A real estate developer plans to build a retirement community. The real estate developer develops a concept of a multi-unit residential complex with the basement level to have room for five or six offices, which will be rented to doctors, dentists and other medical practitioners who would provide independent services to residents and the public at large. In order to attract medical practitioners to the building, the builder of the retirement residence offers the medical practitioners a tenant inducement of a two-year rent-free period (with the condition that they sign a long term lease). The developer plans to continue to own the entire building after it is built and act as the landlord. The builder plans to enter into a lease with the medical practitioners, but does not intend to enter into any form of service contract to ensure that the doctors remain independent contractors. The developer does not intend to employ the medical practitioners.

The developer also intends to include on the first floor level space for a minimart so that the residents do not have to walk far to purchase groceries. The developer plans to offer a tenant inducement of a rent free period of one year to the minimart operator.

Also on the basement level, the developer plans to build an office for a personal trainer, who would offer services to the residents and the public at large. The personal trainer would have enough space for an administrative office and fitness facilities. The personal trainer would be allowed to provide services to residents in his/her office or in the second floor fitness room. The trainer would not be allowed to provide services to the public in the second floor fitness room. Again, the trainer would be offered a tenant inducement and would enter a long term lease. The trainer would be paid by residents directly and would not be paid via the retirement residence operator and would not be an employee.

Question

(i) Is the developer entitled to claim input tax credits with respect to the portion of the construction relating to the building of the medical office in the basement level?

(ii) Is the developer entitled to claim an input tax credit in respect of the construction of that part of the retirement residence that will be a minimart?

(iii) Is the builder entitled to claim input tax credits in respect of the construction of the areas on the basement level for the trainer's office and fitness facilities?

CRA Comments

Our comments are based on the following assumptions:

The developer is a GST/HST registrant.
The developer is not a public service body or a charity.
Either the second floor fitness room is not part of the multiple unit residential complex or the fitness room is not leased to the personal trainer.

Yes, the developer is entitled to claim input tax credits (ITCs) with respect to the construction of that part of the building relating to the medical offices, mini-mart and the trainer’s office/facility. In general, a supply of real property by way of lease, licence or similar arrangement is a taxable supply unless the supply is specifically exempted. There is no exempting provision applicable to the supply of non-residential real property by way of lease (except certain supplies by way of lease by a public service body under section 25 of Part VI of Schedule V or a charity under section 1 of Part V.I of the same Schedule.)

Commercial activity of a person is defined under section 123 to include the making of a supply of real property, other than an exempt supply, including anything done in the course of or in connection with the making of the supply.

Under subsection 169(1), a registrant is entitled to claim an ITC for tax paid or payable to the extent to which the property or service acquired is for consumption, use, or supply in a commercial activity of the registrant.

Since the intended rental of the non-residential portion of the building and the self-supply under section 191 of that portion of the building that is a residential complex constitute taxable supplies, the developer/builder will be entitled to claim ITCs with respect to GST/HST paid or payable on all the constructions costs. However, with respect to the construction of the residential complex, the developer/builder can only claim ITCs with respect to GST/HST paid or payable on the construction costs that were incurred prior to the self-supply under section 191.

Q.2 - New Residential Property Rebate

Facts / Background

A developer has built a retirement community made up of a multi-unit residential complex like an apartment building and 40 single level residential complexes that are adjacent to, but not attached to the multi-unit residential complex. Each of the single level residential complexes has a full kitchen, one or two full bathrooms, one or two bedrooms, a living and dining area and laundry facilities. The resident (s) enter into leases and agree to pay extra for services. The residents cook their own meals, but are permitted to eat dinner in the main retirement residence. The residents do not require much personal care.

Question

Is the builder entitled to claim the new residential rental property rebate in respect of the 40 residential units?

CRA Comments

Assumptions

We will make the following assumptions:

The “threshold amount” in respect of each qualifying residential unit does not exceed $450,000.
Construction of each Complex commenced after February 27, 2000.
The developer is the person who leases the Complex to a resident. The primary use for which the resident occupies the unit is as a place of residence. The lease of the Complex is a separate supply from the supply of services.
The developer makes, or can reasonably expect to make, a supply by way of lease, licence or similar arrangement of a Complex such that the first use of the Complex will be as a primary place of residence of an individual for a continuous period of one year. The developer has no other intended use than to supply the Complex in the manner set out herein.
The developer is not a public service body and not an individual.

Q.3 - Les Immeubles Le Séjour Inc. V. The Queen

Facts / Background

The facts and the decision in this case may be summarized as follows:

On May 12, 1995, the appellant corporation completed construction of a building. This building was divided into 12 residential units, each with five bedrooms, a living room, a kitchenette and two bathrooms. The use of the building was room rental: to students during the academic year, that is, from September 1 to May 31; and to tourists from June to August.

In May 1995, the appellant already had in its possession 58 room rental leases signed by students for the period from September 1, 1995, to May 31, 1996. During the tourist season, the appellant hired reception and room service employees, whose employment was terminated at the end of August.

On the appellant's annual GST return filed in December 1995, the appellant paid 50 per cent of the GST, claiming that half its operations were GST-taxable and the other half were GST-exempt.

Under subsection 206(5) of the Act, the respondent made an assessment that the building was GST-exempt in a proportion of 81 per cent.

The appellant sent the minister an objection to this assessment.

The objection officer concluded that on September 1, 1995, the use of the building as tourist accommodation ceased entirely and no longer existed at that time, with the result that there was no longer any need to assign a proportion to that use of the building. Under subsection 206(4) of the Act, the GST was therefore payable on the entire building, that is, in a proportion of 100 per cent and assessed accordingly.

The Honourable judge François Angers dismissed the Appeal and stated: “The assessment by the Minister reflects the total GST payable by the appellant, and the GST should be computed under section 191(3) of the Act. For these reasons, the appeal is dismissed.”

With all due respect, we disagree with the position taken by the objection officer and by the Honourable Judge, i.e. the computation of the GST on the full consideration, without allowing an ITC.

In practice when faced with a similar situation, i.e. a seasonal change of activities, we establish the use of the building on a yearly basis. In the case of Les Immeubles Le séjour Inc., assuming a yearly commercial use of 19%, the result would be the following one:

If Section 191 of the ETA is applicable, as stated by the Honourable Judge, the corporation would take full ITC during the construction and until September. At that time, applying Subsection 191 (3) of the ETA, we would conclude that there is a deemed supply at Fair Market Value and a deemed payment and a deemed collection of GST. And we would look at the intended use on a yearly basis to conclude that the taxpayer is entitled to an ITC of 19%. The Honourable Judge stopped short of this last action.

If Section 191 of the ETA is not applicable, then we submit that the taxpayer should take ITC all along on the 19% factor. There would be no change of use in September as the 19% factor was established on a yearly basis.

Question

Please comment.

CRA Comments

The Tax Court of Canada found that the appellant corporation:

is a builder of a multiple unit residential complex (subject property);
is required to self-supply under subsection 191(3) of the Excise Tax Act (ETA) in respect of the subject property on September 1, 1995; and
is entitled to claim full input tax credits (ITCs) with respect to the purchase of the subject property and the costs incurred to complete the construction of the complex prior to self-supply.

Based upon the facts and circumstances of this case, the Canada Revenue Agency (CRA) would consider the corporation to be entitled to claim input tax credits (ITCs) following self-supply. The CRA would consider the corporation to have, at the time of self-supply, purchased capital real property for use partly in making exempt supplies (long-term supplies of residential units to students) and partly for the purpose of making taxable supplies (short-term supplies of residential units to tourists).

The CRA will accept any method of determining the extent to which the complex is acquired for use in commercial activities provided the method is fair and reasonable and used consistently by the person throughout the year in accordance with subsection 141.01(5) of the ETA.

