26 February 2001 GST/HST Interpretation 33311/HQR0001582 - — Eligibility to Claim ITC

You request our opinion as to the eligibility of XXXXX to claim ITCs in respect of certain transactions undertaken under agreements entered into with the XXXXX. Specifically, you would like to ascertain XXXXX 's eligibility to claim input tax credits (ITCs) for expenses incurred in servicing the accounts pursuant to the XXXXX Agreement.

Facts:

You provided copies of the following four agreements for our perusal:

•   XXXXX XXXXX XXXXX XXXXX[.] The context of the XXXXX Agreement is as follows:

•   XXXXX[.] The context of the XXXXX Agreement is as follows:

•   XXXXX[.] The context of the XXXXX Agreement is as follows:

•   XXXXX[.] The context of the XXXXX Agreement is as follows:

XXXXX[.] Each of the Agreements contains the phrase "For valuable consideration exchanged between them, XXXXX agree as follows," immediately following the context of the agreement, but not all agreements set out consideration for the supplies specifically referred to in the "context" section.

Pursuant to these agreements, XXXXX sold all credit card accounts (including the outstanding receivables, credit cards, all books and records, all new credit card applications, etc.) to XXXXX, provided XXXXX with a licence to use XXXXX, assigned contracts required for the operation of the Accounts, allowed XXXXX to use its customer information for specified purposes and agreed to service the Accounts and provide systems application support and systems processing, from XXXXX until XXXXX achieved XXXXX (the Interim Period). In return, XXXXX agreed to provide specified levels of service in respect of the Accounts following the purchase, hire a minimum number of XXXXX personnel, use the customer lists for specified purposes only and pay consideration for the transaction. The sale of the Accounts was an exempt supply to XXXXX.

Issue:

In order to meet the terms of the agreements, XXXXX provided administrative services (Services) to XXXXX at its own (XXXXX's) expense for an Interim Period XXXXX. It acquired properties and services for consumption or use in the provision of these Services, paid GST where applicable and claimed ITCs for the full amount.

XXXXX[.] At issue is whether XXXXX is entitled to ITCs for making this taxable supply for no consideration to XXXXX pursuant to the agreements.

You are requesting our views with respect to the following:

1. We are seeking your opinion whether XXXXX is eligible to claim ITCs on the inputs used/consumed in providing the interim Services (administrative services provided to XXXXX during the Interim Period) deemed to be for a purpose other than the making of supplies in the course of XXXXX endeavour?

2. Does subpara. 141.01(2)(b)(ii) apply?, or

3. Are the Services provided under the XXXXX Agreement "Free supplies" under sub. 141.01(4)?

4. In either case is XXXXX eligible to claim ITCs for the inputs used to provide these Services?

5. Are these inputs used in the course of XXXXX taxable activities and is XXXXX eligible to claim the ITCs?

Analysis:

SUPPLY OF SERVICES FOR NO CONSIDERATION

The supply of Services is made pursuant to the XXXXX Agreement, and results from the interaction of the four agreements. The end result is that XXXXX agrees to administer the credit card operations (provide "Services") with respect to the Accounts sold to XXXXX "at its own cost" pursuant to the XXXXX Agreement and related contracts.

Pursuant to XXXXX of the XXXXX Agreement, the termination of any of the other XXXXX Agreements shall trigger the termination of the XXXXX Agreement. Thus, the supply of Services during the Interim Period is a condition of the sale of Accounts and other transactions contemplated by the documents. For this reason, the supply of Services could be considered to be part of the package for which the total consideration is received. There are a number of clauses within the contracts whereby consideration, both monetary and intangible, flows from XXXXX to XXXXX. Some of this consideration is payable during the Interim Period, but is not directly linked to the supply of the Services. In fact, the clauses in the definition section of the XXXXX Agreement relating to consideration for the supply of the Services were deleted by both parties, which evidences a conscious decision on their part to consider the supply as being for no consideration. Although XXXXX, at page XXXXX of the attachment to his letter of XXXXX to XXXXX states that he does not agree that this supply was for no consideration, he provides no reasons for this assertion. Further, the notion that the supply was made for no consideration was not contested in XXXXX meeting with XXXXX representatives. For these reasons, it is reasonable to conclude that there is no consideration attached to the supply of the Services.

In the alternative, in his letter of XXXXX states that the Services were provided to XXXXX as part of the agreement between XXXXX and XXXXX for no additional consideration. XXXXX's contention is that the consideration for the Services was paid by recipients of XXXXX's taxable supplies of XXXXX and XXXXX products. Based on the definitions of "consideration" and "recipient", this is not a viable argument for the purposes of the application of the ETA.

If the consideration for the Services was included in the total consideration paid, the ITCs claimed would be for inputs to an exempt supply, as the sale of Accounts was a financial service and no GST was charged or remitted on the supply. Thus, under the general rules of section 169, XXXXX would not be eligible to make a claim for ITCs.

