28 August 1996 GST/HST Interpretation 11650-7[1] - Taxable Benefits and Passenger Vehicle Rules

Dear XXXXX

This is in reply to your facsimile transmission dated July 4, 1996 in which you request a GST interpretation of section 173 of the Excise Tax Act (the "ETA") in reference to the amendments proposed in the Notice of Ways and Means Motion tabled April 23, 1996.

In your facsimile transmission you provide the following questions for our review and response:

Question 1:

Proposed amendment to subsection 6(7) of the Income Tax Act

The amendment proposed to subsection 6(7) of the Income Tax Act (the "ITA") requires that benefits arising under paragraph 6(1)(e) of the ITA be computed as though the cost of an automobile and the cost of a lease of an automobile should include GST.

Why are automobiles singled out for this treatment? Furthermore, why are benefits taxed under paragraph 6(1)(a) of the ITA not also required to include GST? For example, an employer makes a company owned computer available to an employee. A taxable benefit arises under paragraph 6(1)(a) of the ITA.

i) Is the value of that benefit to include GST or not?

ii) Does the department believe that the benefit would be calculated differently by an employer able to recover full input tax credits and by one who could not?

Answer 1:

Our understanding of the proposed treatment of employee benefits is that, instead of a separate add-on of a GST component on the income tax benefit, the benefit amount to be included in income under paragraph 6(1)(a) or (e) of the ITA is to be determined inclusive of the GST paid by the employer or corporation for the property or service which gives rise to the benefit. This is achieved by repealing paragraph 6(1)(e.1) and amending subsection 6(7) of the ITA to provide that any tax payable by the employer or corporation in purchasing or leasing an employer-provided automobile be included in the calculation of a benefit determined under paragraph 6(1)(e) of the ITA.

The calculation must include any GST or provincial tax payable by the employer or corporation as well as such tax that would have been payable but for the fact that the employer or corporation is exempt from the payment of the tax because of:

i) the nature of the employer or corporation (e.g., where the employer is a provincial government); or,

ii) the nature of the use of the property (e.g., where the provincial tax exemption applies to the property acquisition based on the use of the property).

With this in mind and referring to your example above, the value of the employee's taxable benefit on the company-owned computer calculated pursuant to paragraph 6(1)(a) of the ITA will be a GST included amount. Finally, a taxable benefit calculated for income tax purposes will not differ whether or not the employer is entitled to an input tax credit under the ETA on the property or service provided to the employee.

Question 2:

Taxation of Partners

Where a partner has the use of a partnership-owned automobile, the partner is taxed on a standby charge as business income under paragraph 12(1)(y) of the ITA. The partner is not taxed under paragraph 6(1)(e) or subsection 15(1) of the ITA which apply, respectively, to employees and shareholders. Section 173 of the ETA does not require that a registrant partnership remit GST on the value of this benefit. Why are partnerships singled out in this fashion?

Answer 2:

In circumstances where a partnership-owned passenger vehicle is used personally by a member of the partnership (or an employee of a member of the partnership), the partnership is not entitled to an input tax credit on the acquisition or importation of the passenger vehicle by virtue of subsection 202(2) of the ETA since that use is considered not to be use in the partnership's commercial activity. Accordingly, subsection 173(1) of the ETA will not apply to recapture any input tax credit previously claimed by the partnership on the personal use portion required to be assessed to the member of the partnership under paragraph 12(1)(y) of the ITA.

Question 3:

Payments by Employees/Shareholders

Prior to the technical amendments, it was not immediately clear how to treat payments made by employees or shareholders against amounts that gave rise to taxable benefits. For example, an employee in Alberta (no PST) uses an employer-owned automobile. The automobile costs $20,000. The employee pays all the operating costs personally and pays $1,200 a year towards the capital cost.

The accounting appears to be:

(a) Is this correct?

(b) The Notice of Ways and Means Motion proposes that tax under subsection 173(1) of the ETA be amended. Does this mean that benefits relating to other than automobiles will continue to be treated under the rules outlined above?

(c) Where the benefit relates to an automobile, the income tax benefit and the amount reimbursed are to be added together and tax paid on the total. Should there not also be a provision which deems the reimbursement not to be a supply (it may be that proposed paragraph 173(1)(v) is to do this)? Without this provision, it would appear that the reimbursement is not otherwise relieved of tax so that GST would be due when it is made. The net GST amount and the income tax benefit would then be subject to tax again under subsection 173(1) of the ETA. Is this intended?

