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Notice of Change: TIB B-084 - Treatment of Used Goods

From: Canada Revenue Agency

GST/HST Technical Information Bulletin B-084
July 29, 1997

This bulletin 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 tax services office for additional information. If you are located in the province of Quebec, please contact the ministère du Revenu du Québec (MRQ) for additional information.

Note: The rules outlined in this bulletin also apply, effective April 1, 1997, to the Harmonized Sales Tax (HST) in the provinces of Nova Scotia, New Brunswick and Newfoundland (the "participating provinces"). The HST applies at the rate of 15% in the participating provinces and registrants who have paid 15% HST on their inputs are entitled to claim input tax credits (ITC's) at this rate.

INTRODUCTION

Notional input tax credits have been eliminated for used tangible personal property acquired by way of sale, except for supplies of usual coverings and containers (including returnable containers), seizures and repossessions of property by creditors, and property acquired by insurers on settlement of claims. This bulletin sets out the revised treatment of ITCs in respect of used goods and the new trade-in approach under new subsections 153(4) and (5) of the Excise Tax Act (the Act).

ELIMINATION OF NOTIONAL INPUT TAX CREDITS

For supplies made on or before April 23, 1996, registrants were entitled to claim notional ITCs for the acquisition of used tangible personal property supplied in Canada by way of sale, where the GST was not payable by the registrant in respect of the supply and the property was acquired for the purpose of consumption, use or supply in the course of the commercial activities of the registrant. The notional ITC was equal to the tax fraction (7/107ths) of the consideration for the supply at the time it was paid.

For supplies made after April 23, 1996, registrants are no longer entitled to claim notional ITCs on purchases of used tangible personal property which they purchase or accept as trade-ins from a person not required to charge the GST (e.g., consumers).

However, transitional relief is available to registrants operating under the old rules for claiming notional ITCs for the period beginning April 24, 1996, and ending June 30, 1996.

A registrant who operated under the previous rules contained under paragraph 176(1)(a) of the Act during the transitional relief period may be entitled to claim notional ITCs if:

Notional ITCs are not available for the transitional relief period where the new trade-in rules were applied by the registrant.

For specified tangible personal property and used specified tangible personal property (e.g., works of art, jewellery, stamps, coins, rare books), the recapture provisions under paragraph 176(2)(b) of the Act and the provision restricting actual and notional ITCs under subsection 176(5) of the Act do not apply to transactions entered into after April 23, 1996, as they have been repealed. Therefore, ITCs may be claimed for purchases of specified tangible personal property to the extent the property is acquired for consumption, use or supply in commercial activities.

AGREEMENTS ENTERED INTO PRIOR TO APRIL 24, 1996

Section 133 of the Act provides that the entering into an agreement to supply any property or service is treated as a supply of the property or service made at the time the agreement is entered into. As a result, the entering into an agreement to trade or sell used tangible personal property on or before April 23, 1996, is subject to the previous rules contained in section 176 of the Act.

For example, a consumer enters into an agreement with a car dealer on April 23, 1996, to purchase a new car. The car dealership accepts as partial payment for the sale of the new car a trade-in of a used car. The remainder of the consideration is to be financed by a loan subject to approval by a bank. The bank approved the loan on April 27, 1996, and the transaction was completed that day. In this situation, the car dealership is entitled to claim a notional ITC on the amount paid for the used car because the supply of the new car occurred at the time the agreement was entered into. The GST is charged on the full price of the new car since the supply was made prior to April 24, 1996.

SUPPLIES MADE AFTER APRIL 23, 1996

Effective April 24, 1996, where used tangible personal property (or a leasehold interest therein) is traded in for another good, and the person trading in the good is not required to collect the GST on the supply, the tax is calculated on the net value of the transaction (known as the new trade-in approach), provided that the property is acquired for consumption, use or supply in the course of the commercial activities of the supplier.

THE NEW TRADE-IN APPROACH

After April 23, 1996, new rules apply for trade-ins of used tangible personal property (or a leasehold interest therein) by persons who are not required to collect the GST on those supplies. Under the trade-in approach, the tax is calculated on the net difference in price between the supply of tangible personal property and the supply of used tangible personal property (or a leasehold interest therein) accepted as a trade-in.

Example*

New system

Cost of new good
$20,000
Trade-in allowance
5,000
Difference
15,000
GST ($15,000 × 7%)
1,050
Total cost
$16,050

* This example does not take into account provincial sales taxes.

Supplies of used tangible personal property

Where a person who is not required to be registered for purposes of the GST (e.g., a consumer) supplies used tangible personal property (e.g., a used vehicle) to another person:

Supplies of tangible personal property

The trade-in approach applies only where the supplier makes a supply of tangible personal property to a recipient who supplies used tangible personal property (or a leasehold interest therein) as full or partial consideration for that supply. The trade-in approach does not apply where the supplier makes a supply of intangible personal property, services or real property.

