Place Vanier, Tower C, 9th Floor
25 McArthur Road,
XXXXX Ottawa, Ontario K1A 0L5
XXXXX Case: HQR0000588
XXXXX 11872-5, 11650-1, 11650-9 (sjm)
April 8, 1997
Dear XXXXX
Thank you for your facsimile of March 12, 1997, concerning the application of the Goods and Services Tax (GST) to the operations of XXXXX members.
Interpretation Requested
You have asked about the responsibilities of a registrant under the Excise Tax Act (ETA) pertaining to the determination of the status of the supplier or vendor dealing with a GST registrant ("registrant") and claiming to be a "small supplier" or non-registrant for the purposes of the GST.
In your letter, you state the following:
• a person with a truck load of scrap metal shows up to sell it to a recycler who is a registrant. The registrant (recycler) examines the load, identifies the type(s) of metal, weighs the load and makes an offer to purchase;
• prior to July 1, 1996, the offer to purchase took into consideration whether or not the seller was a GST registrant because of the notional input tax credit (notional ITC, section 176, ETA). Once the offer to purchase is accepted, an invoice is prepared showing the weight, description of the material, the price paid, and the name and address of the vendor;
• if the vendor is registered, the GST and, in the case of Québec, the Québec Sales Tax (QST) number are also shown on the invoice;
• if the vendor is not registered, no such numbers appear;
• the invoice is then signed by the vendor to confirm that the information on the invoice is correct and that the vendor accepts the terms and conditions of the sale;
• often a declaration as to the status of the vendor is added to the invoice and signed by the vendor.
• One example of such a statement by one of XXXXX Québec members is "The supplier declares that he is neither a registrant nor required to register for the purposes of the GST or any consumption taxes in Québec. If this is not the case, the prices stipulated include all GST and any consumption taxes applicable in Québec." In all cases, additional information required by Revenue Canada in respect of the Income Tax Act, such as the registration number of the scrap transporting the scrap metal, appear on the invoice.
You seek clarification that the registrant recycler ("recycler") who purchased the scrap has fulfilled his obligations and exercised due diligence for the purposes of subsection 169(4), ETA and the corresponding Regulations and may claim notional ITCs in accordance with section 176, when the vendor is not registered.
Interpretation Given
As you may be aware, on April 23, 1996 the Minister of Finance tabled a Notice of Ways and Means Motion proposing changes to the ETA. Under the previous legislation, a registrant was entitled to claim a notional input tax credit on purchases of used tangible personal property from persons not required to charge GST. Notional ITCs were eliminated for supplies made after April 23, 1996, except for supplies of usual coverings and containers (including returnable containers), seizures and repossessions of property by creditors, and property acquired by insurers on settlement of claims.
Also note that, administrative relief announced by the Department of Finance on August 29, 1996, allows a registrant to claim a notional ITC where a person not required to charge tax supplies a used good to the registrant on or before June 30, 1996, if the good was acquired for the purpose of consumption, use or supply in the course of the registrant's commercial activities.
It is the Department's position that, prior to July 1, 1996, when a recycler, registered for the GST, purchased scrap metal from another person and tax was not payable on the transaction, the recycler may have been entitled to claim a notional ITC based on 7/107ths of the purchase price. There must have been no tax payable on the supply from the vendor in order for the recycler to claim this notional ITC, that is, the vendor was not registered or required to be registered for the GST. To support the notional ITC claimed, the recycler must have obtained adequate documentation to substantiate the claim prior to making it in addition to the general conditions that must be met (see page 3 of this letter). The documentation must have set out the date of sale, the total price paid for the scrap or credited as a trade-in allowance, the name and address of the vendor, detailed description of the scrap, as well as any other information relevant to substantiate the claim.
If tax is payable on the transaction (whether the vendor charges and collects the GST or not), the recycler cannot claim a notional ITC. Dealers must, therefore, be diligent in determining whether GST was payable on the acquisition of the scrap. GST registrants, such as scrap dealers, are not entitled to claim notional ITCs if the vendor of the used goods is a GST registrant. A registrant is a person who is registered for the GST, or who is required to be registered. As a general rule, persons are required to be registered when their annual taxable sales exceed the small supplier's threshold of $30,000 in the preceding 12 months.
