Fedak v. The Queen, docket 97-3163-GST-I (Informal Procedure)

Date: 19990702

Docket: 97-3163-GST-I

BETWEEN:

BRIAN FEDAK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre Proulx, J.T.C.C.

[1] This is an appeal, by way of the informal procedure, from an assessment made by the Minister of National Revenue (the "Minister") pursuant to the Excise Tax Act (the "Act").

[2] The question at issue is whether the Appellant is entitled to a rebate of tax respecting a trade-in property accepted as partial consideration by the supplier of a supply on which the Appellant paid the tax on the full amount of the supply.

[3] The Minister based his assessment on the assumptions of fact described at paragraph 6 of the Reply to the Notice of Appeal (the "Reply") as follows:

(a) the facts admitted and stated in this Reply, some of which are repeated here for ease of reference;

(b) the Appellant bought a boat from the Supplier;

(c) on March 18, 1996, the Appellant and the Supplier entered into an agreement in writing with respect to the supply by way of sale of the boat;

(d) the consideration for the boat sold by the Supplier was $21,995;

(e) the goods and services tax ("GST") collectible by the Supplier and payable by the Appellant in respect of the boat supplied by the Supplier was $1,539.65 (7% of $21,995);

(f) the GST payable with respect to the supply of the boat by the Supplier was clearly indicated in the written agreement;

(g) the Supplier credited the value of the Trade-in against the consideration payable for the boat supplied to the Appellant;

(h) the Trade-in was valued at $6,000;

(i) the GST charged and collected by the Supplier on the supply of the boat was calculated on the consideration for the boat, without reference to the amount credited by the Supplier to the Appellant with respect to the Trade-in;

(j) the Supplier was entitled to claim an input tax credit of $392.52 with respect to the Trade-in;

(k) the Appellant received possession of the boat he acquired from the Supplier on May 25, 1996; and

(l) the agreement in writing with respect to the supply of the boat was entered into before July 1996.

[4] The Appellant denied paragraph 6(c) of the Reply by saying that the date of the sale agreement should be May 25, 1996, which is the date of delivery of the boat as shown in Exhibit R-1, the contract of sale. The contract is dated March 18, 1996. It is signed by the Appellant, the salesman and the manager.

[5] The total price of the boat acquired by the Appellant is shown as $21,995. There is an amount of $6,000 that is shown next to the description of the Appellant's boat to be traded in, and then the sub-total is shown as $15,995. The amount of tax, $1,539.65, was calculated on the full amount of $21,995. The Appellant paid the purchase price ($15,995 + $1,539.65) at the end of May 1996.

[6] The Appellant stated that the trade-in boat was officially sold sometime in July. That was another of the Appellant's submissions that this date was the date when the deal of sale was finally concluded and should be the date of the agreement. The Appellant stated that no final transaction was made before that time and that everything was contingent on the resale of the trade-in boat.

[7] The Appellant stated that the vendor had told him that it would be applying for a credit or maybe that he should apply for a credit to which he may be entitled. The amount of $420 of tax claimed by the Appellant is the result of 7% on the amount of $6,000.

Analysis

[8] Paragraph 176(1)a) of the Act, as it then was, was applicable to a supply made before April 24, 1996 where the acquisition of a used good was part of the consideration for the supply. It read as follows:

“(1) Acquisition of used goods — Subject to this Division, where

(a) used tangible personal property is supplied in Canada by way of sale after 1993 to a registrant, tax is not payable by the registrant in respect of the supply, and the property is acquired for the purpose of consumption, use or supply in the course of commercial activities of the registrant, or

(b) used tangible personal property is supplied in Canada by way of sale before 1994 to a registrant, tax is not payable by the registrant in respect of the supply, and the property is acquired for the purpose of supply in the course of commercial activities of the registrant,

for the purposes of this Part, the registrant shall be deemed (except where the supply is a zero-rated supply or where section 167 applies to the supply) to have paid, at the time any amount is paid as consideration for the supply, tax in respect of the supply equal to the tax fraction of that amount.

[9] The Technical Notes (February 1993) explain the purpose of this provision as follows:

Section 176 deems tax to have been paid by a registrant acquiring used goods, in certain circumstances, from a person not required to charge tax. This is in order to enable the registrant to claim input tax credits in respect of these purchases to the extent that they are for consumption, use or supply in a commercial activity. The notional input tax credit is intended to remove tax that the supplier originally paid on the goods but did not recover. As a result, when the used good is resold by the registrant, there is no cascading of tax – i.e., GST is not charged on an amount that already includes an element of tax.

[10] Respecting the amount of credit that may be claimed, the Technical Notes (May 1990) state as follows:

Provided that the registrant acquires the used good for use, consumption or supply in the course of the registrant's commercial activities, this subsection treats the registrant as having paid GST, equal to 7/107ths of the purchase price. The registrant may then claim an input tax credit in respect of this amount under the rules in section 169. As an example, assume a used car dealer pays $5,350 for a car purchased from an individual. The dealer would be treated as having paid tax of $350 (7/107 X $5,350) in respect of which an input tax credit could be claimed.

