8 March 2007 CBA Roundtable

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.

ADMINISTRATION (Interest, Penalties, Voluntary Disclosure)

Q.1 - Reporting period - Box 101

Facts/Background

A practitioner has discovered a CRA policy that affects GST registrants who regularly make both taxable and non-taxable supplies for GST and whose total annual revenues exceed the quarterly ($500,000) or monthly ($6,000,000) reporting period thresholds.

Since the introduction of GST Box 101 on the GST Form 34 or 62 (the first box on the GST return) was intended to show "your total sales and other revenue" and the CRA insists that it include all exempt revenue so they could match GST reporting to income tax and other returns filed with them.

Unfortunately, the CRA computer compares the amount in Box 101 to the thresholds to determine if the registrant should be reporting more frequently (i.e. quarterly instead of annually or monthly instead of quarterly), ignoring the fact that the amount is not the same as that required in the calculation of the thresholds. (See the definitions of "threshold amount" in section 249, which exclude exempt supplies.)

If the annual revenues shown in Box 101 exceed the $500,000 quarterly or $6,000,000 monthly threshold, the CRA automatically changes the registrant's GST/HST reporting requirements and simply sends out a letter to inform the registrant.

We have heard of several cases of registrants who make both exempt and taxable supplies (medical practitioners, public sector bodies), or who make no taxable supplies at all (e.g. all revenue falls under section 162 as resource royalties which are not "consideration for a taxable supply"), whose GST reporting was changed by the CRA. By the time the professional advisors became aware of the situation, three or more of their GST returns were overdue, potentially resulting in penalty and interest being assessed if there was a balance owing.

More importantly, the person is marked as non-compliant and if they have any amounts due from the government, refunds will be withheld. As well, the CRA compliance team may assess notional assessments for the outstanding returns and begin collection action.

The practitioner who found this problem has sent letters to the CRA to get the proper filing reinstated and was amazed to discover that they cannot change the filing frequency back until the GST return showing the excess amount in Box 101 is amended to show a number less than the threshold.

Question

Is this indeed happening, and if so, how quickly can it be corrected?

CRA Comments

Yes. Taxpayers are required to enter “Total sales and other revenue” (excluding the GST or HST) on Line 101 of the GST34/62 return. This amount is used by the GST Production system (GSTPRD) to determine mandatory reporting periods for the taxpayer.

The reporting period thresholds are as follows:

TABLE

If, at the end of the fiscal year of the business, the cumulative amounts on Line 101 exceed one of these thresholds, the GSTPRD automatically assigns a new reporting period for the taxpayer. The taxpayer then receives a letter explaining that their reporting period has been changed by the CRA and that they are expected to file accordingly.

How quickly can it be corrected? There may be instances when the taxpayer includes exempt sales in the amount on Line 101. If the inclusion of exempt sales amounts in Line 101 results in total sales in excess of the assigned threshold, the taxpayer can contact the CRA to have an adjustment made to their assigned reporting period. The CRA officer then prepares an internal General Adjustment Form (GAF) to amend Line 101 to exclude exempt sales. When the GAF posts in GSTPRD, the officer enters the correct reporting period. The length of this process depends on the urgency of the adjustment request, and the level of workload for the officers performing GAFs. However, most GAFs are processed within 30 days.

As part of the ongoing GST34 Project, changes to the GST34/62 return have been proposed. A change to the way sales are reported on the GST return may be considered for any future changes to the GST34/62

Q.2 - GST new system

Facts/Background

We haven't yet seen the new GST return form and haven't yet experienced the new GST processing and reassessment system that will take effect April 2007. From the general description that's been provided, it looks like a lot of work and thought has gone into the redesign of the system.

(a) Can you tell us about the GST processing redesign process - how it was conducted, what input was sought from tax professionals, how long it took, what contingency plans are in place for bugs, and why the computer systems will be down for 3 weeks in March-April 2007 to implement the new system?

(b) With the changes, there will doubtless be bugs and unexpected problems in particular cases. What scope will there be for input from the professional community as to systemic problems that are occurring, so that adjustments can be considered?

Question

Please answer both:

(i) If there are processing problems, if new GST reassessments or statements of account appear to be incorrect due to problems in the new system, how should the taxpayer's representative go about trying to get corrections made for the particular taxpayer? (Beyond simple things which can be corrected in the ordinary course by a CRA official inputting different data.)

(ii) To whom should we make representations about systemic problems with the new system and forms, and what time frame might we expect for revisions and changes to the systems? Do you have a schedule for looking at how the new system is running and making further changes?

CRA Comments to questions

(i) The implementation of the new GST system on April 10, 2007 will be preceded by extensive testing. We do not anticipate any issuance of incorrect statements or notices of assessments. However, if taxpayers or taxpayer’s representatives need to get any information, they can contact as usual our regular Business window Tel # 1-800-959-5525.

(ii) System changes will be seamless to the public. We have a SWAT team set up at HQ to deal with any system problems and respond quickly to fix bugs, if any.

Q.3 - Standardized Accounting and Waiving New 4% Interest Premium

Facts/Background

As of April 1, 2007, where a person fails to remit or pay an amount as required, interest at the prescribed rate will be payable. The rate of interest will include a 4% premium which, in part, replaces the 6% yearly penalty otherwise imposed by section 280.

Questions

1. Will the CRA’s wash transaction policy continue to apply such that any interest in excess of 4% will be waived pursuant to section 281.1 of the ETA.

2. Will the CRA waive the 4% premium on voluntary disclosures.

3. Will the CRA waive the 4% premium in situations where the taxpayer can show that it was duly diligent.

CRA Comments to questions

1. The CRA’s wash transaction policy will continue to be applied to those transactions that meet the requirements of the wash transaction policy after March 31, 2007. Under this policy the interest imposed under subsection 280(1) of the ETA in excess of 4% of the tax assessed on the transaction will either be waived or cancelled under subsection 281(1) of the ETA.

2. The VDP focus is on penalties. If no penalty exists then the issue is not a valid VDP request and we will not grant any relief with respect to an invalid VDP request.

For a valid VDP request, where there is a penalty applicable, we will apply the WASH Transaction policy. However, the remaining 4% interest will not be waived under the VDP.

Interest relief will only be granted on a valid VDP request in the same manner as applied currently to Income Tax VDP requests, that is, a reduction of the prescribed rate by 4% with respect to periods older than the most current 3 years required to be filed. There is no interest relief available under the VDP in the most current 3 years required to be filed.

3. Policy P-237, Due Diligence Defence, as it is currently written, is only applicable to the penalty imposed under subsection 280(1) of the ETA. This penalty is repealed effective April 1, 2007. The policy will be revisited to address the new failure to file penalty which will be imposed effective April 1, 2007 on returns filed after the due date with an amount owing. Interest charges are not eligible for relief under the Due Diligence policy.

Q.4 - Penalty and interest-New Interest

Question

How will the penalty and interest rules be applied for GST assessments that straddle the April 1, 2007 implementation for the new "interest only" rule under section 280 of the Excise Tax Act?

CRA Comments

The coming into force provision in subsection 146(11) of the Budget Implementation Act, 2006, provides that the amendments to subsection 280(1) of the Excise Tax Act (ETA) come into effect on April 1, 2007. Therefore, the 6% penalty and interest at the “current” prescribed rate will apply to amounts of GST/HST that a person fails to remit or pay when required prior to April 1, 2007. The penalty and interest are calculated on the amount not remitted or paid starting on the day after the amount was required to be remitted or paid and ending on the day the amount was remitted or paid.

If an amount is still outstanding on April 1, 2007, interest at the “new” prescribed rate will apply to the amounts still outstanding (including the interest and 6% penalty) starting on that date and ending when the amount is paid or remitted.

In addition to the amendments to subsection 280(1), new section 280.1 of the ETA provides for a failure to file penalty that will be charged in respect of any return that is required to be filed on or after April 1, 2007, and any return that is required to be filed before that date if it is not filed on or before March 31, 2007. The failure to file penalty is 1% of the amount overdue on the return, plus an additional one-quarter of this first amount times the number of complete months the return was overdue to a maximum of 12 months.

Currently the prescribed rate of interest for purposes of subsection 280(1) of the ETA is calculated by reference to the rate charged on 90-day Treasury Bills, adjusted quarterly, and rounded to the nearest one tenth of a percentage point. The Interest Rate (Excise Tax Act) Regulations will be amended to define the term “basic rate” as the average rate charged on 90-day Treasury Bills, adjusted quarterly and rounded up to the nearest whole percentage point. The prescribed rate will be the “basic rate” plus 4 percent. To further illustrate the application of the amendments to section 280 of the ETA and the addition of the new failure penalty in section 280.1 of the ETA to a situation that straddles April 1, 2007, we have provided the following example.

Facts

On Sept 18, 2007, XYZ Corporation files its outstanding GST/HST return for the monthly reporting period Jan 1- Jan 31, 2007, which was due on Feb. 28, 2007 with net tax of $10,000. XYZ remits the $10,000 net tax on Sept. 18, 2007.

Legislation:

Application of penalty and interest:

ETA 280(1): • 6% penalty and prescribed interest applies to the $10,000 net tax, starting March 1, and ending March 31, 2007.

ETA 280.1: • Failure to file penalty applies (1% x $10,000) + (1% x $10,000 x ¼ x 5 months)

Note: Although the return was due on Feb 28, 2007, the Budget Implementation Act provides that for purposes of section 280.1, returns due and outstanding prior to March 31, 2007, are deemed to be required to be filed on March 31, 2007.

ETA 280(1):

• Interest at new prescribed rate applies to the $10,000 net tax, starting April 1, 2007 until paid on Sept. 18, 2007.

• Interest at the new prescribed rate applies to the unpaid 6% penalty and interest, beginning April 1, 2007, and to the failure to file penalty, starting April 2, 2007 and ending the day the penalties and interest are paid.

Q.5 - Questions relating to CRA’s Voluntary Disclosure Policy (VDP) and the Standardized Accounting Rules

Facts/Background

With the amendment of subsection 280(1) effective April 1, 2007, the automatic 6% penalty for under-remittance or under-payment of amounts under Part IX will be repealed and an increased statutory rate of interest will apply. We understand that the stated intention is to apply a maximum interest of 4% when assessing qualifying wash transactions.

Taxpayers who file on a timely basis who wish to disclose non-compliance on a voluntary basis would appear not to have any economic incentive to do so, since present policy is to limit the existing penalty and interest to 4% when assessed in the course of a regular audit, provided that certain conditions are satisfied.

Questions

1. Does CRA intend to modify its VDP or Fairness policy in light of the revised penalty-and-interest regime, to allow waiver of the remaining 4% interest component in the case of a valid voluntary disclosure? If so, please provide details. If CRA does not revise its VDP or Fairness policy, so that taxpayers obtain economically the same relief that is currently available, notably potential waiver or cancellation of the 4% penalty under “wash transaction” treatment, taxpayers will generally perceive that there is no economic incentive to making a voluntary disclosure under such circumstances.

2. Similar to the above, except as it relates to disclosure of non-compliance other than with respect to wash transactions, taxpayers/registrants will generally have no incentive to make a voluntary disclosure in future since the 6% penalty that currently exists is being eliminated and effectively being converted to interest under new subsection 280(1).

3. Per existing IC00-1R, a voluntary disclosure will not be accepted if non-compliance is less than one year past due and "initiated simply to avoid the late filing or instalment penalties". At the same time, the new late filing penalty under section 280.1, as a penalty, may potentially be eligible for cancellation under the VDP. How will "simply to avoid..." be interpreted for purposes of the VDP? More specifically, will the VDP be amended to allow the new 280.1 penalty to be considered for waiver under the VDP?

4. 6% penalty will continue to be potentially assessable under section 280(1) for periods prior to April 1, 2007. Our understanding is that the CRA presently treats this as prescribed for purposes of ITA 67.6, on the basis of proposed Regulation 7309, and hence deductible.

Will the 6% penalty assessable under the current 280(1) rule continue to be deductible after March 31, 2007? Please explain.

5. New section 280.1, which sets out the late filing penalties, calculates the penalty in relation to unpaid or unremitted amounts. Will this calculation take into account unpaid credits due to the taxpayer, including amounts due under other legislation administered by the CRA? For example, if a registrant filed a GST return late post March 31, 2007 and had a net tax amount owing for that reporting period, but had more than enough unspecified funds "on account" with the CRA in its corporate tax account on the day the GST net tax was due, will the CRA allow the funds held on account to be transferred to the GST account to prevent the application of the 280.1 penalty and interest for that matter that would apply under 280(1)?

CRA Comments to questions

1. The Fairness Policy will continue to be applied to those wash transactions, which qualify as wash transactions after March 31, 2007. Therefore, where as part of an assessment the interest on a wash transaction is reduced to 4%, where applicable the Fairness Policy may be applied to eliminate all or part of the remaining interest.

In a WASH Transaction situation where there is no penalty applicable the request would not meet one of the basic validity conditions of the VDP. A penalty must be applicable for the request to be eligible under VDP. As no penalty is applicable, the VDP will not review the request or grant any relief. If a gross negligence penalty could be applied, the request would be deemed to meet the penalty condition and the VDP will protect the registrant from the penalty application and they will apply the WASH Transaction policy. However, as the WASH Transaction policy leaves a residual 4% interest, which is generally not waived under the VDP, the 4% will not be waived or cancelled. For the taxpayer the economic incentive under the VDP will always be the waiver or cancellation of penalty and the protection from possible prosecution.

2. The incentive for any voluntary disclosure is the protection from penalties and possible prosecution. This will not change. The VDP will still protect the registrant from the possible application of the gross negligence penalty (section 285 of the ETA), and from the new Failure to File penalty. However, the four basic validity conditions for the VDP must be met before any relief is granted.

