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.
FROM
Graham Leflar
Rulings Officer
General Operations Unit
General Operations and Border Issues Division
Excise & GST/HST Rulings Directorate
TO
[Addressee]
Case Number: 164739
SUBJECT: GST/HST INTERPRETATION
Taxable benefits and the section 156 election
Thank you for your [correspondence] of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to employee taxable benefits. We apologize for the delay in our response.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
BACKGROUND
We understand that […] has contacted you for guidance on how the GST/HST would apply in a particular scenario involving the provision of taxable benefits by a corporation to its employees. The details of this scenario are as follows:
- Corp A and Corp B are both Canadian resident corporations that are registered for GST/HST purposes.
- Corp A purchases motor vehicles that it subsequently leases to Corp B. Each vehicle is acquired by Corp B for the use of a specific employee.
- The vehicles are not used by Corp B’s employees strictly for business use, but also for some personal use and enjoyment. In some cases, the vehicle is used by the employee exclusively for personal use.
- The provision of a vehicle to Corp B’s employee represents a taxable benefit under section 6 of the Income Tax Act […].
You understand that where a Corp B employee uses a vehicle for a mixture of business and personal use, section 173 would apply and the GST/HST would be remittable by Corp B based on the amount of the employee’s taxable benefit. Alternatively, in the case of exclusive personal use of a vehicle by an employee, subparagraph 173(1)(d)(i) would normally relieve Corp B from having to account for tax on the taxable benefit because paragraph 170(1)(b) would prevent it from claiming an input tax credit (ITC) for the tax payable to Corp A on the lease of the vehicle.
However, in the case at hand, Corp A and Corp B are closely related for GST/HST purposes and have made an election under subsection 156(2) (a section 156 election). As a result, the taxable supply of vehicles by way of lease from Corp A to Corp B are deemed to be made for no consideration. You have specifically asked about the case of a vehicle acquired by Corp B for the exclusive personal use and enjoyment of one of its employees.
INTERPRETATION REQUESTED
If Corp A leases a vehicle to Corp B at a time when they are subject to a section 156 election, and the vehicle is provided by Corp B for the exclusive personal use and enjoyment of one of its employees, would section 173 deem Corp B to have collected the GST/HST with respect to the employee’s taxable benefit that has been determined for income tax purposes?
INTERPRETATION PROVIDED
In general, subsection 173(1) provides that where a registrant makes a supply (other than an exempt or zero-rated supply) of property to an individual and an amount in respect of the supply is required under paragraph 6(1)(a), (e), (k), or (l), or subsection 15(1) of the Income Tax Act to be included in computing the individual’s income (that is, there is a taxable benefit to the individual), in the case of a supply of property otherwise than by way of sale (for example, by way of lease, licence, or similar arrangement), the registrant is deemed to have acquired and to be using the property in its commercial activities.
In addition, according to the rules set out in subparagraphs 173(1)(d)(v) to (vii), the registrant is generally deemed to have collected the GST/HST calculated on the value of the taxable benefit and must include that amount in determining its net tax for its reporting period that includes the last day of February of the following year. However, there are specific exceptions to this requirement to account for tax in regard to a taxable benefit, including the situation described by subparagraph 173(1)(d)(i) where the registrant was, because of section 170, not entitled to claim an ITC in respect of the last acquisition, importation, or bringing into a participating province of the property by the registrant.
Paragraph 170(1)(b) generally provides that in determining an ITC of a registrant, no amount shall be included in respect of the tax payable by the registrant in respect of a supply of property or a service that is acquired by the registrant at any time in or before a reporting period of the registrant exclusively for the personal consumption, use, or enjoyment (the “benefit”) in that period of a particular individual who was, is, or agrees to become an officer or employee of the registrant, or of another individual related to the particular individual, except where
(i) the registrant makes a taxable supply of the property or service to the particular individual or the other individual for consideration that becomes due in that period and that is equal to the fair market value of the property or service at the time the consideration becomes due, or
(ii) if no amount were payable by the particular individual for the benefit, no amount would be included under section 6 of the Income Tax Act in respect of the benefit in computing the income of the particular individual for the purposes of that Act.
As you indicated in your email, when Corp B provides a vehicle to one of its employees exclusively for the employee’s personal use and enjoyment, paragraph 170(1)(b) would deny Corp B an ITC for the GST/HST it would normally have to pay on its lease of the vehicle from Corp A (providing neither of the exceptions under that paragraph apply). In that case, section 173 would not require Corp B to account for the GST/HST on the value of the taxable benefit.
When a valid section 156 election is in effect between two corporations, all taxable supplies made between those corporations, other than certain supplies set out in subsection 156(2.1), are deemed to have been made for no consideration. As a result, the amount of tax applicable in respect of a supply made from one of the corporations to the other would be calculated to be zero (for example, 5% of zero), meaning that the recipient corporation would not be required to pay any GST/HST in respect of the supply.
Since Corp B would not be required to pay tax when it leases a vehicle from Corp A at a time when a section 156 election is in effect, we do not consider tax to be payable by Corp B on its acquisition of the vehicle. Furthermore, since no tax was payable by Corp B in respect of the supply, there would not be an ITC to calculate under subsection 169(1). Accordingly, section 170 would not be considered to have prevented Corp B from claiming an ITC in respect of its lease of the vehicle that has been provided for the exclusive personal use and enjoyment of one of its employees.
Therefore, in the scenario you described, subparagraph 173(1)(d)(i) would not apply and Corp B would be deemed to have collected the GST/HST calculated on the value of the employee’s taxable benefit determined under the Income Tax Act.
[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(s) given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.]
If you require clarification with respect to any of the issues discussed in this memorandum, please call me directly at 306-975-4733. Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1--800-959-8287.
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