The CRA would consider under these facts and circumstances that the extent of commercial use for the subject property can be determined on an annual basis. By determining the extent of use in this manner at the outset of the year, the change-in-use rules would not apply unless the percentage of commercial use, expressed as a percentage of the subject property’s total use, was to either increase or decrease, cumulatively, by an amount of 10% or more.

As a result, assuming the percentage of commercial use of the subject property over the entire year is reasonably determined to be 19% on an annual basis, the CRA would permit the corporation to claim ITCs in respect of the deemed tax paid under subsection 191(3) equal to 19% in accordance with paragraph 169(1)(c) of the ETA. Finally, assuming the extent of commercial use determined on an annual basis was to remain above 10% but less than 29%, there would be no GST consequences arising from change-in-use.

Q.4 - Real Proeprty Transactions: Liability To Remit Gst

Facts / Background

Certain commercial property is leased to a tenant. The tenant pays the monthly rent payment plus GST on January 1. On January 11, the owner of the property closes the sale of the property to the new owner. As part of the Closing, the former owner credits to the new owner a GST-included amount equivalent to the portion of the rental payment attributable to the post-January 11 period. The purchase and sale agreement is silent as to who, as between the former owner and new owner, will remit the GST collected on January 1.

Analysis

The former owner made a taxable supply of the real property and collected GST on January 1. It seems that the former owner is the supplier with an obligation to remit the GST thus collected, notwithstanding crediting the rent (including GST) for the portion of the month post-closing. It is also arguable that the purchaser did not collect an amount as or on account of GST when the purchaser was credited on closing by the purchaser for the portion of the rent payment attributable to the post-closing period.

Question

Where title to real property being leased is sold by the landlord, who as between former and new owner, is required to remit GST on lease payment made prior to closing?

CRA Comments

The former owner in this scenario has an obligation to remit the GST collected from the tenant. Section 221 of the ETA requires every person who makes a taxable supply to collect the tax payable by the recipient. For this purpose, tax is payable in the present case at the time that it is paid by the tenant on January 1, pursuant to subsection 168(1). In accordance with subsections 222(1) and 225(1) of the ETA, the supplier is required to remit those amounts.

Notwithstanding that the former owner credited the new owner with a “GST-included” amount equivalent to the portion of the rental payment attributable to the post-January 11 period, the former owner was required to remit the tax collected from the tenant. Furthermore, based on the facts of this case, we would not consider the new owner to have collected an amount as or on account of tax for purposes of section 222 of the ETA.

Q.5 - Small Supplier Threshold: Multiple Owners of Bed & Breakfast

Facts / Background

Four individuals purchase a residential property and operate the property as a bed-and-breakfast operation. The individuals take title as “tenants-in-common” and each individual’s name appears on title.

Analysis Based on the ownership structure, it appears that each individual part-owner is a part-supplier of the taxable supplies of transient accommodation, unless their relationship can be characterized as a “partnership”. Therefore, unless the CRA considers this to be a “partnership”, it appears that the small supplier threshold is not exceeded until the taxable supplies of an individual owner exceed $30,000 in a twelve-month period.

If one of the owners is a “partnership” of two individuals, then it is possible for the $30,000 threshold to be exceeded by the partnership before the threshold is exceeded by the other individual owners (i.e., if taxable revenues are $80,000 per year, then $40,000 is attributable to the partnership and $20,000 each to the individual owners). In such circumstances, it is not clear whether the CRA would insist on GST being charged on half of the price of accommodation in the bed-and-breakfast.

Question

Where a residential property operated as a bed and breakfast is owned by four individuals as tenants-in-common with equal equity interests, is the small supplier threshold exceeded only when the taxable supplies exceed $120,000 in a period of 12 months? Does the analysis differ if there are two individual owners and a partnership of two individual partners, rather than four individuals?

CRA Comments

Scenario 1 - Four Individual Owners as Tenants-in-Common but not in a Partnership In this scenario it is assumed that each of the four individuals, as a tenant-in-common, owns an undivided 25% interest in the real property used exclusively as a bed and breakfast operation (i.e. the subject property). Also, it is assumed that each co-tenant is making separate supplies of their undivided interest in the subject property in the course of the bed and breakfast operation and that no co-tenant is associated with any other co-tenant of the subject property under section 127 of the Excise Tax Act (ETA). It would be a question of law and fact as to whether each co-tenant was in fact making separate supplies of real property in these circumstances.

However, if each time a room is rented in the bed and breakfast operation, each co-owner is in fact making a separate supply of their undivided interest in the subject property, the small supplier threshold would not be exceeded under subsection 148(1) until the consideration from taxable supplies made by each co-tenant exceeds $30,000 in a twelve-month period.

However, we note that in applying this small supplier threshold to a particular individual one must take into account any other taxable supplies made by the particular individual or by persons associated with the particular individual pursuant to section 127 of the ETA.

Scenario 2 - Four Individuals as Tenants-in-common and Two of Them are Members of a Partnership While, it is difficult to conceive of a circumstance where a partnership exists to carry on the business of bed and breakfast establishment that includes, as members of the partnership, only two of the four co-tenants, for purposes of this response, it is assumed that a partnership consists of only two of the individual co-tenants. Also, it is assumed that the partnership and each of the other two-co-tenants is making separate supplies of their undivided interest in the subject property in the course of operating the bed and breakfast (this would be a question of law and fact) and that none of the co-tenants are associated with any other persons under section 127 of the ETA.

If there are three separate owners of the subject property making separate taxable supplies of real property, two individuals and one partnership, the small supplier rules would apply to each of the three owners separately. For instance, if the partnership is making separate supplies of their interest in the subject property in the course of the bed and breakfast operation, the small supplier rules would apply to the partnership as an entity.

Q.6 - Nursing Homes

Facts / Background

ACo operates a for-profit nursing home. 80% of ACo’s beds are funded directly by provincial medical insurance. All beds are leased on a monthly basis to qualifying individuals. ACo leases the underlying real property from BCo.

Questions

1. Are Aco’s supplies exempt pursuant to:

(a) section 9 of Part II of Schedule V?

(b) section 2 of Part II of Schedule V?

(d) all of the above?

2. Please confirm that BCo’s supply of the facilities to ACo by way of lease, license or similar arrangement is also exempt.

CRA Comments

1. Are ACo’s supplies exempt pursuant to:

(a) Section 9 of Part II of Schedule V?

Whether the consideration payable for supplies made by ACo is paid for or reimbursed by the government of a province or territory under a plan established under an Act of the legislature of a province or territory is not clear. Generally, services that fall under section 9 of Part II of Schedule V are those that are provided under a plan to provide for health care services for all insured persons of the province (e.g. the Ontario Health Insurance Plan, the British Columbia Medical Services Plan). We have not seen any instances where the provisions of a provincial or territorial health insurance plan would include payments to operators of nursing homes. Rather,

we understand that provincial or territorial funding of nursing homes is provided from the budgets of health authorities or are otherwise authorized by legislation, such as provincial nursing home acts.

Consequently, it is unlikely that ACo’s supplies of institutional health care services would fall within section 9 of Part II of Schedule V to the ETA.

(b) Section 2 of Part II of Schedule V?

As noted above, we have assumed that for purposes of this example the nursing home operated by ACo is a health care facility as defined in the ETA, and that ACo is providing, to residents with limited capacity for self-supervision and self-care, an institutional health care service that consists of nursing and personal care, supervisory care, assistance with activities of daily living, social and recreational activities, and meals and accommodation.

Accordingly, ACo’s supplies of institutional health care services rendered to the residents of the nursing home would be exempt under section 2 of Part II of Schedule V.

Section 6 of Part I of Schedule V exempts a supply of long-term residential leases and supplies of residential accommodation by way of lease, licence or similar arrangement where the consideration for the rental is $20 per day or less, regardless of the period of occupancy.

