Notice to the reader:

Please note that the following GST Memorandum, although correct at the time of issue, has not been updated to reflect any subsequent legislative changes since the date of issue. As a result, some of the technical information this memorandum contains may no longer be valid. Please contact your GST/HST Rulings Centre for assistance.

GST memoranda 400-3-4

Ottawa, September 12, 1992

INPUT TAX CREDITS
SPECIAL CASES
PASSENGER VEHICLES AND AIRCRAFT

This memorandum does not replace the law found in the Excise Tax Act and its Regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate Regulation or contact any Revenue Canada Excise/GST District Office for additional information. If you are located in the Province of Québec, please contact the Ministère du Revenu du Québec for additional information.

This memorandum may reflect amendments proposed to the Excise Tax Act contained in Notices of Ways and Means Motion and/or announced in press releases dated December 18, 1990, March 27, 1991, November 5, 1991, February 12, 1992, February 25, 1992, March 10, 1992 and April 27, 1992. The federal government announced its intention to introduce certain amendments to the Excise Tax Act to effect these changes which were outlined by the Minister of Finance or the Minister of National Revenue in press releases on the mentioned dates. [Where the information provided in this memorandum reflects proposed amendments, the information is enclosed in square brackets.] At the time of publication, Parliament had not enacted these proposed amendments. Any commentary in this memorandum should not be taken as a statement by the Department that such amendments will in fact be enacted into law in their current form.

This memorandum explains the rules for determining the availability of input tax credits (ITCs) for the Goods and Services Tax (GST) paid on passenger vehicles and aircraft used by registrants.

Definitions and departmental interpretations to explain specific terms are provided at the end of this memorandum.

LEGISLATIVE AND OTHER REFERENCES
Excise Tax Act -- sections 199 to 203, 235 and 340 and subsections 123(1), 136(1), 169(1), 169(2), 176(1) and 206(3)

Income Tax Act -- paragraphs 13(7)(g) and (h)

Notices of Ways and Means Motion tabled on March 27, 1991 and March 10, 1992

TABLE OF CONTENTS

General. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ITC Eligibility . . . . . . . . . . . . . . . . . . . . .3
Operating Expenses. . . . . . . . . . . . . . . . . . . .4
Purchasing Used Passenger Vehicles and Aircraft . . . . .4
Leased Passenger Vehicles and Aircraft. . . . . . . . . .6
Grandfathered Leases. . . . . . . . . . . . . . . . . . .6
Leases Signed Before August 8, 1989 . . . . . . . . . . .7
General Registrants and Public Sector Bodies . . . . . . . . .7
Acquisition of Passenger Vehicles and Aircraft. . . . . .7
Improvements. . . . . . . . . . . . . . . . . . . . . . .8
Change in Use . . . . . . . . . . . . . . . . . . . . . .9
Commercial Use Increases. . . . . . . . . . . . . . . . 10
Commercial Use Decreases. . . . . . . . . . . . . . . . 10
Sale of Passenger Vehicles and Aircraft . . . . . . . . 11
Registered Individuals and Partnerships. . . . . . . . . . . 12
Acquisition of Passenger Vehicles and Aircraft. . . . . 12
Acquisition for Non-Exclusive Use in Commercial Activities. . . . . . . . . . . . . . . . . . . . . . 13
Deemed Acquisition. . . . . . . . . . . . . . . . . . . 14
Improvements. . . . . . . . . . . . . . . . . . . . . . 14
Sale of Passenger Vehicles and Aircraft . . . . . . . . 15
Financial Institutions . . . . . . . . . . . . . . . . . . . 16
Acquisition of Passenger Vehicles and Aircraft. . . . . 16
Change in Use . . . . . . . . . . . . . . . . . . . . . 16
Sale of Passenger Vehicles and Aircraft . . . . . . . . 17
Definitions and Interpretations. . . . . . . . . . . . . . . 18

GENERAL

1. An input tax credit (ITC) may be claimed by a registrant for the tax paid or payable on property or a service acquired or imported for consumption, use or supply in the registrant's commercial activities. Section 169 of the Act governs the claiming of an ITC which, depending on the circumstances, may be full or apportioned.

