23 November 2001 GST/HST Interpretation 36905 - Tri-Party Trade-ins

Dear XXXXX:

Thank you for your letter of July 19, 2001 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to tri-party trade-ins.

The transactions involve typically the owner/operator of a truck, a vehicle dealer and a leasing company.

The owner/operator wishes to replace the current vehicle he owns with a new one. Additionally, he would like to lease the new vehicle.

Where dealers do not provide lease financing, they are frequently partnered with a finance company that will finance the vehicles.

The owner/operator finds a dealer who can provide the new vehicle he requires. The dealer will also express an interest in acquiring the used vehicle at a set price, and the finance company will agree to provide lease financing on the net amount.

Because of expediency and to reduce paperwork, the transaction is usually papered on two documents, a net invoice from the dealer to the finance company and a lease between the finance company and the owner/operator.

A typical invoice would be as follows:

A typical worksheet would be as follows:

Lessee

Dealer

Lessor

Purchase of New Vehicle

In the above example, it is assumed that the lessee owns a vehicle with a fair market value of $10,500 and wishes to lease a new vehicle worth $45,000. The lessee trades in the old vehicle against the new one.

You note that this is a tri-party transaction and that the paperwork looks like the lessee traded the used vehicle to the finance company which in turn traded the unit against the new one.

Apparently Canada Customs and Revenue Agency (CCRA) auditors are raising assessments against the owner/operators for failure to collect GST on the deemed sale of the used vehicle. The auditors are apparently also refusing to allow an ITC on the application of the deemed sale value towards the new vehicle.

In accordance with section 1.4 of Chapter 1 of the GST/HST Memoranda Series, an application ruling can only be issued in respect of a clearly defined fact situation of a particular person. Rulings are issued upon request where the person has presented all the relevant facts such as the nature of the transactions undertaken, detailed descriptions of the services or properties involved, the parties involved in all transactions and relevant documentation such as invoices, contracts and other pertinent agreements. Where all the relevant facts are not provided, an interpretation may be issued. We are pleased to provide you with the following interpretation.

Interpretation Requested

You have requested clarification with respect to claiming an ITC on tri-party leases and reporting requirements with respect to calculation and remittance of net tax.

Interpretation Given

Based on the information provided, we offer the following interpretation:

All legislative references are to the Excise Tax Act.

Tax Treatment on Supply of Used Vehicle

With respect to the requirement that owner/operators collect GST/HST on the trade-in of their used vehicle, we note that, according to the accounting worksheet provided, the lessee (owner/operator) is collecting (charging) GST on the sale of the used vehicle. There is a further note on the worksheet to the effect that the GST collected/paid is to be reported for GST by the applicable parties. This statement is correct. Pursuant to subsection 225(1), an amount as or on account of GST/HST that is collected or collectible during a particular reporting period must be included in a person's net tax calculation for that period. In the example provided, the owner/operator would be required to include $735 on line 103 of its GST/HST return for the appropriate period.

Entitlement to Claim ITCs on the Acquisition of a Used Vehicle

The recipient of the taxable supply of the used vehicle may be entitled to claim an input tax credit (ITC) for the GST/HST paid or payable, provided that all requirements for claiming ITCs are met. The discussion below focuses on two of the requirements for claiming ITCs that relate to the issues you have raised, namely the requirement that the person claiming the ITC be the recipient of the supply and the requirement that the documentary requirements are met.

Pursuant to subsection 169(1), a person may be entitled to claim an ITC for tax paid or payable on a supply of property made by way of sale provided that the person acquired the property and is liable to pay the tax payable in respect of the supply (i.e., the person must be the recipient of the supply). With respect to the acquisition of the used vehicle, the person liable to pay the consideration for the supply is the recipient of the supply, pursuant to the definition of "recipient" in subsection 123(1). In the example outlined above, it appears that the documentation identifies the leasing company as the person liable to pay the consideration for the supply of the used vehicle. Therefore, the leasing company would be the recipient. In order for the dealer to claim the ITC on the acquisition of the used vehicle from the owner/operator, the dealer would have to obtain evidence substantiating that it, in fact, acquired the used vehicle and not the leasing company and that it is liable to pay the consideration payable on the acquisition. Such evidence may include, in addition to the invoice issued, other documentation specifying that the parties to the sale of the used vehicle are the owner/operator and the dealer, and that the dealer is liable for the consideration for the used vehicle and therefore, the recipient of the supply. Although you indicate that the intention of the parties as to who is the recipient of the used vehicle and the written documentation differ, there is no evidence that the facts of the situation are different from the transaction stated in the documentation. Additionally, the facts may differ depending on who is party to the transaction.

