GST Memoranda

G500-2-4 Calculation of Liability (GST 500-2-4)

GST 500-2-4

ADMINISTRATION AND ENFORCEMENT
RETURNS AND PAYMENTS
CALCULATION OF LIABILITY
Ottawa, March 19, 1991

This memorandum in the RETURNS AND PAYMENTS sub-series explains the procedures for calculating any GST remittable and for claiming refunds on the "Goods and Services Tax Return for Registrants" under the Goods and Services Tax (GST).

LEGISLATIVE REFERENCES

Excise Tax Act - section 235, subsections 123(1), 165(1), 228(1), 228(2), 228(3), 228(4), 228(6), 228(7), 231(1) and 231(3)

Offset of Taxes by a Refund or Rebate (GST) Regulations

Provisions discussed in the Appendices to this memorandum are specifically referenced in these Appendices.

TABLE OF CONTENTS

Definitions 2 General 4 Basic Calculations for the GST Return for Registrants 5 Adjustments 7 Bad Debts 7 Recapture of Passenger Vehicle Lease and Food, Beverage and Entertainment ITCs 7 Offsets 8 Appendix A Appendix B Appendix C Appendix D Appendix E

DEFINITIONS

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

"Act" means the Excise Tax Act;

"builder" of a residential complex or of an addition to a multiple unit residential complex means a person who

(a) at a time when the person has an interest in the real property on which the complex is situated, carries on or engages another person to carry on for the person

(i) in the case of an addition to a multiple unit residential complex, the construction of the addition to the multiple unit residential complex,

(ii) in the case of a residential condominium unit, the construction of the condominium complex in which the unit is situated, and

(iii) in any other case, the construction or substantial renovation of the complex,

(b) acquires an interest in the complex at a time when

(i) in the case of an addition to a multiple unit residential complex, the addition is under construction, and

(ii) in any other case, the complex is under construction or substantial renovation,

(c) in the case of a mobile home, manufactures the mobile home,

(d) acquires an interest in the complex

(i) in the case of a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium, or

(ii) in any case, before it has been occupied by an individual as a place of residence or lodging under any arrangement for that purpose,

for the primary purpose of making a supply of the complex or any part thereof or an interest therein by way of sale, or

(e) a person deemed under subsection 190(1) to be a builder of the complex, but does not include an individual described in any of paragraphs (a) to (d) who carries on the construction or substantial renovation, or acquires the complex or interest therein, otherwise than in the course of a business or an adventure or concern in the nature of trade or a person described in any of paragraphs (a) to (c) whose interest in the complex is a right to purchase the complex from a builder of the complex;

"calendar quarter" means a period of three months beginning on the first day of January, April, July or October in each calendar year;

"consideration fraction" means 100/107;

"Department" means the Department of National Revenue, Customs and Excise;

"fiscal month" of a person means a period that is determined under section 243 of the Excise Tax Act to be the fiscal month of the person;

"fiscal quarter" of a person means a period that is determined under section 243 of the Excise Tax Act to be the fiscal quarter of the person;

"fiscal year" of a person means

(a) where the person has made an election under section 244 of the Excise Tax Act that is in effect, the period that the person elected to be the fiscal year of the person, and

(b) in all other cases, the taxation year of the person;

"Minister" means the Minister of National Revenue;

"person" means an individual, partnership, corporation, trust or estate, or a body that is a society, union, club, association, commission or other organization of any kind;

"prescribed" means

(a) in the case of a form, the information to be given on a form or the manner of filing a form, prescribed by the Minister, and

(b) in any other case, prescribed by regulation or determined in accordance with rules prescribed by regulation;

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

"reporting period" of a person means the reporting period of the person as determined under sections 245 to 251 of the Excise Tax Act;

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

"tax fraction" means 7/107;

"taxation year" of a person means

(a) where the person is a taxpayer within the meaning of that term in the Income Tax Act, the taxation year of the person for the purposes of that Act, and

(b) in any other case, the period that would be the taxation year of the person for the purposes of that Act if the person were a corporation.

GENERAL

1. Subsection 228(1) of the Act stipulates that every registrant who is required to file a periodic return shall in that return calculate the net tax for the reporting period for which the return is to be filed.

2. If the net tax for a reporting period is positive, the amount must be remitted to the Receiver General. If the net tax for a reporting period is negative, that amount may be claimed as a net tax refund, which is payable by the Minister. It should be noted that showing the amount in line 114 of the "Goods and Services Tax Return for Registrants" is considered to be sufficient application for the refund.

3. The "Goods and Services Tax Return for Registrants" is to be used by registered suppliers to:

(a) declare tax collectible and other amounts of tax collected;

(b) claim input tax credits; and

(c) calculate net tax for a reporting period.

A sample copy of the "Goods and Services Tax Return for Registrants" is attached as Appendix A to this memorandum. Detailed instructions for completing this return are available in the "Guide to the Goods and Services Tax Return for Registrants".

BASIC CALCULATIONS FOR THE GOODS AND SERVICES TAX RETURN FOR REGISTRANTS

4. For each reporting period, a registrant is required to calculate net tax on the GST return. This calculation requires the accumulation of two totals and subtraction of one from the other.

5. The first total consists of:

(a) all amounts that were collected or became collectible as, or on account of, the GST in the particular reporting period, including all amounts required pursuant to the rules found in the legislative provisions listed in Appendix B to this memorandum. The total of such amounts should be included in line 103, GST Collectible, of the sample copy of the tax return attached as Appendix A to this memorandum; and

(b) all amounts required to be added in determining the net tax of the registrant for the particular reporting period, including all amounts required pursuant to the legislative provisions listed in Appendix C to this memorandum. The total of such amounts should be included in line 104, GST Adjustments, of the sample copy of the tax return attached as Appendix A to this memorandum.

6. The second total consists of:

(a) input tax credits (ITCs) for the particular reporting period or for a preceding reporting period (within the four year limitation period for claiming ITCs). These ITCs should include those amounts permitted by the legislative provisions listed in Appendix D to this memorandum. The total of such amounts should be included in line 106, Input Tax Credit (ITC), of the sample tax return attached as Appendix A to this memorandum; and

(b) all amounts that may be deducted in determining net tax of the registrant for the particular reporting period, including those amounts which can be deducted pursuant to the legislative provisions listed in Appendix E to this memorandum. The total of such amounts should be included in line 107, ITC Adjustments, of the sample copy of the tax return.

7. The difference between these two totals, the registrant's "net tax" for the reporting period, may be a positive or a negative amount. If positive, the net tax must be remitted to the Receiver General on or before the day the GST return for that reporting period is due. If negative, the registrant may claim a net tax refund on the return for the reporting period. This amount is then payable to the registrant by the Minister.

The following are some examples of GST Adjustments and ITC Adjustments that would be taken on line 104 and/or line 107 of the sample tax return. Refer to the Appendices for a complete list and explanation.

ADJUSTMENTS
Bad Debts

8. Where a supplier has made a taxable supply (other than a zero- rated supply) in the course of a commercial activity and has filed a return accounting for the tax on that taxable supply and it is subsequently established that the consideration and tax have become a bad debt, the supplier may deduct an amount equal to the tax fraction of the bad debt written off in determining the net tax for the reporting period in which the bad debt was written off or in a reporting period that ends within four years after the end of that period.

9. This deduction is only available for arm's length transactions in the course of a commercial activity.

10. In cases where a person recovers all or part of a bad debt and a deduction for the tax remitted on the bad debt has been claimed, the person must add an amount equal to the tax fraction of the bad debt or part thereof so recovered in determining the net tax for the reporting period in which the bad debt or part thereof is recovered.

11. A person writing off a bad debt accounts for the amount on line 107, ITC Adjustments, and a person recovering a bad debt in whole or in part accounts for the amount on line 104, GST Adjustments, of the "Goods and Services Tax Return for Registrants".

Recapture of Passenger Vehicle Lease and Food, Beverage and Entertainment ITCs

12. A registrant who has leased a passenger vehicle (and who is entitled to an input tax credit) must, if the lease costs exceed the maximum lease costs deductible under the Income Tax Act, add an amount in determining net tax for the appropriate reporting period. This amount would be included in line 104, GST Adjustments, of the "Goods and Services Tax Return for Registrants".

13. The amount is determined by the following formula:

A x B x C

where

A is that excess,

B is the rate of tax imposed under subsection 165(1) of the Act at the end of that period (7 per cent of the value of the consideration for the supply), and

C is the proportion of the total use of the vehicle that is used in commercial activities of the registrant.

14. Where the reporting period of the registrant in that taxation year for the purpose of paragraph 13 of this memorandum is the taxation year, the appropriate reporting period is that taxation year. Where the registrant ceases to be registered in or at the end of the taxation year, the reporting period is the last reporting period in that year. In any other case, the reporting period of the registrant is the reporting period that begins immediately after that taxation year.

15. Where a full input tax credit is claimed throughout the fiscal year in respect of a supply of business expenses (food, beverages or entertainment), 20 per cent of the input tax credits to which the registrant is entitled must be added in determining the net tax for the appropriate reporting period. For an annual filer, the reporting period is the fiscal year and where the registrant ceases to be registered in or at the end of the fiscal year, the reporting period is the last reporting period in the fiscal year. In any other case, the amount must be included in the reporting period of the registrant that begins immediately after the end of that fiscal year.

OFFSETS

16. Pursuant to subsection 228(6) of the Act, a person may file a rebate application at the same time as the "Goods and Services Tax Return for Registrants", and reduce or offset any net tax remittable by the amount of the rebate. A person may also use a refund on the "Goods and Services Tax Return for Registrants" to reduce or offset any net tax remittable in respect of a purchase of real property pursuant to subsection 228(4) of the Act, if the real property return and the "Goods and Services Tax Return for Registrants" are filed at the same time.

17. Subsection 228(7) of the Act provides that, under certain circumstances, a person will be allowed to reduce or offset tax remittable by the amount of a refund or rebate to which another person may be entitled. This provision applies only to the net tax remittable on the "Goods and Services Tax Return for Registrants", and tax remittable in respect of certain purchases of real property.

18. Circumstances, conditions and rules governing the inter- person offset provided in subsection 228(7) of the Act are prescribed by the Offset of Taxes by a Refund or Rebate (GST) Regulations. Persons must be closely related in order to make use of the provision.

NOTE: This memorandum is not a legal document. It contains general information and is provided for convenience and guidance in applying the Excise Tax Act and Regulations. If interpretation problems occur, please refer to the legislation or contact the nearest Revenue Canada Excise office.

Appendix A - Goods and Services Tax Return for Registrants Form

To view this form, please see the printed copy of this publication. You can obtain a copy by contacting your local Excise office (addresses and telephone numbers of Excise offices are at the end of this memorandum.)

Appendix B - GST Collectible

The following legislative provisions apply to line 103, GST Collectible, on the return:

Provision Circumstance

136(1) Supply of use or right to use real property or tangible personal property: A supply by way of lease, licence or similar arrangement of the use or right to use real property or tangible personal property is considered to be a supply of real property or tangible personal property, as the case may be and not a supply of an intangible property.

171(3) Deemed supply by person ceasing to be a registrant: A person who ceases to be a registrant is considered to have made a supply of the person's property that was for consumption, use or supply in the course of commercial activities and to have collected tax, except where it was an exempt supply, based on the fair market value of the property at that time. An amount representing the tax must be included on the person's last return as a registrant. Capital property is excluded from this rule.

172(1) Individual appropriation of property or service: A registrant individual who appropriates a commercial- use property or service for personal use (or for that of a related individual) is considered to have made a supply of the property or service, for consideration equal to the fair market value at the time of appropriation. The registrant is deemed to have collected tax in respect of the supply and must remit an amount representing that tax.

172(2) Appropriation of non-capital property or service by a corporation, partnership, trust, charity or NPO: A registrant corporation, partnership, trust, charity or non-profit organization that appropriates a property or a service for the benefit of a shareholder, partner, beneficiary or member of the corporation, partnership, trust, charity or non- profit organization or any related individual, is considered to have made a supply, for consideration equal to the fair market value at the time of appropriation, and to have collected tax. However, subsections 172(1) and 172(2) of the Act do not apply where the registrant cannot claim an input tax credit on the original acquisition of the property or a service by reason of section 170 of the Act.

