Costs that Fall within the Scope of Subsection 183(2)

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-175

Date of Issue

March 31, 1995

Subject

Costs that fall within the scope of subsection 183(2)

Legislative Reference(s)

Subsection 183(2) of the Excise Tax Act

National Coding System File Number(s)

11585-0

11585-13

11585-35

11783-2/Ss.183(2)

Effective Date

January 1, 1991

Text

Issue and Decision

The primary purpose of subsection 183(2) is to establish that costs that are related to the making of a supply of seized or repossessed property by a creditor will be deemed to have been incurred in the course of a commercial activity of the creditor. However, the scope of this commercial activity deeming provision in subsection 183(2) specifically excludes those costs that are related to the seizure or repossession itself. For this reason, it is important to distinguish between those costs that are related to the seizure and repossession of a particular property and those that are related solely to making a supply of the property.

Subsection 183(2) opens with the requirement that the property in question had been seized or repossessed by the creditor and goes on to state that "....where at any time a creditor....makes a....supply....of the [seized] property,....anything done by the creditor....in connection with the making of the supply....shall be deemed to have been done in the course of....[the creditor's] commercial activity". If any of the costs related to seizing or repossessing property or making a supply of the property are incurred before the seizure or repossession is recognized under the Excise Tax Act, then such costs will not be eligible for input tax credits as subsection 183(2) requires that the costs be incurred after the seizure or repossession has taken place.

The Department views a seizure or repossession as including the act of taking possession of property. Therefore, anything related to taking possession of property would be in connection with the seizure or repossession. This might include acquiring legal services to obtain the necessary authority to take possession of the property (actual or constructive, as the case may be) and, in the case of personal property, it may include costs related to the physical removal of the property from the possession of the debtor. For GST purposes, these costs would not be considered to have been incurred in the course of a commercial activity.

Costs that may be incurred by a creditor solely in the course of, or in connection with, the making of a supply of seized or repossessed property include selling commissions, legal fees for title search, publicity or advertising costs, post-seizure holding or storage costs and repair or improvement costs. A creditor may be willing to make these expenditures in order to facilitate or enable the eventual supply of the property.

SAMPLE RULING #1

Statement of Facts

1. In 1992, A Co. purchased an office building for $1,000,000. To finance the purchase, A Co. borrowed $500,000 from B Co., a trust company that is a GST registrant. A Co. gave B Co. a mortgage on the building as security for repayment of the loan.

2. In 1993, A Co. defaulted on its payments under the loan agreement.

3. B Co. informed A Co. that, unless the sums payable under the loan agreement were paid by a certain date, B Co. would sell the office building.

4. B Co. gave notice of exercising the power to sell the office building by sending a Notice of Sale to all persons entitled to such notice.

5. The default was not remedied by A Co.

6. The office building was listed for sale.

7. A Co. remained in possession of the building and continued to collect rent, pay taxes and utility bills and manage the building.

8. At the expiration of the notice period, A Co. was still managing the building.

9. Two weeks after the expiration of the notice period, B Co. entered into an agreement of purchase and sale with a third party.

10. A Co. contested B Co.'s right to sell the building and the case was taken to court, where the judge determined that B Co. was entitled under law to enter into an agreement of purchase and sale with a third party.

11. Fees charged by B Co.'s lawyers for services relating to the power of sale proceedings amounted to $25,000 plus $1,750 GST.

You have advised that, to the best of your knowledge, none of the issues herein is being considered by a Revenue Canada Excise/GST office in connection with a GST return already filed and none of the issues is under objection or appeal.

Ruling Requested

That the lawyers' services are deemed, pursuant to subsection 183(2), to have been acquired for consumption or use in the course of a commercial activity of B Co. and, therefore, B Co. is entitled to claim an input tax credit for the GST paid on the $25,000 in lawyers' fees.

Ruling Given

B Co., the mortgagee, is not entitled to claim an input tax credit in respect of the lawyers' services. It is the Department's view that the lawyers' services were acquired in connection with the seizure of the property.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues above is under audit, objection or appeal, that there is no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transaction for which you requested a ruling.

