23 November 1998 GST/HST Interpretation HQR0001407 - Request for GST Interpretation - Eligibility of Input Tax Credit (ITC) on Startup Costs -

Dear Sirs:

Thank you for your letter of September 30, 1998, (with attachments) concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to your operations.

Interpretation Requested

ABC is in the business of providing financing on vehicles to individuals and began operation in XXXXX ABC had intended to start a vehicle leasing business in XXXXX[.] As a new corporation with no credit history, XXXXX ABC had financing restrictions to start the leasing business. ABC's primary lender, a bank, provided funds to ABC XXXXX with the restriction that ABC would not enter into lease contracts. As a result, ABC started operating a vehicle financing business.

Investors had made their investments under the assumption that ABC XXXXX would be in the leasing business and the company in anticipation of entering into the leasing business took the below actions:

•   selected premises with a store front and lot necessary for a leasing operation;

•   obtained contingent lessor's insurance in anticipation of leasing;

•   became a member of various organizations and associations involved in leasing; and

•   became a licensed as a dealer, which is required as a lessor, but not as a finance company.

Initial expenses to start up the business consisted of the following examples:

•   computer equipment;

•   rental of space,

•   renovation costs;

•   utilities;

•   legal and accounting; and,

•   meals and entertainment.

Finally in XXXXX re-negotiated with the bank to remove their restriction so that it could enter into lease contracts. As a result XXXXX may apply to be registered pursuant to subsection 240(1) of the Excise Tax Act (ETA).

You have asked whether ABC XXXXX is eligible to claim input tax credits related to the start-up expenses.

Interpretation Given

An input tax credit is available for the eligible capital expenditures for the start-up costs of a business. This is in accordance with the prevailing policy contained in Policy Statement P-019 ELIGIBILITY FOR ITC ON START-UP COSTS.

It is our interpretation that Subsection 141(2) of the ETA provides that anything done by a person in connection with the establishment of a commercial activity is deemed to be part of that commercial activity.

Since the intent, of incurring the start-up costs was to establish a commercial activity (leasing company) there is an eligibility for input tax credits created. Subsection 171(2) of the ETA provides for certain services such as the rental of space, while subsection 171(1), applies to property, such as computer equipment held at the time of registration.

Some expenses, however, that would normally be considered as services, may be treated as "eligible capital expenditures" under the Income Tax Act (ITA). For example, in relation to the establishment of a business, these may include expenses required for incorporation such as legal and accounting services and regulatory fees.

Not all items that may be categorized as eligible capital expenditures for the purpose of the ITA will automatically qualify for an input tax credit at the time of registration. It is our position that

(a) Tax must have been paid or payable by the person on the acquisition of the qualifying eligible capital expenditure, and,

(b) As is the case with any ITC, subsection 169(4) of the ETA requires that sufficient documentation be available to substantiate the amount of tax that was paid. In this case, since the amount of tax is a deemed amount under subsection 171(1) of the ETA, tax is calculated through the formula contained in the definition of "basic tax content" in subsection 123(1) of the ETA.

The new venture became a financial institution prior to commencing activities. This does not however, invoke the change of use rules with respect to the fiction created under the ITA for "eligible capital expenditures." It is our interpretation, given the current policy, that by extending eligibility for an ITC to "eligible capital expenditures" as property under 171(1) of the ETA that the change of use rules, as they relate to financial institutions, are not applicable since subsection 204(2) of the ETA limits their application to personal property acquired or imported by the institution for use as capital property of the institution. ... (emphasis added)

For income tax purposes, it is our understanding that eligible capital expenditures are not capital property. Thus sections 204, 205 and 206 of the ETA are not applicable. Where, however, an input tax credit is claimed for property, such as the computer equipment, the change of use rules may be applicable.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 613-954-7931.

Yours truly,

David Crawford
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate