14 February 2006 GST/HST Interpretation 64941 - Appraisals on automobiles

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.

Dear XXXXX:

Thank you for your fax XXXXX addressed to the XXXXX Tax Services Office, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to meals and entertainment expenses.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Interpretation Requested

You are enquiring about the GST/HST implications of the recent Tax Court of Canada decision, Mark Stapley v The Queen, (2004-4052(IT)I, 2005 TCC 374 (hereafter referred to as "the Stapley decision"). In this case, Mr. Stapley, a self-employed real estate agent, deducted against his commission income the full cost of tickets to sporting events and concerts and gift certificates for food and beverages provided to clients. Mr. Stapley did not attend the sporting events or concerts with his clients, nor cash the gift certificates for food and beverages. The Tax Court ruled that the amounts were not subject to the application of subsection 67.1(1) of the Income Tax Act (the ITA) on the basis that the taxpayer did not attend any of the events nor consume any of the food or beverages.

You feel that this decision will have obvious GST implications since subsection 236(1) of the ETA requires a person to add back 50% of any input tax credits claimed in respect of meals or entertainment expenses that are also subject to the restriction in subsection 67.1(1) of the ITA, or that would be subject to the restriction, if the person was a taxpayer under that Act. If the Court has determined that certain expenses that are meals and/or entertainment in nature are actually in respect of producing business income and not the consumption of food or the enjoyment of entertainment, then it would seem the restriction on input tax credits contained in the ETA would also not apply.

You ask how the Canada Revenue Agency (the CRA) intends to administer the application of subsection 236(1) in light of this court case.

Interpretation Given

Although the Stapley decision was decided under the Tax Court's Informal Procedure, the CRA appealed the decision to the Federal Court of Appeal, because in the CRA's view, there is no requirement in subsection 67.1(1) of the ITA that the taxpayer must personally consume the food or beverages or enjoy the entertainment. On January 27th, 2006, the Federal Court of Appeal allowed the CRA's appeal. Therefore, our administration of subsection 236(1) remains unchanged. We consider that subsection 67.1(1) of the ITA limits the deductibility of these types of expenses to 50%, regardless of whether the taxpayer personally consumes or enjoys them. As a result, subsection 236(1) requires the person (the taxpayer) to recapture 50% of the input tax credits claimed on these expenses.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-8806.

Yours truly,

Patricia Taylor, CMA
General Operations Unit
General Operations & Border Issues Division
Excise and GST/HST Rulings Directorate

2006/02/13 — RITS 76852 — Application of GST/HST to a Certain Supply of Fresh Fruit in a Bowl