Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
DATE April 27, 2017
TO
[Addressee]
FROM
Doug Campbell
Excise & GST/HST Rulings
General Operations & Border Issues
Ottawa, ON K1A 0L5
Case Number: 154249
SUBJECT: GST/HST INTERPRETATION
Entitlement to claim Input Tax Credits (ITCs) as recipient of the supply
This [correspondence] is in response to […] a ruling [request] regarding the entitlement to claim input tax credits (ITCs). We apologize for the delay in responding to your request. The request related to the purchase of equipment comprised of hardware units and software licences, where only title to the hardware units was assigned to a Lessor, by virtue of a Purchase Assignment Agreement. You would like to know whether the Lessor is entitled to claim the ITCs on the GST/HST paid by the Lessor on the software licences, since […][the Lessor] was required to pay the tax to the Vendor for the software licences, even though title to the licences was never assigned to [the Lessor].
We will not be able to provide you with a ruling on the matter you requested […]. Therefore, we are providing you with […][an interpretation] on this matter.
STATEMENT OF FACTS
Based on the information you provided, our understanding of the facts is as follows:
Parties involved:
* […] (Vendor) – sets up ATM bank machines (i.e., sells equipment & related software licences),
* […]([…][X]) – assignor and subsequently lessee,
* […] (Lessor), a non-depository short term credit institution that provides primary equipment financing through leases – assignee and subsequent lessor
All parties are registered for GST.
Facts:
* [X] enters into an “Acquisition Agreement” to acquire equipment & software licenses from the Vendor.
* [X]’s acquisition of the equipment does not include the purchase of any software which is licensed to [X] by the Vendor.
(Licensed Products remain the property of the Vendor.)
* [X] then enters into a concurrent “Purchase Assignment Agreement” to assign its right to purchase the equipment (except software licenses) to the Lessor to allow the Lessor to lease the equipment back to [X] and “to pay the software license fees on behalf of [X]”.
* The assignment is limited to [X]’s right to own, take title to and possess the equipment (except software licenses).
* The Vendor transfers title to the equipment (except software licenses) to the Lessor.
* The Lessor is financing [X]’s payment of the software license charges payable under the Acquisition agreement.
* The Vendor issues an invoice to the Lessor for both the equipment & software licenses with full HST charged. The invoice shows separate prices for the hardware & software units which were delivered to [X].
* The Lessor pays the total invoiced price, including HST which agrees to the pricing set out in the Agreements.
* The Lessor then bills [X] monthly lease payments for both the equipment & software licenses with full HST charged.
[…][INTERPRETATION REQUESTED]
[X] has ordered equipment and software (Products) from a Vendor and has assigned its rights to purchase the equipment (except Licensed Products) to a Lessor, so that it could lease back the equipment from the Lessor, and have the Lessor finance its purchase of the software licences. You would like to know whether the Lessor (Assignee) is entitled to claim ITCs on the GST/HST paid on the software licence fees. According to the Purchase Assignment Agreement, upon delivery of the Products to [X] (Assignor), the Vendor will transfer title to the Products (except Licensed Products) to the Lessor.
[…][INTERPRETATION GIVEN]
The Vendor has consented to the Purchase Assignment Agreement (PAA), according to which the Assignor has assigned its rights to purchase the Products (except Licenced Products), and the Vendor has consented to transfer title to the Products (except Licensed Products) to the Assignee. However, the Assignor has retained all licensing rights for Products requiring a licence that the Vendor licenses to the Assignor. Consequently, […], the Assignee is entitled to claim the ITCs (1) in respect of the GST/HST paid on the equipment, but (2) not in respect of the GST/HST paid on the software licences, since the Assignee is the recipient of the supply of the equipment only. The title to the software licences has never been transferred to […][the Assignee]. [The Assignee] has only paid for them on behalf of [X].
