3 March 2005 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.

Q.1 - New Housing Rebates

Facts/Background

At the 2003 CBA/CRA GST Round Table, the CRA considered a scenario in which a purchaser of a residential complex under an agreement of purchase and sale (the “Agreement”) transfers title to the residential complex, before closing, to the purchaser's spouse or other related person. The CRA was asked whether such transfer would disqualify the purchaser from the relief afforded by subsection 254(2) of the ETA.

Although, under a strict reading of subsection 254(2), such provision appears not to provide relief to the purchaser in the described circumstances, the CRA indicated that, "subject to consultations with the Department of Finance", it would recommend granting administrative relief in the described circumstances, such that a purchaser under an Agreement could generally transfer title to his spouse or other related person without affecting the application of subsection 254(2).

Questions

1. Has the CRA undertaken the "consultations with the Department of Finance" in respect of this issue, as anticipated in 2003? In any event, does the CRA continue to support the position that it took at the 2003 roundtable?

2. What would the CRA's position be if the individual who signed the agreement of purchase directs title to be taken in the name of that person AND his or her spouse, either as joint tenants or co-tenants, who occupy the unit as their primary place of residence? Is it the CRA's position that the statutory requirements are met in such circumstances?

3. If not, would administrative relief be available?

CRA Comments

1. We have had discussions with the Department of Finance on the issue.

2. & 3. Pursuant to subsection 254(2) of the Act, where a builder of a residential complex makes a taxable supply of the complex by way of sale to a “particular individual” and the requirements of paragraphs 254(2)(a) to (g) are met, “the Minister shall … pay a rebate to the particular individual…”

Our response assumes that the supply is not made to both the individual and his or her spouse and that subsection 262(3) of the Act does not apply.

Paragraph 254(2)(e) of the Act provides that “ownership of the complex … (be) transferred to the particular individual after the construction or substantial renovation thereof is substantially completed.” This requires that the individual acquire ownership of the residential complex as opposed to ownership in only an interest in the complex.

It is our view that the requirement of paragraph 254(2)(e) may be met in the case of spouses taking title as joint tenants.

Where the spouses are registered on title as co-tenants, the ownership of the complex may not be transferred to the particular individual within the meaning of paragraph 254(2)(e) because of the legal nature of the ownership interest. In this case, the requirement may not be met.

We will include this in our discussions with Finance.

Q.2 - Voluntary Disclosures

Facts/Background

Recently the Tax Court upheld CRA's refusal to accept a GST voluntary disclosure made shortly after notification of the commencement of an income tax audit (Brown v. Canada, 2005 F.C. 1639 (F.C.T.D.)). Prior to the receipt of the notification of the income tax audit, the taxpayer through his solicitors had made inquiries about the voluntary disclosure procedures on a nonames basis.

Questions

1. Historically, CRA has accepted that voluntary disclosures under one tax statute can be made following receipt of notification of audits under other taxing statutes but apparently this policy was not applied in this case involving the voluntary disclosure of a GST liability following the receipt of a notification of an income tax audit. Can CRA elaborate? In particular, is it CRA's policy not to accept a voluntary disclosure involving GST following receipt of notification of an income tax audit, and vice versa.

2. Recently, CRA announced that the Voluntary Disclosure Program was moving out of CRA Appeals back to Audit. Can CRA elaborate upon the rationale for this move and provide confirmation that the policies behind the Voluntary Disclosure Program will be unaffected by the change in responsibility?

CRA Comments

1. Any enforcement action being undertaken against a taxpayer must be evaluated by CRA to determine if there is a reasonable linkage to the disclosure. However, not all enforcement actions will be cause for denying the disclosure. A reasonable consideration of the facts will be done by CRA in each case to determine whether the disclosure is voluntary. For example; if a taxpayer is shown to have been aware of an impending audit or enforcement action by CRA and this enforcement action caused the taxpayer to submit a disclosure then CRA may not accept the disclosure as voluntary.

Other examples of these type scenarios are as follows:

• A disclosure is related to older years, while a current year is under investigation. When a current year is under investigation, the older years will usually not be accepted as a valid disclosure. The taxpayer is considered to be under current enforcement action. In the case of large business files the enforcement action will be evaluated by CRA.
• Notices/Demands to File a Tax Return are considered an enforcement action that will prevent the taxpayer from receiving relief under the Voluntary Disclosure Program.

2. In the context of the overall Agency realignment exercise, the Agency reviewed the Voluntary Disclosures Program to determine whether its alignment with the mandate and core competencies of the Appeals recourse function was the best fit from an Agency perspective. As a result, it has been determined that, to maximize its mandate, the Voluntary Disclosures Program is best aligned with Compliance Programs.

The move of the VDP to Compliance Programs will also facilitate better access to experts in different fields to enable easier and more efficient review of complex disclosures, which are becoming more frequent as the program matures. The Voluntary Disclosures Program has enjoyed a high level of integrity and impartiality since its inception, and will continue to do so within Compliance Programs.

The Voluntary Disclosures Program will therefore be a part of the Compliance Programs Branch effective April 1st, 2006.

Q.3 - Voluntary Disclosures

Questions

1. Can CRA please provide an update as to the current status of the No-Names Voluntary Disclosure Policy? What is the CRA’s rationale for the current changes to that Policy?

2. Is it correct that the No-Names Voluntary Disclosure Policy has now been changed to such an extent that no prior agreement can be negotiated with the CRA in terms of time frame covered/quantum etc. of the voluntary disclosure? Previously, such an agreement could be reached between the taxpayer and the CRA, subject to the CRA subsequently confirming that that preconditions for Voluntary Disclosure treatment had been met (e.g., no prior enforcement action, applicable penalty, VD substantially complete, etc.). To the extent that this is no longer the case, what will be the benefit/purpose of the No-Names Voluntary Disclosure option?

CRA Comments

1. Changes to the no-name policy have been made over the past year. These changes were considered necessary, as there were instances where the no-name policy was being abused, such as falsely acquired no-name ID numbers. Thus it was not working as it was originally intended. Also, there was policy and procedural issues, which appeared not to be sufficiently clear such as what considerations, may be conveyed to a taxpayer within the no-name process. It was also necessary to bring the no-name procedures into harmony with the named Voluntary Disclosure procedures. It was not fair to have different procedures under the one Voluntary Disclosure policy.

Therefore some of the substantive changes made to the no-name disclosures policy have been:

• The CRA will no longer accept disclosures over the telephone. The disclosures must be made in writing, with at least a certain amount of information.
• The no-name taxpayer will have to be identified to the CRA within 90 calendar days. During the 90-day period, the CRA can discuss the case and explain the general process and implications of the disclosure. However, no decisions will be confirmed while a taxpayer remains unidentified. If the taxpayer has not been identified at the end of the 90 calendar days the CRA will close its no-name file and the protection from penalties and prosecution will be terminated.
• Once the identification of the taxpayer is made known extensions of time to complete the disclosure will be considered in certain circumstances.
• We have also provided further information to the VDP officers with respect to the advice they may provide to a no-name taxpayer or representative in regard to their no-name disclosure submission.

We will be further defining these procedures and policies issues and will be including some of them in a revision to the Information Circular 00-01R – Voluntary Disclosures Program.

2. One of these changes to the no-name policy was in respect to the extent the TSOs should negotiate any agreements, or negotiate at all, for terms such as time frames, quantum, etc. As at the no-name stage CRA does not have a complete file to work with it was reasonable to limit that which may be negotiated during this process. Only after full identification of the taxpayer is obtained and complete information is obtained may a disclosure be considered to be complete or voluntary. We therefore limited the extent to which the VDP officers would consider negotiations in no-name situation.

However, having received representations from various practitioners in regard to the above element of the no-name policy we are in the process of reconsidering the position we have taken. To further assist us we would appreciate your input in this respect so that any changes, which may be done to this portion of the no-name policy, may be fully explored and revisions made as are necessary. Please provide your suggestions on this matter to { HYPERLINK "mailto:Rick.Power@ccra.adrc.ca" }. When our review of this particular issue has been completed we will be advising of our position.

Q.4 - Voluntary Disclosures

Facts/Background

The decision of CRA to shift responsibility for the VDP from the Appeals Branch to the Audit Branch effective April 1, 2006 raises a number of concerns particularly with respect to no-name voluntary disclosures.

Currently, the VDP provides that if a no-name voluntary disclosure is not withdrawn or otherwise closed before the identity of the registrant is revealed, the CRA will not use the information provided in the course of the no-names disclosures for any other purpose.

Questions

1. If disclosures are required to be made through the TSO of the registrant what safeguards will be put in place to assure registrants contemplating a disclosure that the Audit Branch will not use the information provided to institute enforcement activity such as an investigation to try and determine, inter alia, the identity of the registrant?

2. What Branch will be responsible for disclosures initiated prior to but not completed by April 1, 2006?

3. Please comment on the nature of abuses that have resulted in CRA’s decision to stop giving assurances as to how a disclosure will be dealt with in terms of its qualification as voluntary, and whether years to be covered by the disclosure, and waiver of interest remain items for which the CRA will provide assurances before the identity of the registrant is revealed.

4. Does the CRA’s decision to stop giving assurances apply in situations where all material facts except the identity of the taxpayer are provided?

CRA Comments

1. It has been our policy that the information provided within the no-name process of the VDP program is not exchanged with audit or other enforcement areas within CRA for purposes of identification of the “no-name” taxpayer. We anticipate that this policy will continue when the program is moved to the Compliance Programs Branch from the Appeals Branch.

2. Both branches are committed to ensuring a seamless transition of the Program and all disclosures initiated prior to but not completed by April 1, 2006.

3. Please see our response to both Questions A3(1) and (2). We are revisiting some portions of the changes to the no-name policy and your input is appreciated.

4. Please see our response to both Questions A3(1) and (2). We are revisiting some portions of the changes to the no-name policy and your input is appreciated.

Q.5 - Rebates for Tax Paid in Error

Facts/Background

We note recently released CRA Notice ET/SL-0056 indicating that the CRA plans to only allow end users, who purchase excise-tax-paid goods and subsequently use the goods under exempt conditions, to be able to obtain refunds from the licenced supplier of the goods. After April 1, 2006, the CRA is proposing to no longer accept refund claims from such end users.

Question

Please explain the rationale behind this proposal. On what basis can the CRA not accept refund claims? On what basis can the supplier issue credits based on the subsequent user of the goods (i.e., after the tax point; after the time the tax became payable)? What safeguards will there be to confirm the basis of the exemption claim; will the supplier now be required to verify/be liable for the purchaser’s exemption claim? What if the supplier disputes/refuses to credit the end user?

CRA Comments

CRA is reviewing its administrative policy of honouring end-user refund claims. We are proposing to end accepting all end-user refund claims effective April 1, 2006. If, after our consultations, the CRA decides to end its current policy, all end-users who purchase excise tax-paid goods and use them under exempt conditions will be required to seek credit from the licensed supplier of the goods.