To the extent that the provision of accommodation is an element of a supply of an “institutional health care service” provided in a “health care facility”, as these terms are defined in section 1 of Part II of Schedule V, the accommodation is not a separate supply of real property.

As a result, ACo is not making an exempt supply under section 6 of Part I of Schedule V to the ETA.

(d) All of the above?

As a transactional tax, the application of the GST/HST is determined on a supply-by-supply basis. Accordingly, it will be a question of fact as to which exemption applies to a particular supply made by ACo. On the basis of our assumption noted above that ACo is operating a health care facility, ACo’s supplies of institutional health care services to residents of the facility who have limited capacity for self-supervision and self-care are exempt under section 2 of Part II of Schedule V to the ETA.

2. Please confirm that BCo’s supply of the facilities to ACo by way of lease, licence or similar arrangement is also exempt.

Section 6.1 of Part I of Schedule V to the ETA, in part, exempts a supply made by way of lease, licence or similar arrangement of a building or that part of a building that consists solely of residential units or a residential complex that the lessee holds for the purpose of making exempt supplies described by section 6 of Part I of Schedule V to the ETA.

To the extent that ACo is seen to be making an exempt supply under section 2 of Part II of Schedule V to the ETA, ACo is not making an exempt supply under section 6 of Part I of Schedule V to the ETA.

Consequently, BCo is not making an exempt supply under section 6.1 of Part I of Schedule V to the ETA.

Q.7 - 191(3) And Itcs

Facts / Background

Under section 191(3) of the Act, builders are required to self-assess GST in respect of a newly constructed multiple-unit residential complex at the later of (i) the time construction is substantially completed and (ii) the time first possession of a residential unit in the complex is given under a lease (which later date is referred to as the “valuation date”). The value upon which GST must be paid is the fair market value of the complex as it exists as at the valuation date, which is generally less than the fair market value of the completed complex: See February 14, 2001 CBA Q&A #9. Since the valuation date is normally before construction is completed, the builder typically incurs construction costs after the valuation date to complete construction of the complex, and claims ITC’s in respect thereof.

For example, assume Building A has a fair market value of $3,000,000 on the valuation date, December 31, 2003. The builder incurs another $200,000 in construction costs after the valuation date and up to February 15, 2004 to complete the construction of Building A.

Question

Please confirm:

(i) The builder is entitled to claim ITC’s in respect of the GST paid on all construction costs, including the $200,000 costs to complete construction of Building A incurred after the valuation date. This appears to be correct under s. 169, given the definition of “commercial activity”, and since s. 191(3) provides for a deemed sale of the complete complex (which is the “taxable supply”), even though the builder pays GST at the valuation date on the value of the building as it exists at that time.

Assuming the answer to (i) is yes (i.e., ITC’s on the post valuation date construction costs of the complete complex are available), please confirm that Building A will be exempt on resale under section 5 of Part I of Schedule V, assuming there is no further substantial renovation, addition or improvement to the original complex after February 15, 2004. That is, please confirm that section 5(d) of Part I of Schedule V only precludes exemption if ITC’s were claimed by the builder in respect of the builder’s self-supply, or in respect of “additions” or “improvements” made after the February 15 original completion date of Building A (i.e., exemption is not precluded by claiming ITC’s on the post-valuation date costs of initially constructing Building A).

CRA Comments

The builder in the above scenario cannot claim input tax credits for the tax payable in respect of property and services acquired after the time of the self-supply of the residential complex if the complex is being used to make exempt supplies, such as long-term residential rents. Once the deemed taxable supply under the self-supply rules has occurred on the valuation date (i.e. in this example, December 31, 2003), the builder will no longer be engaged in a commercial activity. Accordingly, assuming the complex is used exclusively to make exempt supplies (e.g. long term rentals of residential units), any tax payable in relation to the $200,000 construction costs will not qualify for an input tax credit.

The sale of a multiple unit residential complex in the circumstances described will generally be exempt under section 5 of Part I of Schedule V to the Excise Tax Act. That section exempts the sale of a multiple unit residential complex by a builder where the last supply of the complex to the builder was deemed to have been made under subsection 191(3) and the builder

has not substantially renovated the complex (or engaged another person to carry on the substantial renovation of the complex for the builder) and
has not claimed an input tax credit in respect of the builder’s last acquisition of the complex or an addition thereto, or in respect of an improvement to the complex since it was last acquired by the builder (other than an ITC in respect of the construction of an addition to the complex).

In this example, the builder last acquired the complex on December 31, 2003.

Should the builder be entitled to claim input tax credits on the deemed tax paid under the self-supply or on an improvement acquired after self-supply (which is not usually the case since that would require that the complex be used more than 10% in commercial activities), the claiming of such input tax credits would cause the sale of the complex to be taxable.

B. AUDIT / GENERAL

Q.8 - Allowable Spillage

What is the audit policy for allowable spillage and spoilage in the hospitality industry?

CRA Comments

Based on our analysis of the industry, we have developed a sector profile that provides guidance to the auditors. On average, spillage and breakage should be <10% of monthly purchases. If the registrant claims an amount that is greater than 10% then we require an explanation and further analysis to substantiate the amount.

Auditors are being trained in using indirect verification of income techniques during their audits. Therefore, they will be looking beyond the books and records to determine the correct amount of net tax that should be reported. This information may also be used in determining the correct percentage for spillage.

The auditors would provide copies of their working papers to indicate the method used to determine the amount of spillage.

Q.9 - Non-Compete Clauses

Facts / Background

In the context of a sale of all of the assets of a business, assume the vendor provides a covenant to not compete for a limited period of time, and that a portion of the proceeds are allocated to the non-compete covenant.

Questions

(1) Does the CRA consider the covenant to be a service or IPP?

(2) Will the supply of the non-compete covenant be excluded from application of the section 167 election?

CRA Comments

1. For Income Tax purposes it was stated in the Manrell decision that the non-competition agreement was not a supply of property in the particular fact situation. The ETA allows that even if a non-competition agreement is not property it can still be a service. The definition of property in the Income Tax Act and the Excise Tax Act is similar for this purpose, however, in the Excise Tax Act the definition of service includes “anything other than property”.

However, a determination as to whether a person provides a non-competition agreement as a service or something else for purposes of the ETA can only be decided on a case-by-case basis.

2. Section 167 of the ETA relates to where a supplier makes a supply of a business or part to a recipient. Where the conditions of subsection 167(1) are met and the supplier and recipient make the joint election, no GST/HST is payable in respect of the supply by the supplier to the recipient on any property or service made under the agreement, with certain exceptions. One of the exceptions relates to a taxable supply of a service that is to be rendered by the supplier. If the non-compete agreement is a supply of a service it will be excluded from relief under the subsection 167(1) election.

Q.10 - Section 232 Price Adjustments

Facts / Background

A supplier agrees to provide certain allowances and rebates to its customer. The customer earns the rebates and issues a debit note to the supplier, netting out the rebate from its remittance. However, the parties intend to adjust the consideration only, not the GST.

Analysis Section 232(2) provides that where the consideration is adjusted, the supplier "may" adjust the tax. However, subsection 232(3) refers to an adjustment of an "amount" pursuant to subsections (1) or (2) and does not specifically specify that the adjustment is to the "tax". A credit note/debit note adjusting the tax is mandatory when "a particular person adjusts, refunds or credits an amount in favour of, or to, another person". Therefore, it is unclear whether the debit note in this case is required to adjust the tax rather than just the consideration.

Question

Are the parties to a transaction required to adjust the tax when (1) the consideration is reduced, and (2) the recipient issues a debit note to the supplier for the reduction (intended to cover consideration only, not GST?