173 Employee and shareholder benefits: A registrant who makes available to an employee or a shareholder property or a service that results in a benefit to be included in the employee's or shareholder's income for income tax purposes is considered to have made a supply to the employee or shareholder. The registrant is required to remit seven per cent of the amount of the taxable benefit (net of provincial retail sales tax), as calculated for the purposes of the Income Tax Act. GST does not apply to the benefit if it is an exempt supply or where the registrant was previously denied an input tax credit for the property or service by reason of section 170 of the Act.

The supply of an employee benefit is considered to have been made at the end of February in the year following that in which the benefit was conferred. The supply of a shareholder benefit is treated as having been made on the last day of the registrant's taxation year in which the benefit was conferred. The provision does not apply in the case of a passenger vehicle or aircraft of an individual or partnership not used exclusively (90 per cent or more) in commercial activities, of other registrants (except financial institutions), not used primarily (more than 50 per cent) in commercial activities. Furthermore, a registrant, other than a financial institution, may elect to have any benefit in respect of a passenger vehicle or aircraft leased for use less than 50 per cent in commercial activities not subject to GST; any previous input tax credit claimed on its acquisition will be recaptured. It should be noted that other special rules apply to financial institutions that are registrants.

176(2) Supplies of used goods: A registrant who makes a zero-rated supply or a supply outside Canada before 1994 of used goods, or at any time of used specified tangible personal property where the consideration paid by the registrant for the property exceeds the prescribed value is considered to have made a supply in Canada and is considered to have paid tax on that supply.

The amount of the tax in the case of used goods other than specified tangible personal property is the lesser of:

(a) tax that was paid in respect of the purchase of the good, or the notional tax that is considered to have been paid under subsection 176(1) of the Act, or the tax that would have been paid had not section 156 or 167 of the Act applied; and

(b) tax that would have been payable if the supply were a taxable supply (other than a zero-rated supply) in Canada.

Special rules apply to used specified tangible personal property (note the restrictions on this term in subsection 123(1) of the Act) purchased for consideration exceeding the prescribed amount. If this property is exported by a person who was entitled to an input tax credit, actual or notional, or would have been so entitled if the property had not been acquired tax-free under section 156 or section 167 of the Act, the person is required to pay tax equal to the least of:

(a) the tax that would be payable if the property were sold in Canada;

(b) the amount of any notional input tax credit the person was entitled to claim on acquisition of the property;

(c) a prescribed percentage of actual tax paid on acquisition of the property, and

(d) the last notional input tax credit claimed by a registered dealer in respect of the property, where this amount can be established.

177(1) Supply by agent: Where a registrant (the "agent") makes a supply of personal property on behalf of a non-registrant, and does not disclose in writing to the recipient of the supply that it is on behalf of a non-registrant; or, where a registrant (again the "agent") makes a taxable supply of property or a service on behalf of another registrant, and does not enter into a written agreement with the recipient, or issue an invoice or receipt for the supply, in the name of the vendor:

a) the agent is considered to have made the supply to the recipient and not to have made a supply to the vendor of services relating to the supply to the recipient, and

b) the vendor is considered to have made a supply to the agent.

The implication of this is that the agent is required to collect and remit GST equal to seven per cent of the consideration paid by the recipient. The agent would be entitled to a notional input tax credit under section 176 of the Act, because he is treated as if the goods had been purchased from the principal for resale to the agent. Where the vendor is a registrant, the vendor is required to collect tax on the deemed supply to the agent, calculated on the actual selling price to the recipient, less the agent's commission. The agent may claim an input tax credit for tax payable to the principal.

177(2) Supply for artists, etc.: A prescribed registrant acting in the course of a commercial activity who makes a supply on behalf of another person of intangible personal property in respect of the product of an artist is considered to be the supplier of that intangible property. These registrants are prescribed in the Artists' Representatives (GST) Regulations.

178 Expenses incurred in supply of service: If a person is reimbursed by the recipient of a supply of a service for an expense incurred in making the supply, the reimbursement is considered to be part of the consideration for the service, and is subject to tax. This rule applies to taxable supplies except for zero-rated supplies. It does not apply to expenses incurred by the person as an agent of the recipient.

179 Supply for non-resident: A registrant who manufactures, produces or acquires property and delivers the property to a person in Canada on behalf of a non-resident who is not a registrant, must account for tax on the supply to the Canadian customer, provided it is not an exempt supply. The consideration on which the tax is calculated is the greater of that payable for the supply to the customer in Canada and the consideration for the supply by the registrant to the non-resident. If the non-resident and the person to whom the property is delivered are not dealing at arm's length, or where the registrant cannot determine the value of the consideration, the value that would be reasonable in the arm's length circumstances is used to calculate the tax.

181(2) Rebates: If a supplier pays a rebate to a registrant who is entitled to claim an input tax credit or a rebate of tax on the tax paid on the receipt of the supply, the registrant receiving the rebate is considered to have made a taxable supply of a service and to have collected tax from the supplier.

The amount of tax considered to have been collected is calculated on the same proportion of the rebate that the input tax credit or rebate of GST the recipient can claim on the good or service is of the total tax paid on the good or service (7/107ths of that amount). The rule does not apply if the rebate is given by way of a credit note described in section 232 of the Act.

182 Forfeiture: If, as a consequence of the breach, modification or termination of an agreement for the making of a taxable, other than zero-rated supply in Canada by or to a registrant:

(a) an amount that is not consideration for the supply is paid, forfeited or becomes payable to the registrant, or

(b) a debt or other obligation (other than consideration for the supply) of the registrant is reduced or cancelled,

the registrant is considered to have made a taxable supply and must remit tax, equal to the tax fraction of the amount paid, forfeited, or payable or the amount by which the obligation was reduced or cancelled. The person required to pay or forfeit the amount, if a registrant, is entitled to an input tax credit for the tax deemed to have been paid.