3. The existing VDP policy will be clarified to allow the Failure to File Penalty to be waived under the same conditions as allowed for Income Tax disclosures. We will not accept disclosures for any reporting period that falls within 1 year of the disclosure date unless it constitutes part of a series of returns that includes periods more than one year past due. Also, amendments to previously filed returns for reporting periods within the most current 1 year period where a penalty is applicable will be allowed under the VDP.

4. Federal Budget 2006 proposed, in part, that the GST/HST portions of the Excise Tax Act would no longer be prescribed under proposed regulation 7309 for purposes of section 67.6 of the Income Tax Act (ITA). In addition, subparagraph 18(1)(t)(ii) of the ITA provides that a taxpayer cannot deduct amounts paid or payable as interest under Part IX of the ETA. Therefore, for taxation years beginning on or after April 1, 2007, arrears interest, the new failure to file penalty and the 6% penalty paid or payable under Part IX of the ETA will not be deductible under the ITA.

5. A new failure to file penalty under new section 280.1 of the ETA will be charged on returns that are filed late and that have an unpaid or unremitted amount.

Once approved, credit amounts will generally be available for offset against any other liabilities a person may have with the CRA effective the latest of:

• The day the return, application or other required documentation giving rise to the credit is filed with the CRA;
• The day the return, application or other required documentation giving rise to the debit is filed with the CRA; and
• The day the payment is received by the CRA.

In this case, the debit (GST) return was filed late and it was filed after the credit (income tax) return. The late filing penalty imposed under section 280.1 would be applied to the return and interest under subsection 280(1) would apply. The credit in the registrant’s income tax account would be applied against these liabilities and any other outstanding liabilities the registrant may have under Excise Tax Act, The Excise Act, 2001, and the Air Travellers Security Charge Act on the date the GST return was filed.

Q.6 - Status - No-Name Voluntary Disclosure

Question

What is the current status of the CRA's policy on "no names" disclosures under the voluntary disclosures program? Have there been any changes or developments in the policy on the 90 day time frame for "no name" disclosures in terms of the ability of a taxpayer or advisor to get some degree of comfort within that period that a disclosure is likely to be accepted?

CRA Comments

Further to the implementation of the no-name policy in October 2005 a review of this policy has concluded that there is still some uncertainly existing in the administration of this policy in the field. Therefore some further clarification of this policy was considered necessary in order to assist taxpayers, their representatives and the CRA in finalizing VDP submissions within a reasonable time frame. A release will be issued shortly on the conclusions of the review of this policy and our information circular and internal VDP guidelines will be updated accordingly.

Q.7 - Voluntary disclosure – unremitted GST

Facts/Background

Assume a fact situation where GST is payable on a supply, but the tax has not been charged, collected or remitted by the supplier and has not been paid by the recipient. The recipient is entitled to fully offsetting input tax credits for any GST payable.

Question

If the recipient made a voluntary disclosure for the GST payable (and applied the offsetting input tax credit in the course of the disclosure process so that no amount was due from the recipient), would penalty and interest stop accruing against the supplier for the unremitted GST assuming the recipient's disclosure was accepted?

CRA Comments

In this scenario the recipient could not make a valid voluntary disclosure as they would not be the registrant who is required to collect and remit the tax on a taxable supply. As such they would not have a net tax amount remittable and no penalty would apply. The supplier would have an amount remittable and penalty and interest would continue to accrue on the account until the amount was remitted. In this scenario the supplier has not made a voluntary disclosure.

Q.8 - No-Name Voluntary Disclosure Program

Question

Could the CRA comment on what impact, if any, the CRA’s recent change to the “no-names” voluntary disclosure program (as further explained by the CRA at Question No. 3 from the March 9, 2006 Meeting) has had on the number of voluntary disclosures being initiated. Has the CRA found an increased reluctance on the part of taxpayer’s to proceed with a voluntary disclosure as a result of the inability to negotiate matters such as time frames, quantum, interest, etc. at the no-names stage.

CRA Comments

The change to the no-name disclosures policy, which was initiated in October 2005, has not resulted in any negative impact to the Voluntary Disclosures Program (VDP). This could be demonstrated by the recent results of the program. For example, the program results for the 2004-2005 year were 6632 disclosures with a tax amount of $318 million and in 2005-2006 there were 7314 disclosures, with a tax amount of $331 million, which indicates an increase in volume of 10.3% over those periods. In 2006-07, we are continuing to see an overall increase and sustained in the number and value of VDP submissions being made both in respect to named and no-named disclosures. We have had feedback from some of our tax services offices on the reluctance of the taxpayer’s representatives to proceed with a disclosure because of the inability to negotiate a settlement prior to the identification of the taxpayer. But there is no noticeable increase in reluctance from prior years. Some of this reluctance is in a misunderstanding of the no-name policy and the 90-day rule. For example, the identification of the taxpayer is required within 90-days, however once the identification of the taxpayer is provided then additional time may be allowed in order to provide additional information, which is relevant to the disclosure. This additional time is at the discretion of the tax services office where the disclosure is being considered. We have, however, considered this further in our review of the no-name policy issue, as indicated in question 6 previously, and we will be addressing this issue in the release, which will be issued shortly as a result of this review.

Q.9 - Situation - Voluntary Disclosure

Facts/Background

A GST audit of A Co was conducted for taxation years 2002 and 2003. It was determined during that audit that A Co failed to charge and collect GST on various supplies that A Co believed were exempt from GST. A Co was issued a Notice of Assessment for such GST, plus penalty and interest. A Co filed a Notice of Objection in respect of the assessment.

A Co also did not charge and collect GST on these supplies in taxation years 2004 and 2005. During the course of the audit, the auditor verbally indicated to representatives of A Co that follow-up audits would probably be done for taxation years 2004 and 2005. Although the initial GST audit has now concluded several months ago, the Canada Revenue Agency has not provided A Co with any formal notice (either in writing or otherwise) that taxation years 2004 and 2005 will also be audited or when such audits will commence (if at all).

Question

Can A Co make a voluntary disclosure in respect of GST that it did not charge and collect on supplies made during taxation years 2004 and 2005?

Comments

A Co should be entitled to make a voluntary disclosure for any taxation year for which it has not received formal notice (either in writing or otherwise) of a pending enforcement action (e.g., audit) from the Canada Revenue Agency. In these circumstances, A Co should not be precluded from making the voluntary disclosure in order to obtain relief from penalties in respect of any GST that A Co failed to charge and collect during taxation years 2004 and 2005.

CRA Comments

Enforcement action for VDP purposes includes verbal notifications of impending audits or other CRA enforcement actions. Because A Co. was notified by the auditor of the subsequent audits it was too late to initiate a voluntary disclosure. In these types of situations the taxpayer should still make a disclosure to the CRA and the CRA will evaluate the enforcement action, on a case by case basis, to determine if there is a reason to accept the disclosure as a valid voluntary disclosure.

Q.10 - Situation - Voluntary Disclosure

Facts/Background

A Co. ("A Co.") and B Co. ("B Co") are joint owners of a commercial real property. A Co. and B Co. have filed an election pursuant to section 273 of the ETA whereby B Co. is designated as the joint venture manager for the purposes of the GST. In addition, B Co. also acts as A Co.’s agent in respect of certain matters pertaining to the administration of the parties' jointly owned real property. Acting independently, and not in respect of the parties' joint venture property, B Co. files a voluntary disclosure with the CRA pursuant to which B Co. makes disclosure of certain non-compliance with the ETA. In the course of the voluntary disclosure, the CRA auditor determines that B Co. has also failed to properly report GST in respect of a second, discrete issue, not the subject of the original voluntary disclosure. Briefly, the second issue concerns A Co. and B Co.’s re-supply of municipal real property taxes to a management company ("ManagerCo.") which acts on behalf of the joint venture parties (the "municipal tax issue"). Although the municipal property taxes are GST exempt when paid by A Co. and B Co., B Co. has failed to recognize that such municipal property taxes, when re-supplied by it to ManagerCo., do constitute a taxable supply. The CRA auditor allows B Co. to treat the municipal tax issue as part of its voluntary disclosure; B Co. discloses all of the real property interests to which the municipal property tax issue relates. This disclosure includes the name and all relevant particulars relating to B Co.’s joint venture partner, A Co. Three months after B Co.’s disclosure of the municipal tax issue to the CRA, B Co. advises A Co. that such issue has arisen and that B Co. has disclosed all of A Co.'s particulars to the CRA. Several days following receipt of this correspondence from B Co., A Co. commences its own voluntary disclosure in respect of the municipal tax issue pertaining to its property held jointly with B Co. as well as all of A Co.’s other real property interests, all of which are held jointly with other commercial property owners in substantially similar joint venture arrangements. Prior to A Co.’s filing its voluntary disclosure, an employee of A Co. receives a telephone call and preliminary correspondence from CRA indicating that an audit of A Co. would be commenced.

Question

On the basis that communication of an audit had been made to A Co., it is arguable that A Co.’s voluntary disclosure may be precluded because A Co.’s disclosure occurred subsequent to an audit notification. It is A Co.’s position however that, at the time B Co. made a disclosure to the CRA of the municipal tax issue disclosing A Co.'s name and particulars (in B Co.’s capacity as joint venture manager and agent of A Co.), a voluntary disclosure by A Co. was effected. Since this disclosure occurred in advance of any audit notification made by CRA to A Co., A Co. should enjoy the benefits of the voluntary disclosure program, assuming all other relevant conditions are satisfied. Can the CRA confirm that A Co. may regard itself as having made a voluntary disclosure through the offices of its agent and JV manager, B Co.?"

CRA Comments

As the joint venture operator B Co. was responsible to report and remit the net tax due pursuant to the joint venture operations and those transactions were covered by the disclosure. Although A Co. may be jointly and severally liable for the net tax it is B Co. that reports and remits. As the disclosure was accepted as valid the resulting liability does not contain a penalty.

We do not believe that B Co. is an agent of A Co. in all matters including the tax reporting required of A Co. and so we will not extend the B Co. disclosure to cover the operations of A Co.

Consequently, A Co. has not made a disclosure to the CRA prior to the audit notification.

Q.11 - Voluntary Disclosure - Update

Facts/Background

The Voluntary Disclosure Program has continued to evolve over the last year, particularly with respect to no-names disclosures and the transition from Appeals to Enforcement. The timing and procedure for transition to Enforcement has also been different for various TSOs. It is also understood that the Program will be centralized later this year in specific TSOs for different regions (e.g. Sudbury will intake Ontario disclosures, but they will be processed in St. Catharines, London or Belleville).

Question

Please provide an update on the key aspects of the Program, including no-names disclosures and their proposed centralization. In particular, how will disclosures be handled later this year?

CRA Comments

Our efforts to enhance the no-name disclosures policy has been referred to previously in questions 6 and 8. As we discussed a release concerning our findings of the review with be released shortly. Further to this we are presently revising the information circular for the Voluntary Disclosures Program. This will assist in clarifying many issues, which both taxpayers and their representatives may have on the application of this program.

In an effort to provide better service and to deliver this program more effectively, as of March 5, 2007, the St. Catharines Tax Services Office (TSO) will be the office of initial contact for all enquires relating to the VDP for the CRA - Ontario Region. This TSO will also be the intake centre for all voluntary disclosures for the CRA - Ontario Region. The responsibility for the delivery of the VDP within the CRA - Ontario Region will be assumed by the Enforcement Divisions in the London TSO, the Peterborough-Kingston-Belleville TSO and the St. Catharines TSO.

This regional transfer of the VDP will facilitate better access to broader expertise to enable easier and more efficient review of complex disclosures, which are becoming more frequent as the VDP matures. We consider that this access to broader CRA expertise will enhance taxpayers’ dealings when making a disclosure and continue to ensure the consistent application of the programs policies and procedures.

The VDP policies, procedures and guidelines are not changing as a result of this change in TSO responsibility for the program within the CRA - Ontario Region. The CRA is committed to a seamless transition and to ensuring taxpayers continue to receive high quality and timely service.

For disclosures made prior to February 5, 2007 the Assistant Director of the Enforcement Division of the TSO to which the disclosure was submitted will remain the contact and are responsible for finalizing any disclosures in progress in their TSO.

For information on disclosures submitted on or after February 5, 2007 the Enforcement Division at the St. Catharines TSO, 32 Church Street, P.O. Box 3038, St. Catharines, On, L2R 3B9, may be contacted.

Q.12 - Notion of “Dispute”

Facts/Background

cra.gc.ca/myaccount (individuals) and cra.gc.ca/mybusinessaccount (corporations) allow a taxpayer to "register a formal dispute".

Question

Is this "dispute" accepted as a valid Notice of Objection by the CRA? If so, on what authority, and what assurance do the taxpayer and their representative have that an objection has validly been filed?

CRA Comments

GST/HST objections are not presently accepted via submissions through “my account” or “my business account”. This is due to the fact that the ETA requires the objection to be filed in the prescribed form and manner. Subsection 301(2) allows the Minister to accept an objection notwithstanding that it was not filed in the prescribed manner.

The system accepts objections under the Excise Act 2001 [195(1); 195(7)] and the Air Travellers Security Charges Act [43(1); 43(7)]. It is anticipated that objections under the Softwood Lumbers Products Export Charge Act [54(1); 54(7)] will be accepted in the fall. Objections under these acts are also required to be filed in the prescribed form and manner. However, these acts allow the Minister to accept objections even though they were not filed in the prescribed form and manner.

Objections under the Income Tax Act do not require a prescribed form.

In order to log into “My account”, the taxpayer must first have registered for a Government of Canada epass. This validates the identity of the person requesting access to the account. Once logged in to the account the taxpayer can register a formal dispute. The taxpayer has 2,500 characters to provide facts and reasons. Once he submits the information, the submission is time stamped and the taxpayer receives an immediate “thank you” page that indicates that CRA has received the submission. The taxpayer can print this page together with his submission.