CRA Comments

Subsection 232(3) of the ETA refers to adjustments, refunds or credits of “amounts in accordance with subsection (1) or (2)”. Subsection (1) refers to amounts charged or collected as or on account of Division II tax and subsection (2) refers to amounts of Division II tax charged to or collected from another person where the consideration is subsequently reduced. Consequently, where subsection (3) refers to adjustments, refunds or credits of an “amount” in accordance with subsection (1) or (2), it is referring to amounts charged or collected as or on account of Division II tax (subsection 1) or to amounts of Division II tax charged to or collected from another person where the consideration is subsequently reduced (subsection 2).

Therefore, the requirement in subsection (3) for the issuance of a credit note by the supplier (unless the recipient has issued a debit note) only applies where amounts of tax or amounts charged or collected on account of tax are adjusted, refunded or credited.

Consequently, where a customer issues a debit note to the supplier to adjust consideration only, neither the customer nor the supplier is required to adjust the tax.

Q.11 - Tax Payable – Recipient Assessment

Facts / Background

The issue in this question is related to, but was not decided by, the decision of the courts in Carlson & Associates Advertising Ltd. v. R., [1998] GSTC 25 (FCA). That decision confirmed CRA’s authority to assess the recipient of the supply.

In assessing the recipient under paragraph 296(1)(b), CRA relies on section 165 which imposes the obligation to pay tax on the consideration for a taxable supply, together with section 168 which determines the date when the tax becomes payable.

Paragraph 296(1)(b) is not explicit as to the period to which the tax-payable assessment is attributable. Nevertheless, it is submitted that under the structure of GST, a liability, or an entitlement, is always attributable to a specific period. It is untenable that a person’s liability would not be related to a specific period, and therefore the liability must be attributable to the period in which the payment came due.

There are a number of consequences, including:

(a) the running of the assessment limitation period; and (b) whether the liability is a pre-appointment or a post-appointment liability of a receiver for purposes of paragraph 266(2)(d) of a trustee in bankruptcy for purposes of paragraph 265(1)(d).

Question

(a) Does the assessment limitation period commence in the reporting period when the tax became payable? or (b) when the CRA assesses the recipient pursuant to paragraph 296(1)(b)?

CRA Comments

For purposes of determining the assessment limitations with respect to tax payable by the recipient to the supplier under Division II, the provision to be applied would be paragraph 298(1)(c) of the ETA. With some exceptions, paragraph 298(1)(c) of the ETA provides that an assessment of tax payable under section 296 of the ETA shall not be made more than 4 years after the tax became payable. Section 168 of the ETA specifies the timing of the liability of taxes payable by the recipient of the supply and it is the earlier of the date the consideration was paid or becomes due. Subsection 152(1) of the ETA is a deeming provision that determines when the consideration becomes due.

For example, where a supplier makes a supply to a recipient on January 15, 2002 and invoices the recipient for the supply at the time of the supply, the taxes in this situation become payable by the recipient at the time of the supply. Under subsection 298(1)(c) the assessment for taxes payable by the recipient would need to be raised within four years of this date.

Q.12 - Bad Debt Adjustments Claimed in the Receivership Context

Question

In the context of a receiver reporting the affairs of a tax debtor under subsection 266(2), is a bad debt adjustment claimed under subsection 231(1) attributable to the period in which the receiver recognizes and writes off the receivable (which will arose post-appointment), or to the period in which the receivable to the tax debtor initially arose (which will usually be pre-appointment) – assuming that the tax debtor had not previously written off the receivable? It is submitted that under the circumstances described, the 231(1) credit can only be recognized in the net tax return filed for the period in which the receiver made the decision to write off the receivable.

This determination can be relevant for the determination of the receiver’s personal liability under paragraph 266(2)(d).

CRA Comments

The adjustment to net tax for a bad debt written off may be claimed in the reporting period in which the receivable is written off as a bad debt in the registrant’s books or in a subsequent period. This is subject to the conditions that:

The tax collectible in respect of the supply was reported in the registrant’s return for the reporting period in which the tax became collectible;

All net tax remittable in that return was remitted; and

The deduction is claimed in a return filed within four years of the due date of the return in which the amount was written off.

The adjustment to net tax for a bad debt write-off is not an adjustment to a prior reporting period (i.e., the reporting period in which the supply originally took place).

Q.13 - Dividends in Kind

Facts / Background

The share provisions of a corporation’s articles may allow the distribution, as a “dividend in kind”, of property of the corporation to the holder(s) of a specific class of shares of the corporation. The declaration of dividends is at the discretion of the directors of the corporation, subject to the corporation meeting certain statutory requirements (such as solvency).

Question

Will CRA confirm that a distribution of property as a dividend in kind, although a “supply” for GST purposes, nevertheless is a supply for nil consideration?

If so, would CRA confirm that the nil consideration rules under section 155 will not apply?

CRA Comments

The distribution of property of a corporation to a specific class of its shareholders as a dividend in kind is a supply, and subsections 172(2) or 155(1) may apply to deem the supply to have been made for consideration equal to its fair market value if the conditions in one of those subsections are met.

Subsection 172(2), in part, applies where a registrant that is corporation appropriates any property (other than capital property of the registrant) that was acquired, manufactured or produced, in the course of commercial activities of the registrant, for the benefit of a shareholder, in any manner whatever (otherwise than by way of a supply made for consideration equal to the fair market value of the property).

If subsection 172(2) does not apply, subsection 155(1) of the ETA may apply where the corporation and any of its shareholders that are receiving the dividend in kind are not dealing with each other at arm’s length, except where a shareholder is a registrant that acquired the property for consumption, use or supply exclusively in the course of its commercial activities.

Q.14 - Change of Use Rules and Calculation Of Gst

Facts / Background

Upon a change of use of capital personal property or capital real property, a registrant is deemed to have received a supply of the property and is deemed to have paid tax on the deemed acquisition equal to the “basic tax content” of the property at the particular time.

The basic tax content is determined by way of a formula. To calculate the basic tax content of a property, you

add the GST paid at the time the property was last acquired and the GST paid on improvements made after the last acquisition
subtract all amounts of GST recoverable by way of rebate, refund or remission (other than ITCs), and
multiply the net amount by a factor (fair market value at the time the basic tax content is being determined)/(value of the consideration for the last supply + consideration for improvements.)

Under Sections 199, 200 and 206 of the Excise Tax Act, the registrant is deemed to have received a supply of the property and is deemed to have paid tax, but these sections do not create a deemed “consideration payable”.

Example: ABC bought a computer in January 2003 for $100,000 plus $7,000 GST. The computer was used exclusively in exempt activities until April 2003, when the use changed to 60% commercial. At that time, the Fair Market Value was $50,000. Under ETA 199 (3), ABC was entitled to an ITC equal to the basic tax content. The basic tax content was:

(A - B) × C

= ($7,000 - 0) × the lesser of 1 and ($50,000/$100,000)

= $3,500

In December 2003, the commercial use of the property decreased to 35%. At that time, the FMV was $50,000. Under ETA 200 (2), ABC was deemed to have collected GST equal to the basic tax content, which was:

(A - B) × C

= ($3,500- 0) × the lesser of 1 and ($50,000/?)

= ?

The last supply was the deemed supply of April 2003. ABC paid no consideration for this supply and the Act does not create one either. Any comments?

Question

On the second change of use, what amount should be considered the “consideration for the last supply”?

CRA Comments

In this example, the CRA would consider that the “consideration for the last supply”, in the calculation of basic tax content (BTC), is not affected by the changes-in-use occurring in April and December of 2003.

Therefore, in this example, “the value of the consideration for the last supply to the person” in element “I” (in “H/I” for purposes of element “C”) in the calculation of the BTC of the property would be $100,000 at the time that the commercial use of the property decreased to 35%. The BTC at that time (i.e. December 2003) would be $3,500, calculated as follows:

(7,000 – 0) X 50,000/100,000

Q.15 -Financial Services/Exempt Supplies; and Definition of “Debt Security”

Facts / Background

An assignor (“A”) transfers the right to be paid money for services already rendered to an assignee (“B”) for an upfront sum of money. Under the contract between A and the recipient of the services (“C”), the precise amount of the account receivable that has been assigned to B will vary depending upon the degree, or relative success, of certain savings achieved by C as a result of the services performed by A. As the supplier of the taxable supplies of services made in Canada under the services contract, A charges, collects, and remits GST in respect of those taxable supplies. C is the recipient of the taxable supplies of services under the contract and pays the assigned fees to B. C pays the GST on the assigned fees directly to A for remittance by A. C can claim input tax credits to fully recover the GST payable on the fees for the services. A, B and C are all resident in Canada and registered for GST purposes.

Question

Would the assignment from A to B of the rights to be paid money be an exempt supply of financial services or a taxable supply of rights?
Would the CRA exclude the “rights to be paid money” from the definition of “debt security” in subsection 123(1), on the basis that the amount of the receivable is uncertain, with the result that the assignment from A to B is not an exempt supply of a financial service (pursuant to paragraph 8 of the CRA’s GST/HST Memorandum 17.1 “Definition of ‘Financial Instrument’ ” (April 1999))?

Discussion

We believe that the answers to the two questions above should be (1) an exempt supply of financial services, and (2) no. To decide otherwise would ignore the plain words of the statutory definition of a debt security and be contrary to the underlying policy of the GST Legislation.

CRA Comments

A debt security is defined in subsection 123(1) as a “right to be paid money”. “A” has rendered services to “C” for which the “right to be paid money” has been established. The fact that it is not known how much that amount will be does not change the fact that a debt security exists and that the debt security is being assigned from “A” to “B”. The assignment of the debt security is an exempt supply of a financial service pursuant to paragraph (d) of the definition of financial service.

No. The services have been rendered and the debt security has been established. Paragraph 8 of GST/HST Memoranda Series Chapter 17.1 “Definition of ‘Financial Instrument” deals with situations where the right to be paid money is a possibility but not a certainty. In this case, the debt security has already been established, it is the amount that is unknown.

Q.16 - Purchase Of Defective Goods By Manufacturer

Facts / Background

A consumer, who is not a GST registrant, buys tangible personal property for personal use. The retailer, a GST registrant, collects the GST upon the sale. The goods are defective, and the manufacturer agrees to buy them back from the consumer for the purchase price, including GST.

Question

Will the manufacturer be entitled to adjust its GST remittances to recover the GST refunded to the consumer? If not will the CRA support an amendment to the ETA to allow the manufacturer to claim an adjustment?

CRA Comments

No. Based upon the information provided, the manufacturer will not be entitled to a net tax adjustment to recover the amount paid to the consumer that was equivalent to the tax.

We would consider the manufacturer to have purchased the goods from the consumer, and paid an amount equal to the tax, as well as the purchase price. However, we would not consider the consumer to have actually collected tax, or an amount on account of tax, from the manufacturer.

Section 166 of the ETA effectively provides that tax is not to be collected by a non-registrant small supplier on the consideration for the supply. (Note: There is an exception with respect to sales of real property). It should be noted that amendments to the ETA are a matter of tax policy, which is the responsibility of the Department of Finance.

Q.17 - Remitting GST by a Billing Agent

Facts / Background

A direct marketer of natural gas enters into contracts with consumers to supply yearly gas requirements. The natural gas is delivered to the customers through pipelines owned and operated by public utilities. These public utilities bill the consumers for the price of the gas, as contracted with the direct marketers, plus delivery charges. The public utility collects GST on the total amount. Although no election has been made under subsection 177(1.1) of the Act, the billing agent remits the GST with its monthly GST return.

Question

How does the CRA treat these arrangements? What about bad debts and the claiming of ITCs under subsection 231(1.1) by the reporting entity when a subsection 177(1.1) election has not been made?

CRA Comments

The situation at hand falls under the scope of our Third Party Remittance Policy, P-131. Subsection 221(1) of the ETA imposes an obligation on the direct marketer, the supplier, to collect the tax on the supply of natural gas. Subsection 225(1) requires suppliers to include amounts that became collectible as or on account of tax under Division II in a particular reporting period, when determining their net tax calculation for a reporting period. This is required whether or not the public utility actually collects the tax.

Under subsection 225(1), the public utility, the third party, that actually collects the tax is required to include those amounts of taxes collected in its own net tax calculation. Pursuant to subsection 222(1) of the ETA the public utility in the circumstances is deemed to hold the

amount collected as or on account of tax in trust for the Crown until the amount is remitted to the Receiver General or withdrawn under subsection 222(2).

It is not the Canada Revenue Agency’s (CRA) intention to collect tax twice on the same supply. Accordingly, where the CRA is satisfied of the arrangement between the supplier and the third party, remittances will be credited to the public utility’s account. The public utility will account for the amount collected in its net tax and the direct marketer will not have to account for and remit the tax collected by the third party. Administratively, P-131 does not require the direct marketer to include taxes collected by the public utility in its net tax calculation.

In order for the public utility to claim a bad debt deduction under proposed subsection 231(1) it must have reported the tax collectible on the bad debt and remitted it as part of its net tax calculation as specified in proposed subsection 231(1.1). Policy Statement P-131 does not provide for a third party to account for another supplier’s tax collectible. The public utility, not having filed the election under subsection 177(1.1) would fall under Policy P-131 and therefore would be denied a bad debt reduction.

With respect to the supplier taking a bad debt debt adjustment where the amount had been recorded as a receivable and was subsequently written off, the adjustment would only be permitted where the supplier, the direct marketer, accounted for taxes collectible and remitted the taxes collectible.

Q.18 - Retroactive GST Registration

Facts/Background

Company A is resident in Canada and supplies customer support services for U.S. resident corporate clients. These services are taxable supplies, but are zero-rated for GST purposes pursuant to section 7 of Part V of Schedule VI of the Excise Tax Act.

Company A began making supplies of these services on January 1, 2002 but did not register for GST purposes. Company A’s taxable revenues exceeded $100,000 in January, 2002 (i.e., Company A exceed the small supplier threshold in the first month of its operation). Therefore, Company A was required to register for GST/HST purposes pursuant to subsection 240(1) of the Excise Tax Act in January, 2002.

Company A now wishes to register for GST purposes retroactive to January 1, 2002 in order to claim input tax credits from that date to the present.

Question

Please confirm that the CRA will allow Company A to register retroactively to that date (or on the specific day in January, 2002 in which its taxable revenues exceeded $30,000). If yes, please also comment further on what specific documentation Company A will need to provide the CRA with in order to register retroactively. If no, please indicate why the CRA’s policy in this regard differs from Revenu Québec’s position allowing such retroactive registration. Revenu Québec’s position, as set out on page 17 of its Guide to Registration, Section D1 – “ Registration for the GST/HST and the QST”, is as follows:

1. Indicate the date on which you wish to make your registration for the GST/HST to take effect, or the date on which you are required to be registered.

This is generally the date on which you make your first taxable sale in Canada. Indicate the earliest of the following dates:

the date of your application for registration;
the date of the first invoice on which an amount of GST/HST was charged; or
the date on which you are no longer considered a small supplier.

Furthermore, if you apply to be registered for the GST/HST retroactively to a date prior to the date on which you file the Application for Registration, you must provide proof that you charged tax to a customer in order to show that you were in business, or proof that you were required to register before that date (for example, a sales invoice, a service contract, zero-rated sales totalling more than $30,000, a sales register, financial statements, etc.). In this case, contact the Ministère du Revenu [emphasis added].

CRA Comments

Subsection 240(1) of the ETA provides that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada must register for the GST/HST except where, among other things, the person is a small supplier.

