6 December 2000 GST/HST Interpretation 33405 - Contractual Breach - Input Tax Credit Entitlements

This memorandum is in response to your recent e-mail messages of November 8, 2000, and November 14, 2000, and our conference call of November 23, 2000, where you enquired about the input tax credit entitlements of a registrant who acquired three vehicles, and subsequently exported two of those vehicles outside of Canada.

Background Information:

•   The registrant in question purchased three vehicles from various car dealers in the XXXXX area. Tax was paid by the registrant on these purchases. Two of the vehicles were purchased in the month of May this year, and the third vehicle was purchased in the month of June.

•   On XXXXX, the registrant filed a return for the reporting period ending June 30, 2000, and claimed a credit in the amount of XXXXX which represented the input tax credits with respect to the tax paid on the vehicles in question. The registrant reported sales in the amount of XXXXX.

•   XXXXX[.]

•   All three vehicles were purchased by the registrant on credit with a minimal amount paid as a down payment. A finance arrangement was established whereby the registrant was required to pay monthly loan payments to pay off the balance outstanding on the three vehicles.

•   In the case at hand, it is your understanding that the credit agreement was a domestic contract and that the vehicles in question were to remain in Canada until the loans were fully paid off.

•   The registrant exported two of the vehicles out of Canada in attempts to sell them to customers in Europe.

•   The CCRA became aware that attempts were being made to export the third vehicle out of Canada. The XXXXX was contacted, who in turn contacted XXXXX ("the Repossession Company") to determine whether or not the vehicle being exported was free and clear of all debt.

•   The Repossession Company in turn called XXXXX ("the Finance Company") and provided them with the vehicle's VIN number. At this point, the Finance Company realized that there was a debt still outstanding on the vehicle. The Repossession Company reported the vehicle "stolen" because if the vehicle was exported, the registrant would have violated one of the terms of their contract. The vehicle was eventually impounded and sent back to the Finance Company.

•   The other two vehicles which were exported out of Canada are currently in Europe. In attempts to get the other two vehicles back, the Repossession Company also reported them "stolen".

Your Questions:

You would like to know whether or not you can deny the input tax credits claimed by the registrant with respect to the three vehicles in question. As well, you would like to know if there are any GAAR issues.

Our Response:

Based upon the information provided, we see no grounds upon which to deny the input tax credits claimed by the registrant in respect of the tax payable on the three vehicles in question. As you are aware, we have been developing a "policy" position in relation to the rebate entitlements of persons who acquired stolen property in good faith, and paid an amount "as or on account of tax" in respect of that property, where that property is subsequently seized by a law authority. It is our view that the situation at hand falls outside the scope of the issue we have been reviewing in regards to "stolen property". It could be argued that in reality, the three vehicles in question may be more properly described as being "encumbered", rather than "stolen".

One of the issues that we have been exploring is whether or not tax is payable in respect of stolen property. However, in the case at hand, tax was properly payable at the time the registrant acquired the three vehicles in question. On that basis, it is our view that the registrant has satisfied one of the basic requirements under subsection 169(1) of the Excise Tax Act (ETA) with respect to input tax credits.

Since it appears as though the vehicles were acquired in the course of the registrant's commercial activities, providing that the documentary requirements are satisfied, we see no reason to deny the registrant's input tax credits claimed in respect of the vehicles. It appears as though there has simply been a breach of contract, and on that basis, one of the vehicles has been seized by the Finance Company. Furthermore, we do not see any GAAR issues in the case at hand. Should you have any additional questions, please feel free to give me a call at (613) 954-9699.