The CRA has also raised this matter with the Department of Finance. The response from that department will also be taken into account in finalizing our decision.

Based on the comments received, the CRA will now extend the current end-user refund policy until December 31, 2006. This will allow the CRA further time to review alternative policy options and to consider possible recommendations for legislative changes to address this issue. For further information see excise taxes and special levies notice ET/SL-058 dated March 23, 2006 on the CRA website.

CRA Comments

1. Please explain the rationale behind this proposal. On what basis can the CRA not accept refund claims?

Under the current legislation, the Act does not provide for a refund of excise tax to end-users. Due to the lack of a statutory refunding mechanism, end-user refund claims are becoming increasingly difficult to litigate in Court. For this reason, the CRA can no longer support its policy of accepting such claims.

2. On what basis can the supplier issue credits based on the subsequent user of the goods (i.e., after the tax point; after the time the tax became payable)? End-users who purchase excise tax-paid goods and subsequently use them in exempt conditions may be able to seek credit from the licensed supplier of the goods. The licensed supplier would be eligible to file for a refund, with the CRA, or take an internal deduction on their excise tax return for tax paid in error.

3. What safeguards will there be to confirm the basis of the exemption claim; will the supplier now be required to verify/be liable for the purchaser’s exemption claim? End-users seeking credit from a licensed supplier will need to certify the use of the goods. Suppliers, who in good faith accept the certification from end-users, will not be held liable should the CRA determine the goods were not used under exempt conditions. The CRA would pursue a diversion assessment on the end-user who issued the false certification to the licensed supplier.

4. What if the supplier disputes/refuses to credit the end user? There are no provisions within the Act that would require a licensed supplier to provide credit to end-users who purchase tax-paid goods and subsequently use the goods under exempt conditions.

Q.6 - Rebates for Tax Paid in Error

Question

Based on the decisions in the 800537 Ontario Inc. [2004] G.S.T.C. 81 (TCC), aff’d [2005] G.S.T.C. 165 (FCA) and West Windsor Urgent Care Centre Inc. 2005 TCC 405 cases, has the CRA modified its position where an amount has been paid in good faith “as or on account of tax” where it is subsequently determined that there has been no supply and that the “supplier” has not remitted the amount paid to the government? Does the CRA now accept that in such situations the person having paid the amount “as or on account of tax” is entitled to a rebate under section 261 of the Excise Tax Act? Are there any situations where this would not be the case?

CRA Comments

In 800537 Ontario Inc. at both the TCC and FCA, and West Windsor Urgent Health Care Centre Inc. at the TCC, the court decisions to deny rebates to the suppliers were based on supplies being made where the recipient, and not the supplier, had paid an amount as or account of tax.

Where a person has paid an amount as or on account of tax where the amount was not payable by the person and the supplier has not credited the person for the tax, a rebate may be paid by the CRA to the person under section 261 of the Act subject to the restrictions in subsections 261(2) and (3), and depending on the facts of the particular situation.

Q.7 - Retroactive Legislation

Facts/Background

In Canada Trustco Mortgage Co. v. Her Majesty the Queen, 2005 SCC 54, GAAR cases, the Supreme Court stated as follows:

A recent amendment to s. 245 (Budget Implementation Act, 2004, No. 2, S.C. 2005, c. 19 s. 52) has no application to the judgments under appeal. Although this amendment was enacted to apply retroactively, it cannot apply at this stage of appellate review, after the parties argued their cases and the Tax Court judge rendered his decision on the basis of the GAAR as it read prior to the amendment.

Question

Could you please advise as to the CRA’s policy is in respect of the foregoing, and in what instances the CRA will accept that a taxpayer’s position is not affected by retroactive legislation? CRA Comments

Legislation, including retroactive legislation, generally applies to any situation that occurs on or after the coming into force date.

Q.8 - Drop-Shipment Rules – Carrying on Business

Facts/Background

Subsection 179(2) contemplates situations where Canadian corporations provide to non-resident persons who are not registered "a taxable supply in Canada of a service of manufacturing or producing tangible personal property" or of acquiring "physical possession of tangible personal property (other than property of a person who is resident in Canada) for the purpose of making a taxable supply of a commercial service in respect of the property to the non-resident person". Where the property is delivered to another registrant ("consignee") in Canada who supplies a drop-shipment certificate, the supply to the non-resident is deemed to be made outside Canada.

Comments

Subsection 179(2) contemplates that a non-resident need not register where the non-resident owns property in Canada, hires a Canadian registrant to perform manufacturing services on the property in Canada and re-sells the property in Canada to another registrant.

Question

Please confirm that in the circumstances described in subsection 179(2), the CRA agrees that the non-resident is not carrying on business in Canada and is not required to register (consistent with Policy Statement P-051R2). Assume that all contracts are made outside Canada and that the non-resident does not have a permanent establishment in Canada, employees in Canada or activities in Canada other than soliciting orders for contracts from Canadian customers.

CRA Comments

We cannot confirm that the non-resident would not be carrying on business in Canada for GST/HST purposes. We do not agree that a non-resident will not be considered to be carrying on business in Canada for GST/HST purposes based on the fact that the non-resident may be in a situation involving the circumstances described in subsection 179(2) of the Act. As we have indicated during previous meetings, the drop-shipment rules are not relevant to the determination of whether a non-resident 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. Reference should be made to this policy, and in particular to the numerous examples in the policy, for an indication of whether the CRA would consider a non-resident to be carrying on business in Canada for GST/HST purposes in various circumstances. For instance, for an example of where a non-resident in a situation similar to the general subsection 179(2) scenario described in the question would be considered to be carrying on business in Canada for GST/HST purposes, reference may be made to example #12 of the policy that deals with drop-shipped manufactured goods. For a further indication of where the CRA would consider a non-resident to be carrying on business in Canada where drop-shipped goods are involved, reference may be made to our responses to carrying on business questions from previous meetings, such as our response to question #12 from last year’s meeting.

With respect to the scenario described, based on the information provided, the non-resident appears to be carrying on business in Canada for GST/HST purposes by virtue of the fact that it is having goods manufactured in Canada, delivers the goods in Canada and solicits orders for the goods in Canada.

Q.9 - Financial Institutions – Para, 141.1(1)(b)

Questions

1. Insurance Company A is going out of business and agrees to sell certain customer lists, contracts and other intangibles to another insurance company. Assume that this does not constitute the sale of a business or part of a business. More than 95% of Insurance Company A’s revenues are derived from exempt financial services. Does the CRA agree that in light of the decisions in Aubrett Holdings Ltd. and Her Majesty The Queen – (97-710-GST-I) and London Life Insurance Company and Her Majesty The Queen –( 96-4239-GST-G), the supply of the contracts and customer lists does not constitute a taxable supply? Please consider paragraph 141.1(1)(b) in your response.

2. To the extent that the customer lists and contracts have not been used "exclusively" in non-commercial activities, would the CRA agree to a "split" of the consideration, i.e., 95% being non-taxable?

CRA Comments

1. It is not clear from the facts of the question but it is assumed that Insurance Company A is a financial institution.

Paragraph 141.1(1)(a) of the Act provides, in part, that where a person makes a supply (other than an exempt supply) of personal property that:

• was last acquired or imported by the person for consumption or use in the course of commercial activities of the person, or was consumed or used by the person in the course of a commercial activity of the person after it was last acquired by the person, or
• was manufactured or produced by the person in the course of a commercial activity of the person or for consumption or use in the course of a commercial activity of the person,

the person shall be deemed to have made the supply in the course of the commercial activity.

It is not clear from the facts, but the question suggests that the customer list, contracts, and other intangibles were used in commercial activities. If, for example, the customer list was acquired and then used in part in commercial activity subparagraph 141.1(1)(a)(i) would apply. The supply of the customer list would be deemed to have been made in the course of the commercial activity. As a result, the supply of the customer list would be taxable.

Paragraph 141.1(1)(b), addresses, in part, supplies of certain personal property where the property was last acquired or imported by the person exclusively for consumption or use in the course of activities that are not commercial activities.

The word exclusive is defined in section 123(1) and in the case of a person who is a financial institution, it means "all" (100%) of the consumption, use or supply of a property or service. Where the customers lists, contracts and other intangibles are not acquired, used or produced exclusively (i.e.100% for a financial institution) in activities that are not commercial activities, the supply of the contracts, customers lists and other intangibles would not fall under paragraph 141.1(1)(b).

2. Where paragraph 141.1(1)(a) applies, the supply would be taxable and it would not be possible to split the consideration.

Q.10 - Damage Payments – Section 182

Facts/Background

Example No. 3 of Policy Statement P-218R, entitled "Tax status of damage payments – whether or not within subsection 182(1) of the Excise Tax Act", states:

"Facts

1. GCo, a GST/HST registrant, made a taxable supply of leased equipment to FCo.

2. While using the equipment, an employee of FCo damaged it by using it in a manner contrary to what was permitted under the lease agreement. FCo agreed to pay an amount to GCo to compensate it for the damage to its equipment.

3. FCo did not receive anything as a consequence of making the payment.

Decision

The payment by FCo to GCo is deemed to be subject to GST/HST.

Rationale

Subsection 182(1) applies to the payment, since all the requirements of the subsection have been met. The payment is an amount other than consideration for the supply under the agreement. The payment is made as a consequence of the breach of an agreement for the making of a taxable supply by a registrant, and the payment is made to that registrant. Consequently, 100/107 or 100/115 of the payment amount is deemed to be consideration on which GST or HST is deemed to have been paid."

Discussion

In this example, the payment that is being made by FCo to compensate GCo for the equipment damaged by the negligent acts of its employee rather than as a result of a breach of the underlying contract for the lease of the equipment. Accordingly, since the payment is not being made "as a consequence of the breach, modification or termination … of an agreement for the making of a taxable supply”, it should not be caught by subsection 182(1). Moreover, as a policy matter, amounts paid by one registrant to another as compensatory damages for negligent should not be subject to GST. Otherwise, all types of damage payments could become taxable, e.g., payments by registrants to leasing companies to pay for damages to automobiles caused by negligent acts of the lessee and payments by commercial lessees to landlords to compensate for damages to the premises.

Question

Please comment.

CRA Comments

In the example that you referred to, subsection 182(1) of the Act applies because FCo became liable to make the damage payment as a consequence of having, through the act of its employee, breached the lease agreement by using the property in a manner contrary to what was permitted under the lease agreement.

A compensatory damage payment in respect of an agreement for the making of a taxable supply will fall under subsection 182(1) if all the criteria of that subsection have been met. This could include damage payments relating to leases of vehicles or real property, depending on the terms of the agreement.

