11650-7 (pl)
Sections 173 & 202
Telephone: (613) 954-8585
Fax: (613) 990-1233
XXXXX July 25, 1995
Dear XXXXX
Thank you for XXXXX e-mail message dated July 12, 1995, in which he requests a GST interpretation of section 173 and subsections 202(2) and (4) of the Excise Tax Act (the "ETA") in reference to the input tax credit allowed to a registered individual on the acquisition of a passenger vehicle.
Statement of Facts:
In your memo you provide the following facts for our consideration:
• a registered individual (the "registrant") acquires a passenger vehicle which is used 80% in the registrant's commercial activities;
• the remaining 20% use of the passenger vehicle represents the personal use portion by a person who is an employee of the registrant (the "employee");
• the personal use portion is considered to be a taxable benefit to the employee pursuant to paragraph 6(1)(e) of the Income Tax Act.
Your questions are whether:
1. the registrant is entitled to a full input tax credit on the GST paid on the passenger vehicle pursuant to subsection 202(2) of the ETA;
2. the registrant is entitled to a CCA-based input tax credit on the GST paid on the passenger vehicle pursuant to subsection 202(4) of the ETA; and,
3. the registrant is required to remit tax in respect of the taxable benefit in accordance with subsection 173(1) of the ETA
DEPARTMENT'S POSITION:
Where a passenger vehicle (or aircraft) is acquired or imported by a registered individual (or partnership) all or substantially all (90% or more) in the course of the registrant's commercial activities, the property will be deemed under subsection 202(2) of the ETA to be used exclusively in its commercial activities. Accordingly, the registrant is entitled to a full input tax credit on the acquisition or importation of the passenger vehicle or aircraft.
On the other hand, where a passenger vehicle (or aircraft) is used other than exclusively in the commercial activities of a registered individual (or partnership), subsection 202(4) of the ETA provides that the registrant is entitled to an input tax credit equal to the tax fraction (7/107) of the capital cost allowance deducted on the passenger vehicle (or aircraft) under the Income Tax Act (the "ITA"). Moreover, subparagraph (i) of element B of paragraph 202(4)(b) of the ETA denies the input tax credit where the passenger vehicle (or aircraft) gives rise to a taxable benefit pursuant to paragraph (6)(1)(e) or subsection 15(1) of the ITA [Please note that this provision is applicable for taxation years ending after March 1991].
Having said this, the central issue in the case at hand becomes whether the employee's use of the passenger vehicle provided by the registrant is considered to be commercial activity of the registrant. In other words, is the use of the passenger vehicle by the registrant considered to be 80% (i.e., less than exclusively) in commercial activity or is it used exclusively (i.e., 80% + 20%) in commercial activity? By examining the issue, our findings will in turn allow us to provide you with the interpretation requested above.
Subsection 173(1) of the ETA says that where a registrant makes a supply (other than an exempt or zero-rated supply) of property or service to an employee or shareholder of the registrant where the supply is considered a taxable benefit under paragraph 6(1)(a) or (e) or subsection 15(1) of the ITA, the registrant is deemed to have made a supply to the employee or shareholder. Furthermore, paragraph 173(1)(d) of the ETA deems the employee's or shareholder's personal use of the property (other than the supply of property by way of sale) that gives rise to a taxable benefit, to be part of the registrant's commercial activities. Lastly, when determining the net tax of the registrant on the supply, subparagraph 173(1)(e)(iii) of the ETA provides that no amount will be calculated in circumstances where the registrant is an individual (or partnership) and the property is a passenger vehicle (or aircraft) of the registrant that is not used by the registrant exclusively in its commercial activities.
Generally, when reviewing the facts of a case, subsection 173(1) of the ETA is structured so that the deeming provision under paragraph (d) is first considered before applying the net tax calculation under paragraph (e). Therefore, it is our understanding that the exceptions to the net tax calculation provided under paragraph 173(1)(e) of the ETA must include not only the actual commercial use of the property by the registrant but also the deemed commercial use portion established under paragraph (d) when establishing the registrant's total commercial use of that property. More specifically, the exclusivity test under subparagraph 173(1)(e)(iii) of the ETA discussed above will therefore include any deemed commercial use portion calculated under paragraph (d) of the ETA.
It should be noted that if the deemed commercial use rule did not apply, in circumstances where, for instance, the registrant (other than an individual or a partnership) acquires a passenger vehicle primarily for the personal use of an employee (i.e., 60%) and the remaining portion is used by the registrant to make taxable supplies (i.e., 40% commercial activity), the registrant would be relieved from remitting tax on the employee's benefit amount pursuant to subparagraph 173(1)(e)(iv) of the ETA. If this was the case, the employee's personal use of a passenger vehicle would only be considered to be use in commercial activities where that use was less than 50%. With the introduction of paragraph 173(1)(d) of the ETA where the employee's personal use is equal to commercial use, this allows the registrant to claim a full input tax credit on the passenger vehicle (or aircraft) without having to monitor changes in the employee's personal use portion to determine whether a change-of-use rule would apply to the vehicle.
For these reasons, since the personal use of the passenger vehicle by the employee is considered, in the case at hand, to form part of the registrant's commercial activity by virtue of subsection 173(1)(d) of the ETA, thereby making the total use of the property exclusively in commercial activity (i.e., 80% commercial activity plus 20% deemed commercial activity), the registrant:
• will be allowed to claim a full input tax credit pursuant to subsection 202(2) of the ETA; and,
• will be required to remit tax in accordance with subsection 173(1) of the ETA on the employee's taxable benefit calculated on the passenger vehicle since the exception under subparagraph (e)(iii) (not exclusively used in commercial activity) will not apply in the circumstance.
If you require further information, please contact Michael Matthews, A/Manager, ITC Unit at 952-8806, or Paul Lafond, the officer responsible for employee benefits and the passenger vehicle rules at (613) 954-9700.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
XXXXX
| c.c.: |
M. Matthews
P. Lafond |
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