183(2) Seizure and repossession: A person (except a court) who makes a supply of property to himself or herself that has been seized or repossessed, except where the supply is an exempt supply, such as a used residential complex, is considered to have made the supply in the course of commercial activities, and must remit GST if the person is a registrant. Moreover, a person who makes use of seized or repossessed property is considered to have made a supply of the property and, except in the case of an exempt or zero-rated supply, to have collected tax equal to the tax fraction of the fair market value of the property. If the person is a registrant and the property is used in his/her business, the registrant is entitled to claim an ITC of the tax deemed to have been collected to the extent that the property is used in commercial activities.

183(5)(b) Supply of Property Seized from Non-Registrant: Where a registrant makes a taxable supply of property seized or repossessed from a person and provides evidence that establishes that the person from whom the property was seized or repossessed had not been entitled to any input tax credit nor rebate in respect of the property, the registrant must pay GST calculated on the consideration for the property equal to the consideration for the supply made to the recipient. A notional ITC will be allowed equal to the amount of tax collected on the taxable supply.

184 Supply to insurer on settlement of claim: An insurer who makes a supply of property that has been transferred to the insurer in the course of settling an insurance claim is considered, except where the supply is an exempt supply, to have made, at that time, a supply in the course of commercial activities. If the insurer to whom property has been so transferred begins to use the property, he is deemed to have made a supply and to have collected tax (except in the case of an exempt or zero-rated supply) equal to the tax fraction of the fair market value of the property.

187 Bets and games of chance: A person with whom a bet has been placed (on a game of chance, race or other "event or occurrence") is deemed to have made a supply for consideration equal to the consideration fraction of the bet net of any provincial taxes. The person must remit tax where the gambling event is a taxable activity.

190(1) Real property: Conversion to residential use: Where a person begins to "hold or use" real property that was not a residential complex as a residential complex, and the property was either acquired to hold or use as a residential complex or was held for supply or used as capital property in a business of a person, and the person has not substantially renovated the complex, the person is then considered:

(a) to have substantially renovated the complex; and

(b) to be a builder of the complex. This means that the same GST rules apply as if these used commercial buildings were newly constructed. The renovation in (a) is deemed to have been substantially completed when the complex is occupied by an individual as a place or residence or lodging or when the person transfers ownership of the complex, whichever is earlier.

190(2) Appropriation of capital real property for personal use by individual: An individual who appropriates real property that was held for supply or was capital property (and was not a residential complex) for his or her own personal use, or for that of a related individual or former spouse, is considered to have made a taxable sale of the property and collected tax based on the fair market value at the time of appropriation.

191(1) Self-supply of single unit residential complex or residential condominium unit: This rule applies to a builder of a single unit residential complex or residential condominium unit, who occupies the complex or gives possession of it as a place of residence (under a lease, licence or similar arrangement) to a person who is not a purchaser. If the builder, person or tenant of the person is the first individual to live in the complex after its construction or substantial renovation has been substantially completed, the builder is deemed to have made a taxable sale of the complex to himself or herself, and to have collected tax calculated on the fair market value of the complex at that time.

191(2) Self-supply of residential condominium unit: If the builder of a substantially completed residential condominium unit gives possession of the unit to a purchaser after 1990 and before the complex in which the unit is situated is registered as a condominium complex, the purchaser has occupied or rented out the unit and the purchase agreement is terminated (otherwise than by performance of the agreement), the builder is considered to have made a taxable sale of the unit, and to have collected tax at the time the agreement is terminated calculated on the fair market value of the unit at that time.

191(3) Self-supply of multiple unit residential complex: The builder of a substantially completed multiple unit residential complex is considered to have made a taxable self-supply of the entire complex at the time the first unit is rented out to a person who is not a purchaser under an agreement of purchase and sale of the complex, or when the builder occupies any unit if he is an individual. The rule applies at the time of substantial completion if units are rented out before the complex is substantially complete and the tax is calculated on the fair market value at that time.

191(4) Self-supply of addition to multiple unit residential complex: This rule is similar to that provided under subsection 191(3) of the Act, except that it pertains to the builder of an addition to a multiple unit residential complex. The builder becomes liable for GST on the fair market value of the addition when any unit in the addition is occupied or when the addition is substantially completed, whichever comes later.

Note: Subsections 191(1), 191(2), 191(3) and 191(4) of the Act do not apply:

(a) where the builder of a residential complex or an addition to a residential complex is an individual, who uses the complex, at any time after the construction or renovation of the complex or addition is substantially completed, primarily as a place of residence for himself, a former spouse or a related individual. The complex is not used primarily for any other purpose between the time the construction or renovation is substantially completed and that time and the individual has not claimed an ITC in respect of the acquisition of or an improvement to the complex; or

(b) where the builder of a residential complex or an addition to a residential complex is a university, public college or school authority, and the acquisition, construction or renovation is carried out primarily to provide a place of residence for students.

191(7) Remote work site: A registrant builder of a residential complex or an addition to a residential complex who has acquired, built or substantially renovated the complex or addition to provide accommodation for an officer or employee at a remote work site, can elect for the supply to be considered as not a supply until such time as the complex is sold or leased primarily to persons who are not officers or employees. While the election is in effect, subsections 191(1) through 191(4) of the Act do not apply.

192 Non-substantial renovation: A person who, in the course of a business of making supplies of real property, renovates or alters a residential complex of the person in a way that is not a substantial renovation (as defined in subsection 123(1) of the Act), is considered to have made a taxable supply and to have collected tax, when the renovation is substantially completed or ownership is transferred, whichever is earliest. The supply is deemed to have been made for consideration equal to the total of all non-taxable costs involved in the renovation that would be included in determining the adjusted cost base of the complex under the Income Tax Act if the complex were the person's capital property. Financing costs and the original cost of purchasing the complex are not included in the value of the consideration. GST is collectible for non- substantial renovation.

194 Incorrect statement regarding tax status of taxable sale of real property: A supplier who makes a taxable sale of real property and incorrectly states or certifies in writing to the purchaser that the supply was exempt, is considered to have collected tax equal to the tax fraction of the consideration for the supply, unless the purchaser knew or ought to have known that the supply was not an exempt supply.