Q.11 - Transfer of an Undivided Interest in a Joint Venture

Facts/Background

ACo, BCo, CCo and DCo form a joint venture which is engaged in the production of steel and other metals. ACo, BCo, CCo and DCo are residents in Canada and registrants for GST purposes. The joint venture agreement states that ACo, BCo, CCo and DCo hold respectively a 15%, 35%, 10% and 40% undivided interest in the joint venture property and in the steel and other metals produced.

Assume that the business arrangement is actually a joint venture.

ACo sells its 15% undivided interest in the joint venture property used in the business (i.e., machinery and equipment, inventory, real property, other tangible property, intangible property, etc.) to CCo, another co-venturer. CCo thus increases its stake in the joint venture from 10% to 25%.

Question

Are ACo and CCo entitled to file an election under subsections 167(1) and (1.1) of the Excise Tax Act to have the supply of the undivided interest in the joint venture not subject to GST? Analysis

In the GST Policy Statement P-103R, revised in March 1996, the CRA indicated in a sample ruling that in a situation where an undivided interest in a joint venture is transferred by a co-venturer to a third party, a valid election pursuant to subsections 167(1) and (1.1) may be filed by the parties. It is thus arguable that a transfer of an undivided interest in a joint venture by a co-venturer to another co-venturer (instead of a third party) also should qualify for the section 167 election, given that the recipient is also acquiring a business or part of a business.

CRA Comments

Where all of the conditions in GST/HST Policy Statement P-103R, Transfer of an Undivided Interest in a Joint Venture have been met and there is a supply of an undivided interest in all the joint venture property and the rights and obligations attached to this interest there is no requirement under policy P-103R that the supply be made to a third party. Therefore, where all of the conditions for the election under subsections 167(1) and (1.1) of the Act are met and where ACo is making and CCo is acquiring a supply of a business or part of a business as discussed in P-103R, the election under subsection 167(1) and (1.1) may be available.

However, based on the facts provided, it is not clear that all of the conditions outlined in policy P-103R have been met in the scenario provided (e.g. whether the joint venture has the characteristics set out in the policy P103-R). It is also not clear whether any of the exclusions under section 167 apply such that GST would apply. (e.g. whether there are services that would be excluded under subsection 167(1.1) (a)).

Q.12 - Joint Venture Arrangements: Supplies between Co-Venturers?

Facts/Background

In situations where the joint venture participants do not make an election pursuant to section 273, each of the co-venturers are considered to supply their respective portion of the joint venture property. For example, in a “50:50” joint venture for the construction of an office building and the supply of the office building by way of lease, each of the co-venturers is considered to be supplying 50% of the office space.

Questions

1. In situations where one co-venturer contributes the land and the other co-venturer contributes construction services to construct the building, are there any cross-supplies being made between each of the co-venturers where no section 273 election is made (e.g. is the land owner considered to be supplying land to the developer and is the developer considered to be supplying construction services to the land owner)?

2. Does the answer to question 1 above change if one of the participants is a public service body who is making an exempt supply of the office space as they have not made a section 211 election?

As an example, a university and a developer enter into a joint venture arrangement for the construction of a two story office building. The university will contribute the land and the developer will construct the office building. Each co-venturer will have an undivided 50% interest in the building and the building will be leased to two tenants. Is the developer required to charge the university GST on 50% of its construction services on the basis that it has made a cross supply of these services in return for an interest in land?

CRA Comments

A supply of real property by one participant of a joint venture to another would require clear documented evidence that such a transaction takes place. For instance, the participant who contributes the real property (the “Land-owner”), would need to make a supply of a 50% interest in the real property by way of sale or lease to the other participant (the “Developer”). Absent evidence of such a conveyance of real property between the participants (e.g., registration of legal title in the names of both participants or a written lease agreement between the participants), we would not recognize a supply of real property between the participants. Entering into a “50:50” joint venture agreement would generally not substantiate that a supply of real property has taken place between participants.

CRA Comments

1. Where no election is made by the participants of the joint venture under section 273 of the Act, the GST/HST treatment would be as follows.

The Land-owner, as the sole legal owner of the real property that includes the office building, would make the entire supply of the office space by way of lease. The Developer does not make a supply of the office space by way of lease because it has no interest (in fee simple or leasehold) in the real property that includes the office building. Where the Land-owner is a registrant for GST/HST purposes and no exemption applies to the lease of the office space, the Land-owner would be required to account for all of the GST/HST collectible on the lease of the office space.

The Developer would make a taxable supply of a construction service to the Land-owner, by erecting the building on the Land-owner’s land. The consideration for the supply of construction service would be equal to 50% of the rental income that the Land-owner is willing to forego, pursuant to the joint venture agreement. The Land-owner would be entitled to claim input tax credits in respect of the GST/HST payable for the acquisition of the construction service it receives from the Developer.

2. Where the University is the sole land-owner, it would be the participant who makes the entire supply of the office space by way of lease. Where the University does not make as election under section 211 of the Act in respect of the real property that includes the office building, the lease of the office space would be an exempt supply under section 25 of Part I of Schedule V to the Act.

As in the response to Question 1, the Developer would make a taxable supply of a construction service to the University. The consideration for the supply of construction service would be equal to 50% of the rental income that the University is willing to forego, pursuant to the joint venture agreement. However, unlike the response to Question 1, the University would not be entitled to claim input tax credits in respect of the GST/HST payable for the acquisition of the construction service it receives from the Developer, since this acquisition is an input to the making of exempt supplies.

Q.13 - Partnerships: Supply from General Partner to Limited Partnership

Facts/Background

Pursuant to subsection 272.1(1) anything done by a person as a member of a partnership is deemed to have been done by the partnership in the course of the partnership’s activities. In a recently released interpretation letter (Document No. 57840) the CRA reasoned that a general partner was making a taxable supply to the limited partnership in the following hypothetical fact situation:

1. A limited partnership (the "Partnership") will be formed for the purpose of investing in mutual funds.

2. The units in the Partnership are divided into Class A and Class B units.

3. Pursuant to the Partnership agreement, a corporation serves as general partner and will manage the Partnership. The general partner has no other activity other than the management of the Partnership. It can be assumed that the only activities undertaken by the general partner are those that it is authorized to perform pursuant to the Partnership agreement.

4. The limited partners hold Class A units while the general partner holds all Class B units.

5. Pursuant to the Partnership agreement, the holder of the Class B units is entitled to receive an allocation from the Partnership that is made up of two components (1) an amount which varies according to the profits and losses of the Partnership (i.e., the amount can be positive or negative) and (2) an amount equal to a set percentage (e.g. 2%) of the net value of the assets of the Partnership.

6. The holders of the Class A units are entitled to a return proportionate to the profit or loss of the Partnership.

Questions

1. To the extent the parties attempt to value the contributions which are made by a general partner on a variable basis (which is not directly tied to the profits of the limited partnership), does the CRA view the partner contributions to be a supply of services?

2. Alternatively, in the same fact situation referenced above, to the extent the limited partnership is required to reimburse the general partner for employee costs which are incurred in the course of the partnership’s activities and the compensation that is paid to the employees is directly tied to the net value of the assets of the partnership, will subsection 272.1(1) apply to the reimbursement? For example, the partnership agreement merely references that the limited partnership will reimburse the general partner for all expenses incurred in the course of the partnership including all employee costs. The compensation that is paid to the employees, however, is directly related to the partnership’s net asset value.

CRA Comments

1. Where a corporate general partner of a limited partnership makes a supply of property or a service to the partnership in the course of its own commercial activity, the supply will be a taxable supply and subsection 272.1(3) of the Act will apply. The determination of whether a general partner does something in the course of its own commercial activity or as a member of a partnership depends on the applicable provincial partnership law and the facts of the particular situation. In the fact situation presented in this question, the corporate general partner of the limited partnership receives a fee for services it provides to the partnership (e.g., the fee based on the net value of partnership assets), which is in addition to its share of the profits or losses from the business of the partnership. This is an indication that the amount is remuneration for services provided by the corporate partner on its own account, i.e., in the course of its own business, and not for something done as a member of the partnership, even though the agreement to provide such services is included in the partnership agreement.

2. With respect to the alternative part of the question, where a corporate general partner receives a fee that is a reimbursement for employee costs related to services it provides to the partnership, the response is the same as to question #1. This is an indication that the amount is remuneration for services provided by the corporate partner on its own account, i.e., in the course of its own business, and not for something done as a member of the partnership, even though the agreement to provide such services is included in the partnership agreement.

Q.14 - Expenses Incurred to Increase Shareholder Value

Facts/Background

There does not appear to be any GST rulings issued post BJ Services indicating that a corporation which is engaged exclusively in commercial activities is entitled to claim input tax credits with respect to goods and services which are acquired for the sole purpose of increasing shareholder value.

Question

Could the CRA confirm its administrative position on such expenses and, in particular, whether registrants may also claim ITCs in situations where there has not been a hostile takeover bid but the corporation is actively searching for a potential purchaser of the corporation itself or the corporation’s assets.

CRA Comments

The position of the CRA is that the decision in BJ Services Company Canada et al v The Queen, [2002] 2984 ETA, applies to target corporations in similar fact situations.

In other situations, it will be a question of fact whether particular costs in a particular situation meet the requirements for claiming ITCs. A person is only eligible to claim ITCs on property or a service to the extent that the person acquired or imported the property or service or brought it into a participating province for consumption, use or supply in the course of commercial activities of the person.

For example, A Co., which is engaged exclusively in commercial activities, enters into an agreement with B Co. in which B Co. will assist in identifying corporations interested in purchasing the assets of A Co., and will assist in structuring and negotiating the sale of the assets. A Co. would be eligible to claim an ITC with respect to the GST paid on the fee paid to B Co. under the agreement, provided the other requirements of section 169 of the Act are met.

Q.15 - Draft P-196R (Notice 200)

Facts/Background

Example No 2 from Policy Statement P-196 indicates that a holding company is entitled to claim input tax credits with respect to GST paid on accounting services acquired for the preparation of its own financial statements “because a) HoldCo can reasonably be regarded as having acquired the property and services for consumption or use in relation to the shares and indebtedness held by HoldCo of the related corporations; b) it is deemed to have acquired the property and services for use exclusively in the course of commercial activities of HoldCo as it acquired the property and services exclusively for consumption for use in the relation to the shares and indebtedness held by HoldCo of the related corporations; and c) when tax is payable, all of the property of each corporations is for consumption, use or supply exclusively in commercial activities”.

Question

The draft policy no longer references GST paid by a holding company for the preparation of its own financial statements. Is this omission the result of a change in interpretation by the CRA as to the scope of section 186?

CRA Comments

The Draft GST/HST Policy Statement P-196R , Whether Administrative Overhead Costs fall under Subsection 186(1) of the Excise Tax Act provides in part:

“Both direct costs and indirect costs will qualify under subsection 186(1) of the Act provided the parent corporation can demonstrate that the costs meet the requirements of subsection 186(1) of the Act. Specifically, only property or services that can reasonably be regarded as having been acquired or imported by the parent for consumption or use in relation to the shares or indebtedness of a related corporation will fall under subsection 186(1) of the Act.

