28 May 1996 GST/HST Interpretation 11650-3[2] - Input Tax Credit Entitlement on Passenger Vehicles

Re:      Input Tax Credit Entitlement on Passenger Vehicles

Dear XXXXX:

This is in reply to an electronic mail message dated April 10, 1996, and a recent telephone conversation with XXXXX of your office requesting a GST interpretation of subsection 202(4) and proposed new subsection 153(4) of the Excise Tax Act (the "ETA") concerning a registrant's input tax credit ("ITC") entitlement in respect of a passenger vehicle.

Statement of Facts:

Our understanding of the relevant facts presented by XXXXX in his e-mail message are as follows:

•   a GST registered individual acquires a passenger vehicle (the "vehicle") for use less than exclusively (i.e., less than 90%) in the registrant's commercial activities;

•   the vehicle is determined to be class 10 property under the Income Tax Regulations Schedule II - Capital Cost Allowances to the Income Tax Act (i.e, the cost of the vehicle does not exceed $24,000 excluding the applicable federal and provincial sales taxes);

•   class 10 also includes other property which have been allowed full ITCs at the time the property was acquired;

•   the registrant correctly calculates the ITC entitlement in respect of the vehicle under subsection 202(4) of the ETA equal to 7/107ths of the capital cost allowance ("CCA") that was deducted for income tax purposes in computing the income of the registrant for the taxation year.

XXXXX questions are:

1. whether the registrant is required to segregate the vehicle from all other properties in the class for purposes of determining the ITC entitlement on the vehicle;

2. how does the Department treat the disposition of the vehicle for GST purposes where there are no other properties in the class?;

3. if the registrant's vehicle was determined to be class 10.1 property under the Income Tax Regulations Schedule II - Capital Cost Allowances to the Income Tax Act (i.e, the cost of the vehicle exceeds $24,000 and, pursuant to Income Tax Regulations 1101(1af) to the Income Tax Act, each property under that class is prescribed to be in a separate class) rather than class 10 property, is the registrant permitted to claim an ITC on the property disposition based on the "half-year rule" for income tax purposes (i.e., Income Tax Regulations 1100(2.5) to the Income Tax Act allows a claim in the year of disposition equal to one half of the CCA that would have been allowed)?; and,

4. under the new trade-in approach for calculating the GST on the acquisition of a new passenger vehicle (proposed new subsection 153(4) of the ETA), would the new rules affect the calculation of the registrant's ITC entitlement where, for instance, a vehicle determined to be class 10.1 property for income tax purposes is purchased for a net value of $20,000 ($30,000 retail price less a $10,000 trade-in) and is used less than exclusively in the course of the registrant's commercial activities?

Response

Question 1:

Generally, subsection 202(4) of the ETA entitles a registered individual or partnership to an ITC on the acquisition or importation of a passenger vehicle or aircraft (in respect of which GST is payable by the registrant) where the property is used other than exclusively in the course of the registrant's commercial activities. It provides for an ITC (determined by the formula 'A x B') equal to the tax fraction (7/107) of the CCA in respect of the passenger vehicle or aircraft that was deducted under the Income Tax Act in computing the income of the registrant from those commercial activities for that taxation year of the registrant.

Having said this and referring to XXXXX first question, although the stated subsection does not require the registrant to segregate the class 10 vehicle from all other property in that class (this would necessitate an amendment to the Income Tax Regulations), it does, however, call for a separate calculation to be made by the registrant (formula 'A x B' discussed above) to determine the correct amount of ITC available on the passenger vehicle. It is therefore our opinion that a separate tracking system may be required to enable the registrant to correctly calculate the ITC entitlement on any class 10 passenger vehicle not used exclusively in the registrant's commercial activities.

Question 2:

The registrant will be entitled to claim an ITC in the year of disposition of the passenger vehicle determined by the formula provided under subsection 202(4) of the ETA for the period in which the vehicle was used in that taxation year in the commercial activities of the registrant. In other words, no ITC will be available to the registrant on the passenger vehicle for the period subsequent to its disposition since the property is no longer used in the registrant's commercial activities.

Furthermore, no GST will be charged on the disposition of the passenger vehicle. Pursuant to subsection 203(3) of the ETA, a registrant who makes a supply by way of sale of a passenger vehicle or aircraft that is capital property of the registrant and, at any time prior to its disposition, the property is not used exclusively in the commercial activities of the registrant, the supply of the property will be deemed not to be a taxable supply (and, accordingly, no GST will be charged on the sale of the property).

Lastly, we suggest that any questions you may have concerning the determination of the correct amount of CCA allowed in the year of disposition of a class 10 (or class 10.1) passenger vehicle should be forwarded to Taxation for their interpretation.

Question 3:

A passenger vehicle determined to be class 10.1 property for income tax purposes acquired by a registrant who is an individual or a partnership for use other than exclusively in the registrant's commercial activities will be entitled to an ITC in the taxation year of disposition calculated under subsection 202(4) of the ETA. Similarly to our reply to question 2 above, the ITC available to the registrant will only be for the period in which the vehicle was used in that taxation year in the commercial activities of the registrant.

Question 4:

For supplies made after April 23, 1996, new subsection 153(4) of the ETA provides that, where a registered supplier accepts a used good (or a leasehold interest therein) as full or partial consideration for another good from a person who is not required to collect GST on the used good (e.g. a non-registrant), the supplier will calculate the GST remittance on the other good on the net value if the property being accepted as a trade-in is for consumption, use or supply in the course of the supplier's commercial activities. Moreover, in circumstances where the supplier and the recipient are not dealing with each other at arm's length and the amount credited to the recipient for the trade-in exceeds the fair market value, the value of the consideration for the trade-in will be the fair market value at the time the ownership is transferred to the supplier.

In the example provided in question 4, new subsection 153(4) of the ETA would not apply since the person supplying the trade-in vehicle is a registrant. Accordingly, the trade-in will be treated as a separate taxable supply (i.e., the registrant will be required to collect and remit GST on the supply of the used good). With respect to the acquisition of the new passenger vehicle, the supplier will charge GST calculated on the full amount of the vehicle (i.e., 7% x $30,000 = $2,100). Since in your example the registrant is using the new vehicle less than exclusively in commercial activities, the formula 'A x B' under subsection 202(4) of the ETA will apply to determine the registrant's ITC entitlement on the property.

If you require further information, please contact Michael Matthews, Manager, ITC and Co-ordination Unit at (613) 952-8806, or Paul Lafond, Policy Officer at (613) 954-9700.

Yours truly,

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

GAD #: 1674(REG)

File: 11850-1