2. Subsection 169(1) provides that, subject to Part IX of the Act, a registrant is eligible to claim a full ITC (100 per cent) if the acquired or imported property or service is for consumption, use or supply exclusively in the registrant's commercial activities. Except for financial institutions, "exclusive" is generally interpreted to mean 90 per cent or more.

3. More information on full ITCs is available in GST MEMORANDUM 400-1-1, FULL INPUT TAX CREDITS.

4. Subsection 169(2) of the Act provides for an apportioned ITC when property or a service is acquired or imported by a registrant for consumption, use or supply (in this subsection referred to as "intended use") partly in the registrant's commercial activities. The registrant may be eligible to claim an apportioned ITC for part of the GST paid or payable based on the intended use of the acquired or imported property or service.

5. More information on apportioned ITCs is available in GST MEMORANDUM 400-1-3, APPORTIONED INPUT TAX CREDITS.
ITC Eligibility

6. The following chart illustrates the eligibility of various registrants to claim ITCs for the tax paid on purchases of passenger vehicles and aircraft. No ITC is allowed for the GST payable on the purchase price of a passenger vehicle in excess of the capital cost allowance (CCA) for income tax purposes. The maximum capital cost allowance, although subject to change, is currently $24,000 and is calculated without reference to provincial sales taxes or GST.

1. Includes governments, non-profit and charitable organizations, municipalities, universities, schools, and hospitals.

2. Includes partnerships.

3. ITCs for financial institutions are based on percentage used in commercial activities.

* Determined annually by formula: CCA x (percentage of use in providing taxable supplies / percentage of use in providing taxable and exempt supplies) x 7/107.

% Percentage of use in commercial activities.

Operating Expenses

7. In general, when a registrant incurs operating expenses for a passenger vehicle used in a commercial activity, the registrant can claim an ITC for the tax paid on these expenses (e.g., gasoline, oil, maintenance charges and all repair charges) based on the vehicle's use in commercial activities.

Purchasing Used Passenger Vehicles and Aircraft

8. In general, the GST and an ITC eligibility apply to used passenger vehicles in the following manner:

(a) the tax is not payable on the sale of a used passenger vehicle by a non-registered individual to another individual, or by a registrant in circumstances where paragraphs 33 or 44 of this memorandum apply;

(b) the tax is not payable by a used car dealer who purchases a passenger vehicle in circumstances described in point (a), however, a notional ITC may be available to the dealer;

(c) the tax is payable by those who purchase a passenger vehicle from a used car dealer.

9. Under paragraph 176(1)(b) of the Act, when a registrant acquires a used passenger vehicle or an aircraft, and tax is not payable (for example, a purchase from a non-registrant or from a registrant not using the vehicle primarily in commercial activities), and the vehicle is acquired for resale or lease in the registrant's commercial activities, the registrant may claim a notional ITC of 7/107 of the price paid. "Primarily" is generally interpreted to mean more than 50 per cent.

Example:

A used car dealer pays $5,350 for a car purchased from a non-registrant individual. The dealer is considered to have paid $350 tax (7/107 x $5,350), for which an input tax credit can be claimed. The subsequent sale of the car by the dealer is taxable. If the dealer sells the car for $6,000, tax of $420 (7% of $6,000) is charged to the purchaser. Because the dealer is eligible for the $350 ITC, the net tax is $70 ($420 - $350, or 7% of the dealer's margin which is $6,000 less $5,000).

10. When a registrant purchases a used passenger vehicle or an aircraft from another registrant in the course of a commercial activity and tax is payable by the vendor, ITCs can be claimed in the usual manner.

11. Under paragraph 176(1)(a) of the Act, when a registrant acquires a used passenger vehicle or aircraft after 1993, for consumption, use or supply in commercial activities, and tax is not payable, the registrant is considered to have paid tax equal to 7/107 of the purchase price. This amount may be claimed as an ITC under section 169 of the Act. For more information on used goods, refer to GST MEMORANDUM 400-3-6, USED OR SPECIFIED TANGIBLE PERSONAL PROPERTY.
Leased Passenger Vehicles and Aircraft

12. A leased passenger vehicle or an aircraft may be used in commercial and other activities. When the vehicle is used in commercial activities, the registrant pays tax in respect of the lease and may claim ITCs in the usual manner.

