5 July 2004 GST/HST Interpretation 49726 - Self-Supply of a Long-Term Residential Facility

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

This is in response to your e-mail XXXXX regarding example 3 in the 2003-2004 Employer's Guide (T4130).

In the example provided in the guide, an employer purchased a watch for $560 (including the GST and PST, or HST) to give to an employee to mark the employee's long service. The employer reported a taxable benefit of $560 in box 14 and under code 40 on the employee's T4 slip. The example states that the employer could not claim an ITC because he purchased the watch for the employee's personal use and enjoyment. Since the employer cannot claim an ITC, he is not considered to have collected GST/HST and, as a result, he will not have to remit GST/HST on the benefit.

Issue:

The issues are:

1. Is there an error in the Employer's Guide?

2. Did the employer acquire the watch for purposes of making a sale to the employee or for the employee's personal use and enjoyment?

3. Are these two concepts mutually exclusive?

Our Comments:

"Sale", in respect of property, is defined in subsection 123(1) of the Excise Tax Act (ETA) 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. Therefore, a gift of property constitutes a sale of property. The definition of supply in subsection 123(1) of the ETA includes both a sale and a gift.

Pursuant to section 169 of the ETA, where a registrant makes a taxable supply (e.g., a sale) of property, the registrant is generally entitled to an ITC in respect of GST/HST paid on the property to the extent (expressed as a percentage) the property is acquired or imported for consumption, use or supply in the course of the registrant's commercial activities. However, the preamble to section 169 states that a registrant's eligibility to claim an ITC under section 169 is "subject to this Part". This phrase indicates that there are sections in Part IX of the ETA that could affect the registrant's eligibility for an ITC. Examples of such sections are sections 170 and 173.

Paragraph 170(1)(b) of the ETA precludes a registrant from claiming an ITC when the property or service is acquired for the exclusive personal consumption, use or enjoyment of an employee of the registrant. However, where the registrant makes a taxable supply of the property or service to the employee for consideration equal to the fair market value or where no amount is payable by the employee and no amount is required to be included in the employee's income under the provisions of section 6 of the Income Tax Act (ITA), the employer will not be precluded from claiming an ITC under this section.

The preamble to section 170 begins "In determining an input tax credit of a registrant ...". The preamble does not mention commercial activity, since ITCs would not be available in the first place unless they were related to a commercial activity. Where ITCs may otherwise be allowed, section 170 imposes certain restrictions.

In addition, paragraph 170(1)(b) of the ETA contemplates that the employer could make a taxable supply (which includes a sale) to the employee. Subparagraph 170(1)(b)(i) considers a taxable supply of the property made by the employer for consideration equal to fair market value and, where no consideration is payable by the employee for the provision of the property, subparagraph 170(1)(b)(ii) considers employee benefits that are not required to be included in the employee's income under the provisions of section 6 of the ITA.

Subsection 173(1) of the ETA applies where a registrant makes a supply (other than an exempt or zero-rated supply) of property or service to an employee or shareholder of the registrant, where the supply is considered to be a taxable benefit under paragraph 6(1)(a), (e), (k) or (l) or subsection 15(1) of the ITA.

Where a registrant makes a supply (other than an exempt or zero-rated supply) of property or a service to an employee or a person related to the employee and the conditions under paragraphs 173(1)(a) or (b) have been satisfied, the use by the registrant in providing the property or service to the employee or the person related to the employee will be regarded as commercial activities of the registrant. Consequently, the registrant would be eligible to claim an ITC, subject to the general requirements in section 169 and restrictions on ITCs, such as those provided for in subsection 170(1) of the ETA.

Certain other provisions of the ETA, such as section 173, do not apply when section 170 does apply. Specifically, subparagraph 173(1)(d)(i) of the ETA provides an exception to the general rules for employee benefits. In the absence of section 170 of the ETA, full ITCs would be available for property or services acquired for the exclusive personal use of employees. The restriction in section 170 is clearly legislated to deny the ITCs.

In conclusion, the concept of the employer purchasing the watch for the purpose of making a taxable supply by way of sale to the employee and that of the employer purchasing the watch for the exclusive personal use of the employee are not mutually exclusive. In addition, there is no error in the 2003-2004 Employer's Guide.

Should you have any further questions regarding this matter, please do not hesitate to contact me at (613) 954-7931.

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