200(2) Ceasing to use capital personal property: A registrant who begins to use capital personal property otherwise than primarily in commercial activities, when the personal property has been acquired or imported for use as capital property primarily in commercial activities, is considered to have sold the property for consideration equal to the fair market value at that time, and to have collected tax based on that consideration. This does not apply in respect of a passenger vehicle or an aircraft of a registrant who is an individual, a partnership, a financial institution or a prescribed registrant.

203(2) Ceasing to use passenger vehicle, etc.: A registrant individual or partnership that begins to use a passenger vehicle otherwise than exclusively in commercial activities, when the vehicle or aircraft was acquired or imported for use as capital property exclusively in commercial activities, is considered to have made a taxable sale to itself for consideration equal to the fair market value, and to have collected tax on that consideration.

206 This section does not apply in respect of property acquired by a registrant who is an individual or a public sector body. (A public service body may file an election in respect of capital real property to have subsection 193(1) and section 206 of the Act apply, and sections 209 and 210 of the Act not apply.)

206(4) Change of use of capital real property: A registrant who acquired real property for use as capital property in commercial activities and begins to use the property exclusively for other purposes is considered to have sold the property to itself and to have collected tax on the fair market value at that time. If the property was not being used exclusively in commercial activities just before the change of use, the registrant must pay tax on the proportion of the fair market value that equals the percentage the property was used in commercial activities. On the remainder of the property, unless it is a residential complex, the registrant is considered to have collected tax equal to the lesser of the total tax previously payable on that part of the property and any improvements, and the tax that would apply if that part of the property were sold at its fair market value.

Note: An offset of ITCs under section 193(1) of the Act may apply.

206(5) Reduction of extent to which capital real property is used in commercial activities: A registrant who acquired real property for use as capital property in commercial activities and reduces the extent to which the property is used in commercial activities is considered to have made a sale of that part of the property no longer used in commercial activities, and to have collected tax equal to the tax that would apply if that part were sold at its fair market value, or the total tax previously payable on that part of the property (whichever is the lesser).

207(1) Change in use of real property by individual: A registrant individual who acquired real property for use as capital property in commercial activities, and begins to use the property exclusively for other purposes or primarily for personal use, is considered to have made a sale and collected tax, except where the supply is an exempt supply.

207(2) Reduction in use of capital real property in commercial activities by individual: A registrant individual who acquired real property for use as capital property in commercial activities, and reduces the extent to which the property is used in commercial activities without beginning to use it primarily for personal use, is considered to have made a sale and, except where the supply is an exempt supply, to have collected tax.

Note: The rules for calculating the tax remittable under section 207 parallel those contained in subsections 206(4) and 206(5). Refer to the legislation for details. Furthermore, subsections 207(1) and 207(2) are to be read in conjunction with subsection 190(2) of the Act.

210(1) Ceasing to use real property by public sector bodies: A public sector body that ceases to use or decreases the use of real property in commercial activities will be covered by subsection 200(2) of the Act. That is, a decrease in commercial use of such property will not have GST consequences unless the use changes from primarily commercial to primarily non-commercial. If this change of use occurs, the public sector body will be considered to have sold the property and will have to remit GST on the fair market value at the time of change of use.

211(1) Election respecting real property of public service bodies: A public service body may file an election in respect of capital property that is used primarily in making exempt supplies not to have sections 209 and 210 apply and to have the rules in subsection 193(1) and section 206 of the Act apply. Subsequent sales or commercial rentals of such property are not exempt while the election is in effect. As a result the body may claim an input tax credit proportionate to the extent of use of the property in commercial activities.

211(2) Deemed taxable sale of real property by election: A public service body that has filed an election under subsection 211(1) of the Act is considered to have made a taxable sale and acquired real property immediately before the election takes effect. This provision will allow the body to claim an input tax credit, the amount to be prorated according to the extent the property is used in commercial activity. Also, since GST will again be payable on the deemed acquisition, the body may claim an input tax credit in respect of the unrecovered tax previously paid on the initial acquisition of the property in order to avoid double taxation.

211(4) Deemed sale where election revoked: A public service body that revokes an election made under subsection 211(1) of the Act is considered to have made a taxable sale of the real property and to have collected tax, based on the fair market value. Either a rebate or input tax credit might then be claimed, depending on whether the property was used primarily in commercial or non-commercial activities.

Appendix C - Goods and Services Tax Adjustments

The following legislative provisions apply to line 104, Special Cases, on the return:

Provision Circumstance

171(4)(b) Ceasing to be a Registrant: A person who ceases to be a registrant is required, for his or her last reporting period, to repay any input tax credit claimed by the person before that time, to the extent that it relates to services to be supplied after he or she ceases to be a registrant or to the value of the consideration that is a rent, royalty, or similar payment pertaining to a period after that time.

231(3) Recovery of bad debt: A person who has written off a bad debt, and made a deduction as permitted under subsection 231(1) of the Act in determining net tax, must, if he or she recovers the bad debt in whole or in part, add an amount in determining net tax for the reporting period in which the recovery takes place, equal to the tax fraction of the bad debt or part recovered.

232(3)(c) Recipient of credit note: The recipient of a credit note, signifying an adjustment, refund or credit of tax in favour of that person, must add the amount of the note in determining net tax for the reporting period in which the credit note is issued, to the extent that the amount was previously deducted in determining net tax for a reporting period.

233(2)(b) Patronage dividends: A registrant who acquires supplies from a cooperative for use in commercial activities must, if he or she receives a patronage dividend from the cooperative, add an amount to net tax for the reporting period in which the dividend was paid, unless the cooperative has filed an election for the dividend to be considered as not a reduction of the consideration for any supplies. The amount to be added is the tax fraction of the appropriate portion of the dividend, which depends on whether the cooperative has elected to treat patronage dividends as individual price and tax adjustments to each member or is treating them as aggregate price and tax adjustments. If the cooperative chooses the latter option, the portion of the dividend will be determined on the basis of the portion of the cooperative's taxable supplies, other than sales of capital property, in the immediately preceding fiscal year, that were not zero-rated.