The submissions are sent to the screeners who review them. If the submission is regular correspondence, it is forwarded to the appropriate division. If it is an objection, it follows the same process as an objection received by mail. The validity of the objection is determined at this stage. An acknowledgment letter is sent, usually within 30 days.

Authority:

• ITA 165(1), (2) & (6): The notice of objection must be writing, addressed to the Chief of Appeals in a TSO or TC and delivered or mailed. The Minister may accept an objection even if not served in accordance with subsection 2
• EA 2001 195(1) & (7)
• Air Travellers Security Charges Act [43(1); 43(7)]
• Softwood Lumbers Products Export Charge Act [54(1); 54(7)]

ELECTIONS (156 and 167 Excise Tax Act)

Q.13 - Availability of the section 156 election – new corporation – asset test

Facts/Background

Company A is registered for GST and is engaged exclusively in commercial activities. Company A has incorporated a new corporation, Company B, and owns 100% of the shares. Both Companies A and B are resident in Canada. Company B has not commenced operations but is already registered for GST. Company B has incurred expenses such as legal and accounting services and incorporation fees. Company B has not purchased any property and has not made any supplies yet.

The Policy Statement P-019R — Eligibility for ITC on "start-up" costs - eligible capital property mentions, in paragraph 4, that certain expenses in relation to the establishment of a business, like expenses required for incorporation such as legal and accounting services and regulatory fees, may be treated as "eligible capital expenditures" under the Income Tax Act. CRA also mentions in paragraph 5 that those expenses may be considered to be in respect of "eligible capital property" and therefore will meet the definition of “property” as defined by the ETA.

Questions

Considering Policy Statement P-019R, do the expenses of Company B related to its incorporation qualify as “property” for the purposes of section 156 of the ETA?

1. If yes, does Company B qualify as a “specified member” (subsection 156(1) of the ETA)?

2. Therefore, could CRA confirm that Company A and Company B can make an election to deem taxable supplies made between closely related corporations to have been made for nil consideration (assuming that all other conditions are met)?

CRA Comments

The property test set out in paragraph (c) of the current definition of “specified member” in subsection 156(1) relates to property other than financial instruments that was “last manufactured, produced, acquired or imported by the person for consumption, use or supply exclusively in the course of commercial activities of the person, …” Since Company B acquired services and not purchased any property and makes no supplies, then the property test in paragraph (c) has not been met.

Since the property test has not been met, Company B is not a specified member and cannot make the election under subsection 156(1).

Q.14 - Leasing Business & Section 167 Election

Question

In situations where a GST registrant’s commercial activities are limited to supplying a particular asset by way of lease, could the CRA confirm that the sale of the following assets (which are the only assets which relate to the business) would qualify for the section 167 election:

1. The asset which the registrant is leasing; 2. The lease; and 3. The books and records that are maintained by the lessor.

Comments

Given that a “business” is defined to include "any activity that is engaged on a regular or continuous basis that involves the supply of property by way of lease", the lessor is supplying a “business” and all or substantially all of the assets reasonably necessary to carry on the business.

CRA Comments

It is a question of fact whether a business is being supplied as required by subsection 167(1). It is not clear from the facts provided what the leased asset is and how a leasing business is being carried on, therefore we can only provide the following general comments.

As pointed out in P-188, Supply of a Business or Part of a Business for the Purpose of the Election under Subsection 167(1), the assets of a business generally include real property, equipment, inventory, and intangibles. In general, the supply of one or more individual assets will not be considered to be the supply of a business. The nature of a business will generally determine the package of assets that would comprise a business or part of a business.

We would be pleased to review any submissions that you would like to make regarding the application of these provisions to a particular fact situation.

Q.15 - Non-Resident Security & Permanent Establishment

Facts/Background

Pursuant to subsection 240(6) of the ETA, a non-resident is required to post security if it does not have a “permanent establishment” in Canada pursuant to paragraph (a) of the definition provided for in subsection 123(1) of the ETA.

Question

Could the CRA confirm that a non-resident who owns a commercial office building, which it supplies by way of lease, will not be required to post security in situations where management of the office building is subcontracted to an unrelated property manager and the non-resident has no other employees or presence in Canada.

Comments

For GST purposes, the supply of the office building by way of lease is a “business” as defined in subsection 123(1) of the ETA. Accordingly, through owning and leasing the office building, a non-resident is considered to carry on a business for GST purposes. Given the fixed and permanent nature of the office building through which the non-resident is supplying property by way of lease, it should follow that the non-resident has a “permanent establishment” as referenced in paragraph (a) of the definition of “permanent establishment” in subsection 123(1) of the ETA. Accordingly, the no-resident should not be obligated to post security.

CRA Comments

Based on the information provided and the principles set out in GST/HST policy statement P-208R Meaning Of Permanent Establishment In Subsection 123(1) of the Excise Tax Act, the commercial building described in the question would be considered to be a permanent establishment in Canada of the non-resident under paragraph (a) of the definition of “permanent establishment” in subsection 123(1) of the ETA. Specifically, the building would be a fixed place of business of the non-resident through which the non-resident is making supplies. As a result, the non-resident in this case would not be required to post security under subsection 240(6) of the ETA.

Q.16 - Carrying on Business in Canada - Policy Statement P-051R2 (Example No. 10)

Facts/Background

A non-resident supplier is sourcing and supplying goods in Canada by way of drop-shipment in Example No. 10 of GST/HST Policy Statement P-051R2. The Canada Revenue Agency does not consider the non-resident supplier to be carrying on business in Canada because the only facts present in Canada are the place of purchase and delivery of the goods. The third sentence of the Facts in Example No. 10 indicates that the non-resident supplier does not solicit orders for the supply of its goods in Canada. However, in the majority of cases, one would expect non-resident suppliers to be soliciting in Canada (in some manner) in order to make sales of goods to Canadian customers.

Question

Would the non-resident supplier in Example No. 10 be considered to be carrying on business in Canada if the supplier did, in fact, solicit orders for the supply of its goods in Canada? Assume that all the other facts in Example No. 10 are unchanged and that the non-resident supplier is not a small supplier.

Comment

If the non-resident supplier were considered to be carrying on business in Canada, on the basis of this additional fact, the supplier would be required to register for GST purposes pursuant to subsection 240(1) of the Excise Tax Act and would not be able to take advantage of the drop-shipment relief provided under subsection 179(2) of the Excise Tax Act. This would seriously limit the scope of subsection 179(2), as in most cases, non-resident suppliers are presumably soliciting to some extent in order to make sales in Canada. It is difficult to imagine how a non-resident supplier can make sales in Canada without doing some form of soliciting.

CRA Comments

As indicated during our meeting of March 2005 (question #12) in response to the above question, if the non-resident in Example #10 of the policy were to solicit orders in Canada in addition to the place of purchase and place of delivery of the goods being in Canada, the non-resident would be considered to be carrying on business in Canada for GST/HST purposes.

As also indicated during that meeting, the concern that you have raised with respect to the drop-shipment rules not applying based on our response is clearly a tax policy issue that falls within the area of responsibility of the Department of Finance, and that you may therefore want to discuss further with officials of that Department.

Q.17 - Leased Asset that is Exported from Canada

Facts/Background

A non-resident Lessor that is registered for GST purposes leases an aircraft to another non-resident Lessee that is not registered for GST purpose. Under the terms of the lease, the aircraft is delivered to the Lessee in Canada. The aircraft is not used by the Lessee in Canada and is immediately exported by the Lessee from Canada. Assume that all of the requirements of section 1 of Part V of Schedule VI of the Excise Tax Act are met to qualify the supply of the aircraft as a zero-rated export.

Question

Would the Lessor be required to charge and collect GST on all lease payments for the aircraft pursuant to paragraph 136.1(1)(d) of the Excise Tax Act, given that the aircraft was initially delivered to the Lessee in Canada? Or, would the Lessor be entitled to zero-rate the supply of the aircraft by way of lease pursuant to section 1 of Part V of Schedule VI of the Excise Tax Act? Would the answer be different if the first lease payment was due (i) at the time of delivery in Canada or (ii) after the aircraft was exported from Canada?

Comment

Given that there is a specific zero-rating section that applies in this case, and that zero-rating is intended to provide GST relief (i.e., is a remedial provision), it should take precedence over paragraph 136.1(1)(d) of the Excise Tax Act in this situation. Otherwise, unrecoverable GST would be charged to the non-resident lessee.

CRA Comments

As indicated during our meeting of February 2002 (question #6) in response to the above question, based on section 136.1 of the ETA, there would be a deemed supply of the property for each lease interval and all of those deemed supplies would be deemed to be made in Canada based on the fact that the property was initially delivered to the lessee in Canada. Each separate supply for each lease interval would then, on its own, have to satisfy the conditions of section 1 of Part V of Schedule VI to the ETA to be zero-rated. Based on the information provided, the supply of the property made for the first lease interval would be zero-rated under section 1 of Part V of Schedule VI provided the lessee intends to export the property when the supply is made, the property is exported in accordance with the requirements of the provision and the lessor maintains satisfactory evidence of that exportation.

The question indicates that the property is not to be used in Canada. The supply of property made for each subsequent lease interval would therefore also be zero-rated where the property is outside Canada when each of those supplies is made.

The answer would remain the same whether the first lease payment was due at the time of delivery in Canada or after the property was exported.

With respect to the comment that section 1 of Part V of Schedule VI of the ETA should take precedence over paragraph 136.1(1)(d) of the ETA, we would again like to confirm that this is clearly not the case under the current legislation. As indicated during our past meeting, the issue is therefore clearly a tax policy issue that falls within the area of responsibility of the Department of Finance and that you may therefore want to discuss this matter further with officials of that Department. As previously indicated, the Department of Finance is aware of the concern that was raised regarding this issue during our past meeting.

Q.18 - Zero-rating of Legal Services

Facts/Background

A non-resident corporation engages the services of a Canadian law firm to acquire the shares of a Canadian resident corporation. The Canadian resident corporation owns real property in Canada (e.g., several mining quarries). The Canadian law firm is GST registered. The non-resident corporation is not registered for GST purposes.

Question

Can the legal services provided by the Canadian law firm be zero-rated pursuant to section 23 of Part V of Schedule VI to the Excise Tax Act?

Comment

At issue is whether the legal services are “in respect of “ real property that is situated in Canada. Zero-rating should be available on the basis that legal services directly relate to the acquisition of the target Canadian company, by way of a share purchase, and only indirectly concern real property owned by the target company.

CRA Comments

Based on the information provided, the supply of the legal services made by the Canadian law firm to the non-resident corporation would be zero-rated under section 23 of Part V of Schedule VI to the Excise Tax Act. Specifically, based on the criteria set out in GST/HST policy statement P-169R Meaning of “in respect of real property situated in Canada” and “in respect of tangible personal property situated in Canada at the time the service is performed”, there is not a direct connection between the legal services and the real property. As a result, the legal services would not be considered to be in respect of real property situated in Canada.

Q.19 - Zero-Rated Research & Development Services

Facts/Background

Pursuant to sections 7 and 23 of Part V of Schedule VI to the ETA, certain services that are supplied to a non-resident are zero-rated. Excluded from zero-rating are services performed in respect of tangible personal property that is situated in Canada at the time the services are performed. In Question No. 39 from the 2002 Annual Meeting and Question No. 32 from the 2004 Annual Meeting the CRA provided some guidance with respect to the zero-rating of research and development services.

Questions

1. In situations where the R&D service provider creates a prototype in the course of providing the R&D services, would the R&D services be zero-rated. Alternatively, could the drop-shipment rules in subsection 179(3) of the ETA apply to deem the R&D service to be made outside Canada where the prototype is ultimately exported from Canada to the non-resident.

2. In situations where a prototype is provided to the R&D service provider, would the R&D services be excluded from zero-rating on the basis that the R&D services are being performed in respect of the prototype. If the services are excluded from zero-rating, would the drop-shipment rules in subsection 179(3) apply provided the prototype is exported from Canada.

3. Would section 21 of Part V of Schedule VI apply to zero-rate R&D services performed in respect of a prototype that is imported into Canada where the prototype is destroyed or discarded in the course of providing or completing the R&D service.

CRA Comments to questions

As indicated during previous meetings, the expression “R&D services” used in the question has a very broad meaning that can encompass a variety of different supplies. As indicated in the responses from previous meetings cited in the question, to make a conclusive determination regarding the characterization of the supply being made and the consequential application of tax in cases involving research and development requires consideration of all the relevant facts, including what the service provider has actually agreed to supply. As was the case with the questions from previous meetings, the current question does not provide sufficient detail to make a conclusive determination. With respect to each of the specific questions:

1. If the supply made by the service provider to an unregistered non-resident is a supply of a service, the supply could be zero-rated under Part V of Schedule VI to the ETA provided it is not a service in respect of tangible personal property (other than a testing or inspection service as explained in response to the issue raised in the third question) that is situated in Canada when the service is performed. As previously indicated, whether the service is in respect of the prototype will ultimately depend on whether the supplier has, based on the facts, agreed to make a supply of a service of creating the prototype as opposed to some other service, during the performance of which the prototype is created and used as an input.

For instance, in the 2002 question, the supply being made by the registrant was the development of a car wax formula with car wax samples being created to test the formula. In that case, based on the information provided, the supply was a supply of developing the formula as opposed to a supply of merely creating tangible personal property and testing it. In the 2004 question, the registrant received a prototype on which to conduct research and development. The prototype was described as an input to the registrant to provide R&D services. As previously indicated, if the supply was to design a product and the prototype was merely being used as an input in the course of developing that design, the supply would not be considered to be a supply in respect of tangible personal property.

If, on the other hand, the R&D service provider has agreed to make a supply to the non-resident of creating a prototype (which may involve a separate supply of a service), that supply could be characterized as either a manufacturing service (which would be considered to be a supply in respect of tangible personal property) or a supply of tangible personal property depending on whether there is a transfer of ownership of the tangible personal property. In either case, the supply made by the service provider could be deemed to be made outside Canada under subsection 179(3) of the ETA if the property is exported in accordance with the conditions of that provision.

2. If the service provider has agreed to supply R&D services in Canada that are in respect of the prototype that it acquires, then the service provider would be considered to be supplying a service in respect of the prototype while it is in Canada and that supply would therefore be excluded from zero-rating. However, the supply made by the service provider to an unregistered non-resident could be deemed to be made outside Canada under subsection 179(3) of the ETA if the prototype is exported in accordance with the conditions of that provision.

3. If the R&D service is supplied to an unregistered non-resident of testing or inspecting the prototype, the service could be zero-rated under section 21 of Part V of Schedule VI to the ETA if the prototype has been imported or acquired in Canada for the sole purpose of having the service performed and the prototype is to be destroyed or discarded in the course of providing, or on completion of, the service.

Q.20 - Zero-Rated Services on Temporary Imports

Facts/Background

Section 4 of Part V of Schedule VI to the ETA zero-rates the supply of certain services that are performed in respect of tangible personal property that is temporarily imported:

4. A supply of

(a) a service (other than a transportation service) in respect of tangible personal property that is

(i) ordinarily situated outside Canada,

(ii) temporarily imported for the sole purpose of having the service performed, and

(iii) exported as soon as is practicable after the service is performed; and

(b) any tangible personal property supplied in conjunction with the service.

Question

Could the CRA confirm that section 4 would apply in situations where the essential character of the imported good has significantly changed as a result of the performance of the service, thus resulting in the exported good not being the same as the imported good.

Comments

The Tax Court’s comments in Hawkins Taxidermists of Canada Ltd. would support this position, with the Court indicating that section 4 would apply with respect to taxidermy services performed on dead carcasses even though such services would have clearly changed the nature and essence of the imported good. Section 4 only zero-rates specimens temporarily imported into Canada to be refashioned here and then delivered back to the non-resident customer.

CRA Comments

A supply of a service of processing imported goods, such as the taxidermy service in the Hawkins Taxidermists of Canada Ltd case, that changes the nature of the imported goods could qualify for zero-rating under section 4 of Part V of Schedule VI to the ETA where all of the conditions of the provision are met.

Q.21 - Zero-Rated Storage Service on Imported Goods

Facts/Background

Section 4 of Part V of Schedule VI to the ETA zero-rates services (other than transportation services) that are performed in respect of tangible personal property that is:

(i) ordinarily situated outside Canada,

(ii) temporarily imported for the sole purpose of having the service performed, and

(iii) exported as soon as is practicable after the service is performed.

Question

Would storage services that are performed in relation to imported property be zero-rated provided the property is ultimately exported.

What is the CRA’s interpretation of “temporarily imported” and is there a maximum time frame in which the property can stay in Canada.

CRA Comments

A supply of a storage service in respect of temporarily imported goods would qualify for zero-rating under section 4 of Part V of Schedule VI to the ETA where all of the conditions of the provision are satisfied, including the exportation of the goods as soon as is practicable after the service is performed.

There is no single specified maximum period of time for purposes of the provision during which the imported goods can remain in Canada. Generally, goods imported temporarily under Customs tariff item No. 9993.00.00 may remain in Canada for a period of up to 18 months. At the time of release, the importer must identify the period of time during which the goods are expected to remain in Canada. Whether goods are considered to be temporarily imported in any given case for purposes of qualifying for zero-rating under the provision ultimately depends on the facts of the case. To substantiate the zero-rating of a service under this provision in any case, the supplier must maintain evidence that the conditions in the provision have been satisfied.

Q.22 - Zero-Rated Exports

Questions

1. If a Canadian supplier (Supplier) sells certain chemicals to a non-resident (PurchaserA) and is responsible for delivering the goods on board a vessel with a destination for a foreign destination, does the supply qualify as zero-rated pursuant to any of paragraphs 12(a), 12(b) or 1? i.e., what does “has been retained ... by the supplier on behalf of the recipient” mean? Does the supplier have to give directions to and pay the common carrier? Does the supplier have to contract with the carrier or is it sufficient if the supplier is made aware of the arrangements. Does the supplier have to be an “agent” for the recipient?

2. If PurchaserA re-supplies the goods to a non-resident purchaser (PurchaserB) following delivery by Supplier to the vessel but before the vessel departs from a Canadian port, does this disqualify zero-rated status of the first supply under any of paragraphs 12(a), 12(b) or 1? i.e., is it necessary for 12(a) that there be no re-supply of the goods until the goods actually arrive at the foreign destination or at least until the goods are outside Canadian territorial waters? Does section 12 permit a re-supply of the goods while they are still in Canada, as long as the supplier has itself arranged for shipping to a foreign destination? Which appears broader than section 1, which requires that the goods not be acquired for “supply in Canada before the exportation”

Example

A non-resident wants to acquire certain chemicals from a Canadian supplier in order to ship them to a processing plant in Asia. The non-resident wants to obtain financing for this transaction but as an Islamic company, cannot do so. Therefore, a “murabaha” transaction is structured whereby the true buyer acquires the goods from the seller as undisclosed agent for a financial instituation/financer, then when the chemicals are on the vessel still in Canada, the financial institution/seller transfers title to the true buyer as principal. As a result, there is a supply and re-supply while the goods are still in Canada; however, it was always the case that the goods are destined to be shipped to Asia. Does zero-rating apply to this transaction under paragraphs 12(a) or 12(b), or 1? The drop-shipment rule?

CRA Comments to questions

1. There is insufficient information to provide a conclusive response with respect to whether the supply of the goods made by the supplier in the various sets of facts and examples would qualify for zero-rating under any provision.

Paragraph 12(a) applies where the supplier ships the goods to a destination outside Canada that is specified in the contract for carriage of the goods. It is unclear how paragraph 12(a) could possibly apply in the facts provided given that the supplier is merely responsible for delivering the goods to the vessel at a destination in Canada.

In order for paragraph 12(b) of Part V of Schedule VI to the Excise Tax Act to apply the supplier must transfer possession of the goods to a common carrier that has been retained by the supplier on behalf of the recipient to ship the goods to a destination outside Canada. The retention of the carrier by the supplier must be done “on behalf of” the recipient. This means that it can be clearly established based on the facts that the supplier has hired a common carrier as an agent on behalf of the recipient (as opposed to on the supplier’s own behalf or on behalf of some person other than the recipient) to have the goods shipped to a destination outside Canada pursuant to directions provided by the supplier to the carrier. This may be done either verbally or in writing. The supplier is not required to be billed or to pay for the carrier’s service. Simply making the supplier aware of the shipping arrangements would not satisfy the requirement of the paragraph. To support the zero-rating of the supply, there must be clear evidence of the supplier’s involvement in hiring the carrier on the recipient’s behalf to ship the goods outside Canada in addition to satisfactory evidence of the exportation of the goods. There is no indication in the question that the requirement in paragraph 12(b) has been met.

Section 1 of Part V of Schedule VI to the ETA could apply to zero-rate the supply of the goods where the conditions of that provision have been met, including the requirement for the supplier to maintain satisfactory evidence of the exportation of the goods by the recipient.

2. Again, it is unclear how paragraph 12(a) could possibly apply in the set of facts provided given that the supplier is merely responsible for delivering the goods to the vessel at a destination in Canada.

Generally, in a situation where the circumstances described in paragraph 12(a) are in fact met, the supply of the goods would not be disqualified from zero-rating if they are re-supplied by the recipient while they are still in Canada in the course of being shipped by the supplier to a destination outside Canada that is specified in the contract for carriage of the goods. A re-supply of the goods by the recipient during their shipment to a destination outside Canada as described in paragraph 12(b) would be equally permissible for purposes of paragraph 12(b).

In order for section 1 of Part V of Schedule VI to the ETA to apply the recipient must intend to export the goods, as opposed to re-supplying the goods while they are still in Canada, and the supplier must maintain satisfactory evidence of the export of the goods by the recipient, as opposed to by a subsequent purchaser. It therefore does not appear that section 1 would apply to zero-rate the supply of the goods in the general set of facts provided.

With respect to the last example, based on the very limited information provided and taking into account the above explanations of what is required to satisfy the requirements of section 1 of Part V of Schedule VI to the ETA and paragraphs 12(a) and (b) of Part V of Schedule VI to the ETA, there is nothing to indicate that the conditions of these provisions have been met to support zero-rating the supply of the goods.

Based on the broader wording of subsection 179(3) of the ETA, it is possible that the supply of the goods to an unregistered non-resident could be deemed made outside Canada under this provision in a case such as this. However, there are insufficient facts to determine whether subsection 179(3) would in fact apply in the general scenario provided.

Q.23 - Publications Delivered Electronically - Internet Sites

Facts/Background

A Canadian company prepares technical bulletins which are sent electronically to its clients (both residents and non-residents) from a server located in Canada. The clients pay a fee to receive the bulletins, which varies according to the number of users (i.e., employees) who will have access to the bulletin. The Canadian company retains the copyright to the information in the bulletins. The agreement allows the clients to use the technical information in the bulletins and to reproduce the materials, but strictly for their own use. As well, the agreement stipulates that non-resident clients may not use the information in Canada.

Question

When the clients are non-residents, including all individual users, will the supply of the bulletins benefit from zero-rating under section 10 of Part V of Schedule VI? Alternatively, would the supply be deemed to be made outside Canada by virtue of 142(2)(c)?

CRA Comments

Based on the information provided, the registrant is making a supply of a right of access to the electronic bulletin. This is a supply of intangible personal property that does not qualify for zero-rating under section 10 of Part V of Schedule VI to the Excise Tax Act.

Based on the information provided, although there is a restriction on the place where the information obtained from the bulletin may be used, there is no restriction with respect to the place at which the non-resident individuals can actually receive the bulletin. As a result, the supply of intangible personal property may be used in Canada and is therefore a taxable (other than zero-rated) supply deemed made in Canada under subsection 142(1) of the ETA.

Q.24 - Goods and Services Tax - Zero-rating of Call Centre Service

Fact/Background

Whether a customer call centre service supplied in Canada is zero-rated under VI-V-7 where the service is provided to a non-resident company in respect of telephone inquiries made by its customers who are expected to be located outside of Canada at the time of making the call.

The relevant part of the zero-rating provision under Schedule VI Part V section 7 is reproduced below: A supply of a service made to a non-resident person, but not including a supply of... (a.1) a service that is rendered to an individual while that individual is in Canada[;]

Scenarios

• USCo is a non-resident corporation who is not registered for GST purposes and carries on business providing services to individuals in the U.S. USCo provides a customer hotline in respect of its business.
• USCo outsources the customer hotline function to a Canadian resident company (CanCo). CanCo is registered for GST purposes.
• The telephone number given to USCo’s customers can be used from anywhere in North America.
• USCo’s customers can call to inquire about their personal accounts held with USCo and request that information be updated, such as mailing address or change of name.
• It is expected that all, if not almost all, of the customers of the USCo will call the call centre from outside Canada. However, on the rare occasion, a customer of USCo may contact the customer call centre while he/she is in Canada (e.g. while on business or holiday).

Questions

1. Please confirm that CanCo makes a single supply of a call centre service to USCo and not a single supply of a service to each and every individual who calls the call centre. Accordingly, it would appear that the exclusion in paragraph (a.1) should not apply notwithstanding that certain individual customers of USCo may on rare occasions call the call centre from a location in Canada. Please comment. Specifically, we are concerned that the CRA might take the position that the instances of individuals being in Canada when they place the call to the call centre might taint or disqualify the entire supply of a call centre service from the zero-rating so the entire supply becomes taxable.

2. IF CRA does not confirm the suggested conclusion in (1) that the entire supply is zero-rated, would the CRA require CanCo to make an allocation between calls made from within Canada and calls made from outside Canada and charge tax only in respect of the calls from within Canada?

3. If the CRA agrees that an allocation must be made in accordance with paragraph 2, would two separate contracts between USCo and CanCo be necessary to solve the problem (i.e. one contract with respect to individual customers who may call from within Canada and a separate contract with respect to individual customers who call from outside Canada)?

4. Please comment on the CRA's normal audit practices in this area. In particular, what type of documentation is satisfactory to the CRA to support the position that the service in this circumstance is zero-rated (in whole or part)? For example, would records evidencing that the contact home addresses of customers are outside of Canada be sufficient or would the CRA require telephone records to show that no calls were made from within Canada? Is the fact that the telephone number given to the customers may be used from anywhere in North America problematic? In this regard, would there be an automatic presumption that the supply of the service cannot be zero-rated unless telephone records show that no calls were made from within Canada.

CRA Comments to questions

1. Based on the limited information provided, Canco would appear to be making a single supply of a call centre service to USCo. This single supply would not qualify for zero-rating in its entirety based on the application of the exclusion in paragraph 7(a.1) of Part V of Schedule VI to the Excise Tax Act cited in the question. Specifically, the instances of individuals being in Canada when they place the call would be sufficient to disqualify the entire supply from zero-rating.

2. An allocation by CanCo of calls between those made from within Canada and those made from outside Canada would not affect the tax status of the single supply as being a taxable (other than zero-rated) supply as explained in the previous question. CanCo would be required to collect tax on the total consideration for the single supply of the call centre service.

3. As indicated in response to the previous question, an allocation of the calls would not have an effect on the tax status of the single supply of the call centre service and would therefore not be required in this case.

