1 July 1998 GST/HST Interpretation 1998-07-01[1] - Application of Subsections 170(2) and 173(1) of the Excise Tax Act

Thank you for the copy of your memorandum of January 30th, 1998 concerning the respective roles of the Income Tax Act and the Excise Tax Act.

You are correct, that in your observation that the ITA and the ETA are different by their very nature. Income tax is a tax on profits whereas, GST/HST is a general levy on supplies of goods and services, or in other words, it is a tax on consumption that is no different in its outward appearance to the consumer than a sales tax. The ETA has been structured such that all economic activities, whatever their purpose or results, provided that they are themselves subject to GST/HST, are taxed in a wholly neutral manner. Herein lies the some of the differences between the two statutes.

To take your comments concerning the above subsections to the next step in the GST/HST self-assessment process, where there is an appropriation of property under section 172 of the ETA, there exists a difference in the valuation of the property between subsection 172(2) of the ETA and subsection 15(1) of the ITA. I understand that under the ITA, the value of the taxable benefit in a non arm's length situation and included in the income of the shareholder is deemed to be the cost to the company or the price paid by the company. For the purposes of the ETA subsection 172(2) where at any time a company appropriates property under the above conditions GST, and HST in the case of a participating province, is deemed to have been collected by the company based on the fair market value (FMV) of the property at that time.

The use of FMV in subsection 172(2) prevents GST/HST inequities and distortions from occurring. For example, take the situation a house builder (company) conferring the benefit of a house in a non arm's length transaction to a shareholder who is also an employee of the company. If this provision was changed, and the value mirrored the ITA, the opportunity to obtain a house at a significantly reduced value would be possible. A person who is a house builder could appropriate homes for personal use thereby being only liable for tax on the cost of the goods and services used to construct the house. Assuming that the house builder used aggressive tax planning and that we are unable to invoke the anti-avoidance provisions of the ETA, there could be considerable scope for tax planning for GST/HST purposes where none previously existed.

In conclusion, the purpose of the two statues is different which means that while a person may take advantage of tax planning situations for income tax purposes this tax planning does not necessarily extend to GST/HST, and may in fact have unintended or undesirable consequences.

While I can appreciate the concerns that have been relayed to you from auditors, it may in some instances be neither appropriate or desirable for tax policy purposes to change certain provisions of the ETA for the sake of being in conformity with the ITA. Once again, thank you for keeping HQ informed of questions and issues being raised at the TSO.

David Crawford
GST/HST Rulings & Interpretations