[urtaxwiz2]

Does anyone have experience with retailers selling calling cards. I have a client who was charging GST on sales but lost business to competitors who do not. Now he is selling the cards at the stated value. I have advised him he is still liable for the sales tax as part of the selling price. His margin on these cards is almost nil. Any feed back would be welcome.

Thanks

[Gordon Wiber]

An amount paid for a prepaid long distance telephone card is an amount paid for a supply of a “telecommunication service”, as defined in paragraph (a) of the definition of a subsection 123(1) "telecommunication service" of the ETA, that is to be rendered when the card is used by the consumer.

When looking at place of supply rules, the taxpayer must first determine whether the telecommunication service is being provided in Canada. Paragraph 142.1(2)(B) of ETA provides that a telecommunication service is considered to be supplied in Canada when the telecommunication is both emitted and received in Canada or is either emitted or received in Canada and the billing location is in Canada.

The CRA's administrative policy, known informally as the “two out of three” rule. The determination of place of supply is relatively simple. One must examine the following three items:
• transmission of the telecommunication (e.g., where a phone call is placed from)
• reception of the telecommunication (e.g., where a phone call is placed to)
• billing for the telecommunication.

If two out of three are in Canada, then the supply is made in Canada, and will normally be taxable (unless zero-rated under another provision such as Schedule VI, Part V, section 22.1).

However - to complicate matters consider this - certain Bell/Telus cards use a microchip rather than requiring the user to dial a 1-800 number. The card has “electronic cash” stored on the card. This card is not a calling card but is a reusable cash card that may be used to place calls in pay phones. When the card is used in the pay-phone network operated by Bell/Telus, the GST is calculated at time of usage, rather than at time of sale of the card. The GST is based on the 2-out-of-3 rule in section 142.1: the place of initiation of a call, the destination and the “billing location”.

Other third-party cards produced by a host of small telecommunications companies, can be used anywhere in Canada by dialing a 1-800 number. The amount prepaid is converted into units permitting the user to make calls. For these cards, the GST applies at time of sale of the card.

Hmm maybe your client should consider selling cheap cell phones instead.

Gord

[urtaxwiz2]

Thank you for that detailed reply I appreciate the information.

[Nauman]

Hi Gord:

We are about to start a telecommunications service in Canada that includes selling of Calling Cards as payment collection methods.
The way the billing system works is that revenue is recognized when actual calls are made and not at the time of sale of calling cards. Therefore we intend to pay GST when actual calls are made rather than when the calling card is initially sold.

Please let me know how to do it and is it allowed under the Canadian GST system?

Nauman.
COO
BeyondPhone.com

[Joe]

Nauman, on Jun 1 2007, 11:01 AM, said:

is it allowed under the Canadian GST system?

"We are about to start a telecommunications service in Canada "
Has your Corporation in Toronto retained a Designated Professional Accountant?

You are surely not suggesting that you are undertaking this without one?
If you have one, surely they have had some input into your operations?

Not to sound snarky, but if you are relying only on piecemeal Forum comments there could be a whole lot of trouble on the horizon...

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[Bilalkhan]

Here is one issue. If telecommunication services starts when the card is being used and the rule for two out of three can be applied for supply of telecommunication services. I wanted know when the supply should be taxed. Distributor will be the one selling cards on behalf of the Company and telecomunication services starts when the card is used :mellow: . After all in the end it is Company which is going to offer services not retailer.

Its a bit confusing please comment.

[Nauman]

Has your Corporation in Toronto retained a Designated Professional Accountant?

I have been to not one but three professional accountants on this issue. They do not seem to have the right solution for the problem. I also asked CRA but they do not seem to have a ruling on this as yet.

Let me restate the problem:

When a Telecommunications Service Provider sells a calling card, they usually book it as Sales which is treated as revenue. Since the cost of sales will not come weeks or months later, the balance sheet shows an over stated profit by the amount of cards in the market.

This is a gross misreporting of facts that has caused lots of problems in the telecommunications industry already.

This is because they treat sales of calling card as realized income although it is as yet unearned income. The income gets 'earned' only when the service is utilized i.e. a call is made. That is the time when it should be moved from unearned to earned income and the cost of sales should be booked at the same time to show the correct profit earned.

To correct the over statement of profits, a crude way to add prudence is to create an 'estimated reserve' at the time of sales of calling cards to the retailer for cost of sales which are going to be incurred weeks or months later. Again this is just an 'estimated' method that can never get exact and is always backwards looking in a market which is very quickly changing.

In my opinion the correct accounting is to book the sales of calling cards as 'unearned income' and only move them to realized income when the service is provided and the cost of sales is known. That is the time when GST should be accrued and paid as well.

Plus as Bilal has mentioned the two out of three rule can only be ascertained at the time of use of service and not before.

The question is the same. How to handle GST at the time of sale of calling card to the retailer?

[Joe]

Nauman, on Jun 1 2007, 11:30 PM, said:

Has your Corporation in Toronto retained a Designated Professional Accountant?
I have been to not one but three professional accountants on this issue. ?

"the balance sheet shows an over stated profit by the amount of cards in the market"
I'm very sorry to hear that.............




"have been to not one but three professional accountants on this issue"

Your Incorporated Canadian Company has Engaged THREE simultaneous Professionally Designated Accountants to be simultaneously responsible to calculate the tax returns for the company?

Perhaps that is your problem right there...

Stick with one, pay them, and they will do what is required.
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[Tim Parris]

<_< This topic is in a T1 forum, Why? <_<
Perhaps it should properly be in a T2 forum as it deals with corporate matters.

Have you looked at the sales tax issues for phone calls? Or Revenu Quebec's web site? RQ actually has some good explanations of issues. For Instance, try http://www.revenu.go...q_exigibles.asp for details on when GST is to be paid. As they put it, when the invoice is to be PAID is the time that the GST is to be collected and remitted. I've also seen some interesting stuff on when and how to charge provincial sales taxes on phone calls, including mobile calls. For instance, a phone call made on a mobile phone which is billed to a Quebec address but has a point of origin outside of Quebec and is made to Quebec is deemed to occur within Quebec and QST is charged. (I think that is what was said then.. It has been a few weeks.)

[Joe]

Tim Parris, on Jun 2 2007, 12:21 PM, said:

<_< This topic is in a T1 forum, Why? <_<

Tim, these later posters are not "Profile Professional Tax Accountants"

They appear to be "Non-accountant offshore business people" who have some ideas about starting an operation in Canada.
Since there are hugely complicating tax and business factors, variable upon on their individual circumstances, it is completely pointless for them to try to get their tax advice piecemeal from Google.
(Dont forget, this is the Googlebot section)
The Free advice they are getting is worth PRECISELY what they paid for it.

They need to hire a Professionally Designated Accountant public accountant for their company
or they may be dealing with government tax Auditors more often than they expect.

Its all urtaxwiz fault for starting in the googlebot section.. :P
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