There is no requirement that the trade-in be of the same property or kind of tangible personal property. For example, where a customer purchases a new washing machine valued at $700 and trades in an old dryer at $50, the GST is to be calculated on the difference between $700 and $50 ($650).

Trade-ins involving services

Only trade-ins of used tangible personal property (or a leasehold interest therein) are allowed to reduce the consideration of the supply for GST purposes. Therefore, services cannot reduce the amount of consideration subject to tax. For example, if an automobile mechanic purchases a $15,000 car by paying $5,000 cash and offering $10,000 worth of services, the mechanic will have to pay the GST on the full $15,000.

Trade-ins involving more than one property

The trade-in approach applies in cases where a person makes one or more supplies of tangible personal property and accepts as full or partial consideration one or more supplies of used tangible personal property (or a leasehold interest therein). For example, a person trades in a used book valued at $10 as partial consideration for two books valued at $30. The GST is calculated on the net difference (i.e., $20). Similarly, if a person trades in two used books valued at $5 as partial consideration for one new book valued at $30, the GST would be calculated on the difference ($25).

Purchases and trade-ins from registrants required to charge the GST

The new trade-in rules do not apply to GST registrants who are selling or trading in used tangible personal property (or a leasehold interest therein) that was last used exclusively in commercial activities, and who are required to charge the GST. In this case, the old rules continue to apply. The purchaser charges the GST on the sale of the used tangible personal property, and the dealer charges the tax on the full sale price of the other property. The dealer and the purchaser are eligible to claim ITCs for the GST they pay on their purchases in the normal manner.

Full or partial consideration

The trade-in approach applies only in cases where the used tangible personal property (or a leasehold interest therein) is accepted as full or partial consideration for the supply of the other property. No GST is payable in cases where the supply of used tangible personal property (or a leasehold interest therein) and the other property are of equal value. Where the value of the used tangible personal property (or a leasehold interest therein) exceeds the value of the other property, no GST will apply. There is no refund of GST for the excess difference in the value of the used tangible personal property (or a leasehold interest therein) and the other property.

Advanced trade-ins

A trade-in occurs when a supplier makes a supply of tangible personal property to a recipient and the supplier accepts other property from the recipient. Where a person trades in used tangible personal property (or a leasehold interest therein) on a specified future purchase or lease of other property, or where the property would be delivered at a later date, the trade-in approach will be allowed.

Non-transferability

The trade-in approach applies only to the recipient of tangible personal property who is supplying used tangible personal property (or a leasehold interest therein) as full or partial consideration to the supplier. An amount credited from one supplier to another, or from one recipient to another, is not considered to be a trade-in.

Where a person decides to sell privately used tangible personal property rather than trade in the property, and subsequently provides the supplier the proceeds of the disposition from the used property, a trade-in is not recognized and the GST is computed on the new property in the normal manner.

Credit notes

The trade-in approach does not apply where a supplier offers a person a credit note or coupon for the value of used tangible personal property (or a leasehold interest therein) credited as a trade-in allowance where the coupon or note is applied in full or in part against unspecified future deliveries of tangible personal property.

Cash Equivalent When Goods Traded In

The trade-in approach applies even if a registrant provides a person with a cash equivalent of all or some of the value of the used tangible property ( or a leasehold interest therein). Where a person  receives a cash advance from the supplier against the value of the trade-in, the advance is considered a  financial arrangement. A financial arrangement of this nature does not reduce the value of the trade-in provided that it is clearly segregated on the sale or lease agreement and any subsequent billings or other statements that are provided to the person.

Conversely, the amount given in cash to the person will not be considered to be an amount credited against the new tangible personal property where the documentation segregating the cash advance is not clear, for example, where the supplier only indicates on the sale or lease agreement the net value of the trade after providing the cash advance to the person.

This approach applies whether the trade is credited against a lease or purchase.

For example, an individual in Ontario wishes to trade in a personal use vehicle and to purchase a new  vehicle from a registered dealership. The trade-in is valued at $12,000 and there is no lien on the trade-in. The new vehicle is valued at $25,000. At the request of the individual, the dealership agrees to apply only $8,000 of the trade-in against the cost of the new vehicle and to give the individual a cheque for the balance (i.e., $4,000). This amount is clearly segregated on the sale  agreement. For the purposes of subsection 153(4) of the Excise Tax Act, the amount credited to the recipient in respect of the trade-in is equal to $12,000. Therefore, the consideration for the supply is equal to $13,000 (i.e., 25,000 - $12,000) and the GST on the supply is equal to $910.

