11650-1 (ms)
Sections 123 & 200
Dear XXXXX
Thank you for the memorandum dated December 21, 1994, from XXXXX, in which you request a GST interpretation of certain issues relating to eligible capital property and capital property in reference to the purchase of an "insurance book'' as part of the purchase of assets of a company in receivership.
Statement of Facts:
In your memorandum you provide the following facts for our consideration:
1. On April 15, 1991, XXXXX (the purchaser) purchased the assets of two insurance agencies, XXXXX (which were both in receivership) from XXXXX which was acting as interim receiver and manager. The purchase price was XXXXX[.] These assets included furniture, equipment and an insurance book. At all times prior to the disposition of the assets, neither XXXXX used the assets in commercial activities.
2. The receiver collected and remitted to Revenue Canada the GST in the amount of XXXXX on the full purchase price of the agencies' assets, including the amount attributable to the insurance book.
3. The purchaser claimed a rebate of the full XXXXX as GST paid in error for the tax charged by the receiver.
4. A GST ruling based on information that the assets were not capital property concluded that the GST was correctly charged by the receiver.
5. Upon clarification of this information by the purchaser's representative, XXXXX XXXXX concluded that the furniture and equipment that was supplied in receivership was capital property and that the insurance book was not capital property.
6. XXXXX has made further submissions that the insurance book is capital property, and it is therefore not subject to GST upon sale, pursuant to subsection 200(3) of the Excise Tax Act (ETA), as the insurance book was not primarily for use in commercial activities before disposition.
Questions
Your questions are:
1. Is the purchase of an insurance book considered to be the purchase of a customer list, goodwill or both?
2. Is a customer list a deductible expense or eligible capital property for the purposes of he Income Tax Act?
3. How does Revenue Canada Excise interpret "capital property" as defined under subsection 123(1) of the Excise Tax Act (ETA)? Specifically, is the definition broad enough to include eligible capital property?
Department's Position:
We have consulted with the Income Tax Rulings and Interpretations Directorate and we have incorporated their views in our comments.
1. With respect to the transaction in question, the purchase of the insurance book is considered to be the purchase of a customer list rather than of goodwill. Paragraph 6 of Interpretation Bulletin IT-143R2 states that "Goodwill cannot be divorced from the business, and may be sold with the business, but it cannot be sold separately. Generally, goodwill arises as a recognizable asset only when a business is acquired at price in excess of the value, as a going concern, of the net assets". Under the circumstances, it is clear that the insurance book cannot be treated as goodwill, and can best be characterized as a customer list.
2. We agree with your conclusion that, in the circumstances, the insurance book (customer list) represents eligible capital property. Paragraph 4 of Interpretation Bulletin IT-386R indicates that there is a "mirror-image test" to determine whether an amount which a taxpayer has received in connection with a business as a result of the disposition of property, is proceeds from the disposition of eligible capital property. In effect, a taxpayer disposing of property in connection with a business "looks in the mirror" to see whether, if the taxpayer were instead purchasing the property, its cost would qualify as an eligible capital expenditure of the taxpayer for the same business. The mirror image test is particularly significant in determining whether dispositions of customer lists will be considered to be dispositions of eligible capital property. Paragraph 8 of Interpretation Bulletin IT-143R2 states that "where a taxpayer acquires lists or ledger accounts of clients, customers or subscribers, it is necessary to determine whether the cost of acquisition is a capital expenditure, or an expense in the year. Generally, the cost of purchasing a customer list which brings an enduring benefit to the business of the purchaser is a capital outlay and is an eligible capital expenditure." Therefore, the customer list would be considered to be eligible capital property.
3. Subsection 123(1) of the ETA states that "capital property, in respect of a person, means property that is, or would be if the person were a taxpayer under the Income Tax Act, capital property of the person within the meaning of that Act, other than property described in Class 12, 14 or 44 of Schedule II of the Income Tax Regulations." When the word "means" is used in a definition, that definition is restrictive. The meaning of the word or phrase is narrowed to what is contained in the definition. Therefore, the meaning of capital property in subsection 123(1) of the ETA is limited to the meaning of capital property under the Income Tax Act. There is a specific direct relationship between the two Acts with respect to the definition of capital property.
Subsection 248(1) of the Income Tax Act provides that the terms "eligible capital property"' and "capital property" have the meanings assigned by section 54 of that Act.
Paragraph 54(d) of the Income Tax Act defines "eligible capital property "as "any property, a part of the consideration for the disposition of which would, if the taxpayer disposed of the property, be an eligible capital amount in respect of a business."
Interpretation Bulletin IT-386R, paragraph 1, states that "eligible capital property of a business may be broadly described as intangible capital property, such as goodwill and other "nothings", the cost of which neither qualifies for capital cost allowance nor is fully deductible in the year of acquisition as a current expense."
Paragraph 54(b) of the ITA defines "capital property" as a) any depreciable property or b) any property (other than depreciable property) on which any gain or loss on disposition would be a capital gain or a capital loss. Accordingly, the issue of whether a property is a capital property is determined by the definition of capital gain and capital loss.
Capital gains or losses are defined under subsection 39(1) of the ITA. Subparagraph 39(1)(a)(i) specifically excludes the gain from a disposition of eligible capital property from the meaning of a taxpayer's capital gain. Similarly, under subparagraph 39(1)b)(ii), the loss from the disposition of an eligible capital property is excluded from the meaning of a taxpayer's capital loss.
In conclusion. under the Income Tax Act, capital property does not include eligible capital property. Therefore, it is our view that the definition of capital property in subsection 123(1) of the ETA also does not include eligible capital property, because of the close connection between the Income Tax Act definition of capital property and the definition in subsection 123(1) of the ETA.
We have reviewed the draft response enclosed with your memorandum. While we are in agreement with your comments that the furniture and equipment that were supplied by the vendor in this transaction are likely capital property, we would point out that subsection 200(3) of the ETA does not apply if the vendor is a financial institution, by virtue of paragraph 200(1)(a). Accordingly, subsection 200(3) cannot be the authority for a rebate on the basis that tax was paid in error, in the circumstances that the vendor is the vendor is a financial institution.
If you require further information, please contact Michael Matthews, A/Manager, ITC and Co-ordination Unit, at (613) 952-8806, or Mark Seigel, the officer responsible for capital property issues, at (613) 952-1512.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Doc. #: 1056 (REG)
c.c.: John Sitka
M. Matthews
M. Seigel
Marlene Legare, Department of Finance
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