29 April 1997 GST/HST Interpretation HQR0000387 - The Entitlement by a for Input Tax Credits in Respect of the GST Paid on Purchases of Property by its Book Store

Dear Sirs:

I am writing in response to your request dated October 23, 1996 for an interpretation concerning the entitlement by a XXXXX for input tax credits in respect of the GST paid on purchases of property by its book store.

From the information provided in your letter, we understand the situation is as follows:

Facts

1) A XXXXX which is also a registered charity under the Income Tax Act, purchases property for general resale by its book store to XXXXX and other third parties. The XXXXX charges GST on the supply of the property.

2) The XXXXX departments historically use a portion of the property purchased by the bookstore in GST exempt activities. A debit memo for the transfer of property is recorded by the bookstore at the time of the transfer to a department.

3) When the book store purchases its materials, no particular property is specifically identified as being for use by the XXXXX departments. The internal requirement for any particular property is not known at the time of purchase and is determined subsequent to the time of purchase.

4) Although the XXXXXX knows each year that a certain amount of the property purchased for the book store will be used by its XXXXX departments, it does not know which particular property will be used by the departments and which will be sold from the bookstore.

Interpretation Requested

Can the XXXXX claim input tax credits in respect of all purchases made by the XXXXX book store as each particular purchase of property is made with the intention to be sold externally?

Analysis

Prior to January 1, 1997, new tangible property acquired for the purpose of supply in the XXXXX book store was excluded by paragraph 2(e) of Part VI to Schedule V of the Excise Tax Act (ETA) from the general exemption for supplies made by charities. Unless another exemption in Part VI applied, this material was subject to the GST upon supply.

As a result of the amendments to the ETA provided in Bill C-70 which received Royal Assent on March 20, 1997, the XXXXX falls under the new definition of a "public institution". Exemptions for supplies made by this organization will continue to be found in Part VI of Schedule V and not in new Part V.1 which applies to charities as that term has been redefined in subsection 123(1). Supplies of new tangible property acquired for supply in the XXXXX book store are excluded by paragraph 2(e) of Part VI to Schedule V from the general exemption for supplies made by public institutions. Unless another exemption in Part VI applies, this material will be subject to the GST.

As you note in your letter, subsection 169(1) provides the general rule concerning the entitlement of input tax credits by registrants. Where a property or service is acquired or imported for consumption, use or supply by a registrant, that person is entitled to an input tax credit equal to the proportion of the tax paid or payable that represents the extent to which the property or service is for consumption, use or supply in the course of the registrant's commercial activity.

Section 141.01 clarifies the rules concerning the apportionment of input tax credits. As amended by Bill C-70, this section essentially provides that a registrant will be entitled to claim input tax credits in respect of its purchases only to the extent that the property or service has been acquired or imported for the purpose of making taxable supplies for consideration in the course of its endeavour (e.g., the business of the person).

In the present situation, the XXXXX is not able to use a direct attribution method to determine its entitlement to input tax credits as it is not possible to track the use of each property acquired by the book store.

Subsection 141.01(2) provides that where a person acquires or imports property or services for consumption or use in the course of an endeavour, the person shall be deemed to have acquired or imported the property or service for consumption or use in the course of commercial activities to the extent that the property or service is acquired or imported by the person for the purpose of making taxable supplies in the course of that endeavour. The person will be deemed to have acquired the property or service for consumption or use otherwise that in the course of a commercial activity to the extent the property or service is acquired for the purpose of making supplies that are not taxable supplies or for a purpose other than the making of supplies in the course of that endeavour.

As the XXXXX is not able to separately track the use of each property acquired by the bookstore, it must use a method of apportioning these inputs. In accordance with subsection 141.01(5), the method chosen by the XXXXX must be fair and reasonable and must be used consistently throughout the year. A method of calculating input tax credits that did not take into account the transfers of property from the book store to the XXXXX departments would likely not be considered to be fair and reasonable under the circumstances.If through application of this method, the XXXXX finds that substantially all (generally 90% or more) of the property acquired by the book store is for consumption or use in a commercial activity, then pursuant to subsection 141(2), all of the consumption or use of this property would be deemed to be in the course of its commercial activity.

As you note in your letter, input tax credits may be claimed under subsection 169(1) to the extent (expressed as a percentage) to which the XXXXX acquired or imported the property for consumption, use or supply in the course of its commercial activities. The XXXXX may also claim a partial rebate under section 259 for the non-creditable tax charged in respect of these purchases.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed or future amendments to the legislation may result in changes to our interpretation. These comments are not rulings and in accordance with the guidelines set out in GST Memoranda Series Section 1.4, do not bind the Department with respect to a particular situation.

If you have any additional questions or would like to discuss this further, please contact me (613) 954-7954.

Yours sincerely,

Elaine Bonnah
Policy Officer
Public Service Bodies and Governments
GST Rulings and Interpretations

Leg Ref: s. 169, s. 141, s. 141.01, 259