Whether a particular property or service can reasonably be regarded as being acquired or imported by the parent corporation for consumption or use in relation to a parent's holding of shares or debt in a related company, and the extent of this relationship, is a question of fact. Each case must be examined in light of its particular facts in determining whether subsection 186(1) of the Act may apply in the circumstances.”

This policy has not changed.

The facts in example 2 were changed (e.g. Holdco previously had no other activity than holding the shares and debt in the related corporations, and now it has other activities) so it now illustrates a different fact situation.

Q.16 - Section 162 and Royalties

Facts/Background

There are two possible interpretations of section 162(2). One interpretation is that paragraph 162(2)(a) is related to 162(2)(c) such that, for a resource royalty to not be subject to GST, a party must have had some related exploration right or rights of entry. In other words, there could be a linkage because of the reference to “such deposit, bog or resource” in paragraph (c). The alternative interpretation is that paragraphs (a) and (c) of section 162(2) are not related in any way. The latter interpretation means that all resource royalties are not subject to GST. The GST/HST Policy Statement P-128R2 would suggest the latter interpretation is correct.

Question

Please confirm that paragraph 162(2)(c) applies to royalties regardless of whether the royalty recipient holds the related exploration rights or rights of entry.

CRA Comments

The Act does not impose a condition on the right under paragraph 162(2)(c) requiring it to be the result of a supply of a right within paragraph 162(2)(a) (right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource) or paragraph 162(2)(b) (a related right of entry or user).

Q.17 - Section 167 – Dissolution of a Partnership

Question

Why does the CRA take the position that section 167 not be available in a context of dissolution of a partnership where one partner receives 99.999% of the partnership property and obtains the use of all the property that is necessary to run the business? This issue is important because section 272.1 does not appear to cover the dissolution of a partnership pursuant to a tax free dissolution under the Income Tax Act if a “new partnership” is not being created. [1] It does not seem appropriate that in a dissolution of a partnership where one partner, who is taking substantially all the assets (99.999%) and has use of all the assets necessary to run the business, cannot make use of the election.

CRA Comments

The CRA’s position with respect to the availability of the election under subsection 167(1) of the Act where there is a supply of a business or part of a business is set out in Policy P-188, Supply of a Business or Part of a Business for the Purpose of the Election under Subsection 167(1).

It is not clear from the question but it is assumed that the 99.999% interest is an undivided interest in the partnership property.

When a business is supplied to more than one recipient, each of whom will have an undivided interest in the business, there has not been the supply of a business to any one of the recipients. In other words, if a supplier is not supplying 100% ownership interest in the property of its business to any one person, the supplier is not making a supply of its business. Therefore, the conditions in subsection 167(1) have not been met and the election is not available.

Q.18 - Section 167 Elections for Franchises

Question

It is clear that services and intangible property rights provided by way of licence cannot be the subject of an election. Would the CRA agree that a grant of franchise together with the tangible business assets could be a single supply such that s. 167 could apply or does the wording of the provision preclude this such that services to be provided under the agreement and intangibles have to be allocated separate consideration that is subject to GST, even if the election otherwise would apply to the tangible business assets.

CRA Comments

Where section 167 of the Act applies, subparagraph 167(1)(a) deems the supplier to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to that part of the consideration for the supply of the business or part that can reasonably be attributed to that property or service.

In the context of a sale of a business including a franchise licence, if the supply meets the requirements of section 167, the election would apply to the tangible assets of that business (provided that these assets are not a taxable supply of property by way of lease, licence or similar arrangement) and the franchise license would be excluded under subparagraph 167(1.1)(a) and subject to GST/HST.

Q.19 - Closely–Related Status and “Super-Voting” Shares – ETA Sections 128 and 156

Facts/Background

Under ETA section 128, one of the conditions for a particular corporation and another corporation to be closely related is that they meet the test of 90% of the value and number of the issued and outstanding shares of the capital.

For the purposes of this test, is it the number of shares, or the number of votes attached to the shares, that governs? For instance, assume Company A has issued 100 common "A" shares with one vote per share and a FMV of $100 to Company B and has issued 10 common “B” shares carrying the right to 100 votes per share and a FMV of $ 10 to Company C (the FMV of the common “B” shares being fixed due to the fixed redemption value).

• Company A would be controlled for income tax purposes by Company C because it holds more than 50% of the voting rights of Company A (10 X 100 = 1000 / 1100). For GST purposes, however, Company A may not be closely related to Company C because Company C does not hold 90% or more of the value and number of the shares having full voting rights.
• Although Company B does not have control of Company A, it has 90 % or more of the value ($100 / $110) and number (100 / 110) of voting shares. Accordingly, Companies A and B appear to be closely related to each other.

Question

Please comment on the foregoing.

It is a question of fact whether a particular corporation is closely related to another corporation under section 128 of the Act. Based on the facts provided, it appears that neither Company B (with less than 10% of the votes) nor Company C (with less than 10% of the value and number of shares) is closely related to Company A as neither appears to meet the condition of owning 90% or more of the value and number of the issued and outstanding shares of the capital stock of Company A having full voting rights under all circumstances.

This interpretation is also consistent with the intent of section 156 of the Act as indicated in the Explanatory Notes. Section 156 addresses the issue of where a corporation has organized some of its operations in a wholly owned subsidiary or closely related special purpose corporation instead of as a division within the same corporation. In the absence of any special rules, transactions between the parent corporation and the closely related corporations would be treated in the same manner as transactions between unrelated companies. Section 156 addresses this situation by effectively zero-rating supplies between two or more closely related corporations that are registrant and resident in Canada if the corporations are engaged exclusively in commercial activities.

Q.20 - Late Invoicing of the Provincial Component of the HST – Rebate Entitlements – ETA Sections 261.3 and 261.4

Facts/Background

Assume the following scenario:

• Consultant located in Halifax performed work for clients located in Ontario, and the HST place-of-supply rules deem the supply of the services to have been made in Nova Scotia.
• Consultant mistakenly charged GST instead of HST.
• Some of the consultant’s clients are entitled to claim ITCs while others are only able to claim rebates.
• Consultant realizes after a period of three years that he has made an error. Consultant wishes to file a voluntary disclosure to correct the past.

With the clients who can claim ITCs, there appears to be no issue (assuming all other ITC requirements are met) as the consultant can issue an invoice for the additional tax and the client can claim an ITC (to the extent that it is for use in their commercial activities) by virtue of the general rules or even paragraph 225(4)(c) (provided CRA issues an “assessment” in the course of the voluntary disclosure – see previous years’ questions.

In the case of a client who can only claim rebates, it normally would be permitted to claim a rebate to recover the provincial portion of the HST under 261.3(1) of the ETA. However, section 261.4 requires the person to file an application for the rebate within one year after the tax was payable. Notwithstanding that the provincial component of the HST was not charged, it was nonetheless payable at the time the invoice was initially issued. Question

Will the CRA nevertheless allow the client to claim the rebate even where pursuant to the voluntary disclosure, the subsequent invoice relates to services rendered more than two years previously? CRA Comments

The CRA would not pay a rebate under subsection 261.3(1) of the Act in the circumstances described. There is clearly no legislative authority in the Act for the Minister to pay the rebate where the rebate application is filed after the one-year time limit. To pay a rebate in these circumstances would require a legislative amendment, which is a tax policy matter that falls within the area of responsibility of the Department of Finance.

Q.21 - The Factors to Determine Whether Subsection 272.1(1) or 272.1(3) Applies to Partner Distributions

Facts/Background

The attached interpretation (RITS 57840 June 30, 2005) deals with the application of section 272.1 and the role of a general partner (GP) of a limited partnership (LP) set up to invest in mutual funds. The interpretation concludes that if the GP is receiving a fixed fee (for example on the basis of a percentage of the net value of the LP's assets) for services it provides to the LP, then generally the amount is remuneration for services provided by the GP (subsection 272.1(3)) on its own account and not for something done as a member of the LP (subsection 272.1(1)), even if the agreement to provide the services is included in the partnership agreement.

This statement indicates that how a partner gets paid, to the exclusion of other factors, will solely establish that subsection 272.1(3), as opposed to subsection 272.1(1), applies to the amounts received by the partner. It is our understanding that how payments are made to and/or calculated for a partner in recognition of its role in a partnership for which it is a partner is only one of several factors that will help in determining whether subsection 272.1(1) or 272.1(3) applies in a particular fact scenario.

In our view, this has particular relevance to the facts presented in the interpretation letter involving an LP set up with the purpose of investing funds. Under LP law, only a GP can manage the affairs of the LP and carry out its objects and this is also spelled out in the LP partnership agreement. Clearly, in this scenario, the GP is doing what it is doing as a member of the LP and, in fact, is the only one of the partners in the LP that can do this. Therefore, subsection 272.1(1) has application here. This should be the case, whether the GP in this scenario is paid a fixed fee, a variable fee or a distribution calculated on the basis of the net assets held in the LP.

Question

Does CRA agree that focusing in solely on the form of payment to a partner is not a conclusive factor to determine that subsection 272.1(1) does not apply where the payment is set up as a fee, fixed or otherwise, and not tied to profits of the partnership? Please provide guidance to the answer given.

CRA Comments

The determination of whether a general partner does something in the course of its own commercial activity or as a member of a partnership depends on the applicable provincial partnership law and the facts of the particular situation.

In the fact situation presented in this question, the corporate general partner of the limited partnership receives a fee for services it provides to the partnership (e.g., the fee based on the net value of partnership assets), which is in addition to its share of the profits or losses from the business of the partnership. This is an indication that the amount is remuneration for services provided by the corporate partner on its own account, i.e., in the course of its own business, and not for something done as a member of the partnership, even though the agreement to provide such services is included in the partnership agreement.

Q.22 - Issues Relating to the Application of Rental Deposits – ETA ss. 168(9), 169 and 232

Facts/Background

Consider the following situation:

Landlord A and Tenant B enter into a long-term lease (say, 20 years including all possible renewals) for commercial real estate, that Tenant B will occupy in the course of its business that is 100% commercial activity.

The lease requires that Tenant B provide a “deposit” equivalent to 6 months of base rent, that Landlord will apply against “last months’ rent” or as security against damages and excess wear and tear on the leased premises. There is no allocation as between last months’ rent and security against damages. The lease also grants Tenant B the option to purchase the premises on the occurrence of certain events during the term of the lease.

Landlord A is not required to pay interest to Tenant B, and the lease specifically provides that Landlord A can spend the deposit prior to the last months of the lease for a number of purposes, including the acquisition of additional lands (on which Tenant B would have the first option to lease) and for improvements to the leasehold properties. If Tenant B exercises the purchase option before the deposit has been applied to last months’ rent, the lease provides that the deposit will be applied against the option purchase price. Questions

1. Does the “deposit” come within subsection 168(9) such that GST does not come due until the last 6 months when Landlord A applies the deposit against the base rental?

Please comment generally as to the factors that would lead CRA to determine that Landlord A has “applie[d] the deposit as consideration for the supply”?

2. If GST does become due at the time Tenant B pays the deposits to Landlord A, and Tenant B exercises the purchase option in the third or fourth year and before the final 6 months of the lease, was Tenant B retroactively rendered disqualified from claiming the input tax credit when Landlord A initially charged the GST?

The potential negative consequences could be as follows:

• the deposit amount could be subject to GST at the time when the deposit is given; and again when it is applied against the option exercise price. Although this would merely be an accounting and reporting concern where Tenant B is registered and can claim ITCs. If tenant B were ITC-restricted, however, there would appear to be a double incidence of tax.; and
• unless the deeming rules in subsections 136.1(1) and 152(2) prevail even though the final lease intervals did not in fact occur, it might be arguable that Tenant B was not entitled to claim the ITC with respect to the GST payable on the deposit.

Discussion

This situation raises a tricky issue as to the situation where GST is initially payable, on the basis of section 168, but the supply ultimately does not occur, because the lease is terminated before the lease periods elapse to which the deposit applies. The general rule in section 133 that the supply is deemed to occur when the agreement is entered into, is supplanted by subsection 136.1(1) in the case of a “lease interval”. Under paragraph 136.1(1)(b), the supply with respect to the lease interval is deemed to have been made on the earlier of the first day of the lease interval, the day when the payment attributable to that period becomes due, and the day on which the payment that is attributable to the lease interval is paid. Does this deeming rule override the fact that the final 6 lease intervals in fact do not occur? Does subparagraph 136.1(1)(b)(iii), which deems the supply to be made on "the day on which the payment that is attributable to the lease interval is paid" prevail? In this regard, if the deposit was attributable to the lease intervals comprised of the last months rent and GST was paid on that amount, this subparagraph would "deem" the supply (of those last months) to be made on the date of payment and, therefore, the ITC was properly claimable at that time, even if the circumstances change after the fact. Furthermore, subsection 152(2) provides that consideration under a lease is deemed to become due when Tenant B is required to pay “the consideration” – does this refer back to subsection 168(9)?

Furthermore, subsection 136.1(1.1) deems, “for greater certainty”, that on the exercise of an option under a lease, the supply by way of sale of the property is deemed to be when the erstwhile tenant commences to hold possession as owner rather than tenant.

CRA Comments

1. A definitive response to this question would require a careful review of the wording used in the lease agreement. It is our understanding that the lease agreement calls for Tenant B to make a payment of an amount referred to as a “deposit” and that such an amount is equal to 6 months base rent. We assume that the “deposit” is due and payable on entering into the lease agreement.

Pursuant to subsection 168(9) of the Act, a “deposit” given in respect of a supply would not become consideration paid for the supply until Landlord A applies it as consideration for the supply. The fact that the deposit is given in respect of various supplies (i.e., as last months’ rent, as a security against damages and excess wear & tear on the leased premises, for the first option to lease in respect of additional lands, for improvements to the leased premises, etc.) does not affect the application of subsection 168(9). GST will only become payable at the time Landlord A applies the deposit as consideration for the supply in respect of which the deposit was made.

Where Landlord A applies the “deposit” as consideration for the last lease interval, the GST will become payable at that time.

It is a question of fact as to when Landlord A applies the deposit as consideration. The terms of the lease agreement that govern the payment of rent, the issuance of other documentation (such as invoices, receipts or statements of account relating to the deposit and its application as rent) would provide evidence of this fact.

2. As stated in our response to Question 1, the GST does not become payable at the time the deposit is paid, the GST is only payable when the deposit is applied as consideration for the supply in respect of which it was given. In addition, an input tax credit (ITC) may not be claimed by Tenant B until such time as the GST becomes payable or is paid (i.e., when the deposit is applied as consideration). Thus, the potential negative consequences you refer to, such as having a single deposit applied as consideration for two separate supplies, will not arise.

Where the amount is not a deposit and is, in fact, a prepayment, the regular rules will apply and GST will generally apply at the time the prepayment is made.

Subsection 136.1(1) of the Act makes reference to a “payment that is attributable” to a lease interval. It is our position that the “payment” described in subsection 136.1(1) refers to an amount that is consideration for a lease, licence, or similar arrangement. Where a deposit is given, subsection 136.1(1) will not apply until such time as the deposit is applied as consideration.

Finally, we wish to point out that subsection 136.1(1.1) applies only to tangible personal property and therefore has no application to real property.

Q.23 - Bare Trustee as "Operator" of Joint Venture

Facts/Background

A joint venture election can be made under ETA section 273 to allow the "operator" to handle all the joint venture GST accounting, for various kinds of activities including real estate development and management.

(Without the election, each participant in the venture would have to account for its share of GST collected.)

The operator is required to be a "participant" in the joint venture. The CRA has an administrative policy, P-106, which allows a person that is not an investor in the joint venture to be a "participant" in order to be an "operator". The person must have "operational or managerial control" of the venture to qualify.

Some clients have set up joint ventures with a numbered company as a bare trustee holding the property, and the same numbered company registering for GST and acting as the "operator" of the joint venture.

Question

In the CRA's view, can the same numbered company wear two hats, and be both a bare trustee and an "operator"? If not, what would the GST consequences be if the CRA discovers this situation on audit?

CRA Comments

The Act does not define the term “operator” for purposes of the joint venture election contained in section 273. Based on the wording of section 273 and Policy Statement P-106 Administrative Definition of a “Participant” in a Joint Venture, it is our position that in order to be an “operator” for purposes of the joint venture election, the person must be a registrant and be the person who assumes the performance of the joint venture accounting and the daily operations of the joint venture.

In order to register, an operator must be engaged in a commercial activity as defined in subsection 123(1) (i.e., carrying on a business, engaged in an adventure or concern in the nature of trade, or making a supply of real property). Policy Statement P-015 Treatment of Bare Trusts Under the Excise Tax Act explains the CRA’s position on bare trusts and the ability of a bare trustee to register. It provides that a bare trustee is not seen as carrying on any commercial activity with respect to the trust property, and thus is not eligible to register, since it does not have any independent power, discretion or responsibility pertaining to the trust property. Conversely, 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.

Where a trustee is registered and is named the operator, it must be responsible for the managerial or operational control of the joint venture. It is unlikely that a bare trustee could come within both the requirements of an operator in section 273 and P-106 and the understanding of what is a bare trustee in P-015.

A bare trustee who was named as the operator of a joint venture but whose only responsibility was to hold legal title to the trust/joint venture property would not be engaged in a commercial activity. A joint venture election in such a case would not be a valid election, since section 273 requires the operator to be a registrant. In such a case, the provisions of the Act would apply to each participant separately. The participants in the joint venture could be liable for penalties and interest if a re-apportionment of tax collected and input tax credits showed there was net tax owing on prior returns.

Q.24 - Subsection 296(2.1)

Facts/Background

Technically 296(2.1) applies only against an assessment of "net tax", which 228(4) is not, but in practice I've had this allowed, even at the stage of settling a TCC appeal.

Question

Will subsection 296(2.1) be applied to allow a rebate for tax paid in error to offset subsection 228(4) tax payable on a purchase of real property, where the purchaser mistakenly paid the vendor?

CRA Comments

Subsection 296(2.1) of the Act applies when the Minister is either assessing the net tax of a person for a reporting period of the person, or an amount that became payable by a person under Part IX of the Act. Where, under subsection 228(4), a person was required to remit tax payable on the purchase of real property, and the Minister assesses this amount of tax payable, subsection 296(2.1) would apply to allow a rebate of tax paid in error against the assessed amount.

Q.25 - Web-based GST Registry

Facts/Background

The CRA has indicated that the web-based list of GST registrants will be operational in April 2006.

Questions

1. How will the registry work?

2. How current will the registry be? For example, vendors of commercial real property need to know if a purchaser is registered for GST on the date of closing, and sometimes registration will be done on that very day, or very shortly before closing. Will the registry reflect same day registrations?

3. To what extent can businesses use and rely on the registry? For example, s. 169(4) states that an input tax credit cannot be claimed unless specific information is obtained, such as the vendor’s GST registration number in some cases. Will the publicly available information from the registry now automatically satisfy the need to get a vendor’s GST registration number (i.e. will purchasers be considered to have all GST registration numbers)? Will some sort of a registry printout be available to establish for a supplier that a non-resident is not registered for GST purposes?

CRA Comments

Background

The February 25, 2005 budget announced the creation of a GST/HST Registry that will assist registrants in validating suppliers' registration numbers. Currently, the sole means available to verify the validity of a supplier's registration is to contact CRA. However, as of April 3, 2006, the GST/HST Registry will be operational allowing for GST/HST Registrants to verify a supplier’s registration number on-line at { HYPERLINK "http://www.gsthstregistry.cra.gc.ca" }.

As part of their obligations under the Excise Tax Act, the Act that administers the goods and services tax and the harmonized sales tax (GST/HST), registrants are required to ensure that input tax credits are claimed only where GST/HST has been charged by suppliers who are registered for GST/HST purposes. A publicly accessible Web-based GST/HST Registry has been created to facilitate the verification of a supplier's GST/HST registration. This will help streamline the process and ensure that a supplier's registration information is readily available. The registry has been designed so that a supplier's GST/HST registration status may be verified for a specific invoice date.

GST/HST registrants whose business or trading names appear on their invoices should verify that these names are displayed on their GST/HST statements/returns from CRA, as any names that are not on file at CRA cannot be verified through the GST/HST Registry. If unsure whether these names have been provided to CRA, contact the Business Window at 1-800-959-5525

CRA Comments

1. The Registrant who has received an invoice from a supplier will enter the supplier’s name, GST/HST registration number and the date of the invoice in question into the fields requested on the verification webpage. The GST/HST Registry will then return a response indicating whether based on the information provided the supplier is a GST/HST registrant for the particular date queried.

2. The GST/HST Registry will search for registered GST/HST program accounts in the Business Number system of which includes all registrations, once a GST/HST number has been assigned. For example, where a person registers on-line the system will be automatically updated.

3. Registrant’s claiming ITC’s will now have the capacity to verify a supplier’s registration status on-line. Confirmation of a supplier’s registration status rests upon the registrant claiming an ITC. The GST/HST Registry can only verify the registration status of a person where the name, GST number and a transaction date are provided. In those situations where a GST number has not been provided, the GST/HST Registry will not be able to process the request for validation of registration status. A screen print out will be able to be made indicating that the request cannot be further processed or is missing field information to proceed.

Q.26 - Waiver of Further Appeal Rights

Facts/Background

It is now much more common than it was a few years ago for the CRA to request that a taxpayer sign a waiver of their appeal rights when Appeals allow a GST appeal in part (s. 306.1(2)). Further, it seems that appeal waivers were previously more restricted to appeals involving factual issues (e.g. real estate valuations), rather than legal issues. It is understood that part of the increased use in waivers is due to their recently encouraged use in all appeals whereas, apparently, they were previously only to be used in larger files.

Question

What is the CRA’s current position regarding the use of GST appeal waivers (and objection waivers under 301 (1.6) as well) – i.e. when does the CRA consider they should properly be used? What if a taxpayer does not want to sign one?

CRA Comments

The first sentence in the Facts/Background segment of this question reads:

“It is now much more common than it was a few years ago for the CRA to request that a taxpayer sign a waiver of their appeal rights when Appeals allow a GST appeal in part”.

In our response, we have assumed that the sentence was intended to read:

“It is now much more common than it was a few years ago for the CRA to request that a taxpayer sign a waiver of their appeal rights when Appeals allow a GST objection in part”.

Subsection 301(1.6) of the Act prevents a person from objecting to the (re)assessment of an issue for which the right of objection has been waived in writing. Similarly, if a person has waived the right to object or appeal a (re)assessment of a particular issue, subsection 306.1(2) prevents the person from appealing that issue to the Tax Court.

For both CRA and the client, a waiver can be a valuable tool to finalize the resolution of disputes. However, a waiver of objection or appeal rights would be invalid if the resultant reassessment contravened any provision of the Act. CRA’s policy, at both the audit and objection stages, is that:

The waiver of objection and/or appeal rights is appropriate only for issues related to the interpretation of the facts as opposed to the interpretation of the law, and The resulting (re)assessment must be correct in law.

In the GST/HST context, waivers could be appropriate used when resolving factual disputes such as fair market value of real property, or input tax credit entitlements for an entity that makes both taxable and exempt supplies (i.e., allocation of inputs).

The decision to sign a waiver rests entirely with the client. CRA procedures are designed to ensure that a client contemplating signing a waiver fully understands the facts and the repercussions related to the waiver and proposed reassessment. If the client does not want to sign a waiver, then CRA will assess or reassess in accordance with our understanding of the law and the facts.

Q.27 - Appeal Procedures

Facts/Background

It is understood that there has been a significant reorganization of how GST appeals are handled by the CRA – i.e., they can be assigned to any CRA office based on workload, regardless of where the taxpayer or their advisor is located.

Questions

1. What is the current system used by the CRA to allocate appeals across Canada?
2. What are the circumstances where a taxpayer or their advisor can request that an appeal be handled by the local CRA office?
3. In any event, will the Appeals officer travel to the location of the taxpayer or their advisor for meetings?

CRA Comments

Introduction:

It is a continuing goal of the Canada Revenue Agency (CRA) to provide accurate and efficient service of the highest quality. One way of attaining this goal is to constantly review CRA processes and procedures to ensure it provides cost-effective service to Canadian taxpayers by making the best use of staff. It is therefore necessary for the CRA to have the flexibility to have objections reviewed where the capacity exists, which means that an objection may be reviewed by a tax services office or a tax centre further away from the taxpayer’s residence. Nevertheless, the CRA recognizes that there are advantages to both the Agency and the taxpayer in having face-to-face meetings when necessary to resolve more complex issues. Our objective is to strike a balance between ensuring that required meetings do take place and delivering service in the most cost-effective manner.

The issue of face-to face meetings is currently being examined from which improved criteria may be developed to identify objections that require face-to-face meetings. To that end the CRA would welcome your input on this issue so that the CRA can develop policies and procedures that indeed strike the balance as stated above. CRA Comments

1. As you may be aware, many of the taxpayers with whom we deal do not reside near a tax services office or a tax centre.

Currently, GST/HST objections are handled in 26 of Canada Revenue Agency’s 55 office locations. Some of them such as visitor rebates are exclusively handled at our Summerside, Prince Edward Island tax centre and others are as general rule forwarded to an office closest to where the taxpayer resides.

In our continuing effort to provide accurate and efficient service of the highest quality we continually review our processes and procedures. One of our initiatives, has over the last year in Ontario, consolidated the front-end activities of our business process. Initial screening of incoming Notices of Objection is done by the Sudbury Tax Centre and the files are then distributed to various Tax Services Offices. The results to date are very positive.

If implemented nationally GST/HST files would flow to available resources meaning that your file would receive more timely attention and we would be improving resource utilization.

We do recognize that at times it is advantageous to meet face-to face to resolve more complex issues. We are very committed that the redress system meets the objective of striking a balance between ensuring that – necessary meetings take place and delivering service in the most cost-effective manner.

2. Most of our files are resolved without the need for a meeting. We do recognize that at times face-to-face meetings are required to work through complex issues to resolve a file and when this occurs flexibility exists to:

• Move a file to another office. or
• Have the officer travel to a meeting.

In the cases where the file cannot be resolved without a face-to-face meeting, the Chief of Appeals for the appropriate Tax Services Office may be contacted.

However, while there may be very good reasons for a face-to–face meeting, we wish to reduce meetings where self explanatory information is handed over to the Appeals Officer. When this happens the redress process becomes more expensive and less effective.

3. The Chief of Appeals of an office has the latitude to decide what would be appropriate in meeting the needs of a file. Depending on the needs of the file, an officer could travel to have a face-to-face meeting. This occurs on occasion.

Q.28 - Drop Shipments/Carrying on Business in Canada

Facts/Background

Please assume the following facts:

CanCo is a GST registered, Canadian resident corporation, which sells manufacturing equipment.

USCo is a manufacturer of goods in the United States. USCo is not registered for GST, is not resident in Canada, and does not sell its goods in the Canadian market.

USCo enters into an agreement to purchase from CanCo equipment for use in its plant in the United States.

Pursuant to the agreement, delivery of the equipment sold to USCo occurs in Canada. However, the agreement states that USCo will be exporting the equipment to the United States, for use in its manufacturing plant in the United States.

The agreement is concluded outside Canada.

Shortly after entering into the agreement with CanCo, and before it takes possession of the equipment, USCo enters into a sale-leaseback agreement with LeaseCo, a non-resident lessor that has a leasing business outside Canada and is not registered for GST.

Under the sale-leaseback arrangement, title to the equipment transfers to LeaseCo, and then back to USCo immediately upon USCo taking possession of the equipment (i.e. title transfers in Canada).

The sale-leaseback agreement is concluded outside Canada, and is clear that the equipment will be located and used in the United States, and not in Canada.

USCo exports the equipment from Canada as soon as possible after taking possession of the equipment.

The equipment is not processed, transformed or altered in Canada except to the extent reasonably necessary to its transportation.

USCo provides evidence of the export of the equipment to CanCo.

Neither USCo nor LeaseCo have any agents or employees in Canada, solicit any business in Canada, have any branch or office in Canada, have any Canadian bank accounts, or have any other ties to Canada. All payments made on the sale-leaseback agreement are made outside Canada.

Questions

1. In the CRA’s response to Supplemental Question #2 of the CBA and CRA GST Round Table held on March 3, 2005, the CRA stated that it is currently reviewing the issue of whether drop-shipment certificates can be issued on transfers of CTCs, including whether parties involved in the supply of CTCs can be considered to have acquired physical possession of such CTCs for purposes of the drop-shipment rules. Can you please provide an update on this issue.

2. Will USCo be considered to be carrying on business in Canada merely because title to the manufacturing equipment transfers in Canada before the equipment is exported?

3. Will LeaseCo be considered to be carrying on business in Canada merely because title to the manufacturing equipment transfers in Canada before it is exported?

4. Will the initial sale from CanCo to USCo be zero-rated under section 1 of Part V of Schedule VI to the ETA? Specifically, the supply would not be excluded from zero-rating by subsection 1(c) of Part V of Schedule VI to the ETA on the basis that section 143 of the ETA would deem the sale by USCo to LeaseCo to be made outside of Canada, and thus there would be no supply in Canada before the machinery was exported.

CRA Comments

1. The question referred to from last year’s meeting was whether certain provisions in the drop-shipment rules could apply with respect to supplies of CTCs in certain circumstances. The application of the drop-shipment rules, including the provisions referred to in last year’s question, is based in part on physical possession of the same tangible personal property transferring between parties, as opposed to merely acquiring physical possession of an equivalent quantity of tangible personal property. Parties involved in the supply of CTCs by way of pipeline such as natural gas that is completely commingled in the pipeline are not considered to have acquired physical possession of the same tangible personal property for purposes of the drop-shipment rules. As a result, it is the CRA’s view that the provisions in question, as currently drafted, do not apply to supplies of such CTCs.

Although it is our understanding that the drop-shipment rules were not intended to apply to supplies of CTCs such as natural gas, this issue is a tax policy matter that falls within the area of responsibility of the Department of Finance.

2. The facts in the question are not entirely clear. For instance, one of the facts refers to a sale-leaseback arrangement between USCo and LeaseCo under which title transfers twice. It is assumed that the sale-leaseback arrangement referred to in the facts consists of a supply by way of sale from USCo to LeaseCo with LeaseCo supplying the equipment back to USCo by way of lease.

Based on the information provided, USCo does not appear to be carrying on business in Canada for GST/HST purposes. Although USCo has purchased the equipment with delivery taking place in Canada and appears to have supplied the equipment to LeaseCo with delivery taking place in Canada, there are insufficient factors present in Canada to support a conclusion that USCo is carrying on business in Canada for GST/HST purposes.

3. Based on the information provided and factors present in Canada, LeaseCo would appear to be carrying on business in Canada for GST/HST purposes. With respect to LeaseCo, the circumstances and relevant facts are similar to those in Example #1 of GST/HST Policy Statement P-051R2 Carrying on business in Canada. Delivery of the equipment to both LeaseCo and USCo appears to take place in Canada. Furthermore, 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. LeaseCo is considered to be in the business of supplying tangible personal property by way of lease. For GST/HST purposes, the supply of property under a lease is considered to be made on a regular and continuous basis. LeaseCo is considered to have made a separate supply of the property for each period to which a lease 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. Based on this and the fact that delivery to both USCo and LeaseCo under the sale-leaseback arrangement occurs in Canada for both USCo and LeaseCo, LeaseCo could be considered to be carrying on business in Canada for GST/HST purposes.

However, if in a particular sale-leaseback case such as this it could be clearly established based on a complete set of facts that the leased equipment may not be used in Canada during the lease, administratively, the CRA would not consider the non-resident lessor to be carrying on business in Canada for GST/HST purposes as a result of entering the sale-leaseback agreement.

4. The supply by CanCo to USCo would not be excluded from zero-rating based on the exclusion in paragraph 1(c) of Part V of Schedule VI to the Act, since the supply made by USCo to LeaseCo before the equipment is exported would be deemed to be made outside Canada under subsection 143(1) of the Act.

