18 April 2002 GST/HST Interpretation 35471 - Taxable Benefits and Input Tax Credit Entitlements

Dear XXXXX

Thank you for your letter of March 30, 2001, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to taxable benefits.

Interpretation Requested

You have written to us concerning a letter XXXXX which was issued by our Directorate on XXXXX and which is hereinafter referred to as our previous letter. Our previous letter was in response to a question regarding the GST/HST treatment of taxable benefits related to input tax credits (ITCs) and the restrictions under subsection 170(1) of the Excise Tax Act (ETA).

We stated in our previous letter that subsection 169(1) of the ETA is the general provision for determining a person's ITC entitlement and that an ITC is generally 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 commercial activities of the person. It was also noted that subsection 169(1) of the ETA cannot be read in isolation from other provisions of the ETA as other sections of the ETA may apply to deem certain events or transactions to occur which may affect a registrant's eligibility for ITCs.

It was also stated in our previous letter that 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 Income Tax Act (ITA). 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 the client, 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.

You have requested clarification and confirmation of the stated conclusion "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". Specifically, you asked for clarification and confirmation of the following four statements:

1. Whether the reference to "shareholder" can be extended to include a "person" as defined in subsection 123(1) of the ETA?

2. Where a registrant has calculated a taxable benefit under section 173 of the ETA for goods and services provided to an employee or shareholder, the restrictions in section 170 do not apply.

3. The GST paid on goods and services that are subject to a section 173 taxable benefit inclusion is available for an ITC as outlined in section 169 of the ETA.

4. The restrictions under section 170 of the ETA would not prevent a registrant from claiming an ITC in respect of the GST paid on a good or service that generates a taxable benefit.

Interpretation Given

1. Whether the reference to "shareholder" can be extended to include a "person" as defined in subsection 123(1) of the ETA.

Section 173 of the ETA applies where a registrant makes a supply (other than an exempt or zero-rated supply) of property or a service to an individual or a person related to the individual and an amount in respect of the supply is required under paragraph 6(1)(a), (e), (k) or (l) or subsection 15(1) of the Income Tax Act (ITA) to be included in computing the individual's income for a taxation year of the individual.

"Shareholder" is not defined in the ETA and, therefore, we would look to the definition of the word in subsection 248(1) of the ITA since the benefit amount must be one that is included in the individual's income under subsection 15(1) of the ITA. "Shareholder" is defined in subsection 248(1) of the ITA to include a member or other person entitled to receive payment of a dividend. This definition is not exhaustive.

The reference to "shareholder" in our previous letter means the individual or the person (as defined in subsection 123(1) of the ETA) related to the individual who received a taxable benefit and an amount in respect of that benefit is required to be included in the individual's income pursuant to subsection 15(1) of the ITA.

2. Where a registrant has calculated a taxable benefit under section 173 of the ETA for goods and services provided to an employee or shareholder, the restrictions in section 170 do not apply.

You have requested clarification with respect to the interaction between sections 170 and 173 of the ETA. Section 170 of the ETA overrides the requirement to account for tax under subsection 173(1) of the ETA. Where a registrant is denied an ITC under section 170 of the ETA, the registrant is not required to account for tax under subsection 173(1) of the ETA.

3. The GST paid on goods and services that are subject to a section 173 taxable benefit inclusion is available for an ITC as outlined in section 169 of the ETA.

Where a registrant makes a supply (other than an exempt or zero-rated supply) of property or a service to an individual or a person related to the individual and the conditions under paragraphs 173(1)(a) or (b) have been satisfied, the use by the registrant in providing the property or service to the individual or the person related to the individual will be regarded as commercial activities of the registrant. The fact that the registrant is deemed to use the property in the course of its commercial activities under paragraph 173(1)(c) of the ETA will allow the claiming of an ITC by the registrant, subject to the general requirements in section 169 and restrictions on ITCs, such as subsection 170(1) of the ETA.

4. The restrictions under section 170 of the ETA would not prevent a registrant from claiming an ITC in respect of the GST/HST paid on a good or service that generates a taxable benefit.

We do not agree with the above stated conclusion. With respect to the application of section 170 of the ETA in those circumstances where taxable benefits are conferred on employees or shareholders, we wish to confirm that where section 170 of the ETA restricts a registrant from claiming an ITC with respect to the tax payable on property or services, the registrant would not be required to account for tax under subsection 173(1) of the ETA in respect of the taxable benefit conferred on the employee or shareholder.

An ITC may not be claimed by a registrant under the provisions of paragraph 170(1)(b) of the ETA where the registrant acquired property or services exclusively for the personal consumption, use or enjoyment of an officer or employee of the registrant (or a relative of the officer or employee), subject to two exceptions.

The first exception to the restriction under paragraph 170(1)(b) of the ETA occurs where a registrant makes a taxable supply of the property or service to the officer or employee for consideration equal to the fair market value of the property or service. The second exception to the restriction under paragraph 170(1)(b) to the ETA occurs where the supply in question would not result in a taxable benefit to the individual under section 6 of the ITA, had it been provided without charge to the officer or employee. Where either of these exceptions applies, the ITC restriction under paragraph 170(1)(b) of the ETA will not apply.

Pursuant to subparagraph 170(1)(c)(iii) of the ETA, where a registrant that is a corporation makes a supply of property by way of lease, licence, or similar arrangement primarily for the personal consumption, use or enjoyment of an individual who is a shareholder of the corporation (or to another individual related to the shareholder), there is no ITC entitlement with respect to the supply unless the registrant makes a taxable supply of the property to the shareholder for consideration that is equal to the fair market value of the supply.

In conclusion, the various restrictions under section 170 of the ETA may still prevent a registrant from claiming ITCs in respect of the GST/HST paid or payable on property or services even though the property or services may be regarded as taxable benefits for income tax purposes.

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 Canada Customs and Revenue Agency 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,

Anne Kratz
A/Technical Officer
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate.