Can a buyer claim input tax credits for GST/HST paid on business assets?

When a buyer pays GST/HST on the assets of a business, the tax may come back as an input tax credit. Section 169(1) of the Excise Tax Act allows the credit where a person acquires property and, during a reporting period in which the person is a registrant, tax becomes payable or is paid without having become payable, subject to the rest of Part IX. The buyer has to be registered, and the credit follows how it will use the asset. If the supplier and buyer make the joint election under section 167, there may be no tax to recover on some supplies, so the first step is to confirm whether tax was charged at all.

The “to the extent” test

The credit is worked out “to the extent” the buyer acquired the asset for consumption, use or supply in its commercial activities. Section 169(1) states that extent as a percentage, and it also has separate wording for property used to improve capital property. So an asset used partly for activities that are not commercial may give only part of a credit. Ask the buyer’s accountant to go through the purchase price allocation asset by asset.

Capital property has its own rule

Section 199(2) deals with personal property a registrant acquires for use as capital property. It says the tax is left out of the credit unless the property was acquired for use primarily in commercial activities. If it was, the buyer is deemed to have acquired it for use exclusively in commercial activities. Section 199(1) says the section does not apply to property of a registrant that is a financial institution or a prescribed registrant, or to a passenger vehicle or an aircraft of a registrant who is an individual or a partnership, so read it with the accountant.

Records and timing

Subsection 169(4) says a registrant may not claim a credit unless, before filing the return, it has obtained sufficient evidence, in the form and with the information the Act requires, to determine the amount. Paragraph 169(4)(b) adds a condition where the registrant must report the tax in a return, and subsection 169(5) lets the Minister exempt registrants from some of these requirements. See the glossary entry on documentary requirements. Section 225(4) also sets a time limit for claiming, which depends on the return, on whether the claimant is a specified person, and on the other cases it lists. Ask when that limit falls for this buyer.

If the election applies, or the deal is for shares

Where a valid election is made, subsection 167(1.1) says no tax is payable on a supply under the agreement other than a taxable supply of a service to be rendered by the supplier, a taxable supply of property by lease, licence or similar arrangement, and, where the buyer is not a registrant, a taxable sale of real property. It applies only if the buyer, when a registrant, files the election with the Minister on time, so ask what tax, if any, is left to claim. The section 167 election is covered separately. For a share purchase, none of the sources read here address GST/HST on the shares, so ask a tax adviser how the Act treats that purchase.