August 18, 1994
Dear XXXXX
I refer to your memorandum of October 19, 1993 requesting clarification on the interpretation of subsection 176(1) of the Excise Tax Act (the "Act") and the meaning of used goods acquired for the purpose of supply with respect to claiming notional input tax credits (ITC). I apologize for the delay in my response.
The Department's Position:
Subsection 176(1) specifies that where a registrant purchased used goods prior to 1994, the property must have been acquired for the purpose of "supply". It is the Department's position that recycling, altering or transforming represents manufacturing or processing and that used goods are "used" or "consumed" in the process of being recycled, altered or transformed rather than "supplied".
The issues you raised in your letter initiated a review of the general policy in this area. More recently, an intensive lobbying effort by the XXXXX resulted in a more in-depth analysis of the policy especially with respect to the transformation of used goods. This review is now complete and the Policy Review Committee for the Policy and Legislation Directorate has determined that the current administrative policy will stand pending the outcome of an impending court case XXXXX[.] This case addresses the issues of XXXXX[.]
In your letter you provide three examples for our review and comment. The analysis and response to each of these examples follows.
Example 1. Scrap metal dealer
Statement of Facts
1. A registrant scrap metal dealer acquires scrap such as wrecked cars, copper pipe, and all types of commodities that contain some metal, from non-registrants.
2. The scrap is sold for use as raw material in manufacturing operations goes through varying degrees of processing prior to sale in order to enhance its value and saleability.
3. The type of scrap metal and degree of processing are as follows:
a) brass sorted, cleaned and placed as is into barrels or boxes for sale.
b) copper sorted and compressed into bricks for sale.
c) aluminum
i) compressed into bales and wrapped in metal bands.
ii) turnings or bits bagged for sale as is.
iii) melted down and sold as ingots.
d) steel cut or shredded then sold in that form.
e) miscellaneous batteries, water heaters, etc. shrink wrapped for sale as is.
Question:
Is the scrap metal dealer entitled to notional input tax credits on the purchase of the scrap in the above cases?
Response:
Used goods acquired prior to 1994 will be eligible for the notional ITC only in respect of those goods acquired for the purpose of supply. The Department considers used goods to be acquired for the purpose of supply (rather than consumption or use) if the property is to be sold, leased, rented, or otherwise supplied, and if it is not to be substantially transformed. The property may be cleaned, restored, maintained repaired, packaged, but only to the extent reasonably necessary or incidental to its resupply. In no case may the property be improved beyond its original state or transformed into different property.
Each of the fact situations identified in fact statement 3 were evaluated against the administrative policy. Based on this policy, the rulings given would be as follows:
3(a) The brass is being sorted, cleaned and placed as is for sale. Since the goods are not considered to be transformed and are being supplied in the same form in which they were acquired, the goods would be considered as acquired for the purpose of supply and the notional input tax credit would be allowed.
3(b) The copper is being compressed into bricks. This would be considered a transformation of the goods from one form to another and in the absence of additional information to clarify the fact situation, the property would not be considered to have been acquired for the purpose of supply. Notional input tax credits would be denied in these cases where the goods were acquired prior to 1994.
3(c)i) The aluminum is being compressed into bales. This would be considered transformation of the goods from one form to another and in the absence of additional information to clarify the fact situation, the property would not be considered to have been acquired for the purpose of supply. Notional input tax credits would be denied in these cases where the goods were acquired prior to 1994.
3(c)ii) The aluminum turnings and bits are being bagged as is for sale. Since the goods are not considered to be transformed and are being supplied in the same form in which they were acquired, the property would be considered to have been acquired for the purpose of supply. The used goods would be eligible for notional input tax credits.
3(c)iii) Since the aluminum is being melted down into ingots, it would be considered that the goods have been transformed into different goods, the property would not be considered to have been acquired for the purpose of supply. Notional input tax credits would be denied where the goods were acquired prior to 1994.