4. Records evidencing the contact home addresses of customers as being outside Canada would merely be an indication of the residency of the individuals. It may subsequently be established through telephone records that no calls were actually made from within Canada. However, as identified in the question, the fact that the telephone number may be used by individuals from within Canada would be reasonably sufficient grounds for the CRA to conclude that the supply would not be zero-rated when the supply is made and for the supplier to collect tax in respect of the supply at that time.

Q.25 - Fees charged by Canadian Financial Institutions to Non-Residents

Facts/Background

A non-resident, non-registrant ("U.S.Co.") will be issuing and redeeming unsecured short-term notes in Canada (“Notes”). U.S.Co. engages a Canadian registrant deposit-taking financial institution ("FinCo") to act as an issuing agent of the Notes. Under this agreement FinCo will be responsible for supplying and safekeeping blank Notes, and will, on U.S.Co.’s instructions, countersign the Notes (thereby creating a legal debt obligation of U.S.Co.) and maintain records of notes issued and outstanding (the “Services”).

Question

In view of the extensive involvement of FinCo in the issuance of the Notes, does the CRA agree that it is supplying exempt financial services? If the CRA considers that the Services are purely administrative and are not exempt "financial services", will the supply of the Services by FinCo to U.S.Co. benefit from zero-rating under section 7 of Part V of Schedule VI? Specifically, will subsection 7(f) of Part V of Schedule VI apply such that the Services will not benefit from zero-rating?

CRA Comments

Although the question refers to the extensive involvement of FinCo in the issuance of the Notes, the facts provided do not appear to support this.

The facts indicate that, under an agreement with U.S.Co, FinCo will be supplying and safekeeping the blank Notes, countersigning the Notes on U.S.Co’s instructions and maintaining records of notes issued and outstanding.

Since the transaction consists of several elements, it is first necessary to determine whether FinCo is providing a single or multiple supplies.

It appears that FinCo is providing a single supply, the predominant element of which is administrative in nature, but this is a question of fact to be determined on a case-by-case basis. The administrative elements appear to include the maintenance of records, supplying and safekeeping of blank Notes and appear to be a large part of what is being provided. Based on the information provided, the supply does not appear to include a “financial services” element.

If FinCo is making a taxable supply to U.S.Co, section 7 of Part V of Schedule VI to the ETA could apply. Based on the information provided, it does not appear that exclusion in paragraph 7(f) of Part V of Schedule VI to the ETA would apply.

Q.26 - Drop-Shipment Certificates – Films

Facts/Background

A non-resident, non-registrant ("U.S.Co.") engages a Canadian registrant ("CanCo") to produce a film in Canada. U.S.Co. retains the intellectual property rights to the film. CanCo is directed to deliver the film on physical media to locations outside Canada and to consignees in Canada.

Question

Will the fees charged by CanCo to U.S.Co. qualify for zero-rating when the films are delivered to Canadian consignees? If CanCo’s services are considered to be in respect of tangible personal property in Canada, can the Canadian consignees supply drop-shipment certificates so that CanCo’s services are deemed by subsection 179(2) to have been made outside Canada?

CRA Comments

Based on the limited information provided, the supply made by CanCo to USCo appears to be a taxable supply of a service in respect of tangible personal property that is made in Canada. There is no provision that would zero-rate this supply.

Although there is only limited information provided in the question, it appears based on that information that USCo is carrying on business in Canada for GST/HST purposes. Whether a non-resident is carrying on business in Canada for GST/HST purposes is a question of fact requiring consideration of all relevant facts. The factors that the CRA will consider in determining whether a non-resident is carrying on business in Canada for GST/HST purposes are set out in policy statement P-051R2 Carrying on Business in Canada.

For GST/HST purposes, a "business" includes any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement. USCo appears to be in the business of supplying tangible personal property by way of lease, licence or similar arrangement. For GST/HST purposes, the supply of property under a lease, licence or similar arrangement is considered to be made on a regular and continuous basis. USCo is considered to have made a separate supply of the property for each period to which a lease or licence payment is attributable. Also, a supply by way of lease, licence or similar arrangement of the use or the right to use tangible personal property is deemed to be a supply of the tangible personal property.

The carrying on business factors present in Canada in this case include the fact that USCo is having the film produced in Canada and delivery of the physical copies of the film to USCo and to the Canadian locations occur in Canada. Based on these facts and the application of the GST/HST provisions that relate to the supply of property by way of lease, licence or similar arrangement, USCo would be carrying on business in Canada for GST/HST purposes.

As a registrant, USCo would be required to collect tax on its taxable (other than zero-rated) supplies made in Canada. Subsection 179(2) of the ETA would not apply to deem the supply made by CanCo to be made outside Canada where USCo is registered for GST/HST purposes.

REAL PROPERTY

Q.27 - Real Property – Whether an expropriation is considered to be a severance

Facts/Background

Pursuant to section 9 of Part I of Schedule V to the Excise Tax Act, a supply of real property by an individual qualifies as an exempt supply if certain conditions are met. In particular, pursuant to subparagraph 9(2)(c)(i), a supply of a part of a parcel of land will not qualify as an exempt supply where the parcel was subdivided or severed into more than two parts by the supplier.

Question

Where a property owner is required by the municipal or other authority which grants severances, to convey certain lands to the municipality or other agency, such as for road widening, as a condition to the grant of a severance, does such requirement constitute a “subdivision” or “severance” for purposes of applying subparagraph 9(2)(c)(i) of Part I of Schedule V?

CRA Comments

The last part of paragraph 9(2)(c) of Part I of Schedule V to the Excise Tax Act provides that a part of a parcel of land that an individual, trust or settlor supplies to a person, such as a municipality, who has the right to expropriate the property, is deemed not to have been subdivided or severed from the remainder of the parcel for purposes of the exclusion under paragraph 9(2)(c).

Where an individual who owns a parcel of land is making a request to a municipality to have the parcel severed and is required to convey a part of the parcel to the municipality as a condition to the grant of a severance, the part that is conveyed to the municipality is severed by the individual. However, the part conveyed to the municipality is deemed not to have been severed by the individual for purposes of paragraph 9(2)(c) if the municipality has the right to expropriate that part. A municipality’s right to expropriate would be provided for under the applicable provincial legislation and limited to the property within its municipal boundaries.

The deeming provision applies provided the supply of a part of a parcel is to a person who has the right to acquire it by expropriation. It is not dependent upon whether the supply is the result of the exercise of a right to expropriate by the person.

If the municipality required the individual to convey a part of the parcel to a third party as a condition to the grant of severance, the part conveyed to the third party is severed by the individual and the deeming provision will not apply if the third party does not have the right to expropriate that part.

Q.28 - Real Property – Whether an Input Tax Credit on Improvements Claimed in Error Taints Qualification as Exempt Supply of Residential Complex

Facts/Background Pursuant to section 2 of Part I of Schedule V to the Excise Tax Act, a supply by way of sale of a residential complex qualifies as an exempt supply if certain conditions are satisfied. In particular, pursuant to paragraph 2(a), the supplier must not have claimed an “input tax credit ... in respect of an improvement to the complex ... after the complex was acquired by the person”. A registrant engaged mainly in exempt activities, purchases a residential complex for the use of one of its managers and based on the application of its input tax credit methodology, claimed an input tax credit of approx. $15.33 in connection with certain capital improvements to the property. The registrant later seeks to sell the residential complex. The registrant acknowledges that the ITC was claimed by the registrant in error.

Question

Whether the sale of the residential complex by the registrant qualifies as an exempt supply pursuant to section 2 of Part I of Schedule V to the Excise Tax Act? Consider also whether the response differs if the registrant signs a declaration confirming that the ITC claimed was in error and undertaking to adjust its net tax to in essence re-pay the ITC claimed in error?

CRA Comments

Assumptions

Our response assumes that the registrant is not a builder of the complex and that the registrant was entitled to claim an ITC in respect of the improvement to the property.

Answer

Paragraph 2(a) of Part I of Schedule V to the Excise Tax Act (the ETA) exempts the supply by way of sale of a residential complex made by a person who is not a builder of the complex unless the person claimed an ITC in respect of the person’s last acquisition of the complex or in respect of an improvement to the complex after it was last acquired by the person. Since the registrant claimed an ITC in respect of an improvement to the complex after the registrant last acquired it, the sale of the complex is excluded from the exemption in paragraph 2(a). The sale would be excluded from the exemption regardless of whether the registrant made an undertaking to adjust their net tax to, in effect, repay the ITC that was claimed on the improvement.

It should be noted that where a registrant makes a taxable supply of real property by way of sale, section 193 of the ETA generally provides for the recovery of tax payable on the last acquisition of the property or on improvements made to the property since it was last acquired to the extent that such tax was not eligible for an ITC. The ITC under subsection 193(1) is equal to the lesser of the basic tax content of the property at the time of sale or the tax payable on the sale, multiplied by the extent to which the registrant was using the property in non-commercial activities immediately before the sale. If the registrant is a public sector body, the ITC available under subsection 193(1) is subject to the limitation in subsection 193(2.1) of the ETA that applies where the registrant is making the supply to another person with whom the registrant is not dealing at arm’s length.

Q.29 - Real Estate Joint Ventures

Facts/Background

CBA Question 26 in 2000 asked about the CRA’s position concerning the possible claiming of input tax credits by a registered joint venture operator on the initial purchase of taxable commercial real property for use in the joint venture operations. For example, assume three corporations intend to purchase commercial real property and enter into a joint venture agreement stating that a property manager will act as operator of the joint venture. Assuming a written joint venture agreement and all relevant s 273 elections are in place for all co-venturers before the purchase of the real property, can the registered operator acquire the real estate as agent on behalf of the co-venturers and claim an ITC for the GST paid on acquisition? The issue is, as explained in the 2000 Question, whether the acquisition of real property itself is a prescribed activity to which the joint venture election potentially applies, or whether the joint venture election for real property can only cover post acquisition real property activities. The prescribed activity includes “the exercise of the rights or privileges, or the performance of the duties or obligations, of ownership of an interest in real property” and could potentially cover the acquisition as well as disposition of real property, particularly since the construction of real property is also covered (is the acquisition of ownership and holding of title not a duty or obligation of ownership?). This issue arises frequently in real estate joint ventures for commercial buildings and land purchased for construction and development. If the joint venture operator cannot claim ITCs on the acquisition of the real estate, the co-venturers must get registered for GST to claim them. If the operator takes care of all post acquisition activities, the co-venturers will file Nil returns thereafter. This results in considerable inconvenience and paperwork.

Question

Can the CRA please reconsider this issue and advise whether its view, as expressed in the answer to Q 26 in 2000, remains the same.

CRA Comments

We have given further consideration to this issue and the information you have provided. Based on the information provided and how the legislation currently reads, section 273 of the ETA and the Joint Venture (GST/HST) Regulations do not provide for the joint venture election to cover this situation.

As you know, the Department of Finance is reviewing the application of GST/HST to joint ventures and what types of situations and activities should be covered by the joint venture election. We will bring this issue and situation to the attention of the Department of Finance for tax policy consideration.

Q.30 - Joint Venture

Facts/Background

A corporation holds nominal legal title to real property under a bare trust arrangement (the "Trustee Corporation"). The Trustee Corporation is registered for GST. Beneficial ownership of the real property is held by two or more corporations who have entered into a joint venture agreement (to which the Trustee Corporation is a party) relating to the development of the property; and The Trustee Corporation also acts as operator for the joint venture (in the sense of, e.g., acquiring building materials, contracting with trades, etc. on behalf of the joint venturers),

Questions

(a) It appears the Trustee is more than a bare trustee so that it may be registered. Do you agree?

(b) Can the co-venturers and the Trustee Corporation jointly elect to designate the Trustee Corporation as "operator" under s.273 of the Excise Tax Act?

(c) If the answer to 1, above, is "yes", can the parties execute a joint election specifying an effective date that occurs in the past, assuming that the parties have operated the joint venture all along in a manner that is consistent with such an election having been made as of the effective date specified?

CRA Comments to questions

Q.(a)

There is not enough information to determine whether the Trustee Corporation may register. In order to register, a person must be engaged in a commercial activity as defined in subsection 123(1) of the ETA. As discussed in GST/HST Policy Statement P-015, Treatment of Bare Trusts under the Excise Tax Act, a bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property. Therefore, the bare trustee is not seen as carrying on any commercial activity with respect to the trust property, and it is the beneficial owner, rather than the trust, that would be required to register. A trust will not be considered to be a bare trust where the trustee has other duties set out in the trust instrument which involve independent or discretionary powers and responsibilities.

Q.(b)

Under section 273 of the ETA, the operator must be a registrant and a participant in an eligible joint venture in order to make the election with a co-venturer. GST/HST Policy Statement P-106, Administrative Definition of a "Participant" in a Joint Venture, provides that a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture would be considered a participant for purposes of the joint venture election.

If the Trustee Corporation is appointed as the operator under the joint venture agreement, and has been given discretionary powers and responsibilities as the operator (i.e., it has managerial or operational control of the joint venture property) then it is not a bare trustee as described in Policy Statement P-015.

If the Trustee Corporation does have managerial or operational control of the day-to-day activities of the joint venture, and it is making and receiving supplies on behalf of the joint venture participants, then the trust would not be a bare trust, and would be required to register with respect to the commercial activities related to the trust property.

Q.(c)

GST/HST Policy Statement P-187, Prescribed Form for Joint Venture Elections, indicates that the operator and co-venturer must specify the date that a joint venture election became effective. The date specified cannot be earlier than the date that the parties formed a joint venture.

Q.31 - Self Supply of Addition to Single Unit Residential Complex

Facts/Background

S 191(3) requires self-assessment of GST by a builder on the construction or substantial renovation of a multi-unit residential complex and s. 191(4) requires GST to be self-assessment by the builder on the construction of an addition to a multiple unit residential complex. s 191(1) requires self-assessment on the construction or substantial renovation of a single unit residential complex.

Question

Could you please confirm that no self-assessment is required on the construction of an addition to a single unit residential complex (unless it amounts to a substantial renovation of the house or the construction of a “multi-unit residential complex” on its own). An example would be an addition of 2-4 rental units to an existing house. Further, if no self-assessment is required in such a case, please confirm that the builder cannot claim ITCs in respect of the construction.

CRA Comments

The self-supply rules under section 191 of the Excise Tax Act (ETA) do not apply to the addition of a residential unit to an existing single unit residential complex where the addition does not result in a substantial renovation of the complex or in the construction of a multiple unit residential complex. Where renovations are made to the existing single unit residential complex in conjunction with the addition of a residential unit, the resulting structure may be viewed as a newly constructed multiple unit residential complex and subject to the self supply rule under subsection 191(3) of the ETA.

A multiple unit residential complex is a residential complex that contains more than one residential unit, but does not include a condominium complex.

Where a person constructs an addition of 2-4 rental units to an existing house, the person is constructing a multiple unit residential complex and is subject to the self supply rule under subsection 191(3) of the ETA. The tax deemed to have been paid and collected under the self-supply rule in subsection 191(3) of the ETA is calculated on the fair market value of the entire multiple unit residential complex (existing house and additional rental units).

Where residential units are added one at a time to an existing single unit residential complex, which is not renovated to any extent, each addition of a residential unit constructed after the coming into existence of a multiple unit residential complex will be subject to the self-supply rule under subsection 191(4) of the ETA. As such, the addition of the first residential unit to the single unit residential complex will not be subject to the self-supply rules. However, the addition of the next residential unit is an addition to a multiple unit residential complex and subject to the self-supply rule under subsection 191(4) of the ETA.

Where a person carries out the construction of an addition to a single unit residential complex and the person is not subject to the self-supply rules under section 191 of the ETA, the person will not be entitled to claim ITCs in respect of the construction inputs acquired for the purpose of making exempt supplies of the residential units.

Where in the course of a business of making supplies of real property, a person renovates or alters a residential complex (e.g., constructs an addition of a residential unit to a single unit residential complex) and the renovation or alteration is not a substantial renovation, the person is liable to remit GST/HST in accordance with section 192 of the ETA. Under this rule, the person is deemed to have made and received a taxable supply and is liable to account for GST/HST deemed collected with respect to certain costs.

Q.32 - Condominium Units and Rental Pools

Facts/Background

Assume that a particular individual owns a condominium unit in a condominium complex in which 90% of the condominium units are rented by their owners as vacation property typically for periods of continuous occupancy by each tenant of less than 60 days. Assume also that a property manager has been engaged by the owners to rent their condominium units to the public by way of operating a rental pool in which each owner has the option of putting his or her unit in the rental pool at the time of the owner’s choosing. For this purpose, the manager, on behalf of the owners’ association, also engages the services of various independent contractors to make available to the occupants of the complex such amenities as daily housekeeping services, 24-hour front desk reception services, parking and recreational facilities. Finally assume that the particular individual is about to sell his condominium unit.

Questions

1. Under which, if any, of the following scenarios would the particular individual’s condominium unit qualify as a “residential complex” at the time of the sale?

a) The particular individual has only ever used his condominium unit for personal use; he has never put it in the rental pool.

b) For seven months of the year, the condominium unit has been used by the particular individual for his personal use and the rest of the year it has been in the rental pool.

c) The particular individual has only ever actually occupied his unit during the months of June, July and August. At other times of the year it tends to be vacant.

d) The particular individual occupies his unit less than 30 days per year. At all other times during the year, the unit is in the rental pool.

2. Would the answer in the case of scenario (c) be any different if we assume that the condominium complex were principally occupied during the peak months of June, July and August and had a high vacancy rate during the other months of the year? Would the answer under this assumption depend on whether or not the particular individual left his unit in the rental pool during the high-vacancy months?

3. Does the answer in the case of scenario (b) and (c) depend on whether the particular individual’s condominium unit happens to be in the rental pool at the time of the sale?

Submission

Based on the definition in subsection 123(1) of “residential complex” (particularly the closing words thereof), the particular individual’s condominium unit should not be a residential complex at the time of sale under scenario (a). This is because, in that case, the unit is not included in that “part of the building” (i.e., the part of the complex) that is a “hotel”, given that the particular individual’s unit is never part of the rental pool under this scenario. Under scenario (b), it is less clear whether the particular individual’s unit should be considered to be included in that part of the building (i.e., the complex) that is a hotel when the particular individual’s unit is used like a suite in a hotel for less than half of the year. Given that the individual uses his unit primarily for personal use, it is reasonable to conclude that the unit qualifies as a residential complex. Under scenario (c), the individual’s condominium unit should qualify as a residential complex for the same reason as under scenario (b) above, where the unit is not put in the rental pool (i.e., is held only for personal use) throughout the high-vacancy period. However, if the unit is put in the rental pool during the high-vacancy period, it is reasonable to count that period as part of the “hotel use”, since the unit is available for rental as a hotel, even if it is not actually rented. Accordingly, since the unit is in the rental pool for the majority of the year, the unit should not qualify as a residential complex. In other words, in response to question 2 above, the answer should depend on the extent to which the individual’s unit is in the rental pool during the high-vacancy period. Under scenario (d), the condominium unit should not qualify as a residential complex since it is used “exclusively” for short-term accommodation. Again, the amount of time that the unit is actually rented is irrelevant, as long as it is available to be rented pursuant to the rental pool arrangements. In response to question 3, it should not matter whether the individual’s unit happens to be in the rental pool at the particular point in time that the sale takes place. The overall characterization of a part of a building as a hotel should be based on a balance of factors considered over a reasonable period of time during which the building or part is used in the ordinary course of its operation, rather than strictly on circumstances existing at a particular point in time.

CRA Comments

Where a person is selling a condominium unit it is necessary to determine if the unit is a residential complex to ascertain whether the sale is taxable or exempt. If it is a residential complex, the tax status will also depend on whether the vendor has claimed input tax credits in respect of the last acquisition of the complex or on improvements made to the complex since its last acquisition. In the case of a taxable supply of a residential complex to an individual, the vendor will be required to collect the tax even if the individual is registered for GST/HST purposes.

For a condominium unit to be a “residential condominium unit” and a “residential complex” it must meet the conditions set out in the respective definitions in subsection 123(1) of the Excise Tax Act (ETA). Based on the information provided, it is assumed that each of the condominium units in the condominium complex meets all of the requirements in the definition of “residential condominium unit” except for whether or not the condominium unit is a “residential complex”.

A condominium unit is a residential complex unless all three of the following conditions (referred to as the “three tests”) in the post-amble of the definition of “residential complex” are met.

Focussing on the post-amble within the context of this question, a condominium unit is a “residential complex” unless the condominium unit (part of the building) is:

(1) a hotel, motel, inn, boarding house, lodging house or other similar premises, (referred to as the “Hotel Test”);

(2) where the building in which the condominium unit is located is not described in paragraph (c) of the definition of “residential complex”(referred to as the “Paragraph (c) Test”); and

(3) where all or substantially all of the leases, licences or similar arrangements in respect of the condominium unit provide, or are expected to provide, for periods of continuous possession or use of less than sixty days (referred to as the “90% Test”).

Hotel Test

GST/HST Policy Statement P-099 – The Meaning of “Hotel”, “Motel”, “Inn”, “Boarding House”, “Lodging House” and “Other Similar Premises”, as Used in the Definition of “Residential Complex” and “Residential Unit” establishes guidelines for determining if a property is a hotel, motel, inn, etc. for purposes of the definition of residential complex. In respect of a condominium complex, the “Hotel Test” is applied on a condominium unit-by-unit basis.

The conditions set out in the guidelines should generally be present throughout the year for the condominium unit to be considered a hotel. The CRA has ruled that where the conditions are met for only a portion of the year, the building or part is not a hotel, but rather a residential complex used to make taxable supplies.

Paragraph (c) Test

The “Paragraph (c) Test” will be met unless the whole of the building is owned by, or has been supplied by way of sale to, an individual and is used primarily as a place of residence of the individual, an individual related to the individual or a former spouse or common law partner of the individual. In respect of a condominium complex where all of the condominium units are in one building, the “Paragraph (c) Test” is applied in respect of the whole building and will be met if various individuals own the condominium units in the building.

If one individual owns all of the condominium units in the building, the “Paragraph (c) Test” will not be met if the entire building (i.e., the combined use of all the units) is primarily used as a place of residence of the individual, an individual related to the individual or a former spouse or common law partner of the individual.

90% Test

GST/HST Policy Statement P-053 – Application of All or Substantially All to Residential Complexes provides guidelines for the application of the “90% Test”. In respect of a condominium complex, the “90% Test” is applied on a condominium unit-by-unit basis.

The time period for applying the “90% Test” should be reasonable for the particular supplies in question and used on a consistent basis. Normally, a one-year interval would be appropriate. Where a one-year interval was reasonable for purposes of the “Hotel Test”, the CRA would generally use the same time period to apply the “90% Test.”

The “90% Test” takes into account all supplies of the condominium unit made by the individual by way of lease, licence or similar arrangement (i.e., both long-term and short term rentals). The personal use by an individual owner of a unit is not a supply of the unit made by the individual by way of lease, licence or similar arrangement. As such, the personal use does not factor into the “90% Test” although it is a factor to consider for purposes of the “Hotel Test”.

If, during a one-year interval, the individual owner only makes supplies of their condominium unit by way of lease, licence or similar arrangement for periods of continuous possession or use of less than 60 days (i.e., “short-term rentals”), the “90% Test” will be met.

Where all three tests are met, the condominium unit is not a residential condominium unit and is not a residential complex for GST/HST purposes throughout the one-year interval.

1) Under which, if any, of the following scenarios would the particular individual’s condominium unit qualify as a “residential complex” at the time of the sale?

a) The particular individual has only ever used his condominium unit for personal use; he has never put it in the rental pool.

In this scenario, the condominium unit is a residential complex at the time of its sale. Although the “Paragraph (c) Test” is met since the individual does not own all of the units in the building, the other tests are not met.

b) For seven months of the year, the condominium unit has been used by the particular individual for his personal use and the rest of the year it has been in the rental pool.

In this scenario, the condominium unit is a residential complex at the time of its sale. The “Hotel Test” is not met in the one-year interval prior to the sale. Sufficient conditions for the “Hotel Test” may be met for a portion of the one-year interval (i.e., the 5 months during which the condominium unit is in the rental pool provided that the individual has made supplies of short-term rentals throughout the interval).

c) The particular individual has only ever actually occupied his unit during the months of June, July and August. At other times of the year it tends to be vacant.

In this scenario, the condominium unit is a residential complex at the time of its sale. The “Hotel Test” is not met for any portion of the one-year interval prior to the sale since there are minimal, if any, supplies of short-term rentals. Refer to our response to question 2 for additional comments.

d) The particular individual occupies his unit less than 30 days per year. At all other times during the year, the unit is in the rental pool.

Based on the limited information provided, the condominium unit is likely a residential complex at the time of its sale. Simply placing the unit in a rental pool is not sufficient to meet the “Hotel Test”.

2) Would the answer in the case of scenario (c) be any different if we assume that the condominium complex were principally occupied during the peak months of June, July and August and had a high vacancy rate during the other months of the year? Would the answer under this assumption depend on whether or not the particular individual left his unit in the rental pool during the high-vacancy months?

The “Hotel Test” cannot be met where there is a mix of personal use and little or no rental use during the one-year interval prior to the sale of the condominium unit. When there is a mix of personal and rental use, the days where the unit is vacant will not automatically be considered to be days for use in making short-term rentals.

3) Does the answer in the case of scenario (b) and (c) depend on whether the particular individual’s condominium unit happens to be in the rental pool at the time of the sale?

No, the answers to 1(b) and 1(c) do not depend on whether or not the condominium unit is in a rental pool at the time of its sale. Generally, the application of the three tests to determine if a condominium unit is a residential complex at a particular time is based on a balance of factors considered over a reasonable period of time (generally a one-year interval)

AMALGAMATIONS

Q.33 - Amalgamations and “Specified Person”

Facts/Background

Assume several predecessor corporations are amalgamated to form a single amalgamated corporation. Further assume that certain of the predecessor corporations are “specified persons”, as defined in subsection 225(4.1) and other predecessor corporations do not so qualify.

Question

For purposes of determining whether the amalgamated corporation can claim an ITC unclaimed by a predecessor corporation that was not a specified person (the “Relevant Predecessor”), will the amalgamated corporation’s claim for the ITC be restricted by the “specified person” rules if:

(a) the amalgamated corporation is, itself, a specified person following the amalgamation; or (b) the amalgamated corporation, itself, is not a specified person following the amalgamation but a predecessor, other than the Relevant Predecessor, is a specified person?

Submission

For purposes of claiming the Relevant Corporation’s unclaimed ITC, the specified person restrictions should not apply because, for that purpose, the amalgamated corporation is deemed (under section 271) to be the same corporation as the Relevant Corporation, which is not a specified person. The fact that the amalgamated corporation is, itself, a specified person following the amalgamation is not relevant because the specified person rules apply with respect to an ITC “for a reporting period” and, therefore, apply only if the person was a specified person during that reporting period.

CRA Comments

(a) We are currently reviewing the interaction of the amalgamation rules and the specified person rules, in this particular situation.

(b) If, a corporation that was not a specified person as defined in paragraph 225(4.1) was eligible to claim an ITC under section 169 in a reporting period but did not claim that ITC, and then it amalgamated with other corporations to form a corporation that is not specified person as defined in subsection 225(4.1), it appears that the limitation for a specified person in paragraph 225(4)(a) would not apply with respect to that unclaimed ITC of that predecessor corporation from that prior reporting period.

