12 January 2017 Internal T.I. 2016-0636911I7 - Standby Charge - PST and the cost of an automobile

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.

Principal Issues: Does the cost of an automobile for the purposes of subsection 6(2) of the Income Tax Act include the actual PST paid or the PST that would have been payable if there was no trade-in?

Position: It depends on the relevant PST legislation, but in most provinces, the cost should likely only include the actual PST paid.

Reasons: See below.

							January 12, 2017

Collections and Verification Branch		HEADQUARTERS
Business Compliance Directorate		R. Dubis
391 Terminal Ave., 4th Flr			905-721-5191
Ottawa ON  K1A 0L5

Attn:	Marlene Sylvest				2016-063691

Manager-Policy and
Legislative Research Section

Meaning of “cost” for the purposes of subsection 6(2) of the Income Tax Act

We are replying to your request of March 10, 2016, in which you asked for our views regarding the calculation of the standby charge in subsection 6(2) of the Income Tax Act (“Act”).

When a trade-in forms part of the consideration paid for a purchased automobile, the amount of GST/HST and provincial sales tax (“PST”) payable on the purchase may be reduced under the applicable federal or provincial legislation. In these circumstances, you asked whether the cost of the automobile for purposes of the standby charge formula in subsection 6(2) of the Act should include the reduced PST paid or the PST calculated as if there was no trade-in.

Our comments

Subsection 6(7) of the Act addresses the treatment of taxes such as GST/HST and PST for the purposes of section 6 of the Act. Effective for 1996 and subsequent tax years, former paragraph 6(1)(e.1) was repealed and subsection 6(7) of the Act was amended to state that for the purposes of section 6 of the Act:

“To the extent that the cost to a person of purchasing a property or service or an amount payable by a person for the purpose of leasing property is taken into account in determining an amount required under this section to be included in computing a taxpayer’s income for a taxation year, that cost or amount payable, as the case may be, shall include any tax that was payable by the person in respect of the property or service or that would have been so payable if the person were not exempt from the payment of that tax because of the nature of the person or the use to which the property or service is to be put.[Emphasis added.]”

Prior to the amendment, former paragraph 6(1)(e.1) of the Act did not address the amount of PST to be included and it was the view of the Income Tax Rulings Directorate (“ITRD”) that the PST was a component of cost for the purposes of subsection 6(2) of the Act. In document E9426525, the ITRD stated that where an employer trades in one automobile for another automobile, “a standby charge calculation program designed to use the actual sales tax computed on the net amount of the transaction would be appropriate.”

While your question focuses on the calculation of the cost of an automobile for the purpose of calculating the standby charge under subsection 6(2) of the Act, the acquisition of an automobile is a purchase of a capital property. In regard to the amount of PST to be included in the capital cost of the vehicle for the purposes of paragraph 7307(1)(b) of the Income Tax Regulations (“Regulations”), a similar view was conveyed in document E9413405, where the ITRD concluded that the actual amount of PST paid should be included in the capital cost of the vehicle for the purposes of paragraph 7307(1)(b) of the Regulations.

Since both ITRD documents predated the amendment to subsection 6(7) of the Act, you further asked whether the amendment changes ITRD’s previous view with respect to the amount of PST that should be included in cost for the purposes of subsection 6(2) of the Act.

Inclusion of tax in the cost of property or service which gives rise to a benefit

Under former paragraph 6(1)(e.1) of the Act, the GST component of the taxable benefit was included separately. Under subsection 6(7) of the Act, GST and any other taxes are included in the cost of the property or service which gives rise to the benefit. Specifically, with respect to taxes, the wording of subsection 6(7) of the Act includes in cost:

• any tax that was payable by the person in respect of the property or service, or
• any tax that would have been payable if the person were not exempt from the payment of that tax because of the nature of the person or the use to which the property or service is to be put.

The word “payable” is not defined in the Act and has been the subject of previous technical interpretations by the ITRD. The primary consideration in those interpretations was the connection to a legal or contractual obligation to pay an amount, as interpreted by the court in Redclay Holdings Ltd v The Queen, 96 DTC 1207 (General Procedure). With consideration to the Redclay decision, the expression “was payable” requires any GST/HST or PST actually paid pursuant to a vehicle purchase or lease contract to be included in the definition of cost for the purposes of subsection 6(2) of the Act.

For those provinces which are harmonized, the CRA publication, Excise and GST/HST News No. 47, outlines the appropriate process for calculating GST/HST for purchasers who trade in a vehicle. For non-harmonized provinces, any PST actually paid pursuant to the applicable legislation should be included in the calculation of the cost of an automobile. The amount of GST/HST and PST actually paid by the purchaser will likely be disclosed on the bill of sale.

If a tax was not in fact paid by the purchaser of a property or service, the only listed exceptions provided in subsection 6(7) are in respect of any tax that would have been so payable “if the person were not exempt from the payment of that tax because of the nature of the person, or the use to which the property or service is to be put.”

Generally, an exemption relieves an individual of an obligation that otherwise arises under the Act and the exemptions are listed in the applicable legislation. In the case of a trade-in, it is likely that the tax is generally not reduced pursuant to an exemption. Rather, the wording of the legislation is such that the tax is likely determined pursuant to a specific calculation which gives consideration to the value of the trade-in.

For GST/HST purposes, under paragraph 153(4)(c) of the Excise Tax Act (“ETA”), if a purchaser is not required to collect tax in respect of the trade-in, the value of the consideration for the automobile is deemed to be equal to the amount, if any, by which the value of the consideration for that automobile exceeds the amount credited to the purchaser in respect of the trade-in. In our view, the GST/HST paid is not reduced because of an exemption but is reduced because of a calculation of the GST/HST base. You may wish to confirm our view with GST/HST Rulings.

For provinces which are not harmonized, the PST is determined pursuant to relevant provincial legislation. Like the ETA, under most PST legislation, vehicles are generally considered tangible personal property, and when accepted as a trade-in, the legislation specifies that the PST is calculated on the difference between the value of the property sold and the credit allowed for the value of the trade-in. For example, subsection 24(3) of the Provincial Sales Tax Act (British Columbia), defines “purchase price” for the purposes of section 9 of that Act and states:

“If, in relation to a sale in British Columbia of tangible personal property, tangible personal property on which the purchaser has previously paid an applicable tax or that was exempt from an applicable tax is accepted at the time of sale by the seller as consideration on account of the price of the tangible personal property sold, for the purposes of this Act, the purchase price of the tangible personal property sold is the amount equal to the initial price of the tangible personal property sold less the amount of the credit allowed for the tangible personal property accepted on account of the price of the tangible personal property sold.[Emphasis added.]”

While each province’s legislation would have to be reviewed, it would appear that in most cases where there is a trade-in, the PST is reduced because of a calculation of the tax base rather than an exemption under the legislation. Therefore, it would not fall within the two listed exceptions in subsection 6(7) of the Act.

Conclusion

Where there is a trade-in, it is a question of fact whether the PST is reduced because of an exemption or a calculation of the tax base. In most cases, it is likely that the PST is reduced because of a calculation of tax base and only the reduced PST (i.e., the actual PST paid) would be included in the cost of the purchased automobile for purposes of subsection 6(2) of the Act.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch