Canada Revenue Agency
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Trade-ins
If you accept used goods in trade for full or partial payment for goods you sell or lease in the course of your business, special rules apply, depending on whether or not the person from whom you are accepting the trade-in has to charge tax on the trade-in.
When the vendor has to charge tax
If the person from whom you accept used goods in trade has to charge GST/HST (for example, if the trade-in is an asset of a registrant's business), two separate transactions occur:
- you purchase the trade-in from your customer; and
- you make a sale or a lease to the same customer.
You have to pay GST/HST on the value of the trade-in, and you have to collect GST/HST on the full price charged for the goods you sell or lease.
Example
ABC is an Alberta GST/HST registrant, and ABC sells new machinery to DEF, also a registrant, for $50,000. ABC accepts old machinery valued at $20,000 as a trade-in. ABC will invoice and collect GST on the full $50,000 selling price. DEF will invoice and collect GST on the trade-in value of $20,000. Both ABC (the vendor) and DEF (the customer) may claim an input tax credit (ITC) for the GST/HST they paid or owe.
When you accept a trade-in, find out if your customer has to collect GST/HST before you close the deal. If so, make sure you meet the invoice requirements, so that you can claim an ITC.
When the vendor does not have to charge tax
A different rule applies for used goods you accept as a trade-in from a person who is not required to charge GST/HST (usually a person who is not required to register for GST/HST). A person may also trade-in a leasehold interest in used goods.
In this case, you generally charge GST/HST on the net amount of the sale or lease, that is, the price of the goods you sell or lease minus the amount you allow for the trade-in. This approach is consistent with the treatment of trade-ins under most provincial sales taxes. For more information on trade-ins, see GST/HST Technical Information Bulletin B-084, Treatment of Used Goods.
In the following example we are using the GST rate of 5%.
Example
John only used his car for personal use. He goes to a registered car dealer in Manitoba to trade in his used car for a new one. The selling price of the new car is $25,000, and the dealer allows $10,000 for his used car. The dealer charges GST on $15,000.
| Selling price of new car | $25,000 |
| Less trade-in of used car | − $10,000 |
| Subtotal | $15,000 |
| GST ($15,000 × 5%) | + $750 |
| John pays | $15,750 |
