Gentlemen:
I refer to your letter of September 18, 1995 which was in reply to our letter of July 18, 1995, that dealt with the claiming of input tax credits, both actual and notional, by automobile dealers for tax paid on the acquisition of used vehicles.
The Excise Tax Act (the "ETA") is quite clear in placing the onus on the taxpayer to meet the necessary conditions before claiming any input tax credits ("ITCs"). That is, the burden of proof rests on the claimant to justify the entitlement to claim any ITCs, whether they are actual ITCs or notional.
While I appreciate the comments and concerns raised by the various automobile associations, it must be understood that our letter reflects the application of the legislation. Subsection 176(1) of the ETA clearly specifies that notional ITCs may only be claimed by a registrant when there is no tax payable on the sale of the used goods to the registrant. I understand you believe that this policy may place dealers at risk and that you also believe this to be an unreasonable burden, however, if tax is payable on the supply, there is no entitlement to a notional ITC under this provision.
As for your comparison of our administration of the ETA with the administration of the Income Tax Act (ITA), the two Acts are not directly comparable. The ITA taxes income whereas the ETA taxes transactions. Our administration of this provision is consistent with other enforcement provisions of the ETA. Further, the entitlement to claim ITCs for tax paid or payable on expenses still depends on meeting legislated requirements.
As for requiring an automobile dealer to ascertain the registration status of a vendor, it is a question of fact whether a vendor is a registrant. It is not sufficient for a dealer to simply question a vendor's status and to accept a reply to the negative in order to absolve the dealer of any further responsibility in this area. Furthermore, there is no significant financial risk to the dealer where there has been misrepresentation as to the registration status of the vendor since the dealer would generally be entitled to claim actual ITCs, which would be for the same amount as the notional ITC if the notional ITC claim is denied. This is assuming that the dealer obtains the necessary information to support the claim for actual ITCs. Whether penalty and interest apply would depend on the particular circumstances of each case.
As for your comment about seeking compensation from the person who made the supply, if the vendor is in fact a registrant, that is, tax is payable on the transaction and the supply was represented as a non-taxable transaction, the Department will pursue the vendor for the correct collection and remittance of tax. However, this action will not change the fact that the dealer will not be entitled to claim notional ITCs on the transaction.
One of your examples cites the case of a self-employed individual selling an automobile through their business. In fact, this scenario should not occur very frequently since, in most cases, the individual will not be using the vehicle 90% or more in the commercial activity of a sole-proprietorship. Consequently, the individual would not be entitled to claim ITCs on the automobile and no tax would be payable on the subsequent sale of the automobile, even though the automobile has been used in the commercial activity of the individual.
I regret that I am unable to provide a more favourable explanation of the application of the legislation to your industry members and trust these comments will assist you in understanding our position on these issues. We appreciate your offer to disseminate our viewpoints on this matter to your industry members. Further to your request to meet to discuss this issue, a meeting has been arranged for Wednesday, December 13, 1995 at 2 p.m. in our offices.
If you require any further details concerning this meeting, please contact Gwen Preston of my staff at (613) 952-8530.
Yours sincerely,
W.K. McCloskey
Director General
GST Rulings & Interpretations Directorate
Policy and Legislation Branch
GAD 2593 (GEN)
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| c.c.: |
M. Matthews
G. Preston |
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