These comments do not replace the law found in the Excise Tax Act (the Act) and its Regulations. The comments are provided for your reference. As they may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact any CRA GST/HST Rulings Centre for additional information. These centres are listed in GST/HST Memorandum 1.2, Canada Revenue Agency GST/HST Rulings Centres. If you wish to make a technical enquiry on the GST/HST by telephone, please call the toll-free number 1-800-959-8287. A ruling should be requested for certainty in respect of any particular GST/HST matter.

If you are located in the province of Quebec and wish to make a technical enquiry or request a ruling related to the GST/HST, please contact Revenue Québec by calling the toll-free number 1-800-567-4692.

FINANCIAL INSTITUTIONS, LATE ELECTION AND ASSESSMENT

Q1 Late Filed Elections Under Subsection 225.2(4) of the ETA

Facts/Background

Section 225.2 of the ETA provides special rules for computing the GST/HST payable by selected listed financial institutions. Under former paragraph 225.2(5)(c), the election had to be filed “by the financial institution with the Minister in prescribed manner on or before the day on or before which a return under Division V for the reporting period of the financial institution in which the election is to become effective is required to be filed.” In 2007, paragraph 225.2(5)(c) was amended to allow the Minister to accept latefiled elections.

Question

Does the CRA have (or will it implement) a policy on late filing elections under subsection 225.2(4) of the ETA? To whom should the late filed elections be made? There seems to be no one person assigned to supervise this issue. Further, late-filed elections are expressly excluded from the voluntary disclosure program.

CRA Comments

Paragraph 225.2(5)(c) of the ETA gives the Minister discretion, on or after October 3, 2003, to consider a selected listed financial institution’s request to late file a subsection 225.2(4) election. We are in the process of finalizing a policy statement that will provide guidelines on when a request may be accepted and when it will not. This policy statement should be issued shortly.

A request to late file an election will be considered on a case-by-case basis and can be sent to the Director of the Tax Services Office of the selected listed financial institution’s head office. Factors that may be considered in evaluating whether or not to accept a late-filed election might include whether the parties clearly meet the criteria for making the election, and as of the effective date of the election, the parties consistently operated as if the election had been made.

The request should include a completed form GST497, Election Under the Special Attribution Method for Selected Listed Financial Institutions and Notice of Revocation (unless it has been previously filed) and an explanation of the circumstances surrounding the late filing of the election.

Q2 Determination of Competent Authority and GST Recovery

Facts/Background

A Co, a Canadian resident corporation that is a de minimis financial institution, self-assesses GST on imported taxable supplies of management services provided by B Co, its U.S. parent.

A Co is audited for GST and income tax purposes by the Canada Revenue Agency for years 2005 and 2006. A Co is issued a GST assessment upon the conclusion of the GST audit in 2007. At issue in the income tax audit is whether to disallow a portion of the management fee claimed as a deduction by A Co for years 2005 and 2006. This requires a determination of Competent Authority, as it has implications for both the U.S. and Canadian tax authorities. The determination of Competent Authority may take more than 5 years to resolve. Assume this determination is not made until 2011 and as a result, a portion of the management fee claimed as a deduction by A Co for years 2005 and 2006 is disallowed shortly thereafter. As a result of the disallowance of the income tax deduction, A Co has overpaid GST on the management fees.

Question 2

Is there any way for A Co to recover the GST that is overpaid by way of self-assessment on the management fees paid to B Co (e.g., file amended GST returns for 2005 and 2006)?

Would subsection 296(2.1) of the Excise Tax Act be available for A Co, given that the GST assessment for 2005 and 2006 ended and A Co is no longer under GST assessment for those years?

If A Co cannot recover the excess GST paid on such management fees, this would result in a GST windfall to the Canada Revenue Agency?

CRA Comments

A Co was assessed for its 2005 and 2006 reporting periods in 2007. Subsection 298(1) of the ETA establishes the limitation period on the Minister’s right to assess or reassess a person under section 296 of the ETA. Generally, an assessment/reassessment of a person shall not be made more than four years after the return was filed. Therefore, if the time limitation has been exceeded, the reporting periods cannot be reassessed, and amended returns cannot be filed.

Under subsection 296(2.1) of the ETA where the Minister determines that there was an “allowable rebate” that was not previously claimed before the day the Notice of Assessment (NOA) is sent to the person and would be payable if it was claimed on the day the NOA is sent, then the Minister shall apply all or part of the allowable rebate against any net tax assessed or taxes payable. In the given case, the Minister when assessing 2005 and 2006, did not determine that there was an allowable rebate for those years and hence subsection 296(2.1) is not available to A Co. As explained above, where the time limitation for reassessing has been exceeded, subsection 296(2.1) cannot be applied.

Where a taxpayer feels circumstances call for the forgiveness or release from a debt or payment of tax, interest and penalties and all rights of objection and appeal have been exhausted, an application may be made for a remission order pursuant to section 23 of the Financial Administration Act, which is the legal authority under which remission of tax, penalties or interest is granted.

The Financial Administration Act provides the broad framework within which remission may be considered, and the decision to recommend relief is left to the discretion of the Minister.

Each remission request is considered on its own merits to determine whether collection of the tax or enforcement of the penalty is unreasonable or unjust, or if remission is in the public interest, in accordance with the broad terms set out in section 23 of the Financial Administration Act.

To assist CRA officials in that assessment, guidelines have been developed, based upon characteristics common to past cases. These are:

Extreme hardship
Incorrect action or advice on the part of CRA officials
Financial setback coupled with extenuating factors; and
Unintended results of the legislation

VOLUNTARY DISCLOSURE

Q3 No- Names Voluntary Disclosure

Facts/Background

Taxpayers use the no-names voluntary disclosure process where there is a significant issue involving real uncertainty. For example, the issue is sometimes that unregistered non-resident persons making taxable supplies in Canada, and their advisors, may not be able to determine whether the CRA would consider them to be carrying on business for purposes of the GST and hence required to register and to charge and remit the tax.

Question

Where the CRA is not able to advise on the technical issue in the voluntary disclosure within the 90 days period, the person is effectively denied access to the potential benefits of the no-names disclosure method, unless CRA agrees to extend the 90-day period. Where a request for such a determination by the CRA has been made, will the CRA extend the no-names timeframe to accommodate the time required by the CRA to make such a determination? If so, what are the conditions and circumstances to obtain the extension?

CRA Comments

In order for a taxpayer to qualify for consideration under the Voluntary Disclosures Program (VDP) they must meet the four of conditions set out in Information Circular 00-1R2. Two of these four conditions are that the disclosure must (1) be complete and (2) include a penalty. The onus is on the taxpayer to demonstrate the application of all conditions when they make their disclosure to the CRA. If, as in this example, the taxpayer is unaware whether they are carrying on a business in Canada for which there are tax consequences, in our view these two above mentioned conditions cannot be confirmed. We could not therefore consider such a case as being within the provisions of the VDP until the taxpayer can explain the tax consequences involved and indicate the penalty which applies to the disclosure.

Therefore, when a taxpayer is unaware of the taxability or penalty implications in a given situation we recommend that prior to a making a disclosure a tax ruling, either GST/HST or income tax, be requested to obtain CRAs taxing position.

Also, in such an example it would be inappropriate, and a moot point, to consider an extension of the 90 day no-name policy as this would not be a case which would first of all qualify as a disclosure. The VDP is not intended to act as a vehicle for taxpayers to intentionally avoid their legal obligations under the acts administered by the CRA.

Q4 Voluntary Disclosure – “One Year” Rule Etc.

Facts/Background

A Co., a GST non-registrant, purchases a residential complex in January 2007. A Co. commences substantial renovation on the complex in February 2007, and completes the substantial renovation in June 2007. The complex is subsequently rented out to others in October 2007. However, A Co. fails to self-assess on the fair market value of the complex on the rental to others in October 2007, as required by section 191 of the ETA.

Question 4A

Would the CRA accept a voluntary disclosure as valid if it were made in August 2008, given that the relevant events (i.e., the purchase and substantial renovation) occurred more than one year prior to August 2008?

CRA Comments

A Co. is not obligated to self-assess and remit GST/HST to CRA until October 2007. Therefore, a VDP made in August of 2008 would be less than one year past due, and would not qualify as a valid voluntary disclosure.

Question 4B

Assuming that the voluntary disclosure is accepted, would/could A Co. be GST registered back to the date the complex was purchased, so that the ITCs could be taken into account in the section 191 self-assessment for the GST paid on the acquisition and construction?

CRA Comments

As indicated above, A Co.’s disclosure is not considered to be a valid voluntary disclosure.

As A Co. was deemed under section 191 of the Excise Tax Act (ETA) to have sold the residential complex at the time possession of the complex, or a residential unit in the complex, was first given to an individual in October 2007, A Co. was required to self-assess GST/HST on the fair market value of the complex at that time. As a non-registrant, A Co. was required to report the tax deemed paid and collected under section 191 in a GST62, Goods and Services Tax/Harmonized Sales Tax Return (Non-personalized), and remit any amount owing by November 30, 2007. If A Co. is a small supplier, it should be noted that the deemed supply under section 191 does not affect A Co.’s small supplier status.