13. If the cost of a lease of a passenger vehicle exceeds the amount that is deductible under section 67.3 of the Income Tax Act (or would be if the registrant was an income tax payer), the registrant may be required to pay tax under section 235 of the Act. Currently, the threshold for the deductible amount under the Income Tax Act is $650 per month. In most cases, this threshold will amount to a recapture of a portion of the ITCs to which the registrant is entitled.

14. This liability must be calculated, in most cases, in the reporting period that begins immediately after the registrant's taxation year. Where the registrant's reporting period is the taxation year, tax under section 235 of the Act must be remitted for that period. If the registrant ceases registration during the taxation year, the tax must be accounted for in the last reporting period of the year.

15. The liability is determined by multiplying the total of the excess lease payments during the year by the tax rate, seven per cent, then by a percentage representing the use of the vehicle in the registrant's commercial activities during the year.

16. This tax liability will not apply where no tax was payable in respect of the lease (for example, where the lease was "grandfathered" under transitional provisions of the Act). The tax liability will also not apply where an ITC was denied on the lease payment under section 170 of the Act (for example, where the vehicle was for the exclusive personal use of an employee).

Grandfathered Leases

17. For the purposes of subsection 340(3) of the Act, the tax does not apply to payments made under a written agreement for automobile leases if

(a) the lease was entered into before January 1, 1991,

(b) the lease payments, or payments to exercise a purchase option, are made before 1994,

(c) the lessee took possession of the automobile before 1991, and

(d) the lease payments, or payments to exercise a purchase option, are attributable to a period before 1994.

Leases Signed Before August 8, 1989

18. Under the general provisions of subsection 340(6) of the Act, a registrant who has entered into a written agreement for the lease of tangible personal property (if the property is a capital property of the supplier) before August 8, 1989, is not required to pay the tax. However, if the registrant changes or alters the term of the agreement or property leased, or renews the agreement after that date, the registrant must pay the tax on the new agreement.

Example:

On August 7, 1989, a registrant signed an agreement to lease an aircraft for three years. No GST is payable on that lease as it was originally written.

19. The following sections explain, by type of registrant, the rules for determining the availability of ITCs for the GST paid when passenger vehicles and aircraft are acquired, improved, sold or changed from one use to another.

GENERAL REGISTRANTS AND PUBLIC SECTOR BODIES
Acquisition of Passenger Vehicles and Aircraft

20. Under subsections 199(1) and 199(2) of the Act, a general registrant or registered public sector body may claim an ITC for the tax payable on the acquisition or importation of a passenger vehicle or an aircraft if it is to be used as capital property primarily (generally more than 50 per cent) in commercial activities of the registrant. When the passenger vehicle or aircraft is for use primarily in commercial activities, the registrant is considered to use the property exclusively in such activities and may claim a full ITC. When such property is not used primarily in commercial activities, an ITC may not be claimed.

21. Under the provisions of section 201 of the Act, when a registrant acquires or imports a passenger vehicle for use as capital property in commercial activities, the tax payable by the registrant is deemed to be the lesser of

(a) the tax payable on the passenger vehicle, and

(b) the tax that would be payable if the item was valued at the deemed capital cost under paragraph 13(7)(g) or (h) of the Income Tax Act. (As of September 1, 1989, the maximum capital cost of a passenger vehicle for income tax purposes is $24,000.) This limit excludes all federal and provincial sales taxes.

Since the definition of an automobile excludes taxis, funeral hearses and ambulances, these vehicles are not subject to the capital cost limitations; nor is the inventory of a car dealership or the leasing vehicles of a leasing company.

Example:

A registrant corporation purchases an automobile from a dealer for $25,000 (exclusive of GST). The registrant uses the vehicle 60 % in commercial activities. Although the registrant paid tax of $1,750, the registrant can only claim $1,680 as an ITC. The calculation is as follows:

Purchase price $25,000
GST paid on purchase price ($25,000 x 7%) $1,750
Maximum GST claimable ($24,000 x 7%) $1,680
ITC $1,680

Improvements

22. Under subsection 199(4) of the Act, a registrant may claim a full ITC for tax paid on improvements to a passenger vehicle or an aircraft that is capital property only if the property is used primarily in commercial activities immediately after it is improved.

