29 December 1999 GST/HST Interpretation 8256/HQR0001862 - Section 173

Thank you for your memorandum of June 18, 1999, concerning the application of section 173 of the Excise Tax Act (ETA). The enquiry was with respect to the eligibility for input tax credits (ITCs) on goods and services acquired to provide a taxable benefit to a shareholder.

On February 12, 1999, XXXXX unit responded to XXXXX request for an interpretation concerning the application of section 173 of the ETA. XXXXX XXXXX[.] They are of the view that the provisions of the ETA should parallel those under the Income Tax Act (ITA) in every way.

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 the GST/HST, are taxed in a wholly neutral manner.

While a person may take advantage of tax planning situations for income tax purposes this tax planning does not necessarily extend to the GST/HST, and may in fact have unintended or undesirable consequences.

As originally pointed out in the memorandum written by XXXXX subsection 169(1) of the ETA is the general provision for determining a person's ITC entitlement. In general terms, an ITC is equal to the tax paid or payable on the acquisition of property or a service, multiplied by the extent (expressed as a percentage) to which the property or service is acquired for consumption, use or supply in the course of the commercial activities of a person. It was also noted that subsection 169(1) cannot be read in isolation and that other sections of the ETA can deem certain events or transactions to occur which may affect a registrant's eligibility for ITCs.

Subsection 173(1) of the ETA is a provision which applies where a registrant makes a supply (other than an exempt or zero-rated supply) of property or service to an employee or shareholder of the registrant, where the supply is considered a taxable benefit under paragraph 6(1)(a), (e), (k) or (l) or subsection 15(1) of the ITA.

Furthermore, paragraph 173(1)(c) of the ETA deems, for the purposes of Part IX of the ETA, that the employee's or shareholder's personal use of the property (other than a supply of property by way of sale) that gives rise to a taxable benefit, to be part of the registrant's commercial activities.

As the supply of the benefit is now deemed to be made in the course of commercial activity by the registrant, we would look again to subsection 169(1) for ITC purposes. Subsection 170(1) of the ETA provides the general restrictions to the claiming of ITCs under subsection 169(1). In the scenario presented by XXXXX, paragraph 170(1)(b) did not restrict the registrant's entitlement to an ITC as the shareholder was not an officer or an employee of the registrant. Therefore pursuant to subsection 169(1), the registrant should be eligible to claim an ITC with respect to the tax paid or payable in respect of the supply.

I hope this answers any questions that have arisen regarding this matter. If you have any further questions regarding this issue, please do not hesitate in calling me at (613) 952-0419.