Since A Co. is a non-registrant who has made a taxable supply of real property by way of sale (i.e., the deemed supply under section 191 of the ETA), A Co. can claim a rebate under section 257 of the ETA, subject to subsections 257(1.1) and (2). The rebate under section 257 of the ETA is generally equal to the lesser of the basic tax content (BTC) of the complex at the time of the deemed sale under section 191 of the ETA and the GST/HST payable in respect of the deemed sale (i.e., the GST/HST calculated on the fair market value of the complex at the time of the deemed sale). The BTC would include any GST/HST payable on A Co.’s purchase of the complex in January 2007, (the sale may have been exempt) as well as the GST/HST payable on any improvements A Co. made to the complex. This rebate is claimed using Form GST189, General Application for Rebate of GST/HST.

A Co. may also be entitled to claim a new residential rental property rebate under section 256.2 of the ETA for up to 36% of the GST or federal part of HST it paid on the deemed sale since it cannot claim an ITC for that tax, and provided that it cannot otherwise recover that tax. A rebate under section 256.2 is claimed using Form GST524, GST/HST New Residential Rental Property Rebate Application, and Form GST525, Supplement to the New Residential Rental Property Rebate Application – Multiple Units, if applicable.

As stated above, A Co. will have to file the GST62 return and any amount due by November 30, 2007, i.e., within one month after the end of the month in which the deemed sale occurred. If A Co. files the GST189 and, if eligible, the GST525 and GST524 forms, together with the GST62 return, subsection 228(6) of the ETA provides that A Co. will only be required to remit the difference between the tax owing on the deemed sale and the amount of the rebate(s). In this case, A Co. would enter the total amount of the rebate(s) on line 111 of the GST62 return.

Q5 Voluntary Disclosures

Facts/Background

At present, in the context of a voluntary disclosure the CRA will waive interest and penalties for pre April 2007 where there is a Wash Transaction (i.e., where tax was not charged in respect of a taxable supply made to a registrant that would have been entitled to claim a full ITC).

Question

Why doesn’t this same policy apply in the context of a voluntary disclosure where the recipient is entitled to a 100% rebate (e.g. a municipality or a Province)?

CRA Comments

In the context of a disclosure request where the CRA accepts the disclosure as valid under the VDP the WASH Transaction policy is applied first if it is applicable and then the VDP policy is applied to remove any remaining penalty amounts left.

As per the definitions contained in the Wash Transaction policy, this situation is not considered a wash transaction.

Where a voluntary disclosure involving a wash transaction has been made and is accepted by the CRA as a valid disclosure in accordance with GST/HST Memorandum 500-3-4, Voluntary Disclosure (to be re-issued as GST/HST Memoranda Series 16.5), the 4% penalty will not be applied to the transaction identified as a wash transaction and reported in the course of a voluntary disclosure. In such circumstances, only the taxes that should have been collected originally by the supplier for that transaction will be sought by the CRA.

The wash transaction policy was developed in recognition of the fact that there would be no revenue loss to the Crown given the recipient’s entitlement to claim a full input tax credit. The policy therefore only applies to persons (i.e., a supplier and recipient) engaged in commercial activity.

ASSESSMENT

Q6 Audit/ Summary of assessment

Facts/Background

Prior to the implementation of Standardized Accounting on April 01, 2007, GST Notices of Reassessment were typically one page in length covering the entire audit period. Subsequent to April 01, 2007, a GST Notice of Reassessment issued as a result of an audit are numerous pages in length consisting of a lead "Results" page followed by numerous "Summary of Assessment" pages for each particular reporting period of the audit.

Questions

Is the individual "Summary of Assessment" page a legal Notice of Reassessment in itself?

When preparing a GST Notice of Objection, can a person object to an individual reporting period (i.e. one month of the audit period) for which a "Summary of Assessment" was issued as opposed to the entire audit period?

CRA Comments

Section 300 of the ETA requires the Minister to send a notice of assessment to the person assessed. The form of that notice is not prescribed.

In Stephens v. R., 87 D.T.C 5024, in the context of liability under the Income Tax Act, the Federal Court of Appeal held that: “The form of the notice does not matter; the notice must simply be expressed in terms that clearly make the taxpayer aware of the assessment made.” In that case, the assessments were issued on letterhead from Revenue Canada – Taxation rather than the Department of National Revenue and had the printed signature of a person who was no longer the Deputy Minister. Despite these errors, the document satisfied the “notice of assessment” requirements because they were not misleading to the taxpayer.

In CCI Industries Ltd., Re, 2005 ABQB 675, the Alberta Court of Queen’s Bench found that an audit proposal letter qualified as a notice of assessment since the key feature of a notice of assessment is to make the taxpayer aware that the CRA has made an assessment.

The Notices of Reassessment issued since April 1, 2007 are made up of a “Results” page and one or more “Summary of (Re) Assessment “ pages.

The first page of the Notice of (Re) Assessment provides the combined results for the period covered by the audit. Each additional page refers to the assessment for the reporting period identified.

The box at the top right corner of each page provides the following information:

Date of Mailing;
Business Number; and
Period Covered.

The box “Period Covered” will either contain the dates of the beginning and end of the audit period or the notation “Refer to Summary”. If the box contains particular dates, it indicates that each consecutive reporting period within the audit period has been assessed. If it contains the notation “Refer to Summary”, it indicates that one or more reporting periods have not been assessed.

In numerous cases, the courts have found that a notice of assessment is a matter of substance, not of form. The Appeals Branch will accept a Notice of Objection for a reporting period for which a Summary of Reassessment has been issued.

Q7 Limitation periods for assessment/reassessment

Facts/Background

The Appeals division’s authority to review an assessment derives from subsection 301(3), not section 296. The limitation periods for reassessment in section 298 apply to assessments and reassessments under section 296, and section 298 does not refer to reassessments under subsection 301(3).

Question

Can the Appeals Division create an upward assessment for a particular reporting period that is statute barred? If so, is there an administrative policy that the Appeals Division follows to prevent this from occurring?

CRA Comments

Subsection 301(3) provides that upon receipt on an objection, the Minister shall with all due dispatch, reconsider the assessment and vacate or confirm the assessment or make a reassessment. This grants authority to make an upward reassessment.

There are no legislative provisions that allow for the withdrawal of a valid objection once it has been filed. The Minister must reconsider the assessment and notify the objector of his decision. Therefore, once identified, an upward adjustment must be processed. It is a policy of the Appeals Branch that the Appeals Divisions will process upward adjustments when the following conditions are met:

i. it is with respect to a matter under dispute or an item related to it;

ii. the normal reassessment period must not have expired if the adjustment results in an upward reassessment, except in cases of misrepresentation that is attributable to neglect, carelessness or wilful default or the commission of any fraud in filing a return or supplying any information under the ETA;

iii. the upward adjustment is of relative importance, and

iv. the upward adjustment has been approved by the Chief of Appeals.

In fact the ability to proceed with upward adjustments is essential to maintaining the integrity of the tax system.

An internal directive on this subject was issued in February 2001 and is still in force.

REAL PROPERTY

Q8 The Agency’s Policy on Senior Care Homes

Facts/Background

In light of the recent decision of the Federal Court of Appeal in North Shore Health Region, please comment on the status of the Agency’s draft policy statement released in Notice 224 – The GST/HST Real Property Implications of Constructing or Purchasing, and Operating a Residential Care Facility”.

Question

In particular, please confirm that the Agency will not apply any changes in its policy retroactively to senior care builders and/or operators who claimed input tax credits on the construction of new facilities, or purchased existing senior care homes on a GST-exempt basis, in reliance on Notice 224.

CRA Comments

GST/HST Notice 224, the draft policy statement, The GST/HST Real Property Implications of Constructing, or Purchasing, and Operating a Residential Care Facility, was released on September 10, 2007. The Notice was a revision to Notice 207, the original draft policy statement released in February 2006.

In light of the decision of the Federal Court of Appeal in North Shore Health Region v The Queen, 2008 FCA 2, the draft policy statement is being reviewed and future changes to the policy may be necessary. Builder-operators of facilities operated in an identical manner to the facility considered in North Shore who acted consistently with the provisions of Notice 224 will not be required to repay amounts claimed as input tax credits in respect of construction costs, provided that these builder-operators accounted for an amount that would have otherwise been payable on the deemed supply made under section 191 of the Excise Tax Act.

Further, if, under the provisions of Notice 224, the supply by way of sale of a residential complex operated in an identical manner as the facility in North Shore was treated as an exempt supply at the time of sale, the CRA will not assess tax payable in respect of the supply provided that the vendor accounted for an amount that would have otherwise been payable on the deemed supply made under section 191.

We can also advise that the numerous GST/HST issues surrounding residential care facilities are under review by the Department of Finance.

Note: On February 26, 2008, the Minister of Finance announced proposed amendments to deal with a number of GST/HST issues affecting residential care facilities; in particular, where the operator of such a facility is providing supplies of personal care/nursing services to its residents and the service includes a residential unit. The amendments, which have since received Royal Assent, are generally prospective. However, in some cases, an operator of a residential care facility may elect to make the amendments retroactive. Reference may be made to the info sheet GI-045, Residential Care Facilities and Proposed Changes in the 2008 Budget, for additional information.

Q9 Operating care homes

Facts/Background

An operator of long term care homes operates many properties. Two of the many properties pre-date the implementation of the GST. These two homes have been vacated by the residents because newer long term care homes have been built in the area and the homes would not conform to newer standards. Further, the newer standards prevent the two homes from being demolished and replaced with new long term care homes (the newer size requirements from resident rooms and height of the building create limitations on the number of beds and result in the location being inappropriate from a new long term care home). The operator has put the homes and the underlying land up for sale. For greater certainty, the homes have not been demolished and buildings remain on the land.

Question 9A

What is the operator supplying (a used residential complex, a health care facility, something else)?

CRA Comments

A “residential complex” is defined in subsection 123(1) of the Excise Tax Act (ETA) and a “health care facility” is defined in section 1 of Part II of Schedule V to the ETA. Whether a particular long-term care home is a residential complex, a health care facility or other real property is a question of fact. As stated in Notice 224, the draft policy statement, The GST/HST Real Property Implications of Constructing, or Purchasing, and Operating a Residential Care Facility, a facility that is described in paragraph (c) of the definition of “health care facility” may be a residential complex. Generally, the supply of a long-term care home for seniors is a supply of a residential complex.

Question 9B

Does the decision in PETER AND MARLENE YAKABUSKI impact on the characterization of the supply?

CRA Comments

No. The decision in Yakabuski et al v The Queen, 2008 TCC 27, dealt with the sale of a residential complex that had been extensively destroyed in a fire and was not habitable at the time of the sale.

There is no indication in the facts of this question that the long-term care homes are uninhabitable in their current state, only that the facilities may not be suitable for use as a long-term care home. As a result, this decision does not have an impact on the characterization of the supply.

Question 9C

Does the fact that no one inhabits the home as a long term care home at the time of the transfer affect the characterization of the supply?

CRA Comments

No. A “residential unit” is defined in subsection 123(1) of the ETA to include “a suite or room in a…residence for…seniors, individuals with a disability or other individuals” and that “is vacant, but was last occupied or supplied as a place of residence or lodging for individuals”. A “residential complex” is defined to include that part of a building in which one or more residential units is located, together with the components set out in the definition.

Provided that the long-term care home contains one or more residential units and the care home is, or includes, a residential complex, the fact that individuals no longer reside at the home will not, in itself, affect the characterization of the supply. The supply will be, or include, a residential complex.

Question 9D

Does the fact that the homes cannot be inhabited as a long term care home in the future affect the characterization of the supply?

CRA Comments

No. The facts do not state that the long-term care homes are uninhabitable. While the homes may no longer be suitable for use as long-term care homes, they may be suitable for use as a place of residence in other circumstances (e.g., rooming houses). The fact that they are no longer suitable for use as long-term care homes does not, in itself, mean the care homes are not habitable or that they are, even in their current state, incapable of being used as a place of residence for individuals.

Question 9E

Should the operator charge, collect and remit GST?

CRA Comments

If the supply is that of a residential complex, the supply may be exempt under section 2 of Part I of Schedule V to the ETA if the vendor is not a builder of the complex. If the vendor is a builder of the complex, the supply may be exempt under section 5 of Part I of Schedule V to the ETA.

If the supply is subject to tax, the vendor will be required to collect tax in respect of the sale unless:

the vendor is a non-resident or is a resident only because of the deeming provisions of subsection 132(2) of the ETA, or

the recipient of the supply is registered for the GST/HST (unless the recipient is an individual and the sale is that of a residential complex).

If the vendor is required to collect tax on the supply, the tax must be remitted in accordance with the relevant provisions of the ETA.

Question 9F

Can the operator accept the GST registration number from a buyer and relieve itself of its obligations regarding GST?

CRA Comments

As stated in the previous response, a taxable supply by way of sale of real property to a GST/HST registered recipient will, in some cases, relieve the supplier of their responsibility to collect tax on the supply.

A supplier can check whether a person is registered for the GST/HST on a particular day by accessing the GST/HST Registry at:

http://www.cra-arc.gc.ca/eservices/tax/business/gsthstregistry/menu-e.html

To validate the registration number of a business at the GST/HST Registry, the supplier will need the business name of the purchaser, the GST/HST number, and the date of the transaction in question.

Question 9G

Should the buyer self-asses GST on the transfer from the operator?

CRA Comments

Where a supplier makes a taxable supply by way of sale of real property and, in accordance with the foregoing, the supplier is not required to collect tax on the supply; the recipient will be required to account for tax on the supply.

Question 9H

Can the operator claim imbedded ITCs? If so, on what may the operator claim imbedded ITCs?

CRA Comments

A person who makes a taxable supply of real property by way of sale may be eligible for input tax credits or a rebate. A GST/HST registrant may be eligible for an input tax credit pursuant to section 193 of the ETA, while a person that is not a GST/HST registrant may be eligible for a rebate under section 257 of the ETA. Generally, those sections serve to allow a person to recover tax paid on the acquisition of the property and improvements thereto where the tax paid was not previously recoverable.

The input tax credit under section 193 and the rebate under section 257 are limited to the lesser of the basic tax content of the property at the time of sale and the tax that is, or would, in the absence of section 167 or 167.11, be payable on the taxable supply by way of sale. Where the taxable supply by way of sale is made by a public sector body to another person with whom the public sector body is not dealing at arm’s length, special rules apply to determine the amount of the input tax credit or rebate as set out in subsections 193(2.1) and 257(1.1), respectively.

IMPORTATIONS

Q10 Imported taxable supplies

Facts/Background

Importers of imported taxable supplies of services and intangible property must self-assess GST/HST in respect of such imported taxable supplies, if they are engaged in part in exempt activities.

Question

Assuming that some of the contracts for the imported taxable supplies of services and intangible property are in currencies other than Canadian dollars (let’s say $USD), what are the best practices for such GST/HST registrants to follow (re self-assessment) during periods of currency volatility in order to meet the expectations of the Canada Revenue Agency?

CRA Comments

For GST/HST purposes the CRA has issued Policy Statement P-222: Acceptable Exchange Rate Sources for Converting the Value of Consideration Expressed in Foreign Currency to a Value in Canadian Currency for Purposes of Section 159 of the Excise Tax Act. To convert from foreign currency into Canadian currency for purposes of Part IX of the Excise Tax Act, a person may only use the rate of exchange from:

the source used for an actual conversion (i.e. foreign currency is exchanged for Canadian dollars);
the source the person typically uses for actual conversions;
a Canadian chartered bank;
the Bank of Canada; or
the rate provided by the Canadian Border Services Agency for purposes of converting the value for duty of imported goods.

When a source other than the source used for an actual transaction is selected, that source must be used consistently and for a reasonable period of time (such as one year). The use of a particular exchange rate source must be supported with appropriate documentation.

We have not considered a specific scenario where currency conversion methods would pose a problem, or would not be practical, under the new Division IV imported taxable supply rules. We would be pleased to consider whether or not the above noted methods would be suitable for a company involved in exempt activities that self assesses under these new rules or whether another method such as an averaging method may be suitable once a specific fact circumstance is submitted to us.

Q11 Importers and Customs Notice 07-036

Facts/Background

On December 7, 2007 Canada Border Services Agency issued Customs Notice 07-036. The purpose of this notice is to “remind the importing community that the Business Number (BN) is not to be used by non-commercial importers” and that “casual or one-time commercial importers should be using the BN of their customs broker with a RM account identified for the program under which they are importing”.

According to the Notice, an importer is not required to register for a BN RM account for:

a. Low Value Shipments (LVS)
b. Courier/LVS Program
c. Importation of High Value Non-Commercial (Casual) goods
d. Temporary Importation
e. Convention and Trade Shows

Questions

We are concerned about some positions taken by the Canada Border Services Agency in this Notice and their possible implications on the claiming of ITC by Canadian importers.

1. With respect to (a) Low Value Shipments - Does the Canada Revenue Agency agree that a one-time importer of commercial goods valued at less than $1600 should act as the importer of record for the payment of GST?

2. Assuming the one-time importer is engaged in commercial activities and is registered for GST purposes, would the importer be entitled to claim input tax credits if it used its broker’s GST Number?

3. Is it acceptable to have two importers of record (being the customs broker for customs purposes and the one-time importer for GST purposes)?

4. If the customs broker acts as the importer of record for both custom (RM) purposes and GST (RT) purposes, can the customs broker claim the input tax credits with respect to the goods if the customs broker is merely providing services in respect of the goods and not supplying the goods?

5. With respect to (d) Temporary Importation – Are the statements in Customs Notice CN-036 consistent with the Canada Revenue Agency’s position and practices relating to the application of GST/HST relating to importations of large items such as airplanes that are leased for a period of less than 2 years?

6. With respect to (e) Convention and Trade Shows – Are the statements in Customs Notice CN-036 consistent with the Canada Revenue Agency’s position and practices relating to the application of GST/HST in connection with conventions and trade shows?

CRA Comments

As indicated in the question, the purpose of the Customs notice is simply intended to remind the importing community that Business Numbers are not to be used by non-commercial importers. The notice reflects existing customs policies and is merely intended to reiterate what has been stated in the past with respect to this issue. For instance, the statements made in the notice and referred to in the questions have already been made in Customs D Memorandum D17-1-5 Importing Commercial Goods dated March 28, 2000. The notice was not intended to create any GST/HST consequences. Our understanding is that the statements in the notice are merely being made by the CBSA again at this time through the issuance of the notice due to a recent increase in non-commercial entities applying for Business Numbers. We have, however, requested that the wording of the new introductory paragraph of the notice be clarified to ensure that it is consistent with the stated purpose of the notice.

1. A one-time commercial importer that has its own BN RM account number should be the importer of record. However, if the one-time commercial importer does not have its own BN RM account number, then the customs broker may, as a matter of convenience, act as the importer or record as explained in the notice. As contemplated in question #14, for various reasons it is not always the constructive importer or de facto importer who acts as the importer of record.

2. If the one-time importer is a registrant who uses its broker’s GST number, the importer would be entitled to claim an ITC for the tax on the imported goods provided the goods are imported exclusively for consumption, use or supply in the course of the importer’s commercial activities. We would like to confirm that there is no requirement in section 169 of the Excise Tax Act or in the Input Tax Credit Information (GST/HST) Regulations for the importer’s name and Business Number to be on import documents. As is always the case, to satisfy the requirements of subsection 169(4) of the ETA with respect to the tax on imported goods, the importer must have documentation supporting the fact that it is a recipient of a supply of the imported goods.

3. There can be only one importer of record for customs and GST/HST purposes.

4. The customs broker would not be entitled to an ITC for the tax on the imported goods merely on the basis of having acted as the importer of record. Based on the information provided, the customs broker would not be considered to have imported the goods for consumption, use or supply in the course of its commercial activities. As a result, the customs broker who acts as the importer of record would not be entitled to an ITC under section 169 of the ETA for the tax on the imported goods. For more detailed information regarding the claiming of ITCs for tax on imported goods, please refer to GST/HST Policy Statement P-125R Input Tax Credit Entitlement for Tax on Imported Goods.

5. The question does not identify any specific issue of concern. As previously indicated, the statements made in the notice, including those in paragraph (d) merely reflect existing policies that have been stated in the past and are not intended to have any GST/HST consequences.

6. The question does not identify any specific issue of concern. As previously indicated, the statements made in the notice, including those in paragraph (e) merely reflect existing policies that have been stated in the past and are not intended to have any GST/HST consequences.

Q12 Importers and exporters

Questions

With respect to exported goods, does the Canada Revenue Agency accept that (1) the exporter from Canada and (2) the importer in the foreign jurisdiction can be different persons?

Similarly, does the Canada Revenue Agency accept that (1) the exporter from the foreign jurisdiction and (2) the importer in Canada may be different persons? Can an exporter in a foreign jurisdiction transfer title to goods immediately before customs clearance so that the importer of record may be a registrant for GST purposes?

CRA Comments

The intended context of the general questions is unclear since they do not make reference to any legislative provisions.

With respect to GST/HST, the GST/HST provisions of the Excise Tax Act that relate to the place of supply of goods, the zero-rating of exported goods and the recovery of tax on imported goods, do not specifically require that the exporter and importer, as the case may be, be the same person. Such provisions also do not specifically prohibit the transfer of title from a non-resident exporter to a resident registrant who is the importer of record immediately before customs clearance.

However, whether the evidence in any given case supports the application of these GST/HST provisions is ultimately a verification issue that must be resolved based on a complete set of facts.

Q13 Imports and claims of input tax credit

Facts/Background

A non-resident, non-registrant sells goods on consignment to a Canadian registrant which acts as the importer of record. The non-resident, non-registrant retains title to the goods until the Canadian registrant finds a Canadian customer. At such time title transfers to the Canadian registrant who will immediately resell the goods to its customer.

Question

Will the Canadian registrant be entitled to input tax credits for the GST paid on importation?

Discussion

The Canadian registrant should be entitled to claim input tax credits since the goods are being imported for consumption, use or supply in its commercial activities. What if the non-resident is a GST registrant? Would the non-resident, registrant be regarded as the de facto importer notwithstanding that the Canadian registrant was the importer of record?

CRA Comments

The question indicates that the goods are being imported for sale on a consignment basis. It is assumed for purposes of the following response that the Canadian registrant is not selling the goods as an agent of the non-resident supplier.

Based on the fact that a consignment arrangement is involved, the Canadian registrant who is the importer of record may not have an obligation under an agreement to purchase the goods and may therefore not be a recipient of a supply of the goods when they are imported. If this is the case, the Canadian registrant would not be a recipient of a supply of the goods unless and until it sells them to its Canadian customers. If no supply of the goods was made to the Canadian registrant before the goods are imported, there would be no specified supply of the goods made to the Canadian registrant for purposes of section 178.8 of the Excise Tax Act (ETA) and the Canadian registrant would consequently not be a constructive importer of the goods. Since the Canadian registrant is not a recipient of a supply of the goods when they are imported, the Canadian registrant would not be considered to have imported the goods for consumption, use or supply in the course of its commercial activities for purposes of section 169 of the ETA. It is rather the non-resident supplier who owns the goods in this case who would be considered to be the de facto importer who imported the goods for supply in the course of its commercial activities.

Based on the information provided, the non-resident could be considered to be carrying on business in Canada for GST/HST purposes based on the fact that there is an inventory of goods for sale in Canada, delivery of the goods that are eventually supplied by the non-resident occurs in Canada and the non-resident solicits orders in Canada. As a registrant, the non-resident supplier who is the de facto importer would be entitled to claim an ITC for the full amount of tax paid on the importation of the goods if it obtains a copy of the import documentation from the Canadian registrant.

Although the Canadian registrant would not be the de facto importer as explained above, provided the non-resident does not claim an ITC for the tax on the importation of the goods, the Canadian registrant who is the importer of record and thus has the import documentation may administratively claim an ITC for the tax on the importation of the goods on a gradual basis as it purchases the imported goods and becomes a recipient of a supply of the goods. This will avoid the need, as the case may be, for the Canadian registrant to pass on the import documentation to the non-resident supplier to support the claiming of an ITC.

We would like to confirm that subsection 215.1(1) of the ETA that provides for a rebate of Division III tax paid on goods imported on consignment could apply in a case such as this where all of the relevant requirements of the ETA have been met (such as the requirement that the goods be exported by the importer within 60 days after their release for the purpose of returning them to the supplier).

Q14 Imports and claims of input tax credits

Facts/Background

A non-resident, non-registrant agrees to sell goods to a Canadian resident Delivered Duty Paid ("DDP") destination. As defined in Incoterms 2000, DDP means that the seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination.

Because the non-resident does not have a Canadian Business Number, it arranges for its Canadian affiliate to act as the importer of record and pay GST under Division III of the Excise Tax Act. The Canadian affiliate is not a party to the transaction and is reimbursed by the non-resident for the tax paid on importation.

Question

Who is entitled to claim input tax credits for the Division III tax?

Discussion

It would appear that the Canadian purchaser should be the person entitled to claim the input tax credits as the "de facto" importer. Alternatively, the Canadian purchaser should be entitled to claim the input tax credits under the flow through provisions in section 180 so long as the parties can establish that the Canadian affiliate acted as an agent for the non-resident and the Canadian purchaser has been provided with a copy of the B3.

CRA Comments

Based on the information provided, the Canadian affiliate would be considered to have imported the goods, and to have paid the tax, on behalf of the non-resident non-registrant for purposes of section 180 of the Excise Tax Act (ETA). As a result, if satisfactory evidence that the tax has been paid on the importation (a copy of the B3) is provided to the Canadian purchaser, based on the application of section 180 of the ETA, the Canadian purchaser would become entitled to an ITC for an amount equal to the tax paid on the importation.

Q15 GST Registration & T2 Returns

Facts/Background

My understanding is that the Canada Revenue Agency has a Non-Filer Program, which typically examines situations in which GST registrations have been effected by non-residents of Canada, but no T2 income tax returns are being filed.

The test for “carrying on business” in the GST context differs slightly than that in the “income tax” context, the former being broader, and also allowing for voluntary registration in certain instances.