Pursuant to paragraph 169(4)(a), a registrant may not claim an ITC for a reporting period unless, before filing the return in which the ITC is claimed, the registrant has obtained sufficient evidence in such form, containing such information, as will enable the amount of the ITC to be determined, including any information prescribed by regulation.

Generally, documentary and information requirements obtained in support of ITC claims will be the same receipts, invoices and agreements in writing currently retained by businesses to support expense deductions under the Income Tax Act.

The Input Tax Credit Information (GST/HST) Regulations (Regulations) prescribed pursuant to paragraph 169(4)(a), prescribe information requirements for supporting documents. The information can be found in different supporting documents to the extent that these documents can be clearly related to the supply that is the object of an ITC claim. Supporting documents include:

(a) an invoice,

(b) a receipt,

(c) a credit-card receipt,

(d) a debit note,

(e) a book or ledger of account,

(f) a written contract or agreement,

(g) any record contained in a computerized or electronic retrieval or data storage system, and

(h) any other document validly issued or signed by a registrant in respect of a supply made by the registrant in respect of which there is tax paid or payable;

Where the consideration for a supply is at least $150, the supply is taxable at either 7% or 15% and the amount is tax-excluded, the information that will be considered to provide sufficient evidence for purposes of an ITC claim will include the following:

(a) the name of the supplier, the name under which the supplier does business, or where there is an intermediary in respect of the supply, the intermediary's name or the name under which the intermediary does business;

(b) the registration number of the supplier or the intermediary, whichever is applicable;

(c) the date of the invoice, if one is issued or, where an invoice is not issued, the date on which tax paid or payable for the supply;

(d) the total amount paid or payable for the supply;

(e) the amount of GST/HST paid or payable for the supply;

(f) the name or trading name of the recipient or the name of the recipient's agent or representative;

(g) the terms of payment; and

(h) a description of each supply, sufficient to identify the supply.

Where an invoice or a set of documents functions as the documentation for supplies by more than one supplier, such as the owner/operator, the dealer and the financing company in your example, the documentary requirements must be met by each supplier in order for the recipients to meet the necessary documentary requirements to claim any available ITCs.

Subsection 169(5) gives the Minister the power to exercise discretion related to documentary requirements of subsection 169(4) for claiming ITCs, and to determine any alternative requirements and to whom they apply. In the case at issue, however, there are no special difficulties that would justify an exemption from the documentary requirements provided in paragraph 169(4)(a).

Pursuant to subsection 223(2), any person who makes a taxable supply to another person must, on the request of that other person, furnish, in writing, such particulars of the supply as may be required to substantiate an ITC claim. That is, the onus for obtaining the particulars required for an ITC claim is placed on the claimant.

There is also a general provision under subsection 286(1) that a person must keep sufficient books and records in such form containing such information as will enable the determination of the person's GST/HST liabilities and obligations or the amount of any rebate or refund to which the person is entitled.

Our position is that the onus is on the parties involved to provide the appropriate documentation for their specific fact situation. Should your industry or interested parties want to develop sample documentation, we would be pleased to comment on that material.

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.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-5124.

Yours truly,

Gabrielle Nadeau
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

Memorandum 400-1-2 Input Tax Credits, Documentary Requirements

Information for Used Car Dealers

Explanatory Notes to ss. 153(4)

XXXXX July 21, 1995 memo to Regina District Office re Kramer Ltd. and R.M. Elcapo, Tax Court of Canada judgement

XXXXX