Example:

A registrant makes $3,000 of improvements to a passenger vehicle and intends to use it 55% in commercial activities. The registrant can claim the full amount of the tax paid on the improvements to the vehicle.

$3,000 x 7% = $210

23. If the registrant intends to use the vehicle 50 per cent or less in commercial activities, then no ITC is allowed on the improvement.

24. When the amount paid or payable by a registrant for an improvement to a passenger vehicle increases the cost of the vehicle to an amount that exceeds the capital cost as determined by paragraph 13(7)(g) or (h) of the Income Tax Act, an ITC cannot be claimed for the tax paid on the excess amount.

Change in Use

25. Change-in-use rules are applied depending on the significance of the change and the type of registrant. For general registrants and registered public sector bodies, where commercial use falls below 50 per cent (i.e., the property is used primarily in non-commercial activities), use in commercial activities is considered to have ceased.

26. Where primary use rules apply, as they do for the capital personal property of most registrants, section 197 of the Act specifies that "a change in use of property from primarily one purpose to primarily another purpose is not insignificant". In these cases, a change in primary use (for example, from 52 per cent to 48 per cent) would not be insignificant.

Commercial Use Increases

27. When a general registrant or registered public sector body owns a passenger vehicle or an aircraft not used primarily in commercial activities and increases its use to primarily in commercial activities, the registrant is deemed to have acquired the property for use as capital property exclusively in commercial activities immediately before that time. The registrant is also deemed to have paid tax, and as a result, can claim an ITC.

28. The amount of tax that the registrant is deemed to have paid is the lesser of

(a) the total tax on the original purchase of the property and any subsequent improvements, and

(b) the tax that would be payable if the registrant had acquired the property at its fair market value when the change in use occurred.

Example:

A registrant purchases a passenger vehicle for $20,000, spends $2,000 on improvements to the vehicle and uses it 40% of the time in commercial activities. The GST paid was $1,540 [($20,000 + $2,000 x 7%], but because of the percentage of commercial use, the registrant could not claim an ITC. Later, the use of the vehicle increases to 55% in commercial activities when its fair market value is $16,000. The registrant is deemed to have sold and repurchased the vehicle for $16,000 and to have paid $1,120 GST. The registrant is eligible to claim an ITC for the lesser amount of $1,120.

Commercial Use Decreases

29. When a general registrant or registered public sector body acquires or imports a passenger vehicle or an aircraft for use primarily in commercial activities and subsequently begins to use the property otherwise than primarily in commercial activities, the registrant is deemed to have

(a) sold the property at its fair market value, and

(b) collected tax on the fair market value.

30. The registrant must remit the tax that is deemed to be collected and may be able to claim an ITC for any tax paid on the acquisition of the property that could not previously be claimed.

Example:

A registrant who acquired an automobile primarily for use in commercial activities ceases to use it primarily in commercial activities at a time when it has a value of $5,000. The registrant is considered to have sold the property for $5,000 and to have collected tax of $350. This amount is then included in the amount of net tax required to be remitted for the reporting period in which the property ceased to satisfy the primary-use test.

Sale of Passenger Vehicles and Aircraft

31. When a registrant sells a passenger vehicle used as capital property in commercial activities, the registrant may claim an ITC equal to the lesser of

(a) the amount by which the tax payable on the purchase of the vehicle and on the cost of any improvements exceeds any claimable ITCs, and

(b) where the sale price is less than the purchase price and the cost of any improvements, the amount of the excess under point (a) reduced to the ratio of the sale price over the purchase price and the improvement costs.

32. [The Notice of Ways and Means Motion tabled on March 27, 1991, announces a proposed amendment to subsection 203(1) of the Act, effective April 1, 1991. This amendment will ensure that when a registrant sells a passenger vehicle which was being used as capital property in commercial activities of the registrant, in calculating the ITC that is available when the vehicle is sold, the tax payable upon acquisition, importation or improvement of the vehicle is calculated exclusive of any tax which is deemed to have been paid or become payable by the registrant as a result of a change in use of the vehicle.]