Question

Can you provide further information about the Canada Revenue Agency’s Non-Filer Program, including its mandate, and provide information or examples of situations where you regard non-residents to be properly registered for GST purposes, yet not “carrying on business” for income tax purposes (and thus not required to file T2 returns).

CRA Comments

NF/NR's mandate is to address outstanding returns as well as non-registrants. The bulk of our program (Non-Filer/Non-Registrant) works on non-filing T1/T2 and T3 clients. A small portion of our workload is dedicated to identifying and registering any business that is operating without being registered for GST but should be registered. The International Tax Services Office (ITSO), is responsible for our non-resident clients.

Since we do not know the population of businesses that should be registered for GST, this workload can not be automated and therefore all of this work is completed through projects. The grand majority of our registrations come from a team we have in the Summerside TC who annually run a match of the T2 database and the T1 self-employed (with gross income over $30K) against the GST database. This produces a listing which they further work to eliminate doctors, residential rent etc. They then contact the remaining entities and determine if they should be registered.

A non-resident corporation who does business with Canada but not in Canada may be properly registered for the GST because they import into Canada but need not file a T2 tax return. If they are doing Business "with" Canada and not "in" Canada there is no need to send in a T2 Return.

A non-resident who does business with Canada, is not operating in Canada, does not have a fixed base or permanent establishment in Canada therefore, would not have any tax liability in Canada.

If NF/NR identifies a non-resident that is registered for GST, we will investigate to determine if the client is operating in Canada or "with" Canada. If we can determine that the non-resident is operating with Canada, no further action will be taken in relation to outstanding tax returns. However, if we are unable to determine the GST information (operating in or with Canada), we will contact the non-resident in order to provide information relating to the GST information.

ADMINISTRATION

Q16 Administration

Facts/Background

The reorganization and reduced role of the Business Window and the removal of the ability to contact CRA by phone for GST domestic registration purposes is problematic. While the general 1-800 number may be helpful for general inquiries, there are serious issues in many areas, particularly with respect to obtaining a GST/HST registration number. Generally, it takes 10 business days to obtain a registration. Once the Request for Business Number is sent in, we are unable to call to confirm receipt or confirm that the registration will be completed on an expedited basis, where such is required, given that we no longer have the relevant contact information (the Business Window can only confirm whether the person is registered). The same issue applies with respect to the filing of a Business Consent form.

Question

Will the CRA revisit the issue of making specific CRA contact information publicly available?

CRA Comments

With the introduction of Business Number (BN) partnerships with a number of provinces, the process for registering a business has changed. Historically, newly incorporated companies would deliver their articles of incorporation to their Tax Services Office where a Business Enquiries Agent would create their BN. Today the process for obtaining a BN varies depending on the type of legal entity that is being registered.

Sole Proprietors and Partnerships

A sole proprietor can request a BN by contacting the Business Enquiries toll-free number provided they have the necessary information on hand at the time of the call to complete the registration process. In addition to obtaining a BN, a sole proprietor can also add their required programs accounts to the BN at the time of the call (i.e payroll account, GST account, etc).

The above also applies to a partnership that is requesting a BN over the phone. The registration process for a corporation seeking to obtain a BN can be a more complicated process and, at times, may not be completed at the time of the phone call. The registration process for corporations to obtain a BN will vary depending on which jurisdiction registered the corporation.

Corporations

Using the Province of Ontario as an example, the following outlines the process for creating a business number for a newly incorporated company. Since October 2007, Ontario sends information about newly created corporations electronically to CRA to create a BN and RC0001 account. This process may take up to 72 hours to complete to ensure that no duplicate accounts are created. The CRA BN registration confirmation notice is mailed to the taxpayer following the creation of the BN.

In situations where the BN is urgently needed, a listed director of the company can contact the Business Enquiries toll free number. Agents will apply confidentiality procedures to determine if the caller is a listed director/owner as per the registration information. If the BN has been created, the agent can then provide the number to the caller. Once the BN has been created in the CRA system, any required program accounts (i.e. payroll, GST, etc) can be added to the BN during the course of a telephone call.

CRA agents cannot provide the BN to unauthorized parties though. In most circumstances of this nature, the BN may have been created, but a signed consent form authorizing the representative is yet to be received or processed. Although an unauthorized third party cannot be provided with the actual BN of an existing corporation, if they already have the number and are calling to ask the CRA to add a program account such as a GST/HST account, this can be done.

Business Enquiries agents cannot manually create Business Number accounts for Ontario corporations using articles of incorporation provided by the company.

Industry Canada (Federal Corporations)

Corporations created by Industry Canada are automatically registered in BN on a daily basis. CRA generates a BN and an RC0001 program account for the new registrant and sends an electronic message to advise Industry Canada. A CRA registration confirmation notice is mailed to the registrant advising of the BN within 5 days. If the registrant cannot wait for receipt of their BN information in the mail, an agent can perform a search to obtain the BN. If the BN is available, the agent can add the required program accounts. If unable to locate the BN, the corporation must submit a copy of the Certificate of Incorporation (not a Certificate of Amendment) to register a BN via the BNS unit in the TC. Alternatively, BNS can obtain information from a report or profile of the corporation issued via the Internet from the incorporating authority.

Such reports must clearly show who the incorporating authority is, include the exact name, date, and certificate number of the corporation, and also include the name of at least one director of the corporation.

Services Performed in Business Number Services Units in Tax Centres

The BNS units process bulk inventory and public contact with the BNS clerks is not and never has been available.

Business Number registration forms, RC1, RC1A, RC1B and RC1C, received at tax centres (applicable to the Prince Edward Island, Newfoundland and Labrador, Quebec, Saskatchewan, Alberta, Nunavut and the territories) are processed by clerks in the Business Number Services (BNS) units located in each of the tax centres. The processing performance standard for these forms is 95% of all forms received within ten days of receipt at the tax centre.

The BNS clerks primarily process 95% of properly completed RC59 Business Consent forms within 10 days or receipt at the tax centre.

For security of information reasons, incomplete RC59s are returned to the business. The main reason for returning the RC59 to the business is the absence of owner information in BN used to corroborate the owner information noted on the form.

Q17 Erosion of the GST recovery on the use of the administrative factor

Facts/Background

As a consequence of the two-stage GST rate reductions from 7% to 6% and then to 5%, the GST recovery rate for reimbursed expenses using the tax factor has dropped from 6/106 of the total expense to 4/104 of the total expense. However, registrants who apply the tax factor of 4/104 to reimbursed expenses on which GST was paid at 5% forego approximately 13% of the GST incurred compared to approximately 7% using a 6/106 factor for GST paid at 7%.

Question

Does the CRA intend to review and revise these tax factors to redress the erosion of ITC available to registrants? For example, a tax factor of 8/195 applied to an expense including GST at 5% would approximate the 7% of foregone GST that arose using the tax factor of 6/106.

CRA Comments

Subsection 169(4) of the Excise Tax Act (ETA) establishes the information that is required to support the ITC claim.

Subsection 169(5) of the ETA provides the Minister the authority to exempt specified registrants or specified classes of registrants from any of the requirements provided for under subsection 169(4). In accordance with such ministerial authority, the CRA may permit a person to opt for the factor method to calculate that person’s deemed tax paid on reimbursed expenses.

GST/HST Memorandum 400-1-2 Documentary Requirements states that specified registrants may choose either the factor method or use the exact calculation method to calculate the eligible ITC in relation to reimbursements for expenses incurred in Canada. Registrants who choose to use the exact calculation method are subject to the documentary and information requirements prescribed under subsection 169(4) whereas those choosing the factor method will be exempt from these requirements, pursuant to subsection 169(5).

CRA’s policy intent with respect to the factor method is an administrative approach, which relieves registrants from the burden of obtaining full documentary evidence, required under subsection 169(4) of the ETA when determining their ITC entitlement on reimbursed amounts under subsection 169(1) of the ETA.

The factors of 4/104 and 12/112 were recently developed and introduced for use by registrants to calculate the deemed tax paid in respect of reimbursements paid on or after January 1, 2008. The choice of the factor method is an option for the registrant. Registrants may choose to use the exact calculation method.

MERGER AND ACQUISITION

Q18 Merger and Acquisition Services

Facts/Background

In GST Policy Statement P- 239: Meaning of the Term “Arranging For” as Provided in the Definition of “Financial Service”, the CRA reasoned that merger and acquisition services would be considered an exempt financial service in situations where the service provider assists in identifying buyers who would be interested in acquiring the shares of a corporation, with the service provider analyzing, structuring, negotiation and effecting the sale of the transaction:

The service provided by M&A Co. falls within the meaning of the term "arranging for" in paragraph (l) of the definition of financial service. At the time the agreement is entered into, it is unknown whether M&A Co. is providing a service with the intent of making a supply of a service described in paragraphs (a) to (i) of the definition of "financial service" therefore the elements necessary for the service to qualify as a service of "arranging for" may not be present. However, when M&A Co. receives the additional fee, it is known that the sale was consummated by selling the shares of the subsidiary. Therefore, the service provided by M&A Co. to XYZ Company contains the elements necessary for the service to fall within the meaning of the term "arranging for" in paragraph (l) of the definition of financial service.