A person is a small supplier during any particular calendar quarter and the following month if the total value of the consideration for world-wide taxable supplies, including zero-rated supplies, made by the person (or an associate of the person at the beginning of the particular calendar quarter) that became due, or was paid without becoming due, in the previous four calendar quarters does not exceed $30,000. There is an exception to this rule. A person ceases to be a small supplier at any time in a calendar quarter if the total value of the consideration that becomes due, or is paid without becoming due, in that quarter for world-wide taxable supplies (other than consideration attributable to the sale of goodwill of a business, supplies of financial services, and supplies by way of sale of capital property) made by the person, or an associate of the person at the beginning of the calendar quarter, exceeds $30,000. The person ceases to be a small supplier immediately before the consideration becomes due or is paid for the particular taxable supply that puts the person over the $30,000 threshold.

Further, a registrant is defined in subsection 123(1) of the ETA to mean a person who is registered, or who is required to be registered, for GST/HST purposes.

Therefore, in the scenario presented, the effective date of Company A’s GST/HST registration is the specific day in January, 2002 in which its taxable revenues exceeded $30,000. When GST/HST registration is mandatory for a person, the person is not required to provide documentation to establish the effective date of registration.

As a result of your submission, we have advised the Assessment and Collection Branch of the inconsistency in registration requirements and have asked them to liaise with the MRQ.

Q.19 - Assignment of Conditional Sales Agreement and Section 222.1

Facts/Background

Company A is resident in Canada and registered for GST purposes. Company A is a manufacturer of goods. Company A sells the goods to Company B. The goods are sold to Company B under a conditional sales agreement between the parties.

Company A then assigns the conditional sales agreement to Company C, a related finance company.

Question

Please confirm that:

(i) the conditional sales agreement is an account receivable for purposes of section 222.1 of the Excise Tax Act;

(ii) section 222.1 of the Excise Tax Act applies to the assignment of the conditional sales agreement to Company C; and

(iii) Company C can thus acquire the conditional sales agreement from Company A free of any liability to remit GST on any payments received in respect of the taxable supply of the goods to Company B.

CRA Comments

(i) The CRA considers conditional sales contracts to be “debt securities” included in the definition of “financial instrument”. Accordingly, we can confirm that a “conditional sales contract” is an account receivable for purposes of section 222.1 of the Excise Tax Act.

(ii) Under the above scenario, the CRA is of the view that section 222.1 of the Excise Tax Act applies to the assignment of the conditional sales contract to Company C.

(iii) Where Company C acquires an account receivable from Company A, it will be entitled to the relief provided under section 222.1 of the ETA. That is to say, any amount collected by Company C on account of the tax payable in respect of the taxable supply is deemed not to be an amount collected as or on account of tax.

C. CORPORATE REORGANIZATIONS

Q.20 - Section 272 - Timing as to When a Corporation is “Wound Up”

Facts / Background

Pursuant to paragraph 272(a) of the ETA, where a subsidiary corporation is wound up and 90% of each class of the issued shares are owned by another corporation (“ParentCo”), the ParentCo is deemed to be the “same corporation as and a continuation of” the subsidiary corporation for the following purposes:

1. for property or a service acquired, imported or brought into a participating province by ParentCo as a consequence of the winding-up;

2. sections 231 and 249 of the ETA; and

3. Prescribed purposes, which include sections 225 and 228 among others.

Question

1. Would the CRA confirm that for purposes of section 272 of the ETA, the CRA adopts Interpretation Bulletin IT-126R2 – Meaning of “Winding-up” for purposes of determining when a corporation has been wound-up. This was indicated in an interpretation letter dated June 7, 1991 – Winding up of Corporations.

2. More specifically, would the CRA confirm that a corporation will be considered “wound up” for the purposes of section 272, where formal steps have been taken to wind-up the corporation including shareholder resolutions, sale of assets, etc. but the corporation has not yet filed articles of dissolution .In this regard, and in reference to IT-126R, what does the CRA consider to be “within a short period of time” for the completion of the formal dissolution.

3. During the period of time between the commencement of the dissolution and the filing of the articles of dissolution, can ParentCo claim ITCs in respect of property and services acquired by

the subsidiary prior to the commencement of the dissolution provided the subsidiary corporation has not claimed the input tax credits?

CRA Comments

The first two parts of this question refer to Interpretation Bulletin IT-126R2, Meaning of Winding-Up, which concerns the meaning of “winding-up” for certain provisions of the Income Tax Act. This bulletin does not apply for purposes of section 272 of the Excise Tax Act.

Section 272 applies where a particular corporation is wound up and not less than 90% of the issued shares of each class of the capital stock of the particular corporation were, immediately before that time, owned by another corporation.

For purposes of section 272, a corporation is considered to have been “wound up” where it has been dissolved under the provisions of its incorporating statute.

In reference to the third part of the question, if the subsidiary has not been wound up, section 272 does not apply and the parent cannot claim ITCs in respect of property and services acquired by the subsidiary.

Q.21 - GST Section 167 Election: Whether Available to Non-Operating Business

Facts / Background

A corporation operates a number of divisions. One of the divisions operates a distinct manufacturing and distribution business. A decision is made to close down the operations and ultimately to sell the assets. After standing idle for some months, the corporation enters into an agreement with a purchaser to sell all of the assets used in operating the business, which include the manufacturing plant including the real property, the machinery and equipment used in the manufacturing operation, and the office furniture and equipment of the business.

Alternative Facts: A corporation operates a number of divisions and encounters financial difficulties and closes down its operations. A liquidator is appointed to sell the assets of the business.

Subsection 167(1) requires that, for the election to be available, a supplier must make a supply of “a business or part of a business that was established or carried on by the supplier”. Based on this language, it is arguable that the election remains available to businesses that are not operating as of the closing date. In particular, it is still true that the business "was … carried on by the supplier”, even if the supplier no longer carries on the business as of the closing. However, it is not clear whether the CRA will consider such a sale of assets to constitute a supply of a “business or part of a business” if the business is no longer operating.

Question

Can the Section 167 election be available in a sale of business assets by a vendor who has closed down the business prior to the Closing Date?

CRA Comments

Where one of a corporation’s divisions that operated a manufacturing and distribution business has not been operating for months, and if the only assets of the division being supplied are the real property, the machinery and equipment, and the office furniture, it appears that it is not a supply of a business and therefore the election under section 167(1) of the ETA would not be available.

With respect to the alternative facts, it is not clear from the information provided but if a liquidator is appointed to sell the assets of the business, it appears that it is not a supply of a business and therefore the election under section 167(1) of the ETA would not be available.

D. PLACE OF SUPPLY RULES / IMPORTS / EXPORTS

Q.22 - Impact of Canada Border Security Agency

Question

Could the CRA explain if the creation of the Canada Border Security Agency will have any impact on the delivery of GST/HST related programs? Will the CBSA continue to be responsible for the application and enforcement of sections of the ETA?

CRA Comments

The creation of the Canada Border Services Agency (CBSA) and the Canada Revenue Agency (CRA) is not expected to have any impact on the delivery of GST/HST related programs. The necessary steps are being taken to ensure that service to our clients remains unaffected as a result of the organizational change, including the formalization as required of the relationship between the CBSA and the CRA with respect to issues such as the exchange of information.

The GST/HST imposed under the Excise Tax Act on the importation of most goods will continue to be collected under the Customs Act as if it were a customs duty. The CBSA is now responsible for the application and enforcement of the relevant sections of the Excise Tax Act that formerly were under the responsibility of the Customs Branch of the Canada Customs and Revenue Agency. The CRA will continue to be responsible for the interpretation of the GST/HST provisions relating to the importation of goods, including those provisions that provide for full or partial tax relief.