Sale and leaseback arrangements

The trade-in approach does not apply where a person supplies used tangible personal property (or a leasehold interest therein) and, in turn, repurchases or leases the same property from the supplier accepting the trade-in as full or partial consideration.

Fair market value of trade-in

The value of the trade-in equals the amount credited to the recipient in respect of the trade-in unless the supplier and the recipient are not dealing with each other in an arm's length transaction.

If the parties to the transaction are not dealing at arm's length, and the value assigned to the trade-in exceeds the fair market value of the trade-in at the time ownership is transferred, the trade-in value is deemed to be the fair market value.

The trade-in approach does not apply where a registrant trades in used tangible personal property (or a leasehold interest therein) and is required to charge the GST on that good. In this case, the GST is charged on the value of consideration for each of the supplies.

Trade-ins involving outstanding liens

Where a person trades in used tangible personal property (or a leasehold interest therein) on the purchase of another property, the GST is calculated on the difference between the value credited as a trade-in allowance and the value of consideration of the other property. The value of the trade-in for purposes of calculating the GST is not affected by any outstanding loans or liens.

The following example illustrates how the GST applies where a consumer trades in a used vehicle on the purchase of a new vehicle:

Selling price of new vehicle before GST
$20,000
Trade-in allowance
5,000
Outstanding loan on trade-in
3,000
Cost of new vehicle before GST (including outstanding loan)
18,000
GST on new vehicle (7% × $15,000)
1,050
Price paid by consumer*
$19,050

* This price does not take into account provincial sales tax.

Leases

Interest included as an element in the payment required under a lease agreement, where the supply is of tangible personal property, is subject to the GST. As a result, the interest amount included in a lease payment is not considered to be consideration for an exempt supply, but is part of the taxable lease payments and the GST will apply.

Trade-ins and leases

A typical lease agreement includes various charges. In addition to the monthly lease payment, there is often a required down payment, a lease acquisition fee, and other charges that are due upon possession. As these amounts are all consideration for the supply by way of lease, the lessor and the lessee may agree to apply the trade-in value to all or a portion of these amounts. The application of the subsection 153(4) rules provides that the consideration for the supply of the tangible personal property by way of lease is reduced on whichever specific charges that the lessor and lessee agree to apply the trade-in value to. In other words, the trade-in value is not limited to reducing the monthly lease payment.

Trade-ins used to reduce the capital cost

Where a consumer trades in used tangible personal property (or a leasehold interest therein) for the lease of other property, and the trade-in allowance is used to reduce the capital cost of the property, the GST is calculated on the monthly payments reduced by the amount credited as a trade-in allowance.

The following examples illustrate how the GST applies where a non-registrant trades in a used vehicle on the lease of a new vehicle and applies the trade-in allowance towards reducing the capital cost of the vehicle (It is to be noted that this formula applies an "acquisition factor" and a "residual factor". These factors are derived from interest rates.):

Registrant dealer leases a new vehicle to a non-registrant

Lease period on the new vehicle leased from the dealer
24 months
Agreed value of the new vehicle
$20,000
Agreed value of the trade-in vehicle
$5,000
Lien against the trade-in vehicle (owed to financial institution)
$2,000
Agreed credit given on the trade-in vehicle ($5,000 - $2,000):
$3,000
Residual value (i.e., option price) on the leased new vehicle
$11,600

The monthly lease payment is calculated as follows:

Total vehicle price
$20,000
Less: agreed credit given on the trade-in vehicle
3,000
Net lease cost
$17,000

Monthly lease payment

Net lease cost × acquisition factor ($17,000 × .047290)
$803.93
Less: residual value × residual factor ($11,600 × .037002)
429.22
Monthly lease payment
$374.71

The GST is not calculated on the monthly lease payment where there is an outstanding lien on the property being traded in. The GST is calculated on an amount that is less than the monthly lease payment because the outstanding lien is ignored when determining the consideration for the supply for purposes of the GST. Therefore, a second calculation is required to determine the GST. The same formula that was used to calculate the monthly lease payment is applied a second time, only this time the outstanding lease payment is ignored. The result is as follows:

GST calculation on monthly lease payments

Total vehicle price
$20,000
Less: trade-in allowance
5,000
Net sales tax lease cost
$15,000
Net sales tax lease cost × acquisition factor ($15,000 × .047290)
$709.35
Less: residual value × residual factor ($11,600 × .037002)
429.22
Monthly sales tax lease payment
$280.13

Monthly GST payable

7% × $280.13 (monthly sales tax lease payment)
$19.61/mth

Example 2

A used vehicle is traded in by a non-registered individual for a new leased vehicle. It is to be noted that Example 2 uses a formula that is different from that used in Example 1. The "monthly rate factor" in this formula is an amount that is derived from an interest rate. The monthly lease payments are determined to be:

