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.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 187306
Dear [Client]:
Subject: GST/HST INTERPRETATION
Meaning of “capital property”
Thank you for your letter of September 29, 2017, concerning the meaning of the term “capital property” for goods and services tax/harmonized sales tax (GST/HST) purposes.
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
A GST/HST registrant’s eligibility to claim an input tax credit (ITC) for the tax paid or payable in respect of property being used in the course of the registrant’s commercial activity depends, in part, on whether the property is considered “capital property” of the registrant.
For example, a GST/HST registrant charity is generally required under section 225.1 to use the net tax calculation for charities. Under this method, the charity is only eligible to claim ITCs for the GST/HST paid or payable in certain circumstances, such as when personal property is acquired, imported, or brought into a participating province by the charity primarily for use as capital property in a commercial activity of the charity.
The term “capital property” in respect of a person is defined in subsection 123(1) to mean property that is, or would be if the person were a taxpayer under the Income Tax Act (ITA), capital property of the person within the meaning of that Act, other than property described in Class 12, 14, 14.1, or 44 of Schedule II to the Income Tax Regulations.
According to subsection 248(1) of the ITA, capital property has the meaning assigned by section 54 of that Act, which defines capital property of a taxpayer as
- any depreciable property of the taxpayer, and
- any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer.
“Depreciable property” of a taxpayer as of any time in a taxation year is defined in subsection 13(21) of the ITA as any property acquired by the taxpayer in respect of which the taxpayer has been allowed, or would, if the taxpayer owned the property at the end of the year and the ITA were read without reference to subsection 13(26), be entitled to a deduction under paragraph 20(1)(a) in computing income for that year or a preceding taxation year. Paragraph 20(1)(a) of the ITA provides that a taxpayer may deduct from income from business or property such part of the capital cost to the taxpayer of property or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation.
Accordingly, a piece of equipment acquired (i.e., purchased) by a person would normally be capital property of the person for both income tax purposes and GST/HST purposes. Alternatively, if the person (as lessee) were to lease the same piece of equipment from a lessor, the equipment would generally not be treated as capital property for either purpose, since the lessee has not acquired the equipment and would not be entitled to claim capital cost allowance in respect of the equipment.
In addition to the general definition of capital property for income tax purposes, subsection 16.1(1) of the ITA provides special rules that may apply in computing the income of a lessee of property, other than prescribed property, leased for a term of more than one year from an arm’s length person who is resident in Canada or who carries on business in Canada through a permanent establishment. These special rules apply where the lessor and lessee jointly elect in a prescribed form that is filed by the lessee with its income tax return for the year in which the lease was entered into.
Additional conditions that must be satisfied in order for the lessor and lessee to make an election under subsection 16.1(1) are that the leased property would have been treated as depreciable property of the lessee if the lessee had acquired the property, and the lease is in respect of tangible property other than prescribed property described in section 8200 of the Income Tax Regulations. Prescribed property includes property that had, at the time the lease was entered into, a total fair market value of $25,000 or less.
If the election is filed, the lease is deemed for income tax purposes not to be a lease and the lessee is deemed to have acquired the property from the lessor at a cost equal to its fair market value and to have borrowed an amount from the lessor in a principal amount equal to that value. In addition, the rental payments made under the lease are treated not as rent but as blended payments of principal and interest on the loan.
Consequently, to the extent that the property is used to earn income, the lessee is permitted to claim capital cost allowance in respect of the property and deduct the interest portion of each rental payment under the applicable rules of the ITA. As a result, property that is subject to the election under subsection 16.1(1) of the ITA is generally treated as depreciable property and, by extension, capital property of the lessee for income tax purposes.
INTERPRETATION REQUESTED
Would an election made under subsection 16.1(1) of the ITA in respect of leased property also result in that property being treated as capital property of the lessee for GST/HST purposes?
INTERPRETATION GIVEN
According to the definition of the term “capital property” in subsection 123(1), property is generally considered to be capital property of a person for GST/HST purposes when it is treated as capital property under the ITA (subject to certain exclusions). Based on the general meaning of “capital property” in section 54 of the ITA and the definition of “depreciable property” in subsection 13(21) of that Act, property can only be considered capital property when it has been acquired by the taxpayer.
In general, in order for property to have been acquired by a person, there must have been a sale of the property to the person. “Sale” in respect of property, is defined for GST/HST purposes in subsection 123(1) to include any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property. If there is no transfer of ownership of a particular property, we do not consider a supplier to have sold, and a recipient to have purchased, the property. This includes those situations where a person leasing property from a third party has an option to purchase the property at some point during or at the conclusion of the lease term, as is the case with many “capital leases.”
Accordingly, property leased from a lessor is generally not considered to have been acquired for income tax purposes and, as such, is not treated as capital property for purposes of the ITA or, by extension, the ETA.
As noted above, when an election is made in respect of particular property under subsection 16.1(1) of the ITA, the lessor is deemed for income tax purposes to have acquired the property and to be eligible to claim capital cost allowance in respect of the property. As a result, property subject to this election is treated as depreciable property, as well as capital property, for purposes of the ITA. In that case, you indicated in your letter that a GST/HST registrant charity may be able to claim ITCs with respect to the GST/HST paid or payable on the lease of such property where the property is also considered to be capital property for GST/HST purposes.
However, it is our position that the deeming provisions of the ITA (or other legislation) don’t necessarily apply for GST/HST purposes. Specifically, in the case of an election under subsection 16.1(1) of the ITA, the deeming provisions under that subsection apply only for specific purposes of the ITA (for example, claiming capital cost allowance) and do not extend to the definition of capital property in subsection 123(1) of the ETA. Therefore, property leased from a third party will not be considered to be capital property for GST/HST purposes, regardless of whether the lessee and the lessor have made an election under subsection 16.1(1) of the ITA.
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 letter, please call Graham Leflar, Rulings Officer, directly at 306-975-4733. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Catherine Séguin-Ouimet
Manager
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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