When vendors are GST registrants, the vendor must charge tax and the purchaser must pay GST on sales. This requirement exists even when the vendor refuses to register, or has not yet completed the registration process, or has misrepresented themselves to be a non-registrant, at the time the sale is made. If tax is payable on the sale, the purchasing recycler would not be entitled to claim a notional ITC on that purchase.
It is incumbent on the recycler to take the necessary precautions to verify the registration status of the vendor. The recycler must, therefore, verify whether the person making the supply is a registrant. If the recycler suspects that a person has sold more than $30,000 of scrap metal in the past 12 months, the recycler should expect that the person would be required to register and that tax would be payable on any sales made by that person. Accordingly, the recycler could not claim notional ITCs in respect of purchases from that person.
If there are any questions regarding the vendor's tax status, the recycler should resolve them directly with the vendor. Revenue Canada can, however, provide confirmation as to whether or not the vendor has a valid registration number.
No notional ITC, what about actual ITCs?
If the person selling the scrap to the recycler is a registrant (that is a person who is registered or required to be registered for the GST), then tax is payable by the recycler on the purchase. Since a notional ITC cannot be claimed, the recycler must determine whether an actual ITC may be claimed for the transaction.
The following conditions must be met for a purchaser to claim an ITC in respect of the tax payable on a purchase of property or service:
1. the purchaser must be the recipient of the property or service;
2. the purchaser must be a GST registrant during the reporting period in which the tax becomes payable or is paid without having become payable;
3. tax must be payable by the purchaser in respect of the supply, or be paid by the purchaser prior to it becoming payable;
4. the property or services must be acquired for consumption, use or supply in the course of the commercial activities of the purchaser; and
5. the purchaser must have obtained sufficient documentation to establish the eligibility for the ITC before the claim is made, including the information prescribed in the Input Tax Credit Information Regulations ("the Regulations").
The documentary requirements stipulated in the Regulations are outlined in the Appendix to this letter. For dealers acquiring scrap metal from registrants, it is crucial that the recycler obtain the vendor's valid GST registration number. If no registration number is provided by the vendor, the recycler will be unable to claim the ITC because the documentation does not meet the information requirements to support the ITC claim.
Where the vendor has provided a registration number on the invoice and the recycler is concerned about the authenticity of the number, the recycler can verify the number by contacting the local Revenue Canada tax services office (or MRQ office in Québec) which will confirm whether the number is valid.
Another important requirement is that the invoice unequivocally states that GST is either included in the amount paid or payable or is added to the purchase price. This information identifies the amount of tax payable on the purchase and, therefore, the amount of the ITC entitlement. In the Department's view, statements on invoices to the effect that "tax is included where applicable" do not meet this documentary requirement since it is not clear from such statements whether the vendor intended to collect GST on the sale. Specifically, the sample statement given by one of XXXXX members.
The supplier declares that he is neither a registrant nor required to register for the purposes of the GST or any consumption taxes in Québec. If this is not the case, the prices stipulated include all GST and any consumption taxes applicable in Québec would not be adequate. If the documentation for a particular transaction does not meet all the information requirements, then the recycler is not entitled to claim an ITC.
What happens when the vendor is a registrant but not registered?
When a vendor is a registrant but has not registered, then the purchasing recycler will be unable to claim ITCs on that transaction because the recycler will be unable to meet the documentary requirements for the transaction. Further, if the recycler purchases scrap from a vendor who has failed to collect and remit tax on the transaction, the recycler may be assessed for the tax payable on the scrap as well as any applicable penalty and interest. If your member dealers encounter situations where a vendor refuses to collect the GST, the dealers should contact the local Revenue Canada tax services office for advice and assistance.
HST Implications
All registrants who make taxable supplies of goods and services in participating provinces will be required to collect both the federal 7% component and the provincial 8% component of the HST. The same rules that currently exist for the claiming of ITCs have been extended to permit recovery of the 15% HST after April 1, 1997. Registrants, regardless of where they operate, will be able to claim ITCs for the HST paid or payable on their acquisitions or importations of goods or services, to the extent that they were acquired or imported for consumption, use or supply in their commercial activities.
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 (1.4), do not bind the Department with respect to a particular situation.
For your convenience, find enclosed, copies of the Regulations and GST Memoranda Series (1.4). If you need additional information, please feel free to contact us again.
Yours truly,
S.J. Mailer
Manager, Industries Unit
General Operations and Border Issues Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch
Revenue Canada
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