235 Input Tax Credit recapture on lease costs of passenger vehicle: see paragraphs 13 and 14 of this memorandum.

236 Input Tax Credit recapture on food, beverages, entertainment expenses: see paragraph 16 of this memorandum.

Appendix D - Input Tax Credit

The following legislative provisions apply to line 106, Input Tax Credit, on the return:

Provision Circumstance

171(1), (2) Becoming a Registrant: Where a person who is a small supplier becomes a registrant, the tax paid or deemed to have been paid on assets on hand that are for use in the course of a commercial activity may be claimed in the first return filed by the person as a registrant. The credit determined with respect to each asset will be the lesser of two amounts:

a) the total of all GST actually paid on the asset in respect of which the person has not previously claimed a credit or a rebate, and

b) the amount of the tax that the person would be required to pay if the asset were acquired at its fair market value at the time the person became a registrant.

An input tax credit may also be claimed in respect to tax that became payable before a person became a registrant, on services to be rendered after the person becomes a registrant or on any rent, royalty or other similar payment relating to property which is attributable to a period after the person becomes a registrant. The input tax credit is available only to the extent that the service or rental is for consumption, use or supply in the course of a commercial activity. No input tax credit is allowed to the extent that the tax is a payment for the services provided before registration.

171(4)(a) Ceasing to be a Registrant: Where a person ceases to be a registrant, in determining the person's ITCs for the person's final reporting period as a registrant, include, in the ITC determination, the GST that becomes payable, after the time the person ceases to be a registrant, on any service or rental payment to the extent that the service was supplied when the person was a registrant or rent was for the use of property when the person was a registrant.

174 Travel and Other Allowances: To the extent that a person pays an allowance to an employee, or where the person is a partnership, to a partner, the person (i.e., the employer or the partnership) may include in its ITC claim the GST paid by the employee or the partner.

The allowance must be for expenses incurred in Canada for supplies all or substantially all of which are taxable (other than zero-rated supplies) and be deductible in computing the income of the person for purposes of the Income Tax Act. The amount of tax that may be claimed is equal to 7/107ths of the allowance.

175 Reimbursement of Employees and Partners: Where an employer or a partnership reimburses an employee or member for expenses incurred by these individuals on behalf of the employer or partnership, and the amounts reimbursed include GST, the employer or partnership, if registered, may include the GST reimbursed to the employee or member in its calculation of the ITC for the reporting period.

176(1)(a) Acquisition of Used Goods after 1993: A notional input tax credit, in respect of used tangible personal property (used goods) purchased after 1993 by a registrant, may be claimed by the registrant if no tax was paid on the purchase and the used goods are for consumption, use or supply in the course of a commercial activity of the registrants. The provision applies where a used good is purchased from a non-registrant or a registrant who had not used the good primarily in a commercial activity. The provision does not apply in the case of zero- rated goods or where section 167 of the Act applies.

176(1)(b) Acquisition of Used Goods Prior to 1994: This transitional provision limits the availability of the notional ITC on used goods purchased prior to 1994 to used goods acquired by a registrant for purposes of supply (i.e., to be resold or leased) in the course of the registrant's commercial activities.

177(1) Supply by Agent: Please refer to the explanation of these provisions in the instructions for line 103.

177(2) Supply for Artists, etc.: A prescribed registrant acting in the course of a commercial activity who makes a supply on behalf of another person of intangible personal property in respect of the product of an artist is considered to be the supplier of that intangible property. The prescribed registrant is the person who may claim the ITC not the artist (the principal). These prescribed registrants are listed in the Artists' Representatives (GST) Regulations.

180(1) Supply by an Unregistered Non-Resident Importer to a Registrant in Canada: The tax paid by an unregistered non-resident on imported goods supplied and delivered to a registrant in Canada is claimable by the registrant, to the same extent as would have been the case if the registrant had been the importer of record and paid the tax.

180(2) Supply by Registrant in Canada on behalf of an Unregistered Non-Resident: An input tax credit may be claimed by a registrant in respect of the tax paid by a non-resident supplier who is not a registrant, under circumstances where section 179 of the Act applies. Under these circumstances, the unregistered non-resident person is required to pay tax in respect of a supply made to a registrant in Canada. Since the non-resident is not registered, an input tax credit may not be claimed by the non- resident. Under this provision, the registrant is considered to have paid the tax and may claim an offsetting input credit provided the non-resident provides the registrant with satisfactory evidence that the tax was paid.

181(2)(a) Rebate: Where a supplier pays a rebate to a person in respect of a taxable supply (other than a zero- rated supply) in Canada, an ITC of 7/107ths of the rebate may be claimed by the supplier.

182 Consequences of a Breach, Modification or Termination of an Agreement: Please refer to the explanation of this provision in the instructions for line 103.

183(3)(b) Use of Seized Property: Please refer to the explanation of this provision in the instructions for line 103.

184(3)(b) Use of Property Acquired by Insurer in the Course of Settling an Insurance Claim: If the insurer is a registrant who uses the property in the course of a commercial activity, otherwise than in making supply of the property, the registrant insurer may claim an ITC for the property to the extent that it is used in the course of a commercial activity.

184(4)(b) Supply of Property Acquired by Insurer in the Course of Settlement of an Insurance Claim: Where an insurer makes a taxable supply of property which was transferred in the course of settling an insurance claim, and provides evidence to establish that the property was acquired from a person not eligible for an ITC or rebate for that property, the insurer must pay GST calculated on the property's consideration. The insurer is then entitled to claim an ITC equal to the amount of tax collected.

185(1) Financial services incidental to commercial activities of non-financial institutions: Inputs used to provide financial services related to the commercial activities of a registrant that is not a financial institution, but that provides some incidental financial services, are treated as having been used in a commercial activity of the registrant. As a result, for the purpose of claiming ITCs, the registrant is not required to apportion the inputs that are used in the provision of financial services that are incidental to his or her commercial activities.

185(2) Financial service relating to commercial activity of individual: For individuals, a financial service is treated as not being related to the commercial activities of that individual, except to the extent that any related income and expenses are taken into account to determine the individual's income from a business for income tax purposes. Therefore, a person who does not claim the revenues and expenses from the financial service as business income or a business expense for income tax purposes cannot claim an input tax credit in respect of that financial service.