Question A

Could the CRA confirm that merger and acquisition services of the type described in P-239 would not be excluded from qualifying as a “financial service” in situations where the recipient of the service is the class of entity referenced in paragraph (q) of the definition of “financial service”?

CRA Comments

The term “merger and acquisition services” is not defined in the Excise Tax Act (ETA), and can include a broad range of services. As this term is used in a general business context, it might or might not refer to a supply of a service or services that fall within the meaning of the term “arranging for” a financial service under paragraph (l) of the definition of financial service in subsection 123(1) of the ETA. GST/HST Policy Statement P-239 provides that in certain circumstances, merger and acquisition services could fall within the meaning of the term “arranging for” in paragraph (l). Where the recipient of the service of “arranging for “ a financial service under paragraph (l) is an investment plan (as defined in subsection 149(5)) or a corporation, partnership or trust whose principal activity is the investing of funds, the service may be excluded from the definition of financial service by paragraph (q). Whether paragraph (q) would apply in this situation depends on the nature of the supply and the activities of the supplier. It is important to note that paragraph (q) will apply where the supplier is a person who provides management or administrative services to the investment plan, corporation, partnership or trust unless the particular service being provided is a prescribed service as set out in the Financial Services (GST/HST) Regulations.

Question B

As the application of paragraph (q) depends on whether the “supplier is a person who provides management or administrative services” to the recipient, would paragraph (q) apply in situations where the supplier is only providing merger and acquisition services to the recipient?

CRA Comments

As noted above, merger and acquisition services can include various different elements. A provider of such services might or might not be considered to be providing management or administrative services for purposes of paragraph (q) of the definition of financial services in subsection 123(1) of the ETA depending on the particular facts of the situation, for example the specific services provided and whether there were single or multiple supplies.

Question C

In light of the Royal Bank case (2007 FCA 72), could the CRA also comment on its views as to what constitutes a “management or administrative service”.

CRA Comments

The term “management or administrative services” is not defined in the ETA. Accordingly, in interpreting this phrase in paragraph (q) of the definition of financial service in subsection 123(1) of the ETA, the CRA would be guided by the general meaning of the term within the context of the provision.

HEALTH CARE SERVICES

Q19 Subcontracted Diagnostic Services

Facts/Background

Section 10 of Part II of Schedule V to the ETA exempts a prescribed “diagnostic, treatment or other health care service” that is made on the order of a medical practitioner or practitioner:

10. A supply of a prescribed diagnostic, treatment or other health care service when made on the order of a medical practitioner or practitioner.

Question

Could the CRA confirm that the above-noted exemption would apply with respect to prescribed diagnostic services that are requisitioned by a medical practitioner, the performance of which is being subcontracted to a third party service provider? For example if Patient A acquires an exempt diagnostic service from Hospital B in the situation where Hospital B subcontracts the performance of the service to Hospital C, does section 10 apply to exempt the services in which Hospital C provides to Hospital B.

CRA Comments

Section 10 of Part II of Schedule V to the Excise Tax Act (ETA) exempts a supply of a health care service prescribed by regulation when made on the order of a medical practitioner (physician or dentist) or a practitioner (optometrist, chiropractor, physiotherapist, chiropodist, podiatrist, osteopath, audiologist, speech-language pathologist, occupational therapist, psychologist, dietitian, or midwife). This section is limited to the services described in the Healthcare Services GST/HST Regulations (the Regulations), which are laboratory, radiological or other diagnostic services generally available in a health care facility.

The Regulations restrict the exemption to diagnostic services that are of the type generally available in a health care facility (a hospital). A diagnostic service is a test, study or analytical procedure, including an examination of specimens derived from the human body or the examination of images of the human body, together with the necessary interpretations that is used to assist a medical practitioner or practitioner in the diagnosis of a disease and formulating a course of treatment.

A diagnostic service contains several constituent elements. These constituent elements generally include both technical and professional components. The CRA would evaluate the supply made by Hospital C with reference to the following constituent elements of a diagnostic service to determine whether section 10 of Part II of Schedule V would apply:

Providing the premises, equipment, supplies and personnel for all elements of the technical and professional components;
Preparing the patient for the diagnostic service;
Performing the test, study or analytical procedure, including any clinical procedure associated with the diagnostic service;
Providing clinical supervision, including approving, modifying and intervening in the performance of the test, study or analytical procedure and quality control of all elements of the procedure;
Monitoring and intervening if necessary after the test, study or analytical procedure;
Preparing and providing records of the results of the test, study, or analytical procedure to a medical practitioner;
Interpreting the results of the test, study or analytical procedure, which is generally performed by a medical practitioner;
Discussion with the patient on matters related to the diagnostic service; and
Preparing and transmitting a written, signed and dated interpretative report of the diagnostic service to the referring medical practitioner or practitioner.

If all the constituent elements of a diagnostic service were present, this would suggest that Hospital C supplied a diagnostic service. If Hospital C made the supply on the order of a medical practitioner or practitioner, then this supply would be exempt under section 10 of Part II of Schedule V.

The CRA would also consider whether other exempting provisions of the ETA would apply to the supply made by Hospital C, including situations where the supply is not exempt under section 10 of Part II of Schedule V. For instance, if Hospital C were a public institution as defined in the ETA; i.e., it is a registered charity under the ITA and a hospital authority under the ETA, an exempting provision covering supplies made by public institutions may apply. For instance, the services supplied by Hospital C might fall within the exemption set out in section 2 of Part VI of Schedule V.

On February 26, 2008, the Minister of Finance announced a proposed amendment to section 10 of Part II of Schedule V. Proposed section 10 would apply to prescribed diagnostic services rendered to an individual and would expand this section to include prescribed diagnostic services that are ordered by registered nurses where the order is made within a nurse-patient relationship. This proposed amendment applies to supplies made after February 26, 2008.

NON PROFIT ORGANIZATION

Q20 Public sector bodies/non-profit organization

Facts/Background

What is meant by the phrase "a particular non-profit organization established primarily for the benefit of organized labour" in Section 26, Part VI, Schedule V to the ETA? Please provide an example of such an organization. For example, would a not for profit organization that promotes health and safety at work programs to employers at large be included in the scope of the section?

Question

Certain not-for profit organizations that are "established primarily for the benefit of organized labour" may exempt supplies to certain member or affiliate organizations, such as trade unions, associations and similar entities under the exempting provision contained in Section 26, Part VI, Schedule V to the Excise Tax Act. The explanatory notes accompanying this provision would appear to limit this exemption to organizations that are directly involved in similar activities; however, there is no additional guidance provided in either the legislation or administrative materials on what type of organization would be considered included as "established primarily for the benefit of organized labour".

CRA Comments

The Canada Revenue Agency has not previously been asked to provide guidance on the meaning of the phrase “a particular non-profit organization established primarily for the benefit of organized labour” as contained in section 26 of Part VI of Schedule V to the ETA. Therefore we would invite you to submit a specific fact based situation for our consideration.

PENALTY/INTEREST

Q21 Deductibility of Penalty

Question

Will 6% penalty arising under former section 280(1) continue to be deductible where arising in the course of earning income, potential changes to draft regulation 7309 notwithstanding?

CRA Comments

Q22 Wash Transactions

Question

Is the Minister presently reducing interest on wash transactions to 4%? If so, will this treatment automatically applied by auditors to qualifying transactions at the time of audit, or will interest be assessed at the full rate and reduced subsequently upon application?

CRA Comments

Effective April 1, 2007, the 6% penalty imposed under subsection 280(1) was repealed for reporting periods ending on or after April 1, 2007. The rate of interest applicable to these same reporting periods has also changed.

Where a "wash transaction" has occurred, the Minister will consider waiving or cancelling the portion of penalty and/or interest payable at the time of assessment that is in excess of 4% of the GST/HST not properly collected by the supplier. The Minister will consider the reduction of interest and/or penalties on wash transactions automatically during an audit.

The 4% penalty and/or interest owing is payable by the registrant in addition to the GST/HST assessed.

LEASING

Q23 Trade-In Rules

Facts/Background

The wording of the subsection 153(4) appears to require that the person supplying TPP be the same person who accepts the used TPP, at the time of the supply.

An issue appears to arise with leases involving a lessee, a financing company and a dealer. The lessee enters into a lease of TPP with the financing company and receives a credit against the lease for trading in used TPP. The used TPP, however, is given to the dealer. The financing company concurrently purchases the new TPP to be leased from the dealer, less the credit given on the used TPP.

