File 11650-1(MM)
Section 171
Telephone: (613) 954-8585
Fax: (613) 990-1233
XXXXX
TIS Team Leader
Client Services Division
XXXXX
XXXXX June 19, 1995
Dear Mr. XXXXX
Thank you for your E-mail message dated March 23, 1995, sent by Mr XXXXX (one of your officers) concerning the application of subsection 171(1) of the Excise Tax Act ("the ETA").
Statement of Facts:
In your e-mail message you provided the following scenario:
• a person involved in a manufacturing business chooses to voluntarily register;
• the business started in the summer of 1994 and the small supplier threshold has not been exceeded;
• some of the materials purchased for the manufacturing process are on hand, in the same form as originally purchased. Other materials has been used and therefore transformed into finished goods. The finish goods on hand are inventory.
You stated that there is no problem with the registrant claiming input tax credits in respect of the unprocessed materials. However, with respect to the finished product, the input tax credit should be denied based on a strict interpretation of the wording contained in subsection 171(1) of the ETA. In particular, you stated that although GST may have been payable or was paid on the materials, the property has been transformed. Where the raw materials have been incorporated into a finished product, it is the finished product which would be the property held for consumption, use or supply in the course of the commercial activities of the person. You also indicated that since GST is remitted in respect of the raw materials and on the sale of the finished product that there would be in effect double taxation if no input tax credit was allowed. However, you concluded that unless the Department accepts a broad interpretation of subsection 171(1) of the ETA, there will not be any input tax credits allowed in respect of the finished product.
DEPARTMENT'S POSITION:
The Department's position is that input tax credits are not allowed in respect of goods manufactured by a small supplier which are held by the small supplier for consumption, use or supply in the course of the person's commercial activities. Specifically, paragraph 171(1)(a) of the ETA deems the person to have received a supply by way of sale of each property of the person that was held immediately before that time for consumption, use or supply in the course of the person's commercial activities. Paragraph 171(1)(b) of the ETA deems the person to have paid tax in respect of the supply equal to the lesser of (i) the total tax charged in respect of the property, that became payable or was paid by the person in respect of the last acquisition or importation of the property and (ii) tax calculated on the fair market value of the property. In the case where raw materials are consumed or used in a manufacturing process, the property that is held by the person for consumption, use or supply in the course of commercial activities is the property manufactured by the small supplier. Although tax was paid or payable in respect of the property manufactured by the small supplier. Therefore, the amount in respect of the tax deemed under paragraph 171(1)(b) of the ETA would be zero and no input tax credits would be available to the person becoming a registrant.
If you require further information, please contact Michael Matthews, A/Manager, ITC Unit, at (613) 952-8806, or Raymond Labelle, the officer responsible for section 171 of the ETA, at (613) 952-8815.
Yours truly
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations Directorate
XXXXX
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