Exporting Vehicles – GST/HST and Input Tax Credits
The sale and export of vehicles from Canada should theoretically yield GST/HST refunds. These are known as Input Tax Credits (ITCs). The reason for this is because you would have paid GST/HST to purchase a vehicle, and as a business, you are entitled to refunds on the amount of GST/HST you paid for business expenses. However, the Canada Revenue Agency’s (CRA) application of this simple concept is almost always more convoluted than one might expect. Essentially, the ability to claim Input Tax Credits, which allow for the recovery of GST/HST already paid out, prevent the government from engaging in double taxation.
To claim ITCs in these circumstances, the vehicle in question must have firstly been purchased from someone who is a GST/HST registrant. Similarly, as a vendor, you must also operate as a GST/HST registrant; thus you must operate under a business number (BN). The CRA explains that ITCs are available for the purpose of recovering GST/HST paid or payable on purchases and expenses related to your commercial activities. The CRA limits the application of ITCs to expenses or purchases that are reasonable in quality, nature, and cost in relation to the nature of your business. In most cases, you have up to four years after the due date for the return in which you could have first claimed the ITC to make your claim.
Why your ITC claim may be Denied
While the concept of GST/HST refunds may be straightforward, your entitlement to ITCs on exported vehicles depends on the CRA’s interpretation of your position in the sales process. It is possible that the CRA may view you as an intermediary agent for a foreign party rather than an independent exporter. If you are found to be an agent, the CRA will not allow your claim for ITCs.
Additionally, it is possible that you do not have the proper contracts in place when purchasing the vehicles. Occasionally, vehicles are purchased by third parties because large car manufacturers do not want to sell cars to someone who will turn around and ship them overseas. So the business enlists the help of these third parties, or agents, to purchase the vehicles on their behalf. If you do not have the proper paperwork completed with your agent, CRA may turn around and deny your ITC refund claim.
ITCs add up quickly, especially when exporting vehicles is the substance of your business. An unexpected and sometimes drawn out audit procedure on part of the CRA can cause substantial cashflow issues to your business. While maintaining organized books and records will help to minimize possible audit issues, keep in mind that you are asking for a refund from the Canadian government. It is in their interest to deny you so they may hold onto the money for themselves.
Grey Market Goods
The reason car manufacturers do not want to sell cars to those who will turn around and export them is because they are not a fan of the grey market. The grey market are items purchased in one country or region that are supposed to be sold and enjoyed in that country or region. However, those items are then exported to another country or region where they are sold for double, triple or even quadruple the amount they cost in the original country. Some luxury vehicles cost $100,000 to $200,000 here in Canada, but may cost $400,000 to $500,000 in other markets.
If you have been claiming ITCs, and you have received an audit letter, you likely need professional assistance. Here at Rosen Kirshen Tax Law, we have assisted taxpayers through audits, objections, and even Tax Court where the CRA has questioned their ability to claim ITCs. We have been successful in proving that taxpayers are not foreign agents, and are eligible to receive their refund claims. Contact us today to learn more.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.