Subsection 153(4) provides as follows:

153(4) Used tangible personal property trade-ins — Where, at the time a supplier makes a supply of tangible personal property to a recipient, the supplier accepts, in full or partial consideration for the supply, other property (in this subsection and subsection (5) referred to as the "trade-in") that

(a) is used tangible personal property or a leasehold interest therein, and

(b) is acquired for consumption, use or supply in the course of a commercial activity of the supplier,

and the recipient is not required to collect tax in respect of the supply of the trade-in, the value of the consideration for the supply made by the supplier is deemed, for the purposes of this Part, to be equal to the amount, if any, by which the value of the consideration for that supply (as otherwise determined under this Part) exceeds

(c) except where paragraph (d) applies, the amount credited to the recipient in respect of the trade-in, and

(d) where the supplier and the recipient are not dealing with each other at arm's length at the time the supply is made and the amount credited to the recipient in respect of the trade-in exceeds the fair market value of the trade-in at the time ownership thereof is transferred to the supplier, that fair market value.

Question 23A

Do the subsection 153(4) “trade in” rules apply where the person supplying tangible personal property (“TPP”) is not the same person accepting used TPP in trade?

CRA Comments

The preamble to 153(4) states, “Where, at the time a supplier makes a supply of tangible personal property to a recipient, the supplier accepts, in full or partial consideration for the supply, other property…” Therefore, “trade-in” rules do not apply where the person supplying tangible personal property (or a leasehold interest therein) is not the same person accepting used TPP in trade. In addition, the trade-in approach applies only to the recipient of tangible personal property who is supplying used tangible personal property as full or partial consideration to the supplier.

Question 23B

Do the trade-in rules apply to the lease between the financing company and the lessee (assuming all the other conditions of subsection 153(4) are met)? It appears that the person supplying the TPP to the lessee (i.e., the financing company) is not the person who “accepts” the used TPP (i.e., the dealer).

CRA Comments

Based on the information provided above and subsequent correspondence between the CRA and the CBA regarding this scenario, we understand that:

i. The financing company enters into the lease of TPP with the lessee;
ii. The dealer accepts the trade-in of used TPP from the lessee;
iii. The lease and trade-in transactions are accounted for in separate documents/agreements; and
iv. The dealer and financing company are not acting as agent for the other in any of the transactions.

Based on our understanding of the scenario described and pursuant to our response to the preceding question, the trade-in rules under subsection 153(4) do not apply to the lease of the TPP between the financing company and the lessee. The trade-in rules do not apply where the person supplying the TPP (in this scenario, the financing company) is not the same person accepting the used TPP in trade (in this scenario, the dealer).

ACCOUNT RECEIVABLE

Q24 Assignment of Conditional Sales Agreement and Section 222.1

Facts/Background

A Dealer enters into a conditional sales agreement (“CSA”) with a Customer in respect of the sale of construction equipment. The Dealer assigns the CSA to A Co, a finance company. The Dealer charged and collected GST from the Customer on the sale of the equipment, but has not yet remitted such GST to the Canada Revenue Agency.

Question

Does section 222.1 of the Excise Tax Act apply to the assignment of the CSA (i.e., is a CSA an account receivable), such that A Co can acquire the CSA free and clear of any GST liability.

Analysis

An account receivable is a debt security (i.e., a right to be paid money that is not contingent). A CSA is also a debt security that is not contingent and, therefore, should also be included in the definition of an account receivable for purposes of section 222.1 of the Excise Tax Act.

CRA Comments

A conditional sales agreement (CSA) has not been defined but, for purposes of this question, is assumed to mean an agreement in which the buyer receives possession of property but only receives title to the property upon the performance of a condition, the payment of the purchase price.

The CRA considers such CSAs to be “debt securities” included in the definition of “financial instrument” found in subsection 123(1) of the Excise Tax Act (ETA). Further, the CRA is of the view that section 222.1 of the ETA applies to the assignment of the CSA by the Dealer to A Co.

Where A Co. acquires the CSA from the Dealer, A Co. will not be liable to remit any GST/HST related to these CSAs under paragraph 222.1(b) of the ETA.

Pursuant to subsection 222(1) of the ETA, the Dealer is deemed to hold the amount of GST that it collected from the Customer in trust for Her Majesty in right of Canada until the amount is remitted to the Receiver General or withdrawn under subsection (2).

TAX REMITTANCE

Q25 Tax remittance/assessment

Facts/Background

Client fails to file some GST returns. CRA issues an assessment based on prior years' information. I file a Notice of Objection. Meanwhile, client files GST returns showing zero net tax.

Months later, an Appeals Officer calls me to say that the returns filed have cancelled the assessment, which was a "notional assessment" issued by Collections, not an audit assessment. He says that, as a result, he will write to me to confirm that the assessment was cancelled and there's nothing left to do (though of course Audit may still pick up the file and audit it in future).

Question

The letter from the Appeals Officer doesn't formally vacate the assessment. Nor has a revised assessment been issued following the client filing the returns. Legally, it seems that the initial assessment is still valid, even though administratively it's considered to be cancelled. How can I advise my client to rely on the Appeals Officer saying that the so-called "notional" assessment has been overridden by filing the returns?

CRA Comments

A “notional assessment” is an assessment issued under subsection 296(1) of the Excise Tax Act (the Act), with the authority of subsection 299(1) to allow the CRA to issue an assessment where no return has been filed.

According to subsection 299(3) of the Act, an assessment, subject to being vacated on objection or appeal, and subject to a reassessment, is be deemed to be valid and binding. Therefore, the “notional assessment” is valid until it is vacated on objection or appeal, or it is reassessed.

Under subsection 299(1) of the Act, the CRA is not bound by any return, including a return received for a reporting period after a notional assessment for that reporting period has been issued. However, should the CRA accept the return as filed, then a reassessment is required and, under subsection 300(1), a Notice of (Re) Assessment is required to be sent.

However, the CRA is aware that Notices of (Re) Assessment are not always being sent where a “nil” return for a reporting period has been accepted as filed, subsequent to a notional assessment having been issued for that same reporting period. The CRA is in the process of determining possible solutions. In the interim, a person may contact the Appeals Division of the local tax services offices and request a reassessment.

INPUT TAX CREDIT

Q26 Requirements in order to claim input tax credit

Facts/Background

The TCC and the FCA have confirmed (in Systematix and other cases) that a registrant must meet the specific requirements in the Input Tax Credit (GST/HST) Information Regulation in order to qualify to claim an input tax credit, by virtue of subsection 169(4). There is, however, no reference to the requirements in subsection 169(4) or the Regulation to claims for rebates under Part IX, and accordingly, there appears to be no legal basis for the Minister to disallow a rebate claim due to a lack of the technical supporting documentation set out in the Regulation. Nevertheless, it is reasonable that the Minister can require some level of documentary support for a rebate claim by virtue of section 299.

Question

Please comment on the documentary requirements that CRA would propose to apply on a rebate application, and whether it would propose to apply the strict tests in Systematix and other similar cases to a rebate claim.

CRA Comments

Paragraph 169(4)(a) of the Excise Tax Act (ETA) and the Input Tax Credit Information Regulations only apply to the documentary requirements for claiming input tax credits and do not apply to rebates.

Ss. 286(1) of the ETA provides that very person who makes an application for a rebate shall keep records in such form and containing such information as will enable the determination of the amount of any rebate or refund to which the person is entitled. Provisions applicable to various types of rebates are contained in Division VI of Part IX of the ETA (Sections 252 to 264). Each of these sections provide for certain filing requirements to claim the rebates, including requirements to provide prescribed information.

Section 262 of the ETA sets out the application requirements in respect of rebates under Division VI whereby it requires an application for a rebate to be made in prescribed form containing prescribed information and to be filed with the Minister in prescribed manner. For a rebate application form or the manner of filing that form, “prescribed” means authorized by the Minister. In the case of information to be given on a form, “prescribed” means specified by the Minister.

For example, GST/HST 189 General Application for Rebate of GST/HST includes the requirement to provide an original document and is, thus, a part of the prescribed information. Further, in Part F of the same form, the applicant is required to certify that in addition to any documents submitted with the rebate application, books, records, and invoices are available for inspection hence bringing all these under the gamut of prescribed information.

Q27 Audit, Assessment and ITCs

Facts and background

Assume that a taxpayer signed a waiver in 2007, allowing the CRA to go back beyond the four years period. The auditor intends to assess GST back to 2002. The auditor would refuse ITCs on the ground that the taxpayer did not have the prescribed information on hand at the time he claimed its ITCs from 2002 to 2007. We have seen a few cases similar to the one above where the auditor advised the taxpayer that he could claim back its ITCs in its next tax return (even for the years 2002 and 2003, which are prescribed!).

Question

Please comment on the position taken by the auditor, i.e. the taxpayer is entitled to claim ITCs back to 2002 in its next tax return? We found no comfort in Section 225 of the ETA. Could such claim be based on Subsection 296 (4) of the ETA? Is there an administrative position taken by the CRA on such an issue?

CRA Comments

Pursuant to paragraph 225(4)(b) of the Excise Tax Act (ETA) an ITC for a “particular reporting period” must generally be claimed by a person who is not a specified person in a return filed by the person on or before the due date of the return for the last reporting period of the person that ends within four years after the end of the “particular reporting period”.