Answer 3(a):

The calculation of the GST deemed collected by the employer in the above example is incorrect. The correct amount of GST calculated in accordance with subsection 173(1) of the ETA as it applies prior to the technical bill changes is as follows:

Answer 3(b):

Under the proposed legislation, the GST remittance by a registrant pursuant to subsection 173(1) of the ETA would be equal to:

•   the prescribed percentage of the total consideration (i.e., the total of the benefit amount and all reimbursements) as required to be included in the individual's income under paragraphs 6(1)(k) or (l) of the ITA; and,

•   in any other case, 6/106th of the total consideration

Accordingly, the GST deemed collected will be calculated as 6/106ths of the total consideration except for automobile operating expense benefits [6(1)(k) and (l) of the ITA] which will continue to be calculated using a "prescribed percentage" [i.e., the GST remittance will be equal to the prescribed percentage (currently 5%) of the total consideration]. Please note that the prescribed percentage only applies to the automobile operating cost benefit and not to the standby charge benefit [please refer to our second calculation above in answer 3].

Answer 3(c):

Under the existing legislation, for purposes of determining the GST deemed collected under subsection 173(1) of the ETA, the tax is calculated on the "adjusted benefit" (i.e., the supply of the benefit amount less any applicable taxes) and excludes any reimbursement made by the employee or shareholder against the benefit amount. The reimbursement is considered to be a separate supply and tax equal to 7/107 of the amount reimbursed is remitted by the employer in the return for the reporting period in which the reimbursement was received from the employee or shareholder.

Under proposed subparagraph 173(1)(d)(v) of the ETA the total of the benefit amount and the reimbursement is deemed to be the "total consideration" payable in respect of providing property during the year to an individual or a person related to the individual. GST is then calculated accordingly under proposed subparagraph 173(1)(d)(vi) of the ETA on the total consideration rather than on a supply by supply basis as discussed above. Therefore, since these two methods of calculating the GST on the benefit amount differ somewhat, it is our opinion that there is no need to include in the proposed amendments to subsection 173(1) any discussion pertaining to the supply of the reimbursement.

Question 4:

Election under subsection 173(2) of the ETA

Why are registrants who are not financial institutions not allowed to make the election under subsection 173(2) of the ETA on owned vehicles?

Answer 4:

Since the Department of National Revenue's responsibility is to administer the ITA and the ETA (among other Acts) any questions relating to legislative policy is the responsibility of the Department of Finance. We can, however, confirm your understanding that, where a registrant (other than a financial institution) acquires a passenger vehicle or aircraft by way of purchase, the registrant is not entitled to make the election in respect of that passenger vehicle or aircraft as provided under subsection 173(2) of the ETA.

Question 5:

Input Tax Credits on Passenger Vehicles

(a) Why does subsection 202(4) of the ETA deny an ITC to an individual or partnership which owns an automobile which gives rise to a benefit under paragraph 6(1)(e) or subsection 15(1) of the ITA?

(b) How can subsection 15(1) of the ITA apply to an individual or partnership anyway?

(c) Why does the ITC limitation not apply where a benefit arises under paragraph 12(1)(y) of the ITA [it seems strange that a partnership can claim an ITC (based on CCA claims) where a vehicle is made available to a partner but not where it is made available to an employee]?

Answer 5(a):

The input tax credit is denied in the circumstance you described because, by virtue of subparagraph 173(1)(e)(iii) of the ETA [or proposed subparagraph 173(1)(d)(iii)], GST does not apply to a taxable benefit related to a passenger vehicle or aircraft used otherwise than exclusively in commercial activities of a registrant who is an individual or partnership.

Answers 5(b) and 5(c):

We are seeking confirmation of the intent of the Department of Finance on these two issues and will forward to your attention any explanation we receive from them.

This interpretation is based upon our current understanding of the proposed amendments to the ETA and Regulations thereunder in their present form and does not take into account the effects of any future amendments thereto or future changes in interpretation.

Further, while we trust that our comments are of assistance to you, we would advise that they do not constitute a GST ruling and are, therefore, not binding upon the Department in respect of any particular fact situation.

If you require further information, please contact Michael Matthews, Manager, Industries Unit at (613) 952-8806.

Yours truly,

H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations Directorate

GAD #: 3111 (GEN)