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.
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TO:
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XXXXX
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From
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Patricia Taylor
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CASE NUMBER:
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63693
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DATE:
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September 26, 2005
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SUBJECT:
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Tax Paid
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In your XXXXX to Owen Newell, you presented the following situation:
1. A sole proprietor, registered for GST/HST, (Husband) sold his business assets (equipment and goodwill) to his wife's corporation (Wifeco), also registered for GST/HST, for an amount of consideration equal to fair market value, plus GST.
2. Rather than pay Husband for these assets, Wifeco paid an amount equal to the consideration and GST to Husband's creditors, at Husband's request.
3. Wifeco filed a credit return in which she claimed an input tax credit (ITC) for the GST charged by Husband on the sale of the business assets.
4. Wifeco has met all the documentary requirements needed under subsection 169(4) of the Excise Tax Act (the ETA), and its accompanying regulation, to claim the ITC.
5. Husband reported the GST collectible from Wifeco on Husband's GST return, but did not remit it.
6. Husband declared bankruptcy.
7. XXXXX.
Issues:
1. Has Wifeco paid tax to Husband on the purchase of Husband's business assets?
2. Can Wifeco claim an ITC for the GST payable to Husband on the purchase of Husband's business assets?
3. Wifeco claimed an ITC for the tax charged on the goodwill, which is not subject to tax pursuant to section 167.1 of the ETA. Does subsection 296(2.1) apply to allow an offsetting rebate for tax paid in error under section 261 of the ETA?
4. Can the CRA assess Wifeco, under paragraph 296(1)(b) for tax payable under Division II?
Opinion Given:
Our opinion, on the issues as presented, is as follows. All legislative references are to the ETA.
1. No, Wifeco has not paid tax on the purchase of Husband's business assets. Under section 165, Wifeco, as recipient of the taxable supply of Husband's assets, was required to pay tax to Husband, the supplier, as agent of her Majesty. Pursuant to subsection 221(1), Husband, as agent of Her Majesty, was required to collect this tax from Wifeco, and remit it according to subsections 225(1) and 228(1). Paying an amount to Husband's creditors does not relieve Wifeco from its obligation to pay GST to Husband for the supply of the business assets.
2. Yes, Wifeco is generally entitled to claim an ITC for the tax payable on the supply of the business assets, where Wifeco has the documentary evidence to support the tax payable on the assets, to the extent the assets are for consumption use or supply in Wifeco's commercial activity. Wifeco would be entitled to claim an ITC for this tax payable pursuant to subsection 169(1), and/or paragraph 199(2)(b).
However, when there is a supply of business assets and if the tests in section 167.1 are met, there will be no tax payable on the part of the consideration for the business or part of the business that can reasonably be attributed to goodwill. The tax charged on the goodwill is not "tax", because tax is defined in subsection 123(1) as tax payable under the Part IX of the ETA. Since a registrant can only claim an ITC for tax paid or payable, there is no ITC entitlement for the GST charged on the goodwill, as this amount is not "tax".
3. No, there is no allowable rebate, under subsection 296(2.1), available for the tax charged on the goodwill. Subsection 296(2.1) allows an unclaimed amount of an "allowable rebate" to be applied against net tax assessed. An amount is an "allowable rebate" if the amount would have been eligible as a rebate had the person claimed it in an application filed on or before the due date of the return for the reporting period under assessment. In the situation as presented, Wifeco would not be entitled to a rebate of an amount paid in error for the tax charged on the goodwill. In order to claim a rebate under section 261, the provision requires the person to have paid an amount as or on account of tax. Since Wifeco did not pay any amount as or on account of tax, Wifeco cannot claim a rebate under section 261, and therefore there is no "allowable rebate" under subsection 296(2.1).
4. Yes, the CRA can assess Wifeco for tax payable under Division II. Although the CRA will not generally intervene to assess the tax payable by the purchaser under section 165, the CRA may assess tax payable under paragraph 296(1)(b) in circumstances of potential revenue loss. Under paragraph 298(1)(c), the time limit for assessing tax payable under paragraph 296(1)(b) is no later than 4 years from the day the tax became payable. Under section 168, tax is payable the earlier of the date the consideration was paid or becomes due. Subsection 152(1) deems consideration for a taxable supply to become due on the earliest of:
(a) the earlier of the day the supplier issues an invoice in respect of the supply for that consideration or part, and the date of that invoice,
(b) the day the supplier would have, but for undue delay, issued an invoice in respect of the supply for that consideration or part, and
(c) the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.
I trust this information is of assistance. Should you have any questions on the above information, please do not hesitate to contact me.
Pat
Patricia Taylor, CMA
Senior Rulings Officer
General Operations Unit
Excise & GST/HST Rulings Directorate
Policy & Planning Branch
Canada Revenue Agency (CRA)
613-952-8806
Fax: 613-990-1233
2005/01/26 — RITS 33697 — Section 156 of the Excise Tax Act
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