The CRA considers the “particular reporting period” to be the reporting period in which the ITC first became claimable. This interpretation of the term “particular reporting period” is consistent with the application of sections 169, 225 and 296 of the ETA. CRA’s position is that subsection 296(2) of the ETA permits the CRA to allow only ITCs for the “particular reporting period” (i.e., ITCs that first became claimable in that same period).

As a general answer to the fact situation described above, the auditor would deny the ITCs claimed from 2002 to 2007 since the taxpayer did not meet the documentary requirements as per subsection 169(4) of the ETA on hand at the time it claimed its ITCs. Since the above question is not very clear, Audit cannot comment on this further.

SUPPLEMENTAL QUESTIONS

Question 28

At the 2005 GST Q&A Round Table between the CRA and CBA, GST & Excise Tax Section, the CRA expressed doubts about whether physical possession of fungible intermingled (untraceable) continuous transmission commodities (“CTCs”) could truly be said to have been transferred from a registered supplier to the consignee for the purpose of the GST drop-shipment rules under section 179 of the ETA. We understand that the CRA still has not expressed a definitive view on this issue and is currently reviewing it. Given the purpose of the GST drop-shipment rules, the ETA’s special treatment of CTCs as unique forms of tangible personal property and the Federal Court of Appeal’s decision earlier this year in Tenaska Marketing Canada v. Canada (2007 FCA 223), affirming the Federal Court’s decision (2006 CarswellNat 1244) allowing this special treatment, the application of the GST drop-shipment rules would appear reasonable in the circumstances.

a. Would the CRA confirm that where a supplier registered for the GST transfers CTCs within Canada by pipeline, wire or other conduit, on behalf of an unregistered non-resident, to another registered person, the consignee could provide a GST/HST drop-shipment certificate to the supplier to relieve the supplier from charging and collecting GST/HST on its sale of the CTCs to the non-resident pursuant to subsection 179(2) of the ETA?

b. Would the CRA confirm that the response to (a) above would not change if the CTCs are transported outside Canada during part of the journey and section 144.01 of the ETA deems the CTCs “not to be exported or imported in the course of that transportation”?

CRA Comments

a. A drop-shipment certificate may not be issued in this case. The issue of whether section 179 can apply to supplies of CTCs in a case such as this has benefited from considerable discussion during previous meetings. The question refers to a response that we provided regarding this issue during our meeting in 2005. However, we also provided a response regarding this issue at our subsequent meeting in 2006. Specifically, our response to question #28 for our meeting in 2006 stated that our position was that the drop-shipment provisions require the transfer of physical possession of the same tangible personal property between the parties and that those provisions consequently do not apply to supplies of CTCs that are completely commingled. Our position regarding this issue remains unchanged.

b. The Federal Court of Appeal’s decision in Tenaska Marketing Canada v. Canada (2007 FCA 223), nor the application of section 144.01 of the ETA, have any impact on the application of the drop-shipment provisions in section 179 of the ETA.

Question 29

Assume that, but for subsection 177(1.2) of the ETA, a registered supplier would make taxable supplies of goods sold at auction in Canada. For the purposes of Part IX of the ETA, except section 180, subsection 177(1.2) deems the registered auctioneer, who sells the goods on behalf of the supplier (and not the supplier), to make the taxable supplies of the auctioned goods to the recipient of the supplies. Since subsection 177(1.2) deems the auctioneer to have made the taxable supplies of the auctioned goods for the purposes of sections 141.01 and 169, would the supplier still be eligible to claim ITCs for taxable business inputs acquired for consumption, use or supply of the goods sold at auction (e.g., ITCs for the acquisition of the goods)?

CRA Comments

All legislative references are to the ETA, unless otherwise stated. It is assumed that your reference to “goods” is a reference to tangible personal property (TPP), which is the type of property that is affected by subsection 177(1.2).

Since you state that the principal is a registrant making taxable supplies for consideration, it may be eligible to claim an ITC for that GST/HST paid on the acquisition of the tangible personal property. Subsection 141.01(7) states in part that, for purposes of Part IX, where provisions deem a supply not to have been made by a person, that deeming shall not apply for the purposes of any of subsections 141.01(1) to (4). Therefore the principal would be regarded as having acquired such property or service for consumption, use or supply in the course of its commercial activities for purposes of subsection 141.01(2). Consequently, the principal may be eligible to claim an ITC on the GST/HST paid or payable on such property or service or, where applicable, on the basic tax content of the property at that time, provided the principal meets all the requirements of section 169.

Question 30

As part of the Standardized Accounting initiative the CRA began issuing a notice of assessment in respect of every filed GST/HST Return processed after April 1, 2007. This practice has ramifications for the ability of registrants to claim a rebate under section 261 of the ETA given that paragraph 261(2)(a) prevents a rebate for tax paid in error from being paid, to the extent that the amount was taken into account as tax or net tax for a reporting period of the person and the Minister has assessed the person for the period under section 296.

Based on the current wording of the legislation, the only way for a registrant to, in effect, claim a section 261 rebate, is to object to the assessment so that the Minister takes into account the allowable rebate. However, it is often the case that the registrant does not discover that it has paid or remitted tax in error until after the 90 day period for filing an objection has expired. As such, the CRA's practice of automatically assessing returns appears to have unintentionally reduced the 2 year period for claiming rebates under section 261 to roughly 90 days.

Please confirm that pending a legislative amendment by Finance, that the CRA will take whatever steps are necessary to preserve the 2 year limitation period by either (i) agreeing to accept and reassess amended returns to give registrants the benefit of the allowable rebate (ii) agreeing to automatically agree to requests to extend the time period for filing a Notice of Objection to allow a registrant to file an objection and require the Minister to give the benefit of the allowable rebate by way of reassessment, or (iii) by some other "administrative fix".

CRA Comments

Under subsection 301(1.1) of the Excise Tax Act (ETA) any person who has been assessed and who objects to the assessment may, within 90 days after the date the notice of assessment is sent to the person, file a notice of objection. Section 303 allows the Minister to accept a notice of objection beyond the 90 days. Currently, the Minister allows a notice of objection to be filed within one year of the notice of assessment being issued to the person.

Alternatively, the person who has been assessed for a reporting period may request a reassessment pursuant to subsection 296(1) of the ETA. Subsection 298(1) requires that the reassessment be made within four years after the later of the day the return was required to be filed and the date the return was filed.

AUDIT HOT ISSUES

The following is a list of common issues arising in audits

Non-remittance of GST/HST associated with bad debt recoveries
GST/HST on additional rents – lease escalations, expenses billed to tenants under Terms of lease
Foreign currency translation, in particular the practice of retro-actively re-stating transactions engaged in foreign currency using more favourable exchange rates for GST purposes.
Input tax credits
- Retro-active changes to allocation methodologies and application of subsection 225(3) of the Excise Tax Act
- Reasonableness of allocation methods
- Lack of sufficient documentation to support ITC’s claimed
Input tax credits related to pension plan expenses –
- Application of TIB-032R
Loyalty Programs
Accounting and data accumulation errors
Residential Care Facilities
- We will be working to develop assessing positions as required in response to the FAC decision in “North Shore Health Region”

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26 February 2008 CBA Roundtable

FINANCIAL INSTITUTIONS, LATE ELECTION AND ASSESSMENT

Q1 Late Filed Elections Under Subsection 225.2(4) of the ETA

Facts/Background

Question

CRA Comments

Q2 Determination of Competent Authority and GST Recovery

Facts/Background

Question 2

CRA Comments

VOLUNTARY DISCLOSURE

Q3 No- Names Voluntary Disclosure

Facts/Background

Question

CRA Comments

Q4 Voluntary Disclosure – “One Year” Rule Etc.

Facts/Background

Question 4A

CRA Comments

Question 4B

CRA Comments

Q5 Voluntary Disclosures

Facts/Background

Question

CRA Comments

ASSESSMENT

Q6 Audit/ Summary of assessment

Facts/Background

Questions

CRA Comments

Q7 Limitation periods for assessment/reassessment

Facts/Background

Question

CRA Comments

REAL PROPERTY

Q8 The Agency’s Policy on Senior Care Homes

Facts/Background

Question

CRA Comments

Q9 Operating care homes

Facts/Background

Question 9A

CRA Comments

Question 9B

CRA Comments

Question 9C

CRA Comments

Question 9D

CRA Comments

Question 9E

CRA Comments

Question 9F

CRA Comments

Question 9G

CRA Comments

Question 9H

CRA Comments

IMPORTATIONS

Q10 Imported taxable supplies

Facts/Background

Question

CRA Comments

Q11 Importers and Customs Notice 07-036

Facts/Background

Questions

CRA Comments

Q12 Importers and exporters

Questions

CRA Comments

Q13 Imports and claims of input tax credit

Facts/Background

Question

Discussion

CRA Comments

Q14 Imports and claims of input tax credits

Facts/Background

Question

Discussion

CRA Comments