General Motors Acceptance Corporation of Canada, Limited (GMAC), has succeeded on an appeal to the Tax Court of Canada with respect to the tax treatment of “rate support” programs under which retail purchasers of General Motors (GM) vehicles are able to finance their purchases at below-market interest rates.
GMAC makes financing available for retail sales of GM cars and trucks by purchasing conditional sale contracts entered into between GM dealers and retail purchasers. In the normal course, GMAC pays the dealer the full-face amount of the conditional sale contract if the contract provides for interest at a market-determined rate, which GMAC announces to dealers periodically. Under a rate support program, General Motors of Canada Limited (GMCL) undertakes to its dealers that financing will be made available through GMAC at a below-market interest rate at no cost to the dealer.
For the first eight years in which rate support programs were offered, GMAC paid the dealer the full face amount of each contract that it purchased and GMCL paid GMAC a “rate support payment” equal to the difference between that full face amount and the present value of the contract discounted at GMAC’s normal market interest rate. Thus GMAC ended up acquiring the contract for its true present value and GMCL bore the cost of the program. GMAC, for both accounting and tax purposes, amortized an amount equal to the rate support payment into income over the life of the conditional sale contract. That is the normal accounting and tax treatment of a debt obligation acquired at a discount below its face value. Revenue Canada reassessed GMAC, taking the position that the payments made by GMCL to GMAC were income to GMAC in the year in which the payments were made. GMAC argued that it was simply GMCL’s agent to administer the rate support programs and that it was acting as a conduit to transmit rate support payments from GMCL to dealers.
In an effort to avoid further disputes with Revenue Canada, at least for subsequent years, GMAC and GMCL entered into a series of written agreements making explicit the agency arrangement between them. In addition, the administration of the programs was altered so that the dealer received two separate cheques in connection with each vehicle financed under a rate support program. One cheque, on a GMAC account, was in the amount of the present discounted value of the contract. The second cheque, on a GMCL account, made up the difference between the contract’s face amount and its present value. GMAC was authorised to write and issue the GMCL cheques so that they could be delivered to dealers simultaneously with the GMAC cheques.
Revenue Canada persisted in the view that the rate support payments were income to GMAC in the year in which they were made by GMCL. Following further reassessments, GMAC appealed to the Tax Court. The Court found that the evidence clearly established the agency relationship asserted by GMAC and GMCL both before and after the written agency agreements and the change in the payment mechanism. On that basis, GMAC’s tax treatment was held to be correct. While the issue was solely one of timing for inclusion of amounts in income, the volume of transaction concerned and the passage of such a lengthy period of time resulted in the amounts of tax and interest in dispute being very substantial.
The decision is likely to have implications for some or all of the finance company affiliates of the other major motor vehicle manufacturers and distributors in Canada.
GMAC’s co-counsel on the appeal to the Tax Court were Joseph M. Steiner of Osler, Hoskin & Harcourt LLP and Alnasir Meghji of Donahue & Partners, supported by tax lawyers Blake M. Murray and Julie A. Colden of Oslera acting for Revenue Canada were Jagmohan S. Gill, S. Patricia Lee, John Shipley, and Arnold Bornstein from the Department of Justice in Toronto.