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 September 15, 2017
TO
[Addressee]
FROM
Doug Campbell
Senior Rulings Officer
General Operations
320 Queen St, Ottawa
FILE
169313
SUBJECT : [GST/HST INTERPRETATION]
Eligibility for an Input Tax Credit on a vehicle that passes from 100% personal use to 100% commercial use in a period after its acquisition by an individual registrant
This [correspondence] is […], regarding the change in use of a vehicle and the eligibility, if any, to claim an input tax credit (ITC).
[FACTS]
The situation is in relation to a registrant that is an individual. The individual, while registered for GST/HST purposes, acquires a vehicle, but the vehicle is acquired and used exclusively for personal use.
At a later date, the individual stops using the vehicle for personal use and begins to use the vehicle as capital property exclusively in commercial activities.
You would like to know whether the registrant is entitled to an ITC. If so, would the ITC be based on the amount paid, the fair market value (FMV), or the capital cost allowance (CCA) for income tax purposes?
[INTERPRETATION REQUESTED AND GIVEN]
Section 169 provides that, in order for a person to be eligible to claim an input tax credit for the tax payable in respect of property or a service, the following conditions must be met:
- the property or service must be supplied to or imported by the person;
- the person must be a GST/HST registrant during the reporting period in which the supply or importation is made;
- tax must be payable by the person in respect of the supply or importation, or be paid by the person prior to its becoming payable;
- the property or service must be acquired or imported by the person for the purpose of consumption, use or supply in the course of commercial activities of the person; and
- the person must have obtained sufficient documentary evidence, including any prescribed information as set out in the Input Tax Credit Information (GST/HST) Regulations, to establish the eligibility for the input tax credit before the claim is made.
Where the above conditions have been met, your eligibility to claim an ITC for the GST paid on the truck also depends on whether the truck is considered to be a motor vehicle or a passenger vehicle, the extent to which you use the truck in your commercial activities and the time limitations in section 225 for claiming an ITC.
Different rules apply depending on whether the vehicle is a passenger vehicle or a motor vehicle. As such, it is necessary to determine which it is. If the vehicle is a passenger vehicle, the passenger vehicle rules apply. If the vehicle in question is a motor vehicle, the capital rules apply.
Generally, a motor vehicle is an automotive vehicle designed or adapted for use on highways and streets. A motor vehicle does not include a trolley bus or a vehicle designed or adapted to be operated only on rails.
A passenger vehicle is a motor vehicle designed or adapted primarily to carry people on highways and streets. It seats a driver and no more than eight passengers. Most cars, station wagons, vans, and some pick-up trucks are passenger vehicles.
Specifically, the ETA defines a passenger vehicle as having the meaning as in subsection 248(1) of the Income Tax Act (ITA). The ITA defines a passenger vehicle as an automobile acquired after June 17, 1987 (other than an automobile acquired after that date pursuant to an obligation in writing entered into before June 18, 1987) and an automobile leased under a lease entered into, extended or renewed after June 17, 1987.
An automobile is defined in the ITA as
(a) a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers,
but does not include
(b) an ambulance,
(b.1) a clearly marked emergency-response vehicle that is used in connection with or in the course of an individual's office or employment with a fire department or the police,
(b.2) a clearly marked emergency medical response vehicle that is used, in connection with or in the course of an individual's office or employment with an emergency medical response or ambulance service, to carry emergency medical equipment together with one or more emergency medical attendants or paramedics,
(c) a motor vehicle acquired primarily for use as a taxi, a bus used in a business of transporting passengers or a hearse used in the course of a business of arranging or managing funerals,
(d) except for the purposes of section 6, a motor vehicle acquired to be sold, rented or leased in the course of carrying on a business of selling, renting or leasing motor vehicles or a motor vehicle used for the purpose of transporting passengers in the course of carrying on a business of arranging or managing funerals, and
(e) a motor vehicle
(i) of a type commonly called a van or pick-up truck, or a similar vehicle, that has a seating capacity for not more than the driver and two passengers and that, in the taxation year in which it is acquired or leased, is used primarily for the transportation of goods or equipment in the course of gaining or producing income,
(ii) of a type commonly called a van or pick-up truck, or a similar vehicle, the use of which, in the taxation year in which it is acquired or leased, is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income, or
(iii) of a type commonly called a pick-up truck that is used in the taxation year in which it is acquired or leased primarily for the transportation of goods, equipment or passengers in the course of earning or producing income at one or more locations in Canada that are
(A) described, in respect of any of the occupants of the vehicle, in subparagraph 6(6)(a)(i) or (ii), and
(B) at least 30 kilometres outside the nearest point on the boundary of the nearest population centre, as defined by the last census dictionary published by Statistics Canada before the year, that has a population of at least 40,000 individuals as determined in the last census published by Statistics Canada before the year;
The ITA also defines a motor vehicle as an automotive vehicle designed or adapted to be used on highways and streets but does not include a trolley bus, or a vehicle designed or adapted to be operated exclusively on rails.
A vehicle definition chart is available on our website at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/bsnssxpnss/mtr/typ-eng.html.
As mentioned previously, if the vehicle in question is a motor vehicle, the capital rules apply, and if the vehicle is a passenger vehicle, the passenger vehicle rules apply. The rules are as follows;
Passenger vehicle rules
Pursuant to subsection 202(2), where a registrant who is an individual acquires or imports a passenger vehicle or brings it into a participating province for use as capital property of the registrant, the tax payable by the registrant in respect of that acquisition, importation or bringing in, as the case may be, shall not be included in determining an input tax credit of the registrant unless the vehicle or aircraft was acquired or imported, or brought in, as the case may be, by the registrant for use exclusively in commercial activities of the registrant.
As the passenger vehicle was not acquired for use exclusively (90% or more) in commercial activities of the registrant, the registrant is not eligible to claim regular ITCs on the acquisition.
Later when the registrant begins to use the passenger vehicle in commercial activities he will be eligible for ITCs as described below.
Less than ten percent usage in commercial activities
Pursuant to subsection 141(3), where substantially all of the consumption or use of property are not in the course of commercial activities all of the consumption or use of the property or service by the person shall be deemed not to be in the course of commercial activities. The effect of this is that no ITCs are available to a registrant where the use of said property in commercial activities is less than 10 percent.
Over ten percent and less than ninety percent usage in commercial activities
When a registered individual or partnership acquires or imports a passenger vehicle for less than exclusive (ninety percent or more) use in commercial activities, the registrant's ITC is the tax fraction (i.e. 13/113) of the capital cost allowance (CCA) deducted for Income Tax purposes from those commercial activities for that or the subsequent taxation year, as the case may be. The amount allowed for CCA already excludes any portion of the cost of the passenger vehicle or aircraft which is attributable to personal use.
In those cases when a passenger vehicle is used for both taxable and exempt activities, the amount must be prorated according to paragraph 202(4)(b) of the Act.
Example (Ontario)
ITC = 13/113 x CCA deduction * % used in commercial activities
_______________________________
% used for CCA calculation
Exclusive use (ninety percent or more) in commercial activities
Where an individual or partnership acquires a passenger vehicle for use less than exclusively in commercial activities, but begins to use it exclusively in commercial activities, the individual continues to claim a CCA-based ITC as above.
As always, any ITC would also be subject to the general rules in section 169 and the time limitations for claiming ITCs in section 225 of the ETA.
Capital property rules
Where a motor vehicle is not used primarily (more than 50%) in commercial activities of the individual registrant, a registrant individual may not claim any ITCs for taxes paid or payable.
Pursuant to subsection 199(1) and 199(2) of the ETA, a registrant individual may claim an ITC for tax paid or payable on the acquisition of a motor vehicle if it is to be used as capital personal property, primarily (more than 50%) in commercial activities of the individual registrant. When the motor vehicle is used primarily in commercial activities, the registrant is deemed to use the property exclusively in such activities and may claim a full ITC subject to the general conditions in section 169 and the time limitations in section 225.
Pursuant to subsection 199(3), where a registrant owns a motor vehicle not used primarily in commercial activities and increases its use to primarily in commercial activities, the registrant is deemed to have acquired the property for use as capital property exclusively in commercial activities immediately before that time. The registrant is deemed to have received, at the particular time, a supply of the property by way of sale, and except where the supply is an exempt supply, to have paid, at the particular time, tax in respect of the supply equal to the basic tax content (BTC) of the property at the particular time.
The BTC of a person's property is generally the amount of tax under Part IX that the person was required to pay on the property and improvements thereto, after deducting any amounts (other than input tax credits) that the person was entitled to recover by rebate, remission or otherwise and after taking into account any depreciation in the value of the property. BTC is defined in detail in Section 123.
Example
An individual registrant that had a passenger vehicle that was used for personal use, will now be used 100% as a taxi. Note that a passenger vehicle is an automobile. An automobile does not include a taxi, but a taxi is a motor vehicle.
Since a taxi is a motor vehicle, we would follow the capital property rules, Meaning, the registrant would have to use the vehicle more than 50% in its commercial activities in order to be eligible to claim an ITC. In this scenario, the individual is using the vehicle 100% in commercial activity, therefore the registrant would be entitled to an ITC at the FMV (provided the amount is the lesser than the original cost of the vehicle) subject to the limitations of subsection 225(4) of the ETA.
[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 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 further information, please call me directly at 613.670.9882, or Catherine Séguin-Ouimet, Manager, General Operation Unit at 613.670.9877.
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