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XXXXX
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Case: HQR0000415
XXXXX File: 11650-9 (gs)
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June 11, 1997
Dear XXXXX
Thank you for your letter of November 13, 1996 (with attachments) addressed to Mr. Les Jones concerning whether a corporation may claim notional input tax credits pursuant to former subsection 176(1) of the Excise Tax Act (ETA) on assets acquired as the result of a "rollover" under subsection 85(1) of the Income Tax Act (ITA). You also wish to know whether the supply of the shares from the corporation to the individual transferring the property is an exempt supply. We apologize for the delay in responding to your request.
In this letter, all references to subsection 176(1) of the ETA are to the former subsection 176(1), repealed as of April 23, 1996. Similarly, all references to subsection 176(4) of the ETA are to the former subsection 176(4), which was renumbered as subsection 176(2) effective April 23, 1996.
Relevant Facts
The relevant facts are taken from your letter of November 13, 1996, the attachment to that letter, and an e-mail from yourself to Susan Mailer, Manager, Industries Unit dated March 12, 1997. These facts are the following:
1. The corporation who wishes to claim the notional ITCs has been registered for GST/HST purposes since XXXXX[.]
2. The sole shareholder of this corporation, an individual, operated as a sole proprietorship up until XXXXX[.]
3. The sole proprietorship was not a GST registrant[.]
4. On January 1, 1996, the individual and the corporation elected, pursuant to subsection 85(1) of the ITA, to rollover the business assets of the individual into the corporation. As a result, the individual transferred ownership of his business assets to the corporation and received in return from the corporation shares in the capital of the corporation.
5. The corporation and the individual did not file a GST44 election concerning the supply of the business assets of the individual pursuant to section 167 of the ETA[.]
6. All of the assets subject to the section 85 rollover were acquired by the corporation for consumption, use, or supply in the course of its commercial activities 7. The property that was rolled over to the corporation from the individual consisted of four motor homes which were being rented out.
8. These motor homes are now being used as capital property in the course of the corporation's commercial activities[.]
It should be noted that pursuant to section 126 of the ETA, the corporation and the individual were not dealing with each other at arm's length.
Interpretation Given
It is the Department's position that the corporation in the above fact scenario was entitled under subsection 176(1) of the ETA to claim a notional input tax credit. The amount of the tax credit is equal to the tax fraction of the fair market value at the time of the rollover of the shares issued to the individual plus any non-share consideration given by the corporation to the individual as a result of the rollover. If this fair market value is greater than the fair market value at the time of the rollover of the used tangible personal property transferred to the corporation, then pursuant to subsection 176(4), the amount of the notional input tax credit is limited to the tax fraction of the fair market value of the used tangible personal property. The amount elected as proceeds of disposition for the used tangible personal property under subsection 85(1) of the ITA is not relevant in determining the amount of the notional input tax credit. There is no GST on the supply of the shares from the corporation to the person transferring the property.
Subsection 176(1) states that where the following conditions are met,
a) used tangible personal property is supplied in Canada after 1993,
b) the supply is made by way of sale to a registrant,
c) tax is not payable by the registrant in respect of the supply[,]
d) the property is acquired for the purpose of consumption, use or supply in the course of commercial activities of the registrant,
e) the supply is not zero-rated or exempt,
f) section 167 does not apply to the supply, and
g) an amount is paid as consideration for the supply, then the registrant is deemed to have paid GST equal to the tax fraction (7/107) of the amount paid as consideration for the supply. The registrant can then claim a notional input tax credit equal to the amount of tax that was deemed to have been paid under subsection 176(1).
Based on the given facts, the items (a), (d), (e) and (f) in the above list of conditions clearly apply to the transaction in question. With respect to item (b), the term "sale" is defined in subsection 123(1) of the ETA as including any transfer of the ownership of property and a transfer of the possession of the property under an agreement to transfer ownership of the property. In the section 85(1) rollover, ownership of the property in question was transferred from the individual to the corporation, so it can therefore be said for the purposes of the ETA that the property was supplied by way of sale. With respect to item (c), it appears that the individual is a "small supplier" as defined in section 148 and therefore pursuant to section 166 of the ETA no tax is payable in respect of the supply.
Thus the only issue left is whether an amount was paid as consideration for the supply. It is our understanding that when a rollover of assets by an individual to a corporation pursuant to subsection 85(1) of the ITA occurs, the individual receives from the corporation as consideration for the assets share capital in the corporation, and may also receive further non-share consideration. The non-share consideration is commonly referred to as "boot". In subsection 123(1) of the ETA, the term "amount" is defined as including property expressed in terms of the value of the property. Share consideration and any "boot" received by the individual can therefore be seen as being an amount paid as consideration for the supply of the property.
The corporation in the fact situation described above is therefore entitled to claim notional input tax credits equal to the tax fraction of the amount that was paid as consideration for the supply. In this case, pursuant to subsection 153(1) of the ETA, this amount would be the fair market value, at the time of the section 85(1) rollover, of the shares and any boot received by the individual from the corporation. If the amount that was paid for the supply, as calculated above, is greater than the fair market value of the property at the time that it was transferred to the corporation, then, pursuant to subsection 176(4), the amount of notional input tax credits which may be claimed is limited to the tax fraction of the fair market value of the transferred property at the time of the transfer.
There is no GST on the supply of the shares from the corporation to the person transferring the property to the corporation, since under the definitions of "financial service", "financial instrument", "exempt supply", and "equity security" in subsection 123(1) of the ETA, the issuing of shares in most cases is an exempt supply. In this particular case, pursuant to section 1 of Part VII of Schedule V to the ETA, the issuing of shares by this particular corporation is an exempt supply.
I hope that the above comments are of assistance to you. If you have any further questions or comments, please do not hesitate to call me at 6138253.
Yours truly,
Gregory Smart
Rulings Officer
Industries Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate
Casework Number HQR0000415
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