Q.29 - Purchases for Resale – ITC Entitlement

Facts/Background

In the recent decision in Aviva Canada Inc. v. R., [2006] T.C.C. 57 (General Procedure), the Tax Court of Canada ruled that a corporation’s isolated purchase and immediate resale transaction, which was effected for the sole purpose of achieving a certain income tax objective within a corporate group, was not a commercial activity for GST purposes. In particular, the purchase and resale did not constitute a trading transaction involving a scheme for profit-making, and so was found not to constitute an adventure or concern in the nature of trade. Further, since the Court found that the subject property was not acquired for use, or actually used, in the business of the corporation, the isolated purchase and resale transaction could not be said to have been made in the course of its business. The Court also rejected the proposition that the isolated transaction was itself a business for GST purposes. The result was that the corporation was not required to charge tax on its sale of the subject property, and, by implication, would not have been entitled to claim an input tax credit for the GST it paid on the purchase of the property from its related corporation.

The Aviva decision did not give rise to a perverse result for the parties involved in that particular case because the circumstances involved property that was used exclusively in GST-exempt activities. Therefore, the denial of input tax credits at the level of the seller, and the relief from GST on the sale to the final purchaser, arguably achieved the intended policy result. However, if the narrow interpretation of “adventure or concern in the nature of trade” that was adopted by the Court in Aviva stands, and is applied broadly to situations involving exclusively commercial activities, it will have serious perverse consequences.

A very common situation that would be impacted is where legal title to assets is transferred between members of a related group in the course of achieving, in the most income-tax-efficient manner, an internal reorganization that ultimately results in the assets being moved from an original operating entity to a new operating entity. The transitional transaction to transfer title typically does not involve a mark-up on the assets, or any use of the assets by the transitional entity. In such a circumstance, where the assets had been used in a commercial activity of the original operating entity, there likely would be GST on the sale to the transitional entity. Under the interpretation adopted in Aviva, GST could then “stick” at the level of the transitional entity. That entity would not be entitled to claim an input tax credit because its immediate transfer of title to the new operating entity would not be made in the course of a commercial activity. Again, we emphasize that this is a very common situation. Until the Aviva decision, it generally had been presumed (including by the Crown) that the foregoing type of transitional transaction would qualify as an adventure or concern in the nature of trade, or a business, and therefore a commercial activity for GST purposes.

Question

We understand that the Crown will not be proceeding with an appeal of the Aviva decision. Does the CRA intend to follow the decision and apply it even in circumstances of reorganizations involving transfers of assets used exclusively in commercial activities?

CRA Comments

In the recent decision in Aviva Canada Inc., the Tax Court of Canada ruled that a transaction involving a corporation’s isolated purchase and immediate resale of trademarks, for the sole purpose of achieving an income tax objective within a corporate group, was not a commercial activity for GST purposes.

This decision involved specific findings of facts by the judge, based on the evidence before the court.

In the case of items not used but acquired solely for re-sale, the sale must be demonstrated to relate to either a “business” or “adventure or concern”, in order for the transaction to be subject to GST. With respect to registrants engaged in exempt activities, evidence would be required that relates the sale to non-exempt activities.

In particular, isolated dispositions of capital property within an income tax planning context by persons engaged in exempt activities may be difficult to characterize as an “adventure or concern” based on income tax jurisprudence.

The question raises concerns about the possible application of this decision in circumstances of reorganizations involving transfers of assets used exclusively in commercial activities. This matter is under review in light of this court decision, which is very recent.

Q.30 - Impact of Christie on GST

Facts/Background

In the B.C. Court of Appeal decision in Christie v. B.C. (Attorney General), 2005 B.C. CA 631, the majority of the court concluded that B.C.’s Social Services Tax Act (imposing that province’s provincial sales tax) should be struck down insofar as it applied to legal services. In general, the basis of the decision was that the tax impeded access to justice and therefore was invalid as offending the rule of law under section 1 of the Canadian Charter of Rights and Freedoms.

Question

Has the CRA considered the impact of this case in relation to whether the GST/HST could be determined to be invalid as it pertains to legal services?

CRA Comments

The decision in Christie v. British Columbia, 2005 BCCA 631, dealt with whether the social service tax on legal services denied access to justice. Although the decision did not deal with the matter of GST/HST on legal services, the CRA is aware that at the outset of the proceedings, Mr. Christie had also sought a declaration that the Act was unconstitutional, insofar as it levies taxes on legal services.

As we understand it, the Province of British Columbia is seeking leave to appeal the Court of Appeal’s decision to the Supreme Court of Canada. This information was made public on the { HYPERLINK "http://www.sbr.gov.bc.ca/ctb/Legal_Services_Provided_to_British_Columbians.htm" } website on February 14, 2006.

Given that the matter is still before the courts, the CRA’s position remains that the supply of legal services is subject to GST/HST pursuant to section 165 of the Act, unless exempt under section 1 of Part V of Schedule V. The CRA will re-evaluate its position, if necessary, once the judicial process is complete.

Q.31 - Application of subsection 199(4): Improvements to Capital Property

Facts/Background

Subsection 199(4) applies to an improvement to capital personal property, and provides that an ITC is available only if the property (rather than the improvement) is used primarily in commercial activities. It is supposed to parallel the “rough justice’ all-or-nothing rule in subsection 199(2).

However, subsection 199(4) appears to have a drafting flaw. It applies only in one direction. It disallows any ITC if the property is not used primarily in commercial activities, but does not allow a full ITC if the property is used primarily in commercial activities.

Consider the purchase of a memory upgrade for a computer that is used 75% in commercial activities. Assume that the computer is capital property and that the memory upgrade is an “improvement” as defined in subsection 123(1).

Paragraph 169(1)B(b) allows an ITC for the upgrade based on the proportion of use of the computer in commercial activities (i.e., only 75%). While subsection 199(2) deems the computer to have been purchased exclusively for use in commercial activities (an intention test), it does not actually deem the computer to be used exclusively in commercial activities; and section 196 deems it to be used exclusively in commercial activities only for the instant in time immediately after the acquisition.

It therefore appears that, in this example, only 75% of the GST paid on the memory upgrade is eligible for ITC. This is an anomaly that may not have been intended by the drafters of the legislation, does not match the “all or nothing” rule in subsection 199(2), and was not present in the version of subsection 199(4) that was in force from January 1991 through March 1991.

GST Memoranda 400-3-4 and 400-3-9, published before the legislation was amended in 1993 effective April 1991, both contemplate that a full ITC is available for “more than 50%” use of the property in commercial activities.

Question

How does the CRA administer subsection 199(4)? If capital personal property is used primarily but not exclusively in commercial activities, will the CRA allow a full ITC for an improvement to the property? If so, how do you justify this based on the legislation?

CRA Comments

CRA administers subsection 169(1) of the Act to allow a full ITC for the GST/HST incurred on the acquisition of the improvement to capital property where in the case of capital personal property the property is used primarily in commercial activities.

Paragraph 169(1)(b), which is subject to Part IX of the Act, allows a registrant to claim an ITC in respect of property or services acquired as an improvement to capital property to the extent (expressed as a percentage) the capital property was being used in commercial activities.

Subsection 199(2) of the Act deems capital personal property that is used primarily in commercial activities to be used exclusively in commercial activities. Subsection 199(1) excludes property of a financial institution or prescribed registrant and a passenger vehicle or aircraft of registrant who is an individual or partnership from the deeming provision in subsection 199(2).

Subsection 199(4) denies an ITC for the tax paid on an improvement to capital personal property where the capital personal property is not used primarily in commercial activities.

Capital personal property, (other than that excluded by subsection 199(1) as described above), which is used primarily in commercial activities is deemed to be used exclusively in commercial activities under paragraph 199(2)(b) and therefore any tax incurred on the improvement to that capital property would qualify for an ITC under paragraph 169(1)(b) based on the extent of use in commercial activities. The extent of use has been deemed to be exclusively for use in commercial activities under paragraph 199(2)(b) therefore a full ITC would be allowed on the improvement.

Q.32 - GST Section 167 Election: Whether Available to Non-Operating Businesses

Facts/Background

At the February 26, 2004 meeting, the CRA answered Question 21 by stating that a sale of a non-operating business, including by a liquidator, would not qualify for the section 167(1) election, even though all the assets of the business are sold and the purchaser may intend to operate the business as a business.

The February 2004 answer appears to be inconsistent with the amendments to subsection 167(1) made effective October 1992. In particular, the sale of a business (or part) that was “established and carried on by another person and acquired by the supplier” now qualifies.

Indeed, Policy Statements P-143 and P-145, which state that they deal with the rules as they applied before October 1992, imply that since October 1992 such a transfer will qualify.

Question

Please reconsider the answer given in February 2004 in light of the above.

CRA Comments

As noted in the question, for purposes of the election in subsection 167(1) of the Act, the business (or part of a business) supplied does not need to be established or carried on by the supplier, but may be established or carried on by another person and acquired by the supplier. However, the supply must still be the supply of a business (or part of a business).

It is a question of fact whether a particular transaction is the sale of a business (or part of a business) for purposes of the subsection 167(1) election. The nature of a business will generally determine the package of assets that would comprise a business (or part of a business).

Based on the facts provided, it is not clear that the supply was a supply of a business (or part of a business) rather than a supply of assets. Question 21 at the February 26, 2004 meeting states that a “decision was made to close down the operations and ultimately to sell the assets” and it refers to the assets used in the business “standing idle for some months” which could be an extended period of time. The original question was not clear that the supplier supplied and the recipient acquired a supply of a business (or part of a business) that could be carried on. Where the transaction was the sale of assets and was not a supply of a business (or part of a business) the conditions in subsection 167(1) would not be met and the election would not be available.

Q.32 - Hot Audit Topics

Question

Please identify the top audit areas or initiatives of the CRA within the past 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.

Additional resources of $5.6 million were internally reallocated for 2005-2006 to further initiatives to address GST/HST fraud, primarily from the “post assessment” verification, to “pre-payment” review.

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 deregistration project to determine the degree of risk in deregistered GST/HST accounts.

We are also pursuing longer-term objectives including policy changes, and legislative changes such as the Internet Registry to better address compliance issues.

Specific GST/HST Audit Issues:

• ITCs claimed on expenditures that are personal and/or not in the name of the registrant
• ITCs claimed on leases
• unreported GST/HST on unreported income
• Retroactive Claims of ITC’s based on amended ITC allocation methodologies
• Division IV tax issues – (Tax on imported taxable supplies on imported goods) -Imported taxable supplies and self assessment (items such as computer related supplies)
• Errors in coding product master file
• Accounting System errors
• S150 elections (Election for exempt supplies) – Are being properly filed and prescribed conditions met

Q.33 - 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

1. Dawns Place Ltd (Federal Court of Appeal)

Issue:

The issue is whether or not the appellant was supplying zero rated intellectual property to clients in the US by allowing them to access a web site and retain one copy of copyrighted material

Facts

• The Appellant operates an adult content website on the Internet. Users are charged a fee to view the content.
• The corporation is resident in Canada; however, most of the users have a billing address outside Canada.
• The corporation did not charge GST on the access fees.
• The CRA assessed the Appellant for non-collection of GST on these fees.
• The appellant appealed to the Tax Court of Canada

The Tax Court allowed the appeal. The court held that the supply was one of intellectual property and therefore zero-rated.

