22 August 1994 GST/HST Interpretation 1994-08-22 - Paintings Purchased Prior to 1991

Dear XXXXX

Thank you for your memorandum of February 15, 1993, as well as subsequent memorandum and facsimiles in which you requested our comments regarding the application of subsection 176(5) of the Excise Tax Act (the "Act") to paintings purchased prior to 1991.

Statement of Facts:

Our understanding of the relevant facts presented in correspondence to headquarters is as follows:

XXXXX purchased the paintings between 1977 and 1989. The paintings were purchased for the account of XXXXX and were not purchased on behalf of any other member of the corporate group. XXXXX recovered only the costs it incurred in respect of operating expenses by charging a monthly fee to XXXXX. The monthly fee was in respect of the depreciation of furniture and fixtures which included the paintings. The amount charged in respect of the paintings did not represent the recovery of amounts incurred to purchase the paintings.

On XXXXX, an amalgamation of the XXXXX took place pursuant to subsection 85(1) of the Income Tax Act.

Upon amalgamation the collection of paintings was transferred from XXXXX to XXXXX. XXXXX subsequently supplied the paintings to XXXXX in exchange for shares of XXXXX[.]

XXXXX and XXXXX are successor corporations to XXXXX that were formed as a result of the amalgamation.

The solicitor for XXXXX cites subsection 176(5) of the Act in arguments that the paintings have been used exclusively in the course of non-commercial activities and therefore the paintings are not taxable on resupply pursuant to section 141(3) of the Act which deems the sale of the paintings to XXXXX to have been in the course of activities that are not commercial activities.

You enquired as to whether subsection 176(5) of the Act will apply to specified tangible personal property acquired by way of purchase prior to 1991 where the consideration for the property exceeded the threshold amount prescribed in GST Regulation SOR/91-20? In addition, you stated that you would appreciate any further information that we may have regarding the intent of subsection 176(5) of the Act.

The Department's PositionHE DEPARTMENT'S POSITION:

Subsection 176(5) of the Act would apply to property acquired prior to 1991. The technical wording contained in this provision does not exclude any property acquired prior to the introduction of the GST since there is no reference to tax which was paid or deemed to have been paid. Notwithstanding, that the property was originally acquired without any GST and that the subsequent resupply of the property after 1991 would not be subject to GST, the overall design of the Act supports this interpretation. Indeed, subsection 198.1 of the Act was introduced to ensure that where a change-in-use occurs as a result of a legislative change or where the person ceases to be a registrant, that the amount of tax deemed to be collected by the registrant does not exceed the amount of tax originally paid. In other words, if no tax had been paid on the property (and thus, no input tax credits claimed) the change of use rules would not give rise to a liability. In the absence of this special provision we can conclude that property acquired prior to 1991 would have been subject to the change of use rules. It thereby follows that property acquired prior to 1991 would fall within the general application of the Act, including subsection 176(5).

Based on the statement of facts in this case, XXXXX is deemed to have acquired the paintings for use, and to have used the paintings at all times, exclusively in the course of activities other than commercial activities. As a result, the supply of the paintings to XXXXX would not be subject to GST.

Based on our discussions with the XXXXX Department of Finance, it is our understanding that the intention of subsection 176(5) of the Act was designed to prevent tax cascading in cases where a registrant was denied the input tax credit (whether real or notional) on the original acquisition of specified tangible personal property. Toward that end, this provision deems the use of the property to be used exclusively in non-commercial activities thus ensuring that any subsequent disposition of the property does not attract tax. Although the disposition of the property would not be subject to GST, the registrant acquiring the used property by way of purchase will only be entitled to the notional input tax credit if they acquired the property for the purpose of supply (since the subsequent supply by the registrant would be fully taxable the notional input tax credit in effect ensures that tax is only charged on the difference between the acquisition cost and the selling price). However, based on the facts in this case, XXXXX would not be eligible for a notional input tax credit unless they acquired they property exclusively for supply.

If you require additional information regarding this situation please contact Joseph Cuillerier at 954-9875 or Michael Matthews at 952-8806.

Yours truly,

H.L. Jones
Director
General Tax Policy
Policy and Legislation
Excise/GST

XXXXX