3(d) Since the steel was cut or shredded which involves a transformation of the goods into different goods, the property would not be considered to have been acquired for supply. Therefore, notional input tax credits would be denied where the goods were acquired prior to 1994.
3(e) Scrap material acquired for resupply in its same condition would be eligible for notional input tax credits since the property was acquired for supply without being used or consumed by further manufacture or transformation.
After 1993, the notional input tax credit will be available where used tangible personal property is acquired for consumption, use or supply in the course of commercial activities.
Example 2. Used Aircraft
Statement of facts
1. A registrant acquires a used aircraft from a non-registrant before 1994.
2. The registrant installs an entirely rebuilt engine.
3. The registrant subsequently resupplies the used aircraft.
Question:
Is the registrant entitled to a notional input tax credit on the purchase of the used aircraft?
Response:
Yes. The registrant acquired a used aircraft and subsequently supplied a used aircraft. The maintenance and repair work restored the aircraft to its original working condition. The fundamental nature of the used good, in this case the aircraft, has not been changed simply by the addition of a rebuilt engine.
Example 3. Auto Wrecker
Statement of facts
1. An auto wrecking firm, registered for the GST, acquires used vehicles from non-registrants.
2. The vehicles are subsequently dismantled in order to supply the various parts.
3. The registrant crushes the remainder of the vehicle after the usable parts have been removed and sells the crushed metal to steel manufacturers as raw material.
Question:
Is the auto wrecker entitled to claim notional input tax credits on the purchase of used vehicles?
Response:
Where property, such as a used vehicle, is acquired prior to 1994 for supply as a unit, or for supply as individual parts, or as parts incorporated in other manufactured or remanufactured goods, and the vehicle or its parts are not transformed except to the extent that is reasonably necessary or incidental to its supply, then a notional input tax credit may be claimed.
However, where a used vehicle is acquired prior to 1994 to be crushed, compressed, smelted, or otherwise transformed to be supplied as scrap metal, this is considered to be consumption of the property and the registrant would be ineligible to claim a notional ITC.
Where a used vehicle is acquired prior to 1994 partially for resupply of parts and partially for sale as scrap, the notional input tax credit is available only to the extent that the consideration for the vehicle can reasonably be attributed to the parts acquired for resale.
After 1993, notional input tax credit will be available where used tangible personal property is acquired for consumption, use or supply in the course of commercial activities of the registrant.
Recent Events
Two meetings have recently been held with XXXXX representatives and senior management to discuss the issues and concerns of XXXXX members. The primary concern raised by XXXXX during their meetings was the issue of notional input tax credits and purchases of scrap metals and the interpretation taken by the Department on the meaning of used goods acquired for the purpose of supply. Other concerns related to audit inconsistencies; the federal sales tax rebate and inventory of scrap metals; and the recapture of notional input tax credits on exports of scrap metal prior to 1994.
At the last meeting, XXXXX was informed that the Department's interpretation of the meaning of acquired for the purpose of supply would remain unchanged pending the finalization of the XXXXX. Further, they were informed that while there may have been inconsistencies in audit practices across the country, these inconsistencies could not be used to formulate administrative policy in this area. For your information, letters have been sent to both XXXXX has indicated that there are more inconsistencies in XXXXX and Audit Programs to verify the interpretation used by auditors.
XXXXX was also informed that their members would not be entitled to claim the inventory rebate for used goods held at December 31, 1990, as the goods did not satisfy the legislative definition of "tax-paid" goods. Further, XXXXX was informed that once the court judgement was handed down in the XXXXX, the policy would be adjusted, if necessary, to reflect the decision of the court.
Thank you for bringing your concerns to our attention. If you have any further questions on these issues, please contact Gwen Preston at (613) 952-8530.
Yours truly,
H.L. Jones
Director
General Tax Policy
Policy and Legislation
Excise/GST
XXXXX
| c.c.: |
M. Matthews
G. Preston |
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