STATEMENT OF FACTS

A non-registrant individual ("pledgor") pawns a ring to a pawnbroker. The pawnbroker gives the individual $400 and they both sign an agreement which entitles the pledgor to redeem the ring for $500 if redeemed within the specified number of days under the applicable provincial pawnbrokers legislation. If the property is not claimed within the redemption period, the pledgor loses all claim to the property. The pledgor returns to claim the property within the applicable redemption period.

RULING REQUESTED

Can the pawnbroker claim an ITC on inputs to support this activity on the basis that the service he provides qualifies as an exempt financial service?

RULING GIVEN

No ITCs may be claimed by the pawnbroker. In this situation, the transaction is treated as a loan. The transfer of the property to the pawnbroker (as well as the transfer back to the pledgor) is treated as a transfer of a security interest which is deemed not to be a supply under section 134. The loan is an exempt financial service pursuant to paragraph 123(1)(g) of that definition. The $100 premium paid to repurchase the property is a payment of interest, which is exempt pursuant to paragraph 123(1)(f).

Example 2

STATEMENT OF FACTS

A non-registrant individual ("pledgor") pawns a ring to a pawnbroker. The pawnbroker gives the individual $400 and they both sign an agreement which entitles the pledgor to redeem the ring for $500 if redeemed within the specified number of days under the applicable provincial pawnbrokers legislation. If the property is not claimed within the redemption period, the pledgor loses all claim to the property. The pledgor does not return to claim the property pledged, and the property is sold to a third party.

RULING REQUESTED

Can the pawnbroker claim a notional input tax credit when the property is resupplied to the third party?

RULING GIVEN

Yes, a notional ITC can be claimed by the creditor if the property is resupplied by way of sale in accordance with subsection 183(7). Because the property was not claimed within the redemption period, it is considered seized for the purpose of satisfying a debt obligation pursuant to subsection 183(1). The subsequent supply is deemed to be for nil consideration under subsection 183(1) and to have been made in the course of a commercial activity under subsection 183(2), and is therefore taxable.

Example 3

STATEMENT OF FACTS

A registrant (pledgor), who is primarily in commercial activity, pawns a fax machine to a pawnbroker. The pawnbroker gives the registrant $200 and they both sign an agreement which entitles the pledgor to regain possession of the fax machine for $250 if redeemed within the specified number of days under the applicable provincial pawnbrokers legislation. If the property is not claimed, the pledgor loses all claim to the fax machine. The pledgor does not return to claim the fax machine within the redemption period. The pawnbroker sells the fax machine to a third party.

RULING REQUESTED

Can the pawnbroker claim a notional input tax credit?

RULING GIVEN

The pawnbroker cannot claim notional input tax upon making a taxable sale of seized property since there would be tax payable by the pawnbroker had the pawnbroker acquired the fax machine from the pledgor in Canada.

If the registrant had supplied the fax machine to the pawnbroker, the supply would have been taxable, since subsection 200(3) would not apply because the registrant was using the fax machine primarily in commercial activity. Therefore, tax would be payable on a supply of the fax machine by the registrant to the pawnbroker. Subsection 183(7) requires that no tax would be payable if a creditor (pawnbroker) purchased the seized property (fax machine) from the debtor (pledgor) in Canada. Since this requirement has not been met, the creditor is not entitled to a notional input tax credit.