The Judge found that the Appellant was making a supply of a right, licence or privilege to use the copyright and that the supply would be zero-rated under section 10, Part V of Schedule VI, if it were supplied to a non-resident non-registrant.

This judgment was appealed to the Federal Court of Appeal by the CRA. In the CRA’s view, the judge failed to distinguish between the supply of access to the copyrighted content and the supply of the copyright itself. CRA does not agree that the subscriber is using the copyright. Rather, the subscriber is using the images, videos etc., which are subject to copyright

The position of CRA is that the right to electronically view an existing digitized product is a supply of intangible personal property; it is not a supply of a licence or other right to use intellectual property, nor is it a service. Accordingly, the subscriptions in this case are supplies of intangible personal property that are deemed to be made in Canada because the property “may be used in whole or in part in Canada.” [142(1)(c)(i) of the Act]. Therefore, they are taxable supplies in the circumstances and are not zero-rated.

There is no general zero rating provision for a supply to a non-resident of intangible personal property that is not intellectual property. There are zero-rating provisions for services and for intellectual property provided to non-residents but these do not apply to the supply in question.

2. Camp Mini-Yo-We Inc. v. Canada (Federal Court of Appeal)

Issue:

The issue is whether GST was collectible on the fees charged by the Appellant for its summer camp, i.e., whether the camp programs conducted by the Appellant, were exempt supplies under Schedule V, Part V.1, section 1 of the Act.

The facts are as follows:

• The Appellant, a registered charity, operated a summer camp for children.
• The Appellant charged a single fee to cover the cost of the overnight camping program supplied to a camper, which included the cost of accommodations, meals, supervision and instruction in recreational and athletic activities.
• The CRA assessed the Appellant for not collecting GST on the fees charged for attending the camp.

The Appellant's position is:

• The supplies of the camping programs are exempt under section 1 of Part V.1 of Schedule V to the Act. The exclusion in paragraph (f) does not apply because the principle activity of the camp is the promotion of religious beliefs and not the recreational activities offered.
• The Appellant relied on an earlier Tax Court decision, Camp Kahquah Corporation Limited. v. The Queen, in which the supply was found to be exempt.

The CRA’s position is:

• The camping programs provided are supplies of services involving instruction or supervision in a recreational or athletic activity and therefore are excluded from the exempting provision, pursuant to paragraph 1(f) of Part V.1 of Schedule V of the Act. Accordingly, the supplies are taxable and GST must be collected by the Appellant.

On September 9, 2005, the TCC dismissed the Appellant’s appeal.

The Tax Court of Canada held that the service offered by the Appellant falls within the paragraph (f) exception to the general exemption of supplies made by charities. The Appellant operated a summer camp, not a religious school. Since it was the children’s camping experience for which fees were paid, GST must be collected on the fees. The court distinguished the case of Camp Kahquah, stating that on the evidence before the court, it could not make the same findings.

On October 5, 2005, the Appellant appealed this decision to the Federal Court.

3. Royal Bank of Canada (Federal Court of Appeal)

Issue:

Definition of "Financial Service"

The issue is whether branch services provided by the Royal Bank of Canada (the "Bank”) to certain mutual funds are exempt supplies of services for purposes of the Act.

Summary of Facts:

• The Bank is a financial institution as defined in the Act and makes both taxable and exempt supplies.
• The Bank provided branch services to certain mutual funds. In consideration for the branch services provided by the Bank, the mutual funds paid monthly fees.
• The Bank charged GST on the branch services supplied to the mutual funds and claimed input tax credits (ITCs) on its inputs to these services.
• The CRA disallowed the ITCs on the basis that the branch services provided by the Bank were exempt financial services.

The Bank filed an appeal to the Tax Court of Canada (TCC).

The Bank’s arguments were:

• The Bank is precluded by the Bank Act and its regulations from engaging in the distribution of mutual funds.
• The Bank provides administrative services to a mutual fund corporation, such as personnel services, as well as the use of space within which the personnel work.
• As a result, the branch services provided by the Bank to the mutual fund corporation constitute taxable supplies.

On December 20, 2005, the TCC dismissed the Bank’s appeal.

The TCC found as follows:

• The service the Bank provided to the mutual fund corporation was to arrange for the distribution of mutual funds, as well as to ensure ongoing customer service.
• Paragraph (t) of the definition of “financial service” in subsection 123(1) of the Act does not apply; therefore, the branch services are not excluded from the definition of financial service”.
• The branch services were tax-exempt financial services and therefore the related expenditures did not give rise to an entitlement to input tax credits.

On January 19, 2006, the Bank appealed to the Federal Court of Appeal.

4. Commission scolaire des Patriotes (Tax Court of Canada)

Issue:

The issue is the constitutionality of retroactive legislation which authorizes the CRA to recapture input tax credits (ITCs) which had been allowed to the Commission scolaire des Patriotes (the “School Board”), pursuant to a Consent Judgment. Facts

• The School Board claimed a partial rebate for tax paid in error for the GST incurred for the transportation of its students.
• The CRA disallowed the rebate claim and the school Board appealed to the Tax Court of Canada
• On March 7, 2003, the CRA signed a Consent Judgment in favour of the School Board.
• On June 19, 2003, the Budget Implementation Act, 2003, received Royal Assent. Section 64 of this Act permits the Minister of National Revenue to issue reassessments to school authorities retroactively for reporting periods in which they received full ITCs, even if those periods are otherwise statute-barred. It also includes an amendment to ensure the service of transporting students by a school authority is treated as an exempt supply.
• On May 11, 2004, the CRA issued a reassessment, reversing the assessment that had followed he Consent judgment.
• On April 13, 2005, the School Board appealed this reassessment to the Tax Court of Canada.

School Board's Position:

• At the time the services were provided and the Consent Judgment signed, the proposed legislation did not apply.
• The service of transporting students was made in the course of its commercial activities and, as a result, the School Board is entitled to full ITCs.
• The retroactive legislation authorizing the Minister to recapture ITCs is unconstitutional.

CRA's Position:

• The School Board provided an exempt supply of transporting students and is not entitled to ITCs.
• The new legislation authorizes the Minister to issue a reassessment to the School Board and recapture the ITCs that had been allowed pursuant to the Consent Judgment.
• The new legislation is constitutional.

Similar claims have been filed by other school boards located in Ontario and Québec.

Suppl Q.1 Voluntary GST Registration: Claiming of ITCs

CRA Comments

(i) If it can be clearly established based on the facts that at the time of the acquisition of the intangible personal property Corporation B intends to use it in the course of its commercial activities, it will be entitled to an ITC under subsection 169(1) of the Act for the tax on the acquisition.

(ii) Based on the information provided, Corporation B may file a request in prescribed form and manner under subsection 242(2) of the Act that it be deregistered. The deregistration would be effective the after last day of Corporation B’s fiscal year provided it has been registered for a period of not less than one year.

Suppl Q.2 Claiming ITCs: Supplies Made Outside Canada

CRA Comments

(i) Based on the information provided, Corporation A who is a resident of Canada would appear to be engaged in a commercial activity in Canada and would therefore be able to apply for voluntary registration under paragraph 240(3)(a) of the Act.

(ii) Based on the information provided, where registered, Corporation A would be entitled to claim input tax credits for the GST on the goods and services it acquires for consumption, use or supply in the course of its distribution activities.

Suppl Q.3 Application of Subsection 272.1(1) to Supplies Made by Partner

CRA Comments

(i) Where a corporate partner of a partnership makes a supply to the partnership in the course of its own commercial activity, the supply will be a taxable supply. The determination of whether a general partner does something in the course of its own commercial activity or as a member of a partnership depends on the applicable provincial partnership law and the facts of the particular situation. In the fact situation presented in this question, the corporate partner, A Co., is engaged in an accountancy business and provides accountancy services for a number of persons including the partnership of which it is a member. Where a corporate partner receives a fee that is in addition to its share of the profits or losses from the business of the partnership, for example, as in this fact situation, a fee that is reimbursement of employee costs for services it provides to the partnership, generally that fee is remuneration for services provided by the partner on its own account (i.e. in the course of the corporate partner’s own business) and not for something done as a member of the partnership even if the agreement to provide the services is included in the partnership agreement. Where a partner supplies property or services to a partnership otherwise than in the course of the partnership’s activities subsection 272.1(3) of the Act applies.

Where A Co. acquires property or a service for consumption or use in the partnership’s activities but on its own account, does not claim any ITCs for the GST/HST paid on those inputs, and is reimbursed by the partnership, subsection 272.1(2) and section 175 of the Act would apply. As a result of section 175, the partnership is deemed to have received a supply of the property or a service and to have paid GST/HST according to the formula in paragraph 175(1)(c), and the consumption or use of the property or service by A Co. in the partnership's activities is deemed to be consumption or use by the partnership and not by A Co.

(ii) Where a corporate partner of a partnership makes a supply to the partnership in the course of its own commercial activity, the supply will be a taxable supply. The determination of whether a general partner does something in the course of its own commercial activity or as a member of a partnership depends on the applicable provincial partnership law and the facts of the particular situation.

Where a corporate partner receives a fee that is in addition to its share of the profits or losses from the business of the partnership, for example for labour services or for the lease of equipment that it provides to the partnership, generally this is an indication that the amount is remuneration for services or property provided by the partner on its own account (i.e. in the course of its own business) and not for something done as a member of the partnership, even if the agreement to provide the services or the equipment lease is included in the partnership agreement. Where a partner supplies property or services to a partnership otherwise than in the course of the partnership’s activities subsection 272.1(3) applies.

In the situation where a corporate partner provides a service that it has acquired for use in partnership activities and does not receive a fee that is in addition to its share of the profits or losses from the business of the partnership, this is an indication that the partner could be providing the service as a member of a partnership such that subsection 272.1 could apply.

Suppl Q.4 TIB 0-32R Status

CRA Comments

In view of the Finance announcement on November 17, 2005, we are currently reviewing the interpretation and application of the Act to pension plan trusts. It is expected that the review will result in a revision of TIB-032R.

Suppl Q.5 Grants and Subsidies

CRA Comments

The impact of the Tax Court of Canada’s decision in the County of Lethbridge case is limited as it was based on the specific facts of the case.

The decision does not impact on the CRA’s overall policy with respect to the GST/HST treatment of grants and subsidies. The CRA’s policy concerning grants and subsidies as set forth in the Technical Information Bulletin (TIB)-067 remains unchanged.