186(1) Related corporations: When a parent corporation, resident in Canada, retains an investment in shares of the capital stock or indebtedness of a related corporation that is exclusively involved in commercial activities, the investment is treated as the property of the parent company and as being used exclusively in a commercial activity. An ITC may be claimed for property or services purchased that may reasonably be considered to relate to those shares or that indebtedness, on the later of the last day of the parent's fiscal year, and the day the tax became payable or was paid.

186(2) Takeover fees: When a parent corporation acquires or proposes to acquire all or substantially all the shares of capital stock of another company that is exclusively engaged in commercial activities, the buyer may claim an ITC for property or services purchased relative to that acquisition. An ITC may be claimed on the later of: the day the shares of the target corporation have all or substantially all been acquired, and the day the intent to acquire has been abandoned; and the day the tax became payable or was paid by the purchaser.

186(3) Shares, etc., of the Act held by corporation: For purposes of subsections 186(1) and (2) of the Act, the shares and indebtedness of a corporation engaged exclusively in commercial activities, held by related corporations, are treated as property acquired for use exclusively in commercial activities.

188(1) Prizes: A registrant in the business of taking bets or conducting games of chance, who pays an amount as a prize or winnings, is considered to have received a taxable supply of a service and to have paid tax, equal to the tax fraction of the amount of money paid as the prize or winnings.

188(5) ITC of prescribed registrant: This subsection details the entitlements of a prescribed registrant (a prescribed lottery corporation) that makes taxable supplies of rights to play or participate in games.

Such organizations are entitled to a special credit, which equals seven per cent of the value of the lottery corporation's profit after deducting expenses, including employee remuneration and agents' commissions. These organizations are not entitled to claim actual input tax credits for their purchases.

If the corporation sells real property, it can claim a credit for any previously unclaimed tax paid on the acquisition of the property.

191(7) Remote work site: A registrant builder of a residential complex or an addition to a residential complex who has acquired, built or substantially renovated the complex or addition to provide accommodation for an officer or employee at a remote work site, can elect for the supply to be considered as not a supply until such time as the complex is sold or leased primarily to persons who are not officers or employees. While the election is in effect, subsections 191(1) through 191(4) of the Act do not apply, and the registrant can claim input tax credits for tax paid on the purchase, construction or substantial renovation in the normal manner.

193(1) Taxable sale of real property by registrant: A registrant who makes a taxable sale of real property (other than a supply considered to have been made under subsection 206(5) or 207(2) of the Act as a result of the change of use of the property) may claim an input tax credit. The credit is calculated by multiplying the proportion of non-commercial use of the property by the lesser of:

(a) tax payable in respect of the purchase of the property (or pursuant to section 191 or subsections 206(4), 207(1) or 211(2) of the Act) plus any tax paid in respect of improvements, minus any rebates to which the registrant was entitled; and

(b) tax collectible by the registrant in respect of the sale of the property.

This rule does not apply to public sector bodies, unless the body is a financial institution or has made an election under section 211 of the Act to treat otherwise exempt supplies of real property as taxable supplies.

193(2) Sale by public sector bodies: This subsection applies to a registrant that is a government, and makes a taxable sale of real property (other than a sale considered to have been made by reason of section 210 of the Act); or to a registrant that is a public service body and is considered under section 190 or subsection 211(2) to have made a taxable supply of real property. If the real property was not being used primarily in the registrant's commercial activities, an input tax credit may be claimed, equal to the lesser of:

a) the total tax payable in acquisition of the property (or on a previous deemed disposition of the property due to change in use), plus tax paid on improvements, less any rebates to which the registrant was entitled; and

b) the tax collectible on the sale.

This subsection does not apply to a registrant that is a financial institution.

194 Incorrect statement as to use of real property: A purchaser of taxable real property who receives the property from a supplier who incorrectly states or certifies in writing that the supply was exempt, is considered to have paid tax equal to the tax fraction of the consideration for the supply. This payment is deemed to have taken place on the earlier of the day ownership of the property was transferred and the day possession of the property was transferred. If a registrant, the purchaser may claim an input tax credit to the extent that the property is for use in a commercial activity. The credit may not be claimed if the recipient knew or ought to have known that the supply was not an exempt supply.

199(2) Acquisition of capital personal property: A registrant may claim a full input tax credit pertaining to the acquisition or importation of capital personal property if it is to be used primarily (more than 50 per cent) in commercial activities of the registrant. No input tax credit may be claimed in respect of capital personal property used less than 50 per cent in commercial activities of the registrant.

199(3) Change of use of capital personal property: A registrant who begins to use capital personal property primarily in commercial activities, if he or she has previously paid tax on the property, is considered to have received a supply and to have paid tax, and may claim an input tax credit. The amount of tax the registrant is considered to have paid is equal to the lesser of;

(a) tax payable on the purchase of the property and improvements (or tax payable pursuant to a deemed supply of the property due to a decrease in commercial use); and

(b) tax that would be payable if the registrant were to acquire the property at fair market value at the time of the change in use.

199(4) Improvement of capital personal property: A registrant who acquires or imports an improvement to capital personal property may claim an input tax credit only if the property is used primarily in commercial activities immediately after it is improved.

199(5) Use of musical instrument: If a registrant individual owns and uses a musical instrument in employment or in the business of a partnership of which the individual is a member as well as in self- employment, all these activities will be considered as commercial activities for the purpose of determining if the property is used primarily in commercial activities.

Note: Section 199 of the Act does not apply in respect of the property of a registrant financial institution or a prescribed registrant, or a passenger vehicle or an aircraft of a registrant who is an individual or a partnership.

201 ITC for purchase of passenger vehicle: A registrant may not claim an input tax credit pertaining to the purchase of a passenger vehicle for use in the registrant's commercial activities in excess of the amount that is the capital cost of the vehicle for the purposes of the Income Tax Act.