[…][EXPLANATION]
You have been provided with the following documents: a) the Purchase Assignment Agreement (PAA), b) the Schedule No. […] to the Equipment Lease Agreement No. […], and c) a copy of the letter of [mm/dd/yyyy] which outlines the position of the […][ABC]. The following information is found in the PAA. The [X] has ordered equipment and software (‘Products’) from the [Vendor]. [X] has subsequently assigned its rights to purchase the Products (except Licensed Products) to [the Assignee], so that [the Assignee] may finance the purchase of those Products and lease them back to [X]. However, [X] has not transferred title to the Licenced Products to [the Assignee] and has retained all licensing rights for products requiring a licence that the Vendor licenses directly to [X].
As stated under the Vendor’s Consent section of the Purchase Assignment, the Vendor has given its consent to the PAA and has agreed to transfer title to the Products (except Licensed Products) to the Assignee. As per this assignment, the Assignee would pay the Vendor the full purchase price (and licence fees, if any) for the Products plus all applicable taxes. An invoice would be issued by the Vendor to the Assignee for the full purchase price of the Products.
It is clear from the documents provided, that [X] had ordered both the equipment and the software licences from the Vendor, and that only title to the equipment was subsequently transferred to the Assignee. [X] considers that the Assignee will be paying for the Products whose title was transferred to [the Assignee], and will be financing [X]’s payment of the software licence charges. As per the Equipment Lease Agreement Schedule No. […], the software licence fees are paid on behalf of [X]. The PAA did not cancel or nullify the original ‘Acquisition Agreement’ between the Vendor and [X]. Schedule No. […] has been entered into concurrently with the acquisition agreement. [X] remains solely responsible for performing all its duties and obligations under the acquisition agreement, except that the Assignee will be primarily responsible for paying the full purchase price. In the event of non-payment by the Assignee, [X] will remain responsible for the payment of the purchase price to the Vendor, jointly and severally with the Assignee.
From the foregoing, we can conclude that, as per the original Acquisition Agreement with the Vendor, [X] is the recipient of the supply of both the Products and the software licences. When title to the Products (except Licensed Products) was transferred to the Assignee, a taxable supply of property was made to the Assignee who has then become recipient of the supply of the Products (except Licensed Products). It is not clear how this particular taxable supply was accounted for, since the full Equipment Lease Agreement [#] was not submitted […].
[…]
[…] [ABC] has referred to section 165 of the ETA to say that “every recipient of a taxable supply made in Canada” shall pay GST/HST based on the “value of the consideration for the supply”. [ABC] also referred to the definition of ‘recipient’ in subsection 123(1) to say that the recipient of a supply of property or a service is defined to mean, “where consideration for the supply is payable under an agreement for the supply, the person who was liable under the agreement to pay that consideration”. As the Vendor has issued an invoice to the Assignee for the full purchase price of both the hardware and the software licences, [ABC] has considered that the Assignee was primarily liable under the Assignment to pay the consideration to the Vendor, and that the Assignee was the “recipient” of the supply and the one who was entitled to claim an ITC for the full amount of GST/HST charged on the Vendor’s invoice.
[…]
[…][It is Canada Revenue Agency (CRA)’s position] that the total amount invoiced by the Vendor and paid by the Assignee represents consideration for two different supplies (1) the first being the supply of the Products, title to which was subsequently assigned to the Assignee, and (2) the second being the supply of software licences made to [X], and for which consideration is paid by the Assignee on behalf of [X]. This is further confirmed in the section of the purchase assignment under the Assignee’s Obligations according to which, in the case where the Assignee fails to pay the Vendor for any reason, the Vendor will have the right to enforce remedies against both [X] and the Assignee.
The terms of the Purchase Assignment Agreement are as follows: [X] assigns the right to purchase the Products to the Assignee, and the Vendor agrees to transfer title to the Products to the Assignee and to invoice directly the Assignee for the purchase price. The Vendor also consented to other terms of the Purchase Assignment according to which [X] has requested that the Assignee finance [X]’s payment of the software licences and pay the software licence fees on behalf of [X]. The Vendor, in conformity with the assignment agreement, has agreed to invoice the Assignee for the full purchase price, including the software licence fees.
