19 March 1992 Income Tax Severed Letter 9202885 - Taxation of GST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: TAXATION OF GST Section(s): 12(1)(x)]

XXX 920288 Marc Vanasse (613) 957-2110

Attention: XXX

March 19, 1992

Dear Sirs:

Re: Taxation of the Goods and Services Tax (GST)

Your letter addressed to Revenue Canada, Customs and Excise, dated January 22, 1992 has been forwarded to us for our reply. You have requested that we confirm your understanding of the income tax implications of certain aspects of the GST.

It is your view that:

• 1) GST transitional credits are subject to income tax.
• 2) Registrants remitting by way of the Quick Method of GST accounting ("Quick Method") will not be subject to tax in respect of the difference between the GST collected and the amount so remitted to Revenue Canada, Customs and Excise.
• 3) Registrants remitting by way of the Quick Method will include as a deductible expense the GST portion relating to current expenses and inventory.

OUR COMMENTS

GST transitional credits received by a taxpayer under section 346 of the Excise Tax Act from Revenue Canada, Customs and Excise, which are intended to assist businesses in implementing the GST, are taxable as government assistance under paragraph 12(1)(x) of the Income Tax Act.

As discussed during our telephone conversation of February 21, 1992 (Vanasse/XXX), the difference between the GST collected on taxable sales and the amount remitted to Revenue Canada, Customs and Excise, in accordance with the Quick Method, constitutes income subject to tax under section 9 of the Income Tax Act.

It is our understanding that, under the Quick Method, registrants are not entitled to claim an input tax credit for the GST paid on current expenses and inventory and, as such, the total deductible cost of these expenses will include the GST. This assumes, of course, that the deductibility of these expenses, or any portion thereof, is not prohibited under any provision of the Income Tax Act.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

cc. Ms. Josee Vigeant, Ottawa District Office - Excise

FILE # 5/920288

NOTES TO FILE

GST transitional credits are included in income when received - see the 1991 fishermen tax guide p.8.

Registrants who have elected to use the Quick Method of GST accounting in remitting the GST that is collected, must include in income the difference between the amount collected (i.e. 7%) and the amount that must be remitted to Revenue Canada, Customs and Excise based on a specified percentage under the Quick Method. The taxpayer in this particular enquiry thought that this difference was non taxable as it is intended to compensate the registrant for the input tax credit that normally could have been claimed in respect of the GST paid on current expenses and inventory had the registrant not chosen to use the Quick Method.

However, as I explained to the taxpayer, registrants not electing the Quick Method must include in income pursuant to 12(1)(x) the input tax credit received or receivable in respect of the GST paid on current expenses and inventory.

Therefore, as the ITCs received or receivable with respect to the GST paid on current expenses and inventory would be included in income under 12(1)(x), the difference between the amount collected and the amount that is remitted under the Quick Method must also be included in income as this difference is suppose to compensate the registrant for the GST paid on current expenses and inventory.

Finally, as registrants who have elected to use the Quick Method are not entitled to claim ITCs for the GST paid on current expenses and inventory, the deductible cost of these expense will include the GST paid in respect of these expense.

Marc Vanasse
March 5, 1992