Calculation of the Notional Input Tax Credit that may be Claimed by a Creditor Under Subsection 183(7)

From: Canada Revenue Agency

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST Policy Statement P-156r

Date of Issue

Issued March 1, 1994
Revised April 30, 1999

Subject

Calculation of the Notional Input Tax Credit that may be Claimed by a Creditor under Subsection 183(7).

Legislative Reference(s)

Subsections 183(2) and 183(7) of the Excise Tax Act

National Coding System File Number(s)

11585-0, 11585-13, 11585-35, 11783-2-183

Effective Date

January 1, 1991 for GST

April 1, 1997 for HST

Text

Subsection 183(7) includes a formula for determining the amount of the notional input tax credit that a creditor is entitled to claim when seized property is supplied by way of a taxable sale. That formula is A - B, where A is the tax calculated on the deemed consideration and B is the total of the input tax credits that must be deducted from A. The purpose of this policy is to determine exactly which input tax credits must be deducted from A.

Subsection 183(7) describes B as the total of all amounts each of which is an input tax credit or a rebate under this Part that the creditor was entitled to claim in respect of the property or an improvement thereto. This policy discusses the Department's position regarding the phrase "in respect of the property or an improvement thereto." The description of B could suggest that all input tax credits claimed in relation to the property would have to be included in the calculation without regard to their nature (i.e. all ITCs for GST/HST paid on improvements, maintenance, commissions, storage, etc.).

The Department's position is that the words "entitled to claim an input tax credit or rebate in respect of the property" refer to any rebate or input tax credit claimed on the property. In addition, where a rebate or input tax credit was claimed for property that became part of a larger property, then post-1990 outlays that would normally be capitalized by the creditor according to generally accepted accounting principles are also considered to be "in respect of the property". This means that B is the total of all input tax credits that the creditor was entitled to claim on the property itself, plus any ITCs that the creditor was entitled to claim on expenditures that had been capitalized according to generally accepted accounting principles (including improvements).

The word "improvement" is defined in the Excise Tax Act as property or service the cost of which may be added to the adjusted cost base of an asset under the Income Tax Act.

Maintenance costs, storage costs and selling costs are not included in determining
the adjusted cost base under the Income Tax Act and are, therefore, not considered
improvements under the Excise Tax Act. These costs, unlike improvements, do not normally add to the value of property and, therefore, cannot normally be recovered through a sale by including them in the value of the property.

In order to allow for a recovery of GST/HST paid on these expenditures, subsection 183(2) deems that any costs made in connection with the supply of seized property, except for the costs associated with the seizure or repossession itself, are made in the course of a commercial activity, including any costs for improvements, maintenance, selling and storage of the property. As a result, a creditor is entitled to claim input tax credits for the GST/HST paid on these costs. However, the notional input tax credit that a creditor may claim under subsection 183(7) is intended to reflect the amount of embedded tax in the value of seized property. If, under subsection 183(2), the creditor was already entitled to claim input tax credits for the GST/HST paid on the improvements, then the tax is no longer embedded in the value of the property at the time that the creditor makes a taxable supply of the seized property.

The value of A in the formula A - B in subsection 183(7) is equal to the tax that the creditor is deemed to have paid on the deemed supply of the property to the creditor. Paragraph (c) of the subsection states that the creditor is deemed to have received a supply of the property immediately before the supply to the recipient and for the same consideration as the supply to the recipient, which will normally reflect any improvements or capital expenditures. This means that the amount of deemed tax in A takes into account the value of the improvements - for which the creditor was already entitled to claim as an input tax credit under subsection 183(2). Therefore, in order to avoid the situation where a creditor receives both an input tax credit (under 183(2)) and a notional input tax credit (under 183(7)) in respect of the same improvement, it is appropriate that the tax on the value of any improvements be "backed out" of the amount of the notional input tax credit that the creditor may claim in respect of the property.

EXAMPLE NO. 1

Statement of Facts

A creditor agreed to finance the purchase of a new ice-cleaning machine by an individual who had various long-term ice cleaning contracts. The individual, who is not registered for purposes of the GST/HST, purchased the ice-cleaning machine in the province of Manitoba. The purchaser fell into arrears on the payments of the machine and on July 27, 1992, the creditor was obliged to seize and repossess the equipment. The creditor tried to find a buyer immediately but was unable to sell the machine until November, by which time the creditor had paid $1,000 plus GST/HST in storage costs.


When the prospective purchaser went to the storage yard where the machine had been kept since its repossession, he noted that the engine had been scavenged for parts and the seat had been removed. The buyer offered to purchase the machine for a total of $30,000, provided the seat was replaced and the engine was restored to good working order. The creditor agreed and spent $3,000 plus GST/HST to make the repairs.

Ruling Given

Subsection 183(2) entitles the creditor to claim input tax credits for the GST/HST paid on the storage costs and on the repairs. However, since the storage cost is not an expenditure that is capitalized according to generally accepted accounting principles it is not considered to be "in respect of the property" as that term has been interpreted. Therefore, the ITC claimed for the GST/HST paid on the storage costs is not included in the calculation of B. The seat replacement and engine work are considered to be "in respect of the property" and the input tax credit claimed must be included in the value of B in the formula A - B:

A = $30,000 x 7/107 = $1,962.62

B = $3,000 x 7% = $210.00

A - B = $1,962.62 - $210.00 = $1,752.62

The creditor would be entitled to claim a notional input tax credit in the amount of $1,752.62.

EXAMPLE NO. 2

Statement of Facts

An individual, who is a resident of Halifax, Nova Scotia, purchased a new vehicle on January 15, 1998. The individual, who is not registered for purposes of the GST/HST, purchased the vehicle from a car dealer in Dartmouth, Nova Scotia. The purchase price of $46,500 was financed through a loan with a financial institution who is registered for purposes of the GST/HST.

In November 1998, the individual defaulted on his monthly payment to the financial institution. The individual advised the financial institution that, due to his financial situation, he would not be able to fulfill his obligations under the loan agreement.

Subsequent to repossessing the vehicle, an inspection was performed to determine the condition of the vehicle. The inspection determined that there was some body damage and that the frame of the vehicle was slightly bent. The cost of the repairs to the vehicle amounted to $15,000 plus GST/HST. The financial institution did not pursue this matter further with the individual.

The financial institution authorized the necessary repairs and had the vehicle towed from its compound in Halifax to the dealer in Dartmouth. An independent operator, who was registered for purposes of the GST/HST, charged $500 plus GST/HST for the towing service. Upon the completion of the necessary repairs, the financial institution sold the vehicle for $37,500 plus GST/HST to a resident of Fredericton, New Brunswick.

Ruling Given

Subsection 183(2) entitles the creditor to claim input tax credits for the GST/HST paid on the towing and repair costs. However, since the towing cost is not an expenditure that is capitalized according to generally accepted accounting principles it is not considered to be "in respect of the property" as that term has been interpreted. Therefore, the ITC claimed for the GST/HST paid on the towing cost is not included in the calculation of B. The body and frame repairs are considered to be "in respect of the property" and the input tax credit claimed must be included in the value of B in the formula A - B:

A = $37,500 x 15% = $5,625

B = $15,000 x 15% = $2,250

A - B = $5,625 - $2,250 = $3,375

The creditor would be entitled to claim a notional input tax credit in the amount of $3,375.

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