[ABC] […][states] that if the Assignee had not paid the full amount of the invoice to the Vendor, the Vendor would not have transferred legal title to the Products to [the Assignee]. […], however, neither Equipment Lease Agreement Schedule No. […], nor the Purchase Assignment Agreement specifically mentions that full payment of the purchase price, including the licence fees, had to be made as a condition for the transfer of title to the Products to the Assignee. […][The CRA understands] the scope of the Assignment is as described in section […] of the Purchase Assignment. According to that section, the Assignment is limited to the Assignor’s rights to own, take title to and possess the Products (except Licensed Products). Upon delivery of the Products to Assignor, the Vendor will transfer title to the Products (except Licensed Products) to the Assignee. The Vendor reserves a purchase money security interest in the Products until Vendor is paid the full purchase price for the Products. There is no mention of the full payment of the purchase price as a condition for the transfer of title. As mentioned earlier, title to the equipment is transferred upon delivery of Products to [X], and in the case where the Assignee fails to pay the Vendor for any reason, the Vendor will have the right to enforce remedies against both [X] and the Assignee.
[…]
[It is CRA’s position] that, under subsection 165(1) of the ETA, every recipient of a taxable supply made in Canada is liable to pay the GST/HST on the consideration for the supply. We also agree that the Assignee was liable to pay consideration for the supply of the Products made to [the Assignee] by the Vendor. Since the Products assigned to [the Assignee] will be leased back to [X], the Assignee is entitled to claim an ITC for the GST/HST paid on their acquisition, since they are destined for use in the course of [the Assignee’s] commercial activities.
The amount paid for the software licences, however, was not consideration for a supply made to the Assignee, since no supply of software licence has ever been made to the Assignee. The scope of the Assignment is specifically limited to the Products (except Licensed Products). The Assignee paid, on behalf of [X], the consideration for a supply of software licences made to [X]. That was the business arrangement made between the Assignor and the Assignee, and to which the Vendor has consented.
Consequently, the Assignee is not considered the recipient of the supply of software licences and is not entitled to claim an ITC for the GST/HST paid for them to the Vendor.
Generally, the “recipient” of a supply is defined under subjection 123(1) to include,
“(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and…”
In determining who the recipient of a supply is, and who may therefore be entitled to an ITC for any tax payable on the supply, it is necessary to determine whether the supply is acquired by a person on its own behalf or as an agent on behalf of another person. The definition refers to ‘consideration for the supply’. However, in the present case, the Assignee has not acquired any supply of software licences, and is therefore not entitled to claim any ITC for the tax paid for them.
[X] also has an End of Term Purchase Option on the equipment leased from the Assignee. At any time during and after the term, [X] may, upon not less than [#] days’ notice to the Lessor, purchase all but not less than all of the Units, for an option purchase price of $[…], excluding applicable taxes. [X]’s purchase of a Unit does not include the purchase of any software, which is licensed to [X] by the Vendor. If [X] purchases a Unit, [X]’s Software Rent charges will have to be paid out by [X], at such time. This further confirms that the title to the software licences was never assigned to the Assignee by [X].
In summary, […][it is CRA’s position] that [X] is the one entitled to the ITCs on the software licences under subsection 169(1) of the ETA, to the extent to which [X] acquired the rights to use the software licences for consumption, use or supply in the course of its commercial activities. According to the Equipment Lease Schedule, […], the Vendor, granted licences to [X] to use the software. No supply of software licence was made to […], as the Assignee. Consequently, […][the Assignee] cannot use subsection 169(1) of ETA to claim that it acquired the software licences for use in the course of its commercial activities, and that it is entitled to claim ITC on the GST/HST paid for them to [the Vendor].
[In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.]
Should you have any questions or require clarification on the above matter, please do not hesitate to contact me at (613) 670-9882.
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