Selling price of a new vehicle before GST
$20,000
Trade-in allowance
5,000
Less: outstanding loan on trade-in
3,000
Net trade-in
2,000
Net cost of vehicle to be leased before GST
18,000
Residual value (buy-out option)
8,000

$10,000
Monthly principal lease payment
$10,000 ÷ 48 months
$208.33/mth
Monthly interest portion of lease payment (8.71%)
($18,000 + $8,000) × .00368 (monthly rate factor)
95.68/mth
Lessee's monthly lease payment before GST
$304.01/mth

GST calculation on monthly lease payments

As discussed in Example 1, a second calculation is necessary to determine the GST base where there is an outstanding lien on the property being traded in. Therefore, applying the formula used in Example 2 a second time, but this time ignoring the amount of the outstanding lien, leads to the following GST calculation:

Selling price of a new vehicle before GST
$20,000
Trade-in allowance
5,000
Net cost of vehicle to be leased before GST
15,000
Residual value (buy-out option)
8,000

$7,000
Monthly principal lease payment
$7,000 ÷ 48 months
$145.83/mth
Monthly interest portion of lease payment (8.71%)
($15,000 + $8,000) × .00368 (monthly rate factor)
84.64/mth
GST base
$230.47/mth

Calculation of the GST payable

7% × $230.47 (GST base)
$16.13/mth

Deposits

The trade-in approach does not apply to security deposits.

Buy-out options

The trade-in approach does not reduce the amount of the GST charged on the amount of the buy-out option when the person exercises that option.

Where a lessee is obligated under the terms of a lease agreement to pay the lessor for any shortfalls below the guaranteed amount in the vehicle's value at the termination of the lease period, any shortfall in that amount is considered for GST purposes to be additional consideration paid in respect of the vehicle. The trade-in approach does not apply to this consideration.

Similarly, where, under a lease agreement, the lessee has the right to purchase the vehicle from the lessor at the termination of the lease period for an amount equal to the vehicle's guaranteed value (the buy-out option), the amount paid by the lessor to the lessee as an amount in excess of the guaranteed value is not considered for GST purposes to be an adjustment of the consideration paid by the lessee for the supply of leasing the vehicle from the lessor during that period, but is regarded as consideration in relation to the vehicle's leasehold interest.

Trade-ins and lease payments

Where a person enters into an agreement to lease a motor vehicle and makes a down payment or prepayment against the lease, the amount of the down payment or pre-payment is subject to the GST at that time. The remainder is then divided into lease payments that are subject to the GST as they become due.

However, as mentioned previously, where the trade-in is used fully or partially as a down payment, the trade-in approach applies and the GST is reduced accordingly. In addition, where the trade-in is applied against the lease acquisition fees and future lease payments, the GST is reduced accordingly.

EXPORTS OF USED SPECIFIED TANGIBLE PERSONAL PROPERTY

Under previous subsection 176(2), where a registrant made a supply outside Canada, or a zero-rated supply was made by way of sale of used specified tangible personal property after September 14, 1992, there was a recapture of actual or notional ITCs the registrant may have claimed in respect of the property that was acquired for consideration that exceeds the prescribed value.

Effective for supplies made after April 23, 1996, there is no longer a requirement to recapture actual or notional ITCs even if the registrant had already claimed actual or notional ITCs on acquisitions made on or before April 23, 1996.

RESTRICTION ON CLAIMING ACTUAL AND NOTIONAL INPUT TAX CREDITS OF SPECIFIED TANGIBLE PERSONAL PROPERTY

Under previous subsection 176(5), registrants that acquired or imported specified tangible personal property for consideration in excess of the prescribed amounts could claim actual or notional ITCs only if the property was acquired exclusively for supply in the course of their commercial activities. Where the property was acquired otherwise than exclusively for supply in commercial activities, the registrant was deemed to have used the property exclusively in non-commercial activities, and therefore was not entitled to claim actual or notional ITCs. The subsequent disposition of the property was not subject to the GST.

For supplies made after April 23, 1996, the normal ITC rules apply to specified tangible personal property and ITCs may be claimed for purchases of specified tangible personal property to the extent that the property is acquired for consumption, use, or supply in commercial activities.

ELECTION FOR EXHIBITORS

Under previous subsections 176(6) and (7), there were special rules that denied actual or notional ITCs on purchases of specified tangible personal property in excess of prescribed amounts, where the property was used to make taxable supplies of admissions. An exhibitor, such as a museum or gallery, could elect to be exempted from these rules by using the appropriate form.

This election is no longer necessary and is repealed for supplies made after April 23, 1996.

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