Buying or selling a company car can be a daunting task, with many legal and financial considerations to take into account. In fact, it’s a complicated process for many business owners - especially when it comes to HST on vehicles, which can result in missed opportunities or non-compliance.
That’s because there are specific regulations in Ontario that must be followed when buying or selling a company car, which we will talk about today.
Understanding Taxes on Vehicles
When vehicles are bought or sold through private sale, there’s a provincial tax of 13% that applies to the vehicle. This tax is known as Retail Sales Tax (RST) or Provincial Sales Tax (PST) and is paid by the buyer when they register the vehicle with the Ministry of Transportation.
Because it’s the same amount as HST in Ontario, many business owners assume it is HST. But it is not. It’s a tax that only applies to privately sold vehicles when the vendor is not a GST/HST registrant.
All of this confusion can lead to business owners who buy or sell a car through private sale to incorrectly handle the tax.
When buying a company vehicle through private sale, business owner’s can incorrectly claim an input tax credit for the 13% tax, which can result in a liability, as well as potential interest and penalties. Not to mention that the 13% tax actually becomes an unrecoverable cost that may not be budgeted for by the business owner.
When selling a company car, business owners have mistakenly not collected HST on the sale, believing the 13% RST was HST being collected directly from the customer. But as a business owner, you are required to collect HST on all taxable supplies, including the disposition of capital property, such as a company car.
Brian & Deborah Dewan Enterprises Ltd. v. The Queen
In a recent case, a limousine company sold three limousine’s when liquidating the company. Thinking that the 13% tax collected by the Ministry of Transportation was HST, they did not collect or remit $13,741 HST on the $105,700 sale.
After being assessed by the CRA, it was determined that they failed to collect tax. They attempted to appeal the assessment. While the judge empathized with the situation, he had to dismiss their case. As per the Excise Tax Act, they were required to collect and remit the tax.
While the business owners could normally request a refund on the PST that was paid in error to offset the HST obligation, there’s a limitation on refund requests of four years. Because the vehicles were sold in 2011 and the case was not heard by the judge until six years later, it’s unlikely the refund can be claimed in this case. As a result, both HST and RST were remitted on the vehicle where only HST was required.
Why Does This Confusion Exist?
When Ontario decided to harmonize GST and PST to create HST, the Auto Dealers Association was worried that having HST would create a bigger incentive for people to sell vehicles privately, instead of through a used car dealer.
To resolve the disparity, the Ontario government increased the RST rate for private vehicle sales, which was previously 8%, to 13% and required that it only be collected for sales where the vendor was not a GST/HST registrant.
One major difference between the two taxes is that HST is collected on the purchase price while RST is collected on the greater of the purchase price and listed wholesale value in the Used Vehicle Information Package. This means the RST can actually be greater than the HST on the same purchase price if you got a deal.
Buying a Company Car From a GST/HST Registrant
If you are buying a car from someone who is a GST/HST registrant they are required to collect HST, however, you won’t have to pay the RST when registering the vehicle with the Ministry of Transportation.
To prevent any issues when registering and for registrants to claim an ITC for the HST paid (or GST credit if your an employee using a vehicle for business purposes), you must be sure to get the correct documentation from the seller with:
- Name and address of vendor
- Name and address of purchaser (should be the person who plans to register the vehicle and claim the ITC or GST credit)
- GST/HST registration number of vendor
- Vehicle description
- Purchase price
- GST/HST paid
- Date of issue
As you can see, there are many intricacies when it comes to buying or selling a vehicle as a business owner. To ensure no costly mistakes are made, you need to be certain of the process. Otherwise you could end up with unrecoverable costs and additional liabilities.
For help with the processes of buying or selling a company car to maximize your position, contact us today.