Q.34 - Amalgamations and Filing Requirements

Facts/Background

Assume that three predecessor corporations are amalgamated to form a single amalgamated corporation on March 15, 2007. Also assume that all three of the predecessor corporations are GST registrants, each having a different reporting period – one is annual, another is quarterly and the other is monthly. Assume further that the reporting period in which the amalgamation occurs begins on January 1st for the annual filer, February 1st for the quarterly filer, and March 1st for the monthly filer. Finally assume that the new amalgamated corporation chooses to have a monthly reporting period.

Question

Is it necessary for each of the predecessor corporations to file a special GST return for the short period (“Stub Period”) beginning with the first day of that predecessor’s final regular reporting period and ending on the day immediately preceding the amalgamation (i.e., March 14, 2007)? Alternatively, can the amounts of tax collected or collectible by a predecessor during its Stub Period simply be carried over and included in the amalgamated corporation’s first GST return for its first reporting period ending on March 31, 2007?

Submission

It should not be necessary for each of the predecessor corporations to file a special GST return for its Stub Period. This is because the provision requiring a registrant to file a GST return at the end of the registrant’s reporting period, section 238, is among the provisions listed in the Amalgamations and Windings-Up Continuation (GST/HST) Regulations and is, therefore, one of the purposes for which the amalgamated corporation is deemed under section 271 to be the same corporation as, and a continuation of, each of the predecessor corporations. The purpose of the deeming rule in section 271 is to achieve a seamless transition from the predecessors to the amalgamated corporation for each of the prescribed purposes, which includes the purpose of filing a GST return under section 238. Section 225 (containing the formula for determining the net tax of a person to be reported in the person’s GST return) is also one of the prescribed purposes for which the amalgamated corporation is deemed to be the same corporation as, and a continuation of, each of the predecessor corporations. Accordingly, after the amalgamation, and as a consequence of the deeming rule in section 271, any unreported amount of tax collected or collectible by a predecessor that would have formed part of its net tax for its last reporting period had the amalgamation not occurred, is considered to be part of the tax collected or collectible by, and thus part of the net tax of, the amalgamated corporation after the amalgamation.

CRA Comments

Paragraph 271(a) of the ETA provides that a new corporation formed on an amalgamation will generally be treated, for GST/HST purposes as being a person separate from each of the predecessor corporations. However, paragraph 271(b) provides that the new corporation will be considered to be the same corporation as and a continuation of each of the predecessor corporations for the purposes of the bad debt provisions in section 231, the calculation of the threshold amount in section 249 and for certain prescribed purposes.

Section 2 of the Amalgamations and Windings –Up Continuation (GST/HST) Regulations deems the new corporation to be the same as and a continuation of the predecessor corporations for purposes of (among other things) calculating net tax, paying net tax, refund payments and filing returns.

However, on ceasing to be registrants on a particular day, subsection 251(2) deems A, B and C to have two separate reporting periods. The first deemed reporting period begins on the first day of the reporting that includes the particular day and ends on the day immediately preceding the day the person ceases to be a registrant. The second deemed reporting period begins the day after A, B and C ceased to be registrants and ends on the last day of the calendar month that includes the day A, B and C ceased to be registrants.

Section 251 is not prescribed in the Regulations. Therefore A, B and C are required to file separate GST returns for their respective stub periods.

VARIA

(Financial Services, Cemetery Property and Services, Public Service Body Rebate, Input Tax Credit, Rebate customs Brokers, Excise Tax, Registration of a partner, GAAR)

Q.35 - Financial Services

Please provide an update of current litigation matters dealing with the GST exemptions for financial services.

CRA Comments

Royal Bank of Canada

Whether branch services provided by a bank to a mutual fund company are financial services. The bank provided administrative services to one of its wholly owned subsidiaries, a mutual fund dealer. The bank charged GST on the branch services and claimed input tax credits on the expenditures related to these services. The bank’s position is the branch services are taxable supplies. The CRA characterized the services as exempt financial services.

On December 20, 2005, the TCC dismissed the registrant’s appeal. On January 19, 2006, the registrant filed an appeal before the FCA. On May 15, 2006, a Notice of Motion for leave to intervene was filed by the Canadian Bankers Association (CBA). On June 13, 2006, the FCA granted leave to intervene to the CBA subject to certain conditions. On February 14, 2007 the FCA dismissed the appeal.

General Motors of Canada Limited

Whether the Appellant can claim ITC’s for the tax paid on investment management fees paid to professional investment managers related to the administration of pension plan trust assets. Alternatively, GMCL can claim a rebate for tax paid in error on an exempt supply.

The case was heard in Tax Court on November 27 and 28, 2006. At the conclusion of the hearing, the Judge ordered that the appellant and the respondent serve and file written arguments. Continuance of the hearing was set for January 23, 2007. Judgement reserved.

Canadian Medical Protective Association

Whether the supply of investment management services is a taxable supply or an exempt supply of financial services.

The Canadian Medical Protective Association (CMPA) is charged management fees, by external independent investment managers, in respect of the investment of its significant financial reserves arising from membership contributions of participating physicians. The CRA’s position is that the services provided by the investment managers are not “financial services” as defined by the ETA; therefore, the CMPA was the recipient of taxable services.

GEN – TCC: On December 23, 2004, the CMPA filed an appeal before the TCC. Discoveries were held in November 2005. Pre-hearing conference was held on February 26, 2007.

Royal Bank of Canada

The question in issue is whether or not the supply of frequent flyer points by Canadian Airlines to the Appellant is a taxable supply. Pursuant to a contract between Canadian and RBC, RBC issued credit cards that rewarded the cardholder with frequent flyer points for each dollar charged to the card. RBC purchased the points pursuant to the contract with Canadian, but RBC did not pay GST on the consideration for the points.

A second question is whether or not the Minister of National Revenue can assess RBC as the recipient of the points while also assessing Canadian as the supplier of the same points.

Hearing set for March 7, 2007.

EnCana Corporation

The issue is whether or not GST is exigible on a fee paid for planning the sale of units of a trust. The Appellant spun off its holdings in a tar sands project into a royalty trust. The Appellant negotiated terms of public offering on behalf of the royalty trust assisted in preparing the

prospectus and assisted in marketing the units, including negotiating special price for appellant’s employees to buy trust units. The Appellant received a $5 million fee for its services but did not charge the trust GST.

No date set for hearing.

RSM Richter Inc. Liquidator of Distribution Co. Inc

The principal issue in this appeal is whether or not Distribution Co, supplied financial services such that it is not entitled to input tax credits. Distribution Co. was a company set up for the sole purpose of receiving the assets, and liabilities, of Eaton’s, liquidating those assets, and distributing the rest to Eaton’s creditors. The Appellant paid GST of $675,000 to a number of consultants and advisors who participated in the liquidation and settlement of creditor claims and sought ITCs. Those ITCs were denied on the grounds that activities of collecting accounts receivables and settling claims were financial services provided by the Appellant and were exempt from GST.

No date set for hearing.

Q.36 - Financial Institution and Permanent Establishments

Facts/Background

• A Financial Institution (FI) is a non-resident of Canada.
• A U.S. Permanent Establishment (USPE) of FI has a portfolio of Canadian loans, i.e. it makes loan to Canadian residents. These loans are primarily for use in Canada.
• The Canadian Branch of FI, a GST registrant, has its own portfolio of Canadian loans (different customers than USPE).
• The Canadian Branch provides 1) consulting and 2) administrative services to USPE. These services are related to USPE portfolio of Canadian loans.

Questions

1. t appears that the consulting service is zero-rated as a taxable service supplied to a non-resident person. Do you agree?
2. or the purpose of determining the status of the administrative services, is the Canadian Branch a “person at risk”?

Comments

On the second question, we look for your comments on the interaction between the deeming provision of S. 132 of the Excise Tax Act and the concept of “person at risk” under the Financial Services (GST/HST) Regulations. Under Subsection 132 (4) of the Excise Tax Act, the Canadian Branch is deemed to be a separate person who deals at arm’s length with USPE. Does it mean that it is not a person at risk for the purpose of the Act?

CRA Comments

Please note that our response is based on the following assumptions:

• the Canadian Branch constitutes a permanent establishment of FI in Canada and USPE constitutes a permanent establishment of FI outside Canada based on the definition of the term “permanent establishment” in subsection 123(1) of the Excise Tax Act (ETA); and
• FI carries on a business through the Canadian Branch and USPE.

Under subsection 132(2) of the ETA, non-resident FI is deemed to be a resident in Canada for the purposes of Part IX of the ETA, but only in respect of the activities of FI carried on through the Canadian Branch.

Based on the information provided, it appears that the Canadian Branch renders consulting and administrative services to USPE. Under subsection 132(4) of the ETA, the rendering of these services would be deemed to be supplies of these services and, in respect of these supplies, the Canadian Branch and USPE would be deemed to be separate persons who deal with each other at arm’s length.

Under section 23 of Part V of Schedule VI to the ETA, a supply of consulting services to a non-resident person is a zero-rated export, if paragraphs (a) through (d) do not apply. It appears that the consulting services rendered by the Canadian Branch to USPE could be zero-rated under this provision as the exclusions set out in paragraphs (a) through (d) do not appear to apply.

The Canadian Branch is stated to be providing administrative services to USPE in relation to USPE’s Canadian loans portfolio. Based on the limited information provided, the supply does not appear to include a “financial services” element. If this is the case, it appears that administrative services rendered by the Canadian Branch to USPE would be taxable supplies and there is no need to consider the application of paragraph (t) of the definition of financial service in subsection 123(1) of the ETA and the concept of “person at risk” for the purposes of determining the tax status of the deemed supply.

However, for discussion purposes only we will assume that the Canadian Branch renders a service to USPE which is included in paragraphs (a) to (m) of the definition of “financial service”, and that it is necessary to determine whether the Canadian Branch is a “person at risk” for purposes of determining whether paragraph (t) applies to exclude the service from the definition of financial service. It is our initial view that the determination of whether or not the Canadian Branch is a “person at risk” with respect to an instrument in relation to which the service is provided would depend, in part, on the facts of the particular situation. Further information and analysis would be required before we could make a determination in this regard.

Q.37 - B-093 Application of GST/HST to Cemetery Property and Services

Facts/Background

Please comment on the recently issued CRA TIB B-093 concerning cemetery plots and burial services to the effect that a supply of the plots constitutes a licence of real property. There must be more than a licence involved given the perpetual nature, but presumably it is considered to be a supply of real property other than by way of a “sale”. Further, there is a statement that if burial services are provided together with a plot for a single consideration then there are 2 separate supplies.

Question

Please explain the rationale for this? It would appear that this could be a single or combined supply as per the O.A. Brown/Oxford Frozen Food/Hidden Lake Golf Course line of cases.

CRA Comments

1. Cemetery operators have advised the CRA that they do not supply interment rights by way of sale. For GST/HST purposes, interment rights are supplied by way of lease, licence or similar arrangement. Generally, the CRA’s position is that supplies of interment rights are made by way of licence given the specific use and purpose of the property for the interment of human remains, and the fact that the purchaser has little or no control over the individual lot, plot, crypt, etc. or the cemetery as a whole.

2. TIB B 093 deals with supplies of cemetery products and services provided under pre need arrangements. Generally, provincial laws prohibit cemetery operators from supplying interment rights and pre need cemetery products and services under the same agreement. Consequently, where a cemetery operator enters into an agreement to supply interment rights, and a separate agreement to supply cemetery products and services on a pre need basis, the CRA views the operator as having made multiple supplies for GST/HST purposes. The fact that the cemetery operator may consolidate the payment arrangements does not negate the fact that there are two separate supplies.

Q.38 - Public Service Body Rebate – Whether applicable to an unregistered non-resident municipality

Facts/Background

Pursuant to section 259 of the Excise Tax Act, a rebate is granted to a “selected public service body”. This term is defined to mean, among other things, “a municipality”. A U.S. municipality that is not registered for GST purposes and is situated across one of the Great Lakes, contracts with a Canadian based contractor to provide some services both within Canada and outside Canada. The contractor’s fees are subject to GST.

Question

Does the unregistered non-resident municipality qualify for the public service body rebate?

CRA Comments

The Excise Tax Act is silent as to the residency of the organizations included in the definition of “selected public service body” (ss. 259(1)). However, the various rebate rates were determined based on consultations with the Canadian public sector, an analysis of their operations and the impact of the former federal sales tax. The rebates are intended to ensure that these organizations do not carry a greater burden as a result of the GST/HST than they carried under the former federal sales tax.

As such, the rebate will only be paid to these organizations who are resident in Canada.

Q.39 - Input Tax Credits After Customs Re-determination

Questions

Q1: if an importation is subject to a “re-determination” of tariff classification, valuation, or origin by the CBSA that results in additional GST payable, and the re-determination is issued more than four years after the importation, is the additional GST assessed against the importer eligible for an input tax credit?

Q2: if so, is there a technical problem with claiming the input tax credit as the importer would have already made an ITC claim in respect of the GST paid on the original importation?

Example

Goods are imported, valued at $1,000 with 15% duty ($150) and GST of $69. Importer files a claim for – and is granted – a refund on the basis of an incorrect tariff classification which results in a change in the duty rate to 5%, leading to a reduction in the duties and GST payable of $50 and $3 respectively. Subsequently, the CBSA reviews the refund that was issued and issues a re-determination changing the tariff classification back to the original claim and assessing the importer for the additional duties and GST owing.

Comments

Pursuant to paragraph 59(1)(b)the Customs Act and the Determination, Re-determination and Further Re-determination of Origin, Tariff Classification and Value for Duty Regulations, in certain circumstances the CBSA is entitled to re-determine the tariff classification, origin, or valuation of imported goods up to five years from the “date of accounting” of the importation. The circumstances are: where the importer claimed and was issued a refund of duties; and where the importer filed a “correction” or amendment to a prior importation.

