25 August 2004 GST/HST Interpretation 53938 - Request for Municipal Designation

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX, with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the transaction described below.

Statement of Facts

Our understanding of the facts, the transaction, and the purpose of the transaction is as follows:

1. Your client, XXXXX (the "dealership") is located in XXXXX, and is registered for GST/HST purposes.

2. The dealership purchases its new automobile inventory from XXXXX (the "manufacturer").

3. The manufacturer delivers an automobile that it manufactured in Canada to the dealership. Pursuant to subsection 23(1) of the Excise Tax Act (the "ETA") and section 7 of Schedule I to the ETA, an excise tax of $100 is payable in respect of the air conditioner that is included as permanently installed equipment in the automobile.

4. In accordance with subsection 23(2) of the ETA, the $100 excise tax is payable by the manufacturer at the time of delivery of the automobile to the dealership.

5. To recover its manufacturing costs, the manufacturer includes the $100 excise tax, together with other costs, on the invoice issued by the manufacturer to the dealership for the sale of the automobile.

6. The dealership subsequently enters into a purchase agreement with a customer to sell the automobile. The automobile is sold for a negotiated sale price plus a surcharge of $100.

7. The purpose of the surcharge is to recover the dealership's out-of-pocket cost that relates to the excise tax payable by the manufacturer and that was passed on by the manufacturer to the dealership. Instead of including the surcharge in the negotiated sale price, the dealership has chosen to separately identify the surcharge in the purchase agreement.

8. The sale of the automobile by the dealership to the customer is a taxable supply made in a non-participating province that is not zero-rated for GST/HST purposes. In addition, the dealership does not accept any other automobile (trade-in) as full or partial consideration for the sale of the automobile to the customer.

Ruling Requested

For GST/HST purposes, is the $100 surcharge part of the consideration payable for the supply of the automobile made by the dealership?

Ruling Given

Based on the facts set out above, we rule that the $100 surcharge that is made to recover the dealership's cost relating to the excise tax payable by the manufacturer is part of the consideration payable for the supply of the automobile. As such, GST of 7% applies on the value of the consideration payable for the supply of the automobile, which includes the surcharge.

This ruling is subject to the general limitations and qualifications outlined in Chapter 1.4 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the ETA, or to our interpretative policy; and that you have fully described all necessary facts and the transaction for which you requested a ruling.

Explanation

Subject to Part IX of the ETA, subsection 165(1) of the ETA provides that every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply. In subsection 123(1) of the ETA, "consideration" is defined to include any amount that is payable for a supply by operation of law. Generally, where the consideration is expressed in money, the value of the consideration is equal to the amount of the money pursuant to paragraph 153(1)(a) of the ETA.

With respect to the surcharge, section 154 of the ETA, which provides that certain amounts such as federal or provincial taxes, duties, or fees are included in the consideration for a supply of property or a service, does not apply in this situation. Although the surcharge is made to recover the excise tax payable by the manufacturer that was passed on to the dealership, the surcharge itself is not an amount that falls within the provisions of section 154. The surcharge is not a tax or levy imposed under federal or provincial legislation that is payable or collectible by the supplier (i.e., the dealership) or payable by the recipient (i.e., the customer).

In this case, the surcharge is one of the dealership's component costs for the automobile that is being passed on to the customer as part of the final sale price for the automobile. In other words, the surcharge is part of the total amount payable by the customer for the automobile. Where a vendor breaks down some or all of the component costs that are part of the final sale price for a good, the tax is payable and calculated on the final sale price. As such, the GST applies on the total amount payable for the automobile, which is the sum of the negotiated sale price and the $100 surcharge.

It should be noted that subsection 223(1) of the ETA requires a registrant who makes a taxable supply, other than a zero-rated supply, to indicate to the recipient either in prescribed manner or in the invoice or receipt issued to the recipient or in an agreement in writing entered into with the recipient for the supply, the consideration paid or payable by the recipient and the tax payable in respect of the supply in a manner that clearly indicates the amount of the tax or that the amount paid or payable for the supply includes the tax payable. In this situation, to meet the requirements of subsection 223(1), the dealership could clearly indicate in the purchase agreement the negotiated sale price, the surcharge and the sum of these amounts, which would be the consideration payable by the customer and the tax payable on the value of that consideration.

XXXXX

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2488.

Sincerely,

Marcel R. Boivin
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

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