Q.23 - Assignment of Lease - Section 136.1 and Section 143

Facts / Background

A Co., a Canadian registrant, leases tangible personal property to another resident in Canada. A. Co, sells and assigns the tangible personal property and lease to US Co, a non-resident, non-registrant that does not carry on business in Canada. As a consequence of the sale and assignment US Co. becomes the lessor of the property to the Canadian resident.

Section 143 deems the supply of the property by US Co. to be a supply made outside Canada. Paragraph 136.1(1)(d) provides that the place of supply of property under the lease is determined without reference to the deemed separate supplies for each lease interval. At the time the lease was entered into, the supply of the property was made in Canada by A Co. After the sale and assignment, the supply of the property is by US Co.

Question

Can the CRA confirm that all supplies of the property under the lease by US Co. would be deemed to be made outside Canada by virtue of section 143 of the ETA?

CRA Comments

Based on the information provided, the CRA cannot confirm that all supplies of the property under the lease by US Co. would be deemed to be made outside Canada by virtue of section 143 of the ETA. In order for section 143 to apply, the non-resident must not be carrying on business in Canada. US Co. would likely be considered to be carrying on business in Canada by virtue of the fact that it both acquired the tangible personal property in Canada and is in the business of leasing it in Canada.

In a case where a lease of tangible personal property is assigned, and the underlying property sold, to a non-registered non-resident that is in fact not carrying on business in Canada, the supplies of property made by the non-resident under the lease would be deemed to be made outside Canada pursuant to section 143 of the ETA.

Q.24 - De-Registration of Non-Residents

Facts / Background

The restrictive scope of the zero-rating provision for “intellectual property” in section 10 of Part V of Schedule VI, which does not apply more broadly to intangible personal property, creates severe problems in the case of cancellations of registration under subsection 171(3) by non-residents, and in many other transactions involving non-resident entities, due largely to the broad scope of the place of supply rule for IPP under subparagraph 142(1)(c)(i).

Finance has announced that it intends to review and revise the scope of section 10 to alleviate the foregoing hardship.

Question

(1) In the interim, will CRA accept that the scope of what constitutes “intellectual property” can be given a broad interpretation? For example, it has been suggested that a distribution or franchise agreement will not come within the scope of section 10. If the exercise of the distribution/franchise rights in question would require the implicit or explicit license of trademark or copyright, as a component of the “single supply” of the distribution/franchise right, will CRA view that single supply as coming within the scope of section 10, assuming the other requirements of section 10 have been met?

(2) Alternatively, will the CRA confirm that it will not apply subsection 171(3) to IPP of non-residents?

CRA Comments

(1) The determination of whether a supply made pursuant to a franchise or distribution agreement would qualify as a single supply of intellectual property or the right, licence or privilege to use such property would depend on the particular facts of the case. In order to qualify for zero-rating under section 10 of Part V of Schedule VI of the Excise Tax Act, assuming all other requirements of the provision would be met, it would have to be established that the single supply being made is in fact a supply of intellectual property as described in the provision, as opposed to some other type of single supply of which intellectual property is merely a component.

As indicated in the question, the scope of the place of supply rule for IPP under the ETA is broad while the zero-rating rule for supplies of IPP under the ETA is not. The CRA will not broadly interpret the meaning of what constitutes "intellectual property" on an interim basis to administratively allow supplies other than intellectual property to be zero-rated under section 10 of Part V of Schedule VI to the ETA, just as the CRA has not narrowly interpreted the place of supply rule for IPP.

(2) The CRA administers the GST/HST legislation as enacted. As indicated in our response to a similar question posed at our meeting of last year, a non-resident that ceases to be a registrant can have an obligation in this case to self-assess tax as a result of the application of subsection 171(3) of the ETA. To provide otherwise would require an amendment to the legislation which is a matter of tax policy for which the Department of Finance is responsible.

Q.25 - Refunds Of Division III GST

Facts / Background

An importer imports goods valued at $1,000 but incorrectly declares the value of the goods to be $10,000, resulting in an excess GST payment of $630 [assume the goods are not subject to customs duties]. The importer files a B2 Adjustment Request with the CRA and receives a decision from the CRA confirming the corrected value. The importer, if not registered for GST purposes, also receives a cheque for $630. The importer, if registered for GST purposes, does not receive a refund cheque but is directed to apply separately for the refund from the CRA, Excise Branch.

Analysis

There appears to be an inconsistency in the manner in which the CRA administers subsections 216(6) and 261(2) of the Excise Tax Act. Subsection 261(2) denies a rebate for excess GST paid as a result of a valuation error. Subsection 216(6) provides that for valuation errors, a GST rebate shall be paid and "the provisions of the Customs Act ... apply ... as if the rebate were a refund of duty". This suggests that on filing a B2 refund claim with CRA, based on a valuation error, a claimant should receive a refund of duties and GST. In particular, if the GST were a “duty”, then the importer would file a refund claim under section 74 of the Customs Act; the approved refund claim is deemed to be a determination made under subsection 59(1) of that Act; and payment of the refund is mandated by para. 59(3)(b) of that Act. Notwithstanding these provisions, the CRA has a published policy of refunding GST only to claimants who are not registered for GST purposes. For claimants who are registered for GST purposes, the claimant is subject to a number of other requirements in order to receive the refund, such as filing a GST rebate claim form (Form 189) and filing other supporting documentation including the B2-1 received from Customs and potentially others forms such as a power of attorney if the customs broker is filing the claims on behalf of a client.

It is not clear whether the difference in treatment of registered vs. non-registered importers is supported by the current ETA provisions

Question

Please explain how the CRA administers subsections 216(6) and 261(2) of the ETA. Please comment on whether the CRA’s published policy of issuing refund cheques to non-registrants but not registrants is consistent with the legislative scheme in the referenced provisions of the ETA.

CRA Comments

As indicated in the question, a rebate under subsection 216(6) of the Excise Tax Act of an excess amount paid as tax resulting from a valuation error will not automatically be paid to a registrant upon filing Form B2. The basis for this is the restriction under section 263 of the ETA. Paragraph 263(b) of the ETA clearly states that a rebate of an amount under subsection 216(6) shall not be paid to a person to the extent that it can reasonably be regarded that the person has claimed or is entitled to claim an input tax credit in respect of the amount.

Unlike the case of a non-registrant, a rebate of the excess amount is not automatically paid to a registrant upon filing Form B2 as it can reasonably be regarded that the registrant has claimed an ITC in respect of the amount. Technically, an ITC may only be claimed in respect of "tax" which is defined as tax payable under subsection 123(1) of the ETA. However, if a person claims an ITC respect of the excess amount (which typically occurs given that the registrant does not immediately realize upon payment that an overpayment has been made), that amount must be offset at the time of a net tax assessment by the amount of a rebate of the excess GST to which the person would have otherwise been entitled, without any penalty or interest consequences. Claiming an ITC is also a simpler process for a registrant than applying for a rebate and can be more beneficial, such as where the registrant is a monthly filer.

If a rebate were to be automatically issued to a registrant upon the filing of Form B2, the ITC that the registrant would have already typically claimed for the excess amount would result in under-remitted net tax or an excess net tax refund for the reporting period in which the registrant claimed the ITC along with retroactive penalty and interest on the amount.

Although the rebate in this case is payable under subsection 216(6) rather than under section 261 as confirmed in the restriction referred to in subsection 261(2), the rebate nevertheless remains subject to the restriction in section 263. The manner in which CRA administers the payment of rebates to registrants under subsection 216(6) of the ETA is fully consistent with the overall legislative scheme of the ETA as it takes into account not only the specific provisions referenced in the question but also the restriction set out in section 263 as explained above.