[11] Subsection 176(1) of the Act provided a notional input tax credit to a registrant who bought used goods from a non-registrant for resale. The person who was entitled to the notional input tax credit was the registrant, not the individual trading in a property. The purpose behind this provision was that an amount of tax originally paid by the trader was part of the price of the traded-in property acquired by the registrant (vendor) and that the registrant was entitled to claim that notional tax as an input tax credit. A supplier was to tax the full amount of a supply when there was a trade-in and then claim a notional input tax credit under section 176 of the Act. There was no requirement in the legislation to pass the value of the trade-in to the recipient. In such a case, the notional input tax credit under subsection 176(1) of the Act is 7/107 of the trade-in value.

[12] Subsection 176(1) of the Act was amended by section 25 of an Act to amend the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the Income Tax Act, the Debt Servicing and Reduction Account Act and related Acts, S.C. 1997, c. 10, "the amending Act". Subsection 176(1) of the Act was replaced by a provision respecting used returnable containers coming into force on April 24, 1996.

[13] From that date, the provision of the Act that is of application for the situation of the type under appeal is subsection 153(4) of the Act that was added by subsection 13(1) of "the amending Act". It reads as follows:

(4) Where, at the time a supplier makes a supply of tangible personal property to a recipient, the supplier accepts, in full or partial consideration for the supply, other property (in this subsection and subsection (5) referred to as the “trade-in”) that

(a) is used tangible personal property or a leasehold interest therein, and

(b) is acquired for consumption, use or supply in the course of a commercial activity of the supplier,

and the recipient is not required to collect tax in respect of the supply of the trade-in, the value of the consideration for the supply made by the supplier is deemed, for the purposes of this Part, to be equal to the amount, if any, by which the value of the consideration for that supply (as otherwise determined under this Part) exceeds

(c) except where paragraph (d) applies, the amount credited to the recipient in respect of the trade-in, and

(d) where the supplier and the recipient are not dealing with each other at arm's length at the time the supply is made and the amount credited to the recipient in respect of the trade-in exceeds the fair market value of the trade-in at the time ownership thereof is transferred to the supplier, that fair market value.

[14] The purpose of adding that section was to remove the system of notional input tax credit. The provision now allows the tax to be calculated on the net amount of a supply when there is a trade-in provided in full or partial consideration of that supply.

[15] The Technical Notes (July 1997) explain the nature of the amendment as follows:

New subsection 153(4) provides that, where a supplier who is a registrant accepts a used good (or a leasehold interest therein) as full or partial consideration for another good, the supplier has to collect GST only on the net value if the property being accepted as a trade-in is for consumption, use or supply by the supplier in the course of commercial activities and the person trading in the property is not required to collect tax on it. For example, a car dealer who accepts a trade-in from a consumer as partial consideration for a new car will charge tax only on the difference between the value of the new car and the value of the used car.

...

The new trade-in rule is added as a consequence of the amendment to section 176, which eliminates notional input tax credits except for certain returnable containers (see commentary on clause 25). Charging tax on the net value prevents tax cascading when a used good, for which no input tax credit was claimed, is accepted as a trade-in by a supplier and is subsequently resold on a taxable basis.

[16] Subsection 13(2) of "the amending Act" reads as follows:

13(2) Subsection (1) [being subsection 153(4) of the Act] applies to supplies made after April 23, 1996 other than any supply to a recipient of particular property for which the supplier accepted, as full or partial consideration under an agreement in writing entered into before July 1996, other tangible personal property (in this subsection referred to as the "trade-in") where the supplier charged or collected tax in respect of the supply of the particular property calculated without reference to the amount credited by the supplier to the recipient in respect of the trade-in.

[17] It is therefore important to determine the date of a supply. Section 133 of the Act determines that date. It reads as follows:

Agreement as supply – For the purposes of this Part, where an agreement is entered into to provide property or a service,

(a) the entering into of the agreement shall be deemed to be a supply of the property or service made at the time the agreement is entered into; and

(b) the provision, if any, of property or a service under the agreement shall bed deemed to be part of the supply referred to in paragraph (a) and not a separate supply.

[18] It is my view that the evidence has shown clearly that the Appellant has entered into an agreement of purchase and sale on March 18, 1996. On that date, the vendor sold a boat to the Appellant. The Appellant agreed to pay the sale price. There was no mention of the date of delivery of the Appellant's boat but there is a mention of its acquisition by the supplier. Except as to the statement made by the Appellant and referred to at paragraph 6 of these Reasons, there is no evidence that the acquisition of the traded boat did not take place on March 18, 1996 and no evidence that the agreement of sale was conditional to the sale of the traded-in property.

[19] The other date mentioned in subsection 13(2) of "the amending Act" reproduced at paragraph 16 of these Reasons is July 1996. Subsection 153(4) of the Act will not apply to a supply made after April 23, 1996 under an agreement in writing entered into before July 1996 where the supplier charged or collected the tax in respect of the supply without reference to the amount credited by the supplier to the Appellant in respect of the trade-in. There is no doubt that the written agreement was entered into before July 1996 and that the supplier charged the tax on the full amount as evidenced by Exhibit R-1.

[20] The only conclusion that can be reached considering the written agreement (Exhibit R-1) and section 133 of the Act is that the supply took place at the date of the agreement, that is March 18, 1996. In consequence, the appeal of the Appellant must fail since subsection 153(4) of the Act cannot apply.

Signed at Ottawa, Canada, this 2nd day of July 1999.

"Louise Lamarre Proulx"

J.T.C.C.