202(2), (3), (4), (5) Passenger vehicles or aircraft: A registrant individual or partnership may claim an ITC equal to the tax paid in respect of a passenger vehicle or aircraft, or an improvement to a passenger vehicle or aircraft, only if it is to be used at least 90 per cent in commercial activity. If this is not the case, the ITC must be calculated annually, based on the capital cost allowance (CCA) claimable for the vehicle or aircraft in that taxation year for income tax purposes. Tax is considered to have become payable in the last reporting period beginning in the registrant's taxation year, and is determined by multiplying the tax fraction by the CCA. This rule applies only where GST was payable on the acquisition of the passenger vehicle or aircraft. However, where a registrant individual or partnership is deemed under subsection 203(2) to have made a taxable supply of a passenger vehicle or aircraft, the registrant is also deemed for purposes of subsection 202(4) to have acquired the vehicle or aircraft and paid tax on it. Consequently, the individual or partnership may claim a CCA-based ITC under subsection 202(4) of the Act.

203(1) Sale of passenger vehicle: A registrant who makes a taxable sale of a passenger vehicle that immediately before that time was used as capital property in commercial activities may claim an input tax credit 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 the ITCs claimable prior to the sale; and

b) where the sale price is less than the purchase price plus the cost of improvements, the amount of the excess under (a) reduced in proportion to the ratio of the sale price to the purchase price and the cost of improvements.

206(2) Deemed acquisition of capital real property: A registrant who previously was unable to claim an input tax credit and begins to use capital real property in commercial activities is deemed to have received a supply of the property and to have paid tax, except where the property is exempt. The amount of GST deemed paid is equal to the lesser of:

a) the total tax payable in acquisition of the property (or payable where the registrant was deemed to have made a supply of the property under subsection 206(4) or 211(2) of the Act), plus tax on improvements, less any rebates pertaining to the property to which the registrant was entitled; and

b) the amount of tax that would be payable if the property were acquired at its fair market value at the time it begins to be used in commercial activities.

206(3) Increase in use of capital real property: A registrant who has increased the extent to which real property is used in a commercial activity is considered to have received a supply of the property, and may claim an ITC unless the supply is exempt. The tax in respect of which an input tax credit may be claimed is calculated as the percentage increase in the property's use in commercial activities, multiplied by the lesser of:

a) the total tax payable in acquisition of the property (or that would have been payable had the registrant not acquired the property as part of a non-taxable sale of a going concern or the tax payable where the registrant was treated as having made a supply of the property under subsection 206(4) or 211(2) of the Act) and tax payable for improvements, less any rebates pertaining to the property to which the registrant was entitled); and

b) the tax that would be payable if the property were acquired at its fair market value at the time of increase in use in a commercial activity.

208(2) Capital real property used in commercial activities by registrant individual: A registrant individual who begins to use real property as capital real property in commercial activities, as long as the property is not primarily for personal use of the individual or a related individual, is considered to have received a supply of the property and to have paid tax, and may claim an input tax credit. The amount of tax in respect of which an input tax credit may be claimed is calculated in a manner similar to the method described in subsection 206(2) of the Act pertaining to a change of use of property owned by non-individuals.

208(3) Increase in use of capital real property by registrant individual: A registrant individual who increases the use of capital real property in commercial activities may claim an input tax credit, in respect of tax which is the lesser of:

a) the total tax payable for acquisition of the property (or the tax that would have been payable had the registrant not acquired the property as part of a non-taxable sale of a going concern or the tax payable where the registrant was considered to have made a supply of the property due to a change of its use) and tax payable on improvements; and

b) the tax that would be payable if the registrant were to acquire the property at its fair market value at the time of increased use.

209, 210 Public sector bodies and capital real property: A public sector body (other than a financial institution, which is treated like other financial institutions) may claim an input tax credit in respect of capital real property or improvements only if the property is primarily for use in commercial activities. A full ITC is allowed in these circumstances.

Change-of-use rules apply only when the use of the property changes from primarily non-commercial to primarily commercial. The amount of tax on which the ITC is based is the lesser of:

a) the total tax payable on the purchase of the property (or the tax payable on a previous deemed supply of the property due to a change in use) and improvements, less any rebates pertaining to the property to which the body may have been entitled; and

b) the tax that would be payable if the public sector body were to acquire the property at its fair market value.

211(1), (2), (4) Please refer to the explanation of these provisions contained in the instructions for line 103.

Appendix E - Input Tax Credit Adjustments

The following legislative provisions apply to line 107, Input Tax Credit Adjustments, on the return:

Provision Circumstance

231(1) Bad debts: A person who has remitted tax under Division II of the Act in respect of a taxable, other than zero-rated supply may, to the extent that the consideration and tax have become a bad debt in whole or in part, deduct an amount equal to the tax fraction of the bad debt written off, in determining the net tax for the reporting period in which the debt is written off or for a reporting period that ends within four years after the end of that period.

232(3)(b) Person who has issued a credit note: A person who has issued a credit note, signifying an adjustment, refund or credit of tax to another person in accordance with subsection 232(1) or 232(2) of the Act, may deduct the amount of the note in determining net tax for the reporting period in which it is issued, to the extent that the amount has previously been included in determining net tax for the period or a preceding reporting period.

233(2)(b) Patronage dividends: A cooperative may deduct from its net tax, for the reporting period in which a patronage dividend is paid, the tax fraction of the appropriate portion of the dividend, unless the cooperative has filed an election for the dividend to be considered as not a reduction of the consideration for any supplies.

234 Builders' rebates: A builder who has paid or credited a rebate to an individual in accordance with subsection 254(4) of the Act may deduct the amount of the rebate in determining the net tax of the builder for the reporting period in which the rebate was paid or credited. The individual's rebate application must be sent to the Minister with the builder's GST Return for Registrants.

346(1)(a) Transitional credit for quarterly and monthly filers: Where a registrant files a GST return on a quarterly or monthly basis, the calculated amount of the transitional credit can be deducted from the amount of the GST the registrant is otherwise required to remit for the reporting period that includes the last month of the registrant's first fiscal quarter beginning in 1991. Information on how to calculate the transitional credit is contained in GST MEMORANDUM 200-9. "TRANSITIONAL CREDIT".

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 BRANCH UNDER THE AUTHORITY OF THE DEPUTY MINISTER OF NATIONAL REVENUE, CUSTOMS AND EXCISE.

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