The Canada Revenue Agency Takes the Position that a Deposit is Not Consideration
Based on the current Canada Revenue Agency (CRA) position on deposits, a vendor/purchaser may not be able to get around the harmonized sales tax (HST) transition rules by having a client/customer pre-pay a deposit on April 30 or before. The CRA's position (following statutory provisions in the GST Legislation) is that a deposit is not treated as a payment for a supply until the supplier applies it against the consideration for that supply. For example, if a person pays a deposit of $100 in April 2010 but the consideration for a taxable supply of property/a service becomes due (and the deposit is applied) on or after July 1, the $100 deposit and the balance of the consideration will be subject to HST.
The relevant statutory provision is subsection 168(9) of the Excise Tax Act (Canada), which provides:
For the purposes of [the rules on when tax is payable], a deposit (other than a deposit in respect of a covering or container ...), whether refundable or not, given in respect of a supply shall not be considered as consideration paid for the supply unless and until the supplier applies the deposit as consideration for the supply."
This provision does not leave much discretion to the CRA auditors. I can look into my crystal ball and hear them now quoting this section after HST implementation and saying that they have no choice as the Act mandates them to issue assessments in respect of deposits. Without a legal clarification or an administrative statement, there is assessment risk - real assessment risk.
The reason for this rule is that until the property or service is actually supplied, it is not known what was provided and whether it was provided. It is possible that a service/good is never be provided and, therefore, the deposit would be returned. It is possible that an exempt or zero-rated service would be provided and, therefore, no GST/HST would be payable.
The characterization as a refundable deposit is the problem. The same problem exists relating to retainers and other forms of deposit that are money on account and not consideration for property or services.
Please be careful to characterize pre-payments as pre-payments. Otherwise, a CRA auditor may take the position in the future that HST was payable, collectible and/or remittable on amounts paid before the May 1, 2010 transition rule deadline.
A little guidance is provided in CRA New Memorandum Series 19.1 Real Property and GST/HST. For clarification, the problem is NOT restricted to real property - this is just a policy to read. The CRA has not issued a policy statement on deposits.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