Relevant Legislative Provisions

The general rule governing ITCs is found at section 169 of the ETA. This section basically allows a registrant to claim ITCs to the extent to which the person acquired the property or service for consumption, use or supply in the course of the person's commercial activities. Specific rules relating to the allocation of ITCs for persons who make both exempt and taxable supplies are found at s. 141.01 of the ETA. This section was added in 1994 to clarify and reinforce the requirement to apportion the use of inputs, based on the extent to which the inputs are used or consumed, or acquired or imported for consumption or use, for the purpose of making taxable and non-taxable supplies; it does not represent a change in policy or in the manner in which the tax is to be administered. Pursuant to the 1994 Technical Notes, "New section 141.01 is added only to reinforce this concept that the ultimate purpose of making supplies of some kind involves all aspects of the business.[...] only if, and to the extent that, those costs are incurred for the purpose of making taxable supplies are they eligible for input tax credits."

XXXXX is involved in both taxable and exempt activities. Although they are no longer receiving income from their credit card operation (financial service), they remain a de minimis FI for the relevant period XXXXX by virtue of their XXXXX and XXXXX and are required to apportion ITCs pursuant to s. 141.01 ETA for this reason. (see XXXXX and p. XXXXX of the attachment to XXXXX letter dated XXXXX, to XXXXX)

As you will note, section 141.01 was amended in 1997, with effect as of December 17, 1990, by specifying that the "taxable supplies" referred to in subsections 141.01(2) and (3) are supplies made "for consideration." As a result, businesses are entitled to claim input tax credits in respect of their business inputs only to the extent that those inputs are used or consumed or acquired or imported for consumption or use for the purpose of making taxable supplies for consideration in the course of their business.

Pursuant to subsection 141.01(4), however, there may be an entitlement to input tax credits in relation to property or services supplied for nominal (or nil) consideration (referred to as "free supplies") depending on the purpose for which the free supply is made.

141.01(2)/(3)

Subsections 141.01(2) and (3) relate to intended consumption or use and actual consumption or use of the inputs, respectively. These sections stipulate that in order for a property or service to be considered to be used or consumed or acquired or imported for consumption or use in the course of commercial activities of the person, the supply must be made for consideration.

The Registrant states that the supply of the Services is made for no consideration, and there is no consideration directly linked to this supply in contracts: therefore any claim under either of these subsections for ITCs related this supply must fail. The Registrant's alternative argument that consideration for the Services was paid by third parties is untenable.

141.01(4)

Subsection 141.01(4) relates to "free supplies" of a supplier in the course of an endeavour and makes the determination with respect to ITC entitlement based on the "specified purpose" for which a supply is made.

As noted by XXXXX, XXXXX was involved in the (taxable) "endeavour" of selling XXXXX and XXXXX products during the relevant period. XXXXX was also involved in the (exempt) "endeavour" of selling its Accounts during the relevant period and of administering its XXXXX and XXXXX. Prior to the period in question, XXXXX was involved in administering its Accounts/providing credit to its customers. In order to determine how to apply 141.01, it is necessary to determine which endeavour XXXXX was supporting when it provided the taxable supply of Services at its own cost (to XXXXX for no consideration).

XXXXX states that "one of the purposes "among" the purposes of the supply of the processing services was ... the purposes [sic] of facilitating, furthering or promoting the acquisition of XXXXX products by its customers and of generally facilitating, furthering or promoting the XXXXX business of selling (taxable) products."

While it is true that the granting of credit may serve to further XXXXX sales, such credit was available to XXXXX customers prior to the sale of Accounts and resulting supply of Services at XXXXX's own cost. It would be more correct to state that it was in XXXXX's business interests to avoid Service disruption during the sale of the Accounts because it served both the purpose of retaining clients and maintaining credit sales volume. It also provided continued revenues from credit sales (merchant fee, etc[.]) to XXXXX. However, even giving broad interpretation to the contractual provisions relating to XXXXX's sale of Goods and Services in the "Context" portion of the contracts, it is our view that the primary purpose of the transaction was not to promote sales of taxable products, but to promote the sale of Accounts from XXXXX to XXXXX. If successful, this supply would result in continuous service of the already existing provision of credit to XXXXX's customers (in order that they may purchase said taxable products).

The collective purpose of the XXXXX Documents as well as the specific purpose of XXXXX Agreement can be found in the "context" sections of each of the agreements. From these agreements it is obvious that each transaction is dependent upon the others, and that they all depend upon the sale of Accounts from XXXXX to XXXXX. The specified purpose for which XXXXX receives consideration is the sale of the Accounts. The provision of Services is a condition of this sale. The sale of Accounts to XXXXX is an exempt supply (outside the course of commercial activities) since it is a supply of a financial service.

In other words, based on the stated context and interrelationships between the XXXXX Documents, the "specified purpose" for which the "free supply" of taxable Services was provided was to facilitate an exempt supply of financial services.

All of the XXXXX Documents, including the XXXXX Agreement, include the phrase, "For valuable consideration exchanged between them, XXXXX XXXXX and XXXXX agree as follows." There is no apparent consideration flowing from XXXXX to XXXXX in respect of Services provided pursuant to this agreement, just as there is no consideration directly linked to some of the assignments and licences supplied by virtue of the agreements.

Sincerely,

Sheena France
XXXXX