customers to calculate how the GST amount on the rebate was determined, the invoices issued by Telus needed to be clearer and the indication needed to be sufficiently clear. Justice Mainville also clarified that the written indication must be more than a simple opportunity for the customer to calculate and figure out how Telus treated the GST aspects of the rebate. In order for Telus to claim the ITC, it must either break down the GST component of the rebate and indicated in writing the resulting amount to the customer, or alternatively, indicate in writing to the customer that a portion of the rebate is an amount on account of tax.
Pro Tax Tip from Canadian tax lawyers – manufacturers should provide sufficiently clear invoices
Although Justice Mainville clarified a specific breakdown between price and GST was not necessary, the component of the GST rebate must be indicated in writing in a sufficiently clear manner. Manufacturers providing such rebates should adopt an invoice format that sets out the GST rebate amount.
FAQ:
What is input tax credit?
As a GST/HST registrant, you recover the GST/HST paid or payable on your purchases and expenses related to your commercial activities by claiming input tax credits (ITCs).
You may be eligible to claim ITCs only to the extent that your purchases and expenses are for consumption, use, or supply in your commercial activities.
To claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of your business.
When can a registrant claim ITC on rebates issued to third-party customers?
Under section 181.1 of the Excise Tax Act, a registrant may claim an ITC where
- The registrant made taxable supply (other than a zero-rated supply) of a property of a service,
- A particular person acquired the property or service from the registrant or someone else,
- The registrant has paid a rebate in respect of the supply, and
- With the rebate, the registrant provides written indication that part of the rebate is on account of tax.
Disclaimer
Only general information is provided in this article. Only as of the publishing date is it current. It hasn’t been updated, therefore it might no longer be relevant. It cannot or ought not to be relied upon because it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should contact a Toronto tax lawyer if you have specific legal inquiries.