SAMPLE RULING #2

Statement of Facts

1. Mr. A bought a pick-up truck. He financed the purchase by taking out a loan from B Co., a finance company that is a GST registrant. Mr. A gave B Co. a chattel mortgage on the truck as security for repayment of the loan.

2. Mr. A went into default on his payments to B Co.

3. B Co. hired a bailiff to repossess the truck at a cost of $300 plus $21 GST, all payable in advance.

4. On the way to B Co.'s place of business, the bailiff had an accident and both the bailiff's vehicle and the repossessed truck were destroyed.

5. B Co. sued the bailiff for the loss of the truck, incurring lawyers' fees for the lawsuit amounting to $20,330, including $1330 GST.

You have advised that, to the best of your knowledge, none of the issues herein is being considered by a Revenue Canada Excise/GST office in connection with a GST return already filed and none of the issues is under objection or appeal.

Ruling Requested

That B Co is entitled to claim input tax credits for the $21 in GST charged by the bailiff company and the $1,330 in GST paid to their lawyers for their services.

Ruling Given

B Co. is not entitled to claim an input tax credit in respect of either cost. It is the Department's view that both the lawyers' services and the bailiff services were acquired in connection with the seizure or repossession of the property.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues above is under audit, objection or appeal, that there is no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transaction for which you requested a ruling.

SAMPLE RULING #3

Statement of Facts

1. B Co., a GST registrant, made a sale of a motorcycle to Mr. A under a conditional sales contract. B Co. retained legal title to the motorcycle as security for the purchase price.

2. When Mr. A went into default on his payments, B Co. sent out a notice that it would be repossess the motorcycle if the arrears were not paid by a certain date.

3. The arrears were not paid by the due date and B Co hired a bailiff company to repossess the motorcycle. The bailiff had significant difficulty in locating the motorcycle and total charges by the bailiff company amounted to $1100 plus $77 GST.

4. B Co. instructed his lawyer to perform a title search on the motorcycle at a cost of $100 plus $7 GST.

5. B Co. also hired an appraiser at a cost of $100 plus $7 GST. The appraiser who determined that the motorcycle needed a tune-up and some minor paint touch-ups before it could be sold. These repairs were effected at a total cost of $300 plus $21 GST.

6. The motorcycle was sold three weeks later. During this three week period, the vehicle was sent to a security storage yard at a cost of $10 per day plus the applicable GST.

You have advised that, to the best of your knowledge, none of the issues herein is being considered by a Revenue Canada Excise/GST office in connection with a GST return already filed and none of the issues is under objection or appeal.

Ruling Requested

That B Co. is entitled to claim an input tax credit for the GST paid on any of the expenses incurred in realizing the balance of the debt.

Ruling Given

B Co is not entitled to claim an input tax credit in respect of the $77 in GST paid to the bailiff company since the bailiff's services were acquired in connection with the repossession of the furniture. However, B Co. is entitled to claim an input tax credit for the $49.70 paid in GST in connection with the title search, appraisal costs, repairs to the vehicle and storage costs.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues above is under audit, objection or appeal, that there is no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transaction for which you requested a ruling.

SAMPLE RULING #4

Statement of Facts

1. Mr. A, the owner of vacant land, fell into arrears in payment of a $75,000 mortgage held by B Co., a GST registrant.

2. B Co. sent out an appraiser to value the property in order to determine which course of action would be the most advantageous for it to pursue.

3. The appraiser informed B Co. that the property was now worth $150,000.

4 B Co decided that it would foreclose on the mortgage, rather than exercise the power of sale remedy.

5. The appraiser charged $300 for the appraisal plus $21 in GST.

You have advised that, to the best of your knowledge, none of the issues herein is being considered by a Revenue Canada Excise/GST office in connection with a GST return already filed and none of the issues is under objection or appeal.

Ruling Requested

That B Co. is entitled to claim an input tax credit for the GST paid on the cost of the appraisal.

Ruling Given

B Co. is not entitled to claim an input tax credit for the GST paid on the cost of the appraisal.

It is the Department's view that the appraiser's fees were acquired in connection with the seizure of the property.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of the GST Memoranda Series. We are bound by this ruling provided that none of the above issues above is under audit, objection or appeal, that there is no relevant changes in the future to the Excise Tax Act, and that you have fully described all necessary facts and transaction for which you requested a ruling.