7 August 2003 GST/HST Interpretation 41502 - ITC Implications on ATM Operators

This is in reply to your letters XXXXX with respect to the XXXXX.

Background

XXXXX purchased ABMs from a company in XXXXX called XXXXX, who supply, install and maintain ABMs as per an agreement named XXXXX.

In their letter, XXXXX provided the following information:

•   XXXXX choose their own locations, which appear profitable based on traffic flow and availability of ABMs in the surrounding area.

•   XXXXX negotiated an agreement with the location owner to allow for the installation of an ABM for which they pay a portion of the applicable surcharge amount.

•   The surcharge amount varies from XXXXX per withdrawal based on the affordability and need of customers using the ABM.

•   XXXXX. fills the ABM with their own cash from their business account.

However, the documents XXXXX provided to the Canada Custom and Revenue Agency (CCRA) do not support entirely these facts, as they are not party to the XXXXX that intervenes between XXXXX and the location owner.

The customers use the ABM to withdraw their own money using their debit/credit cards. The process is exactly the same as being used by all other financial institutions except that XXXXX ABMs allow withdrawals only.

Every time a customer uses XXXXX ABM, the amount withdrawn along with the surcharge amount is deposited electronically in their bank account within 48 hours. The electronic processing of funds is being done by a company called XXXXX who also provide this service to banks, credit unions and other financial institutions.

XXXXX was denied claims for ITCs on the purchase of ABMs from XXXXX on the basis that the revenues generated from these machines are mainly exempt financial services.

In XXXXX opinion, they should be allowed to claim ITCs on the purchase of the equipment to get started in its XXXXX venture because the ABM operations business was started with the following objectives in mind:

•   To purchase and install ABMs at potentially profitable locations, establish the business with a view to improve the transaction volume and then find suitable customers who would buy their ABMs along with an established location and pay a certain price which would provide a sizeable profit.

•   XXXXX[.]

•   XXXXX[.]

Issues

1. Is XXXXX purchase of ABMs from XXXXX considered a purchase for use, consumption or supply in the course of a commercial activity?

2. Should XXXXX be allowed to claim ITC's on the initial purchase of the ABMs from XXXXX?

Our comments

1. XXXXX purchase of ABMs from XXXXX is not considered a purchase for use, consumption or supply in the course of a commercial activity.

XXXXX provided the CCRA with a copy of the XXXXX signed between them and XXXXX and the invoice for the purchase of the ABMs. The XXXXX provides a summary of key points of the agreement with the location where the ABM will be placed. Based on that information, the CCRA requested that XXXXX provide the XXXXX for all of the XXXXX and enquired about the current status of the ABMs already placed in specific retail locations. In an exchange of correspondence between XXXXX and XXXXX, you confirmed that XXXXX does not sign any agreement with the retail locations. XXXXX who have sold them all their ABMs sign these agreements.

In a letter XXXXX provided to the CCRA, XXXXX confirmed having sold XXXXX ABMs, which according to the documentation we have were placed in the following retail locations:

•   XXXXX

•   XXXXX

•   XXXXX

•   XXXXX

As for the current status of the ABMs, XXXXX wrote a letter to the CCRA stating that the ABM at XXXXX and the other XXXXX locations were being offered for sale to potential buyers.

After analyzing the information XXXXX provided, it appears that even if XXXXX intent was to sell the ABMs along with the location once it had been installed, operated and proven to be profitable, it is clear from the facts that XXXXX did not purchase other ABMs from XXXXX after XXXXX and after a period of XXXXX, XXXXX still owns and operates the ABMs placed in its original retail locations. Therefore, our view is that XXXXX is not engaged in the commercial activity of the sale of ABMs.

2. XXXXX is not allowed to claim ITCs on its initial purchase of ABMs.

The ITC that a registrant is entitled to claim, at the time the property is acquired, is determined on the basis of the registrant's intended use in commercial activities at that time. Given that the CCRA already determined that the purchase of ABMs by XXXXX is not for use in a commercial activity, the ABMs are purchased as capital personal property that will be used primarily (more than 50%) in exempt activities. Since more that 50% of XXXXX ABM revenues are exempt, our view is that no ITCs can be claimed on the purchase of the ABMs.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 941-2046.