Example:

A registrant acquires an automobile in 1992 for $50,000 (excluding taxes) for use primarily in its commercial activities, and sells the vehicle in December 1994 for $30,000. The registrant pays $3,500 GST on the purchase and is entitled to claim an ITC of up to $1,680 (7 per cent of $24,000) in the reporting period in which the vehicle was acquired. On the sale in 1994, the registrant will be required to collect tax of $2,100 (7% of the $30,000 sale price) and will be entitled to claim a further ITC equal to the lesser of:

(a) $1,820 ($3,500 - $1,680), and

(b) $1,092 ($1,820 x 30,000/50,000).

The total ITCs available will thus be $2,772 ($1,680 when purchased, plus $1,092 on resale). The $728 which is denied as an ITC to the registrant represents tax paid on the purchase price of the vehicle in excess of the ceiling, to the extent the registrant has "consumed" that value of the vehicle.

33. When a general registrant or registered public sector body sells a passenger vehicle or an aircraft, which immediately before the sale was used otherwise than primarily in commercial activities, subsection 200(3) of the Act provides that the supply is not considered to be a taxable supply and does not have any GST consequences. For more information on the change-in-use rules for capital personal property, refer to GST MEMORANDUM 400-3-9, CAPITAL PERSONAL PROPERTY.

REGISTERED INDIVIDUALS AND PARTNERSHIPS
Acquisition of Passenger Vehicles and Aircraft

34. Under subsection 202(2) of the Act, when a registrant who is an individual or partnership acquires or imports a passenger vehicle or an aircraft for use in commercial activities, the registrant can claim a full ITC on the tax paid or payable if the vehicle or aircraft is acquired for use exclusively in commercial activities. Except for financial institutions, "exclusive" is generally interpreted to mean 90 per cent or more.

Example:

A registered individual purchases an automobile from a dealer for $24,000. Since the registrant uses the vehicle 90 per cent in commercial activities, a full ITC may be claimed for the $1,680 GST paid. The calculation is as follows:

Purchase price $24,000
GST paid on purchase price ($24,000 x 7%) $1,680
ITC $1,680

Acquisition for Non-Exclusive Use in Commercial Activities

35. When a registered individual or partnership acquires or imports a passenger vehicle or an aircraft for less than exclusive use in commercial activities, the registrant's ITC is the tax fraction (7/107) of the capital cost allowance (CCA) deducted in computing the income of the registrant from those commercial (DPA) activities for that or the subsequent taxation year, as the case may be. The amount allowed for capital cost allowance already excludes any portion of the cost of the passenger vehicle or aircraft which is attributable to personal use.

36. In those limited cases when a passenger vehicle or aircraft is used for both taxable and exempt activities, the amount must be prorated according to paragraph 169(2)(a) of the Act.

Example:

A registered individual purchases an automobile from a dealer for $20,000 to be used 40% in taxable activities, 40% for personal use and 20% in exempt activities. The GST payable on acquisition is $1,400 ($20,000 x 7%), making the GST-included cost of the vehicle $21,400 ($20,000 + $1,400). If the CCA in the year of acquisition is calculated as 15% of the purchase price (i.e., 50% of the normal 30% rate as provided for under section 1100(2) of the Income Tax Regulations), the registrant may claim an ITC in the last reporting period in the taxation year (for income tax purposes) in which the vehicle was purchased. The calculation is as follows:

7/107 x (50% x 30% x 80% x GST-included price) = ITC

7/107 x $2,568 = $168

The 80% figure includes both the use in commercial activities and personal use, since the personal use element is already accounted for in the CCA.

Deemed Acquisition

37. When a passenger vehicle or an aircraft ceases to be used exclusively in a commercial activity, the registered individual or partnership is treated as having made a taxable supply, by way of sale, of the passenger vehicle or aircraft based on the fair market value and to have collected tax on the supply.

38. The registrant is also treated as having acquired the vehicle or aircraft and as having paid tax on the acquisition. The practical consequence is that the individual or partnership is entitled to claim a CCA-based ITC where the use in commercial activities by the individual or partnership is less than exclusive.

39. Where an individual or partnership acquires a passenger vehicle or aircraft for use less than exclusively in commercial activities, but begins to use it exclusively in commercial activities, the individual or partnership continues to claim a CCA-based ITC.

Improvements

40. Under subsection 202(3) of the Act, when a registered individual or partnership acquires or imports an improvement to a passenger vehicle or an aircraft that is capital property, the tax payable for the improvement cannot be claimed as an ITC unless the vehicle is used exclusively in commercial activities before and after the improvement.

41. When the amount paid or payable by a registrant for an improvement to a passenger vehicle increases the cost of the vehicle to an amount that exceeds the capital cost as determined by paragraph 13(7)(g) or (h) of the Income Tax Act, an ITC cannot be claimed for the tax paid on the excess amount.

Sale of Passenger Vehicles and Aircraft

42. When a registrant sells a passenger vehicle used as capital property in commercial activities, the registrant may claim an ITC equal to the lesser of:

(a) the amount by which the tax payable on the purchase of the vehicle and on the cost of any improvements exceeds any claimable ITCs, and

(b) where the sale price is less than the purchase price and the cost of any improvements, the amount of the excess under point (a) reduced to the ratio of the sale price over the purchase price and the improvement costs.

43. [The Notice of Ways and Means Motion tabled on March 27, 1991, announces a proposed amendment to subsection 203(1) of the Act, effective April 1, 1991. This amendment will ensure that when a registrant sells a passenger vehicle which was being used as capital property in commercial activities, in calculating the ITC that is available when the vehicle is sold, the tax payable upon acquisition, importation or improvement of the vehicle is calculated exclusive of any tax which is deemed to have been paid or become payable by the registrant as a result of a change in use of the vehicle.]

Example:

A registrant acquires an automobile in 1992 for $50,000 (excluding taxes) for use exclusively in its commercial activities, and sells the vehicle in December 1994 for $30,000. The registrant pays $3,500 GST on the purchase and is entitled to claim an ITC of up to $1,680 (7 per cent of $24,000) in the reporting period in which the vehicle was acquired. On the sale in 1994, the registrant will be required to collect tax of $2,100 (7% of the $30,000 sale price) and will be entitled to claim a further ITC equal to the lesser of:

(a) $1,820 ($3,500 - $1,680), and

(b) $1,092 ($1,820 x 30,000/50,000).

The total ITCs available will thus be $2,772 ($1,680 when purchased, plus $1,092 on resale). The $728 which is denied as an ITC to the registrant represents tax paid on the purchase price of the vehicle in excess of the ceiling, to the extent the registrant has "consumed" that value of the vehicle.

44. When a registrant who is an individual or a partnership sells a passenger vehicle or an aircraft used otherwise than exclusively in commercial activities, subsection 203(3) of the Act provides that the sale is deemed not to be a taxable supply and does not have any GST consequences.

FINANCIAL INSTITUTIONS
Acquisition of Passenger Vehicles and Aircraft

45. Generally, for financial institutions, the rules for capital real property are applied to capital personal property having a cost exceeding $50,000. Accordingly, an ITC is available to financial institutions at the time of acquisition or importation of capital personal property to the extent that the property is intended for use in commercial activities.

46. Where the vehicle or other capital personal property acquired by a financial institution has a cost which does not exceed $50,000, any ITC eligibility is based on the intended use in commercial activities when the vehicle is acquired or imported. No change-in-use rules apply.

47. For more information on the tax treatment of the acquisition, improvement, change in use and sale of capital personal property by financial institutions, please see GST MEMORANDUM 700-5-11, CAPITAL PROPERTY.

Change in Use

48. Change-in-use rules are applied depending on the significance of the change and the type of registrant. [The Notice of Ways and Means Motion tabled on March 27, 1991, announces a proposed amendment to section 197 of the Act, effective April 1, 1991, to ensure that a change in use of less than 10 per cent will be insignificant "except where there is a cessation of commercial use".]

49. Yet, even when an insignificant change does not trigger change-in-use rules, these changes do accumulate. When previous insignificant changes of less than 10 per cent total 10 per cent or more, the accumulation is considered to be a significant change and registrants must account for the change in use.

50. Where extent of commercial use rules apply, as in the case of capital real property and all capital property of financial institutions having a cost exceeding $50,000, a change of less than 10 per cent in the total use of the property is insignificant except where there is a cessation of commercial use.

Sale of Passenger Vehicles and Aircraft

51. Under subsection 203(1) of the Act, when a registrant makes a taxable supply of a passenger vehicle used as capital property in commercial activities, the registrant may claim an ITC equal to the lesser of:

(a) the amount by which the tax payable by the registrant on the purchase of the vehicle and on the cost of any improvements exceeds any claimable ITCs with respect to the purchase or cost of improvements, and

(b) where the sale price is less than the purchase price and the cost of any improvements, the amount of the excess under (a) reduced to the ratio of the sale price over the purchase price and the improvement costs.

52. In many cases, the provisions of subsection 203(1) of the Act will not apply to financial institutions since they may not be engaged in commercial activities or may have made an election under subsection 173(3) of the Act to have the use of passenger vehicles deemed to be exclusively in activities other than commercial activities.

53. [The Notice of Ways and Means Motion tabled on March 27, 1991, announces a proposed amendment to subsection 203(1) of the Act, effective April 1, 1991. This amendment will ensure that when a registrant sells a passenger vehicle which was being used as capital property in commercial activities, in calculating the ITC that is available when the vehicle is sold, the tax payable upon acquisition, importation or improvement of the vehicle is calculated exclusive of any tax which is deemed to have been paid or become payable by the registrant as a result of a change in use of the vehicle.]

Example:

A registrant acquires an automobile in 1992 for $60,000 (excluding taxes) to be used 40 per cent in commercial activities, and sells the automobile in December 1994 for $40,000. The registrant pays $4,200 GST on the purchase and is entitled to claim an ITC of up to $672 (7 per cent of $24,000 x 40 per cent) in the reporting period in which the vehicle was acquired. On the sale in 1994, the registrant will be required to collect tax in the amount of $2,800.

Under subsection 206(3) of the Act, the registrant will be deemed to have paid tax in the amount of $1,008 (60 per cent of 7 per cent of $24,000) at the time of sale and will be entitled to claim that amount ($1,008) as an ITC under subsection 169(1) of the Act. Under subsection 203(1) of the Act, a further ITC may be claimed at the time of sale equal to the lesser of

(a) $2,520 ($4,200 - $672 - $1,008), and

(b) $1,680 ($2,520 x 40,000/60,000).

The total ITCs available will thus be $3,360 ($672 when purchased, plus $1,008 and $1,680 on resale). The $840 which is denied as an ITC to the registrant represents tax paid on the purchase price of the vehicle in excess of the $24,000 ceiling, to the extent the registrant has "consumed" that value of the vehicle.

DEFINITIONS AND INTERPRETATIONS

The following are either definitions which have been taken from the Excise Tax Act as amended by S.C. 1990, c. 45 (Bill C-62), or departmental interpretations of terms relevant to the administration of that Act.

"Act" means the Excise Tax Act;

"amount" means money, property or a service, expressed in terms of the amount of money or the value in terms of money of the property or service;

"automobile", as defined by the Income Tax Act, means

(a) a motor vehicle that is designed or adapted primarily to carry individuals on highways and streets and that has a seating capacity for not more than the driver and 8 passengers,

but does not include

(b) an ambulance,

(c) a motor vehicle acquired primarily for use as a taxi, a bus used in a business of transporting passengers or a hearse used in the course of a business of arranging or managing funerals,

(d) except for the purposes of section 6 of the Income Tax Act, a motor vehicle acquired to be sold, rented or leased in the course of carrying on a business of selling, renting or leasing motor vehicles or a motor vehicle used for the purpose of transporting passengers in the course of carrying on a business of arranging or managing funerals, and

(e) a motor vehicle of a type commonly called a van or pick-up truck or similar vehicle

(i) that has a seating capacity for not more than the driver and 2 passengers and that, in the taxation year in which it is acquired, is used primarily for the transportation of goods or equipment in the course of gaining or producing income, or

(ii) the use of which, in the taxation year in which it is acquired, is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income;

"capital property", in respect of a person, means property that is, or would be if the person were a taxpayer under the Income Tax Act, capital property of the person within the meaning of that Act, other than property described in Class 12 or 14 of Schedule II to the Income Tax Regulations. The definition of capital property found in the Income Tax Act includes:

(a) any depreciable property of the taxpayer,and

(b) any property (other than depreciable property), any gain or loss from which would, if the property were disposed of, be a capital gain or capital loss, as the case may be, of the taxpayer.

The definition excludes property, the sale of which would be taken into account in computing ordinary income, eligible capital property including intangibles, cultural property, resource properties, insurance policies, and timber resource properties. Class 12 includes low value assets depreciated at a rate of 100 per cent, while Class 14 includes limited-time patents, concessions, franchises, and licences;

"commercial activity" means

(a) any business carried on by a person,

(b) any adventure or concern of a person in the nature of trade, and

(c) any activity engaged in by a person that involves the supply of real property or of a right or interest in respect of real property by that person,

but does not include

(d) any activity engaged in by a person to the extent that it involves the making of an exempt supply by the person,

(e) any activity engaged in by an individual without a reasonable expectation of profit, or

(f) the performance of any duty or activity in relation to an office or employment;

"consideration" may be money, a thing, a service, forbearance in the exercise of a right or anything else which induces the supplier to make the supply. Where consideration is monetary, the amount of the money will be used to calculate the tax. Where the consideration is non-monetary, the fair market value of the consideration at the time the supply was made will be used to calculate the tax;

"exclusive", in respect of the consumption, use or supply of property or a service, means all or substantially all of the consumption, use or supply of the property or service. "All or substantially all", in respect of the consumption, use or supply of property or a service by a financial institution, means all of the consumption, use or supply of the property or service;

"exempt supply" means a supply included in Schedule V to the Act;

"fair market value" of property or a service supplied to a person means the fair market value of the property or service without reference to any tax excluded by section 154 of the Act from the consideration for the supply;

"financial institution", at any time, means a person who is at that time a financial institution under section 149 of the Act;

"improvement" in respect of capital property of a person, means any property or service that is supplied to, or goods that are imported by, the person for the purpose of improving the capital property, to the extent that the consideration paid or payable by the person for the property or service or the value of the goods is, or would be if the person were a taxpayer under the Income Tax Act, included in determining the adjusted cost base to the person of the capital property for the purposes of that Act;

"individual" means a natural person;

"input tax credit" means a credit claimable by a registrant for the Goods and Services Tax paid or payable by the registrant in respect of the acquisition or importation of any property or service for consumption, use or supply in the course of commercial activities of the registrant;

"passenger vehicle" has the same meaning assigned by subsection 248(1) of the Income Tax Act. Subsection 248(1) of the Income Tax Act states that a "passenger vehicle" means an automobile acquired after June 17, 1987 (other than an automobile acquired after that date pursuant to an obligation in writing entered into before June 18, 1987) and an automobile leased under a lease entered into, extended or renewed after June 17, 1987;

"personal property" means property that is not real property;

"property" means any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money;

"registrant" means a person who is registered under section 241, or who is required to apply to be registered under section 240 of the Act;

"sale", in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property;

"supply" means, subject to sections 133 and 134 of the Act, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;

"tax" means the Goods and Services Tax payable under Part IX of the Act;

"taxable supply" means a supply that is made in the course of a commercial activity, but does not include an exempt supply.

REFERENCES
OFFICE OF RESPONSIBILITY:

Policy and Legislation

LEGISLATIVE REFERENCES:

Excise Tax Act

HEADQUARTERS FILE:

N/A

SUPERSEDES GST MEMORANDUM:

N/A

OTHER REFERENCES:

N/A

SERVICES PROVIDED BY THE DEPARTMENT ARE AVAILABLE IN BOTH OFFICIAL LANGUAGES.

THIS MEMORANDUM IS ISSUED BY TECHNICAL INFORMATION, EXCISE/GST BRANCH UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE, CUSTOMS AND EXCISE.