CRA Comments

If the importer is a registrant, paid the initial $69 in GST, was entitled to an ITC with respect to the importation, and claimed an ITC for the $69, no further action would have been required by the registrant as a result of the subsequent re-determination and further re-determination. The $3 reduction in GST would have been considered to be an amount paid as tax in error by the registrant for which there would technically not be an ITC entitlement under subsection 169(1) of the ETA but that would have to be offset in assessing the registrant’s net tax by the amount of the Division III rebate that would have otherwise been payable to the registrant in respect of the amount.

If the re-determination had instead increased the GST amount payable on the importation to an amount in excess of the initial $69 amount, the excess amount would become payable during the subsequent reporting period of the registrant during which the re-determination is made. The registrant would be entitled to claim an ITC for the excess amount in a return filed within the applicable ITC time limit under subsection 225(4) of the ETA that would start based on the subsequent reporting period.

Q.40 - Rebates – Customs Brokers

Facts/Background

The recent U.P.S. decision suggests that a customs broker is entitled under subsection 296(2.1) and section 261 to rebates for overpaid GST as a result of customs errors, e.g., overvaluation or payment of GST on zero-rated goods. As well, it appears from the decision that a broker may claim rebates beyond the 2 year period specified by section 261. Please comment on the ability of a customs broker to claim input tax credits or rebates on overpaid GST, as well as the time limits for making such claims.

Question

Is there a difference regarding the broker’s entitlement to rebates or input tax credits for GST paid on Low Value Shipments versus importations over $1,600 where the importer must file a B3 accounting form?

CRA Comments

Our only comment regarding the Tax Court of Canada decision referred to in the question is that the CRA does not agree with the decision and it has been appealed to the Federal Court of Appeal.

Our position remains that a customs broker would not be entitled to claim ITCs or rebates for the GST paid on importations in circumstances such as those in the UPS case, and this is regardless of whether the tax was paid on a low value importation or otherwise.

Q.41 - P-216 Registration of a partner

Facts/Background

A limited liability partnership has 100% commercial activities and is held by two corporate partners. The only activities of the limited partner (“partner A”) consist in the holding of its participation in the partnership. Partner A regularly pays for taxable promotional services acquired in the course of the partnership activities but not on the account of it.

Questions

1. Section 272.1 of the Excise Tax Act does not make any distinction between a general and a limited partner. In practice, does CRA makes a difference in the application of this section to limited partner or general partner?

2. If Partner A is not registered for GST purposes, can it still rely on policy paper P-216 to register ? Does finance intend to modify section 240 of the Act with respect of partners’ GST registration?

3. Please confirm that Partner A can rely on the application of subsection 272.1(2) in order to claim full ITCs with respect to its own activities.

CRA Comments to questions

1. We are currently reviewing the general issues surrounding Limited Liability Partnerships (LLPs) and the Excise Tax Act. We could respond to a specific fact situation in the context of an interpretation or ruling request.

2. As indicated in the response to question 1, we are currently reviewing the issues surrounding LLPs. We are not aware of any plan by Finance to amend section 240 with regard to a partner’s GST registration.

3. If subsection 272.1(2) applies equally to a partner of a LLP, subsection 272.1(2) would apply where property or a service is acquired or imported by a member of a partnership for consumption, use or supply in the course of activities of the partnership but not on the account of the partnership. Subsection 272.1(2) does not apply to expenses incurred with regard to the partner’s own activities. It is a question of fact whether the expenses incurred in a particular situation meets the requirements of section 272.1(2) and section 169.

Q.42 - GAAR

Question

Has the CRA ever invoked the general anti-avoidance rule provided in section 274 of the ETA and could the CRA comment on the type of situation where section 274 would be applied.

CRA Comments

Section 274 was applied in Michelin Tires (Canada) Ltd v MNR [1995] 4521 ETC and there were two other cases where it was included as a secondary argument but not relied on by the Court.

Section 274 would apply where another provision of the ETA does not apply to deny a tax benefit in a particular situation and the conditions of section 274 are met. At this time, we have not compiled examples where section 274 would apply. However if requested, a ruling could be provided regarding a particular transaction.

Q.43 - Excise Taxes – End-User Refunds

Please comment on the status of this review.

CRA Comments

On December 4, 2006, the CRA issued ET/SL Notice 61, which extends the current administrative end-user refund policy until June 30, 2007, or the effective date of any legislative change addressing this issue.

Until such time, the CRA will continue to administer end-user refunds as follows:

If at time of purchase, the use of the goods was known to be for an excise tax-exempt purpose, the goods must be purchased exempt of excise tax by furnishing an excise tax exemption certificate or other acceptable documentation to the supplier; or

If at time of purchase, it was not possible to determine the use of the goods, or the goods had both excise tax-exempt and taxable uses, the goods must be purchased on an excise tax-paid basis. The purchaser can then file an end-user refund claim directly with the CRA for the portion of the goods that was used under exempt conditions.

JURISPRUDENCE AND HOT TOPICS

Q.44 - Aviva Case Update

Question

In Question No. 29 from the March 9, 2006 meeting, the CRA was asked to comment on the Aviva decision and what it would mean in the context of a corporate reorganization involving the “flipping” of assets. The CRA’s response was that the matter was under review. Could the CRA advise the outcome of that review.

CRA Comments

It is the Canada Revenue Agency’s position that the decision in Aviva Canada Inc .v. R., [2006] TCC 57 applies to a specific fact situation and we will apply the Court’s decision in fact situations that are the same as those in the Aviva case.

Q.45 - Dawn’s Place case

Question

The FCA in Dawn’s Place appears to have concluded that the supply of digitized products is a supply of IPP, and not zero-rated for GST purposes – largely upholding the CRA’s policy position in Technical Information Bulletin B-090, GST/HST and Electronic Commerce (July 2002).

How does the CRA reconcile its policy position (and its position in that case) with the early statements in the GST White Paper to the effect that Canadian products destined for the export market were to be zero-rated of GST so as to improve Canadian competitiveness in the global markets?

As it is, it would appear that Canadian e-commerce is now 6% less competitive than e-commerce businesses of our global competitors.

Are there any plans afoot with the Department of Finance to broaden section 10 of the Part V of Schedule VI, and if so, could detail be provided?

CRA Comments With respect to the comment regarding a perceived need to reconcile the CRA’s position with the general statement made in the Department of Finance Technical Paper, we would first like to confirm that the CRA’s position is based on the wording of the current legislation.

Furthermore, any clarification regarding the intended meaning of the general statement made in the Department of Finance document is clearly a matter in respect of which you would have to seek clarification from the Department of Finance. However, we do note that of greater relevance to our current position is the fact that the Technical Paper specifically indicated that the zero-rating of exports would be limited to supplies of intangible personal property that qualify as intellectual property. Section 2.6 of that document that specifically addresses exports clearly states that: “Zero-rated exports will include exports of goods, intellectual property and services.” The Department of Finance is aware of the concern raised about the scope of the zero-rating of intangible personal property supplied to non-residents under the current legislation and is currently reviewing the issue. Whether the Department of Finance intends to broaden this zero-rating is clearly a tax policy matter that you may want to further discuss with officials of that Department.

Q.46 - Important Pending Cases

Question

Please identify any important cases before the courts that have not been decided and reported (i.e. only those cases that have not yet been heard, or that have been heard but no judgement has been rendered)

CRA Comments

Supreme Court of Canada

Dawn’s Place Ltd. (Application for leave filed on December 29,2006)

The Appellant is resident in Canada and operates an adult content website on the Internet. Users are charged a subscription fee to view the contents. Substantially all the users have a billing address outside Canada.

As there was no restriction on the place of use, the supply (one of intangible personal property) was deemed to be made in Canada pursuant to paragraph 142(1)( c) of the ETA.

In overturning the TCC judgment, the FCA held that the supply of website access to non-residents was not zero-rated pursuant to section 10, Part V, Schedule VI of the ETA as it was not the supply of, or the right, licence or privilege to use, intellectual property (in this case, copyright) to a non-registrant non-resident. The FCA distinguished between the supply of copyright and the supply of content subject to copyright. Therefore, the Applicant was properly reassessed for GST on the website access subscription fees.

Dugald Christie (Hearing March 21, 2007)

The petitioner, a B.C. lawyer questions the constitutional validity of charging GST (and B.C. sales tax) on legal services to person who cannot afford legal representation. The Petition states that Ottawa's tax on legal services "increases the cost of legal services to members of the public who cannot afford appropriate legal service thereby interfering with, impeding or otherwise fettering the right of access to the courts by persons on low income within B.C." The petitioner seeks a declaration that the GST is contrary to the Charter and the Magna Carta along with an order prohibiting the application of GST to low-income clients.

Scott Paper Limited (Excise case) (Application for leave filed on January 16,2007)

Federal Court of Appeal

United Parcel Service of Canada (No hearing date set)

The Appellant is a Courier company that brought goods into Canada for customers on ongoing basis. UPS acted as customs broker and paid GST on such goods on behalf of customers. UPS sometimes overpaid GST by mistake and claimed a refund of $3 million for tax paid in error.

At Tax Court, judge Bowman ruled that, under the Customs Act UPS was jointly and severally liable to pay the GST on the importation of goods and that the corporation was entitled to a rebate of the amount paid in error.

The CRA appealed to The Federal Court of Appeal on December 28, 2006. The issue is whether UPS is entitled to claim the refunds on its own account. If it was an agent, the act limits refund entitlement to the customer for who UPS acted.

West Windsor Urgent care Centre (No hearing date set)

The Appellant is a corporation operating a medical clinic. Most services are paid by the provincial health insurance plan. The physicians are independent contractors who pay 40% of their billings to the Centre plus GST. The Appellant has claimed a rebate of this GST on the grounds that it is supplying health care services. The issue is whether the doctors are collecting fees from OHIP and paying rent to the clinic (taxable), or is the clinic collecting from OHIP and paying the doctors for medical services (exempt)?

North Shore Health Region (No hearing date set)

Whether a builder of a Residential Care Facility is deemed to make a “self-supply” under s. 191 and is required to self-assess. The Appellant argued that it was not required to self-supply because the predominant element of the supply was health care services, with the provision of the accommodation forming a small portion of the cost of the compound supply, and the appellant therefore made a single supply of medical care services.

Tax Court of Canada – General Procedure

Commission Scolaire des Patriotes (No hearing date set)

Whether the Minister is entitled, pursuant to retroactive legislation, to recapture input tax credits (ITCs) that were allowed to school boards by virtue of consent judgments. The Budget Implementation Act, 2003, provides that the Minister may reassess the school boards retroactively for reporting periods in which they received full ITCs, even if those periods are otherwise statute-barred.

Roger Obonsawin c o b Native leasing Services (No hearing date set)

Whether an Indian operating a placement agency on a reserve is required to collect and remit GST when providing services to off-reserve organizations that benefit Indians.

Omni Health Care Inc.

Issue is whether the Appellant is required to self-supply on a nursing home and whether the Appellant is entitled to a new residential rental property rebate on that home.

Michel Guérin

The issue is whether or not the supply of illegal drugs is taxable for GST purposes and whether the payments are recognized as consideration under Quebec’s Civil Code.

Q.47 - Hot Audit Topics

Question

Please identify the top audit areas or initiatives of the CRA within the last 12 months.

CRA Comments

Compliance Review:

Starting in 2004, the CRA undertook a comprehensive, Agency-wide review of the risks facing tax administration in Canada. The review spanned all program areas, and involved identifying key areas of risk, as well as developing comprehensive strategies to address those risks. This review confirmed that our top risk areas are aggressive tax planning, the underground economy, GST/HST compliance, and non filers/ non registrants and collections.

The CRA is pursuing a sustained strategy to deal with GST/HST compliance. The strategy focuses on

• Improving our ability to identify high-risk registrants and refund claims before refunds are issued;
• Enhancing enforcement activities; and
• Creating a legislative and administrative environment, which significantly reduces the opportunity for improper and/or fraudulent refund claims.

This Strategy is being implemented through initiatives to:

• Enhance registration processes;
• Enhance risk assessment processes;
• Enhance audit and other enforcement activities; and
• Seek appropriate amendments to policy and legislation.

We have initiated a number of pilots to determine the extent of risk in certain areas and to determine possible ways to address it. For example, one current pilot is a project to provide a statistical estimate of the level of non-compliance in the refund-filing population.

We are also pursuing longer-term objectives including policy changes, and legislative changes.

We are also conducting a fundamental review of the GST/HST Prepayment Program that will examine all aspects of the Program’s operations, including analyzing the population and identifying risk areas, studying risk assessment, workload management issues, service standards and the various models of how the program is set-up in the Tax Services Offices. This information will be analyzed and will lead to recommendations to improve the Program’s effectiveness and efficiency as well as suggest the best way to address staffing issues.

Expansion of Combined Audit Program:

In the past year, the Combined Audit Program was expanded from the PM-02 to the PM-03 and AU-01 auditor levels. This means that taxpayers with a gross income of less than 4 Million dollars are now being audited for both Income Tax and GST/HST at the same time.

GST/HST Redesign Project:

The GST/HST Redesign Project will be implemented in April 2007. This large multi-stakeholder project will modernize the delivery of the GST/HST programs, operations and services. by migrating to Agency common business platforms, including Standardized Accounting (SA), CASE and Business Client Communications System (BCCS), correcting deficiencies, and modifying legislation. This approach will enable the Agency to provide better client service by moving us closer to a common account view for business clients and will improve our compliance capabilities within GST/HST.

Specific Audit Issues

• 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 – use of appropriate rates and retroactive adjustments to rates to reduce net tax of prior periods
• Input tax credits
  • Retroactive 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 input tax credits claimed
• Input tax credits related to pension plan expenses
• Loyalty programs
• Accounting system errors