Q.26 - Zero-Rating of Legal Services

Facts / Background

A Canadian manufacturer has an export contract to sell frozen pies to customers in Europe. The European customers purchase f.o.b. the manufacturer’s premises and obtain insurance from a non-resident insurer against property loss. A common carrier picks up the frozen pies for delivery to the ocean carrier which will ship the pies to Europe. While in transit, the truck hits a moose and the frozen pies are destroyed. The purchaser files a claim with the non-resident insurer, which engages Canadian counsel to investigate the loss and whether the common carrier can be held responsible. Canadian counsel sends an invoice for fees and disbursements to the non-resident insurer and does not charge GST/HST in accordance with section 23 of Part V of Schedule VI of the ETA.

Question

Would you please confirm that in the circumstances, the CRA would not consider the services to be rendered "in respect of tangible personal property that is situated in Canada at the time the services is performed" so as to exclude the services from zero-rating?

CRA Comments

As set out in GST/HST Policy Statement P-169R Meaning of "In Respect of Real Property Situated in Canada" and "In Respect of Tangible Personal Property That is Situated in Canada at the Time the Service is Performed", there must be more than a mere indirect or incidental connection between a service and the underlying real or tangible personal property (TPP) before the supply of the service will be excluded from zero-rating. Whether the relationship between the service and the property is sufficiently direct to be "in respect of" property will depend on the particular circumstances of each case.

In the circumstances provided there is not a direct relationship between the services supplied by the Canadian counsel and the TPP consisting of the frozen pies. As a result, the services are not considered to be in respect of TPP situated in Canada and are therefore not excluded from zero-rating under section 23 of Part V of Schedule VI to the ETA.

Q.27 - Importation of Railcars After Sale-Leaseback

Facts / Background

A Canadian owner of railcars operating in Canada and the U.S. enters into an arrangement with a non-resident, non-registrant whereby the railcars are sold to the non-resident and immediately leased back. With respect to the railcars which are in Canada at the time of closing, subsection 179(4) will deem the supply of the railcars to the non-resident to have been made outside Canada so that GST is not payable. With respect to railcars which are outside Canada at the time of closing, the supply of the railcars will also be deemed to be made outside Canada under subsection 142(2) of the ETA.

Question

Would you please comment on the application of GST under Division III when the railcars re-enter Canada after the sale and leaseback. Would they qualify as a non-taxable importation under Schedule VII? What, if any, reporting requirements apply at the time the railcars first re-enter Canada after being leased back?

CRA Comments

If the railcars are supplied outside Canada by way of sale or by way of lease prior to importation, they would not qualify as a non-taxable importation under Schedule VII to the Excise Tax Act and the Non-Taxable Imported Goods (GST) Regulations on the basis of being classified under tariff items 98.13 or 98.14 as Canadian goods or goods once accounted for, exported and returned.

Based on the information provided, it does not appear that the importation of the railcars would otherwise qualify as a non-taxable importation under Schedule VII.

With respect to reporting requirement, the importation of the railcars would have to be reported on Form B3 at the time of importation. The determination of the specific tariff number applicable to the importation would require an examination of all relevant facts and circumstances relating to the importation.

Q.28 - Drop Shipments for the Cra

Facts / Background

A GST registrant (Registrant A) enters into an agreement with a non-resident person who is not registered for GST (the Non-Resident Company) under which Company A makes a taxable supply in Canada of tangible personal property by way of sale to the Non-Resident Company. Before physical possession of the goods is transferred, the Non-Resident Company sells the goods to another GST registered company (Registrant B), and Registrant B then sells the same goods to a third GST registered company (the Consignee). Physical possession of the goods is transferred, at a place in Canada, directly from Registrant A to the Consignee (neither the Non-Resident Company nor Registrant B ever have physical possession of the goods). While the agreement between Registrant A and the Non-Resident Company contemplates transfer of physical possession of the goods directly from Registrant A to a third party specified by the Non-Resident Company, the Consignee is not specified in the agreement.

Discussion: Subparagraph 179(2)(a)(ii) requires physical possession of the goods to be transferred by a registrant, at a place in Canada, to a third person "consignee". However, there is no requirement that the non-resident, non-registrant sell the goods directly to the consignee. Thus, if the Consignee issues a drop-shipment certificate to Registrant A, the supply by Registrant A to the Non-Resident Company should be deemed to be made outside Canada and not subject to GST.

Question

If the Consignee issues a drop-shipment certificate to Registrant A, will subsection 179(2) of the Excise Tax Act apply to the transaction such that the transfer of the goods from Registrant A to the Non-Resident Company will be deemed to have been made outside of Canada?

CRA Comments

Subsection 179(2) of the Excise Tax Act will not apply in the circumstances described to deem the supply by Registrant A to be made outside Canada where the GST/HST registered company identified as the consignee issues a drop-shipment certificate to Registrant A.

Pursuant to paragraph 179(2)(c) of the ETA, the drop-shipment certificate issued by the registered consignee must acknowledge that the consignee, on taking physical possession of the property, is assuming liability to pay or remit any amount that is or may become payable or remittable by the consignee under subsection 179(1) or Division IV of the ETA in respect of the property. In order to be a consignee who may validly issue a drop-shipment certificate under subsection 179(2) of the ETA, the registered person must be someone who may in fact be potentially liable to pay or remit an amount under subsection 179(1) or Division IV. That is, the person must either be a person who is acquiring the property for the purpose of supplying to a non-registered non-resident recipient a commercial service in respect of the property as indicated in subsection 179(1), or a person who is the recipient of a taxable supply of the property made by a non-registered non-resident person as indicated in paragraph 217(b). The registered company identified in the question as the consignee is not such a person as it is the recipient of a supply made by a registered supplier (Registrant B) and is not acquiring the property to supply a commercial service in respect of the property.

Q.29 - Freight Charges and Drop Shipment Rules

Facts / Background

A GST registrant (Registrant A) enters into an agreement with a non-resident person who is not registered for GST (the Non-Resident Company) under which Registrant A makes a taxable supply in Canada of tangible personal property by way of sale to the Non-Resident Company. At the Non-Resident Company's direction, physical possession of the goods is transferred directly from Registrant A to a second GST registered company (StorageCo). StorageCo will be providing the service of storing the goods to the Non-Resident Company, and will issue a subsection 179(2) drop-shipment certificate to Registrant A. The storage services provided by StorageCo to the Non-Resident Company include StorageCo arranging for delivery of the goods to the final GST registered purchaser (the Consignee), once the Consignee has been identified. The Consignee will issue a subsection 179(2) drop-shipment certificate to StorageCo. Once the goods are delivered to the Consignee, StorageCo will send a single bill to the Non-Resident Company for its services. This bill will be a fee for the storage services (based on a percentage of the sale price), and charges for disbursements (which would include the amount that StorageCo paid on freight charges). Alternatively, the bill will only list a single amount due, and this single consideration will cover all of the services provided (including both storage and freight charges). The storage services account for over 90% of the total charges, and the disbursements, including those for freight, will be less than 10% of the total charges.

Since StorageCo issued a subsection 179(2) certificate to the Non-Resident Company, subsection 179(5) of the Excise Tax Act will not apply, resulting in StorageCo acquiring possession of the goods from Registrant A for the purpose of performing the storage service (a taxable supply of a commercial service) in respect of the goods. Under subsection 179(2), except in the case of a supply of a service of shipping the property (which is not a "commercial service" if supplied by a carrier, but would be a commercial service if supplied by anyone else), any supply made by

StorageCo will be deemed to have been made outside of Canada. Thus, the storage service fees from StorageCo to Non-Resident Company should not be subject to GST.

Where the storage service is being provided by StorageCo together with the freight service for a single consideration, since the freight service is incidental to the provision of the storage service, the freight service should be deemed to form part of the storage service. The freight service should be considered incidental to the provision of the storage service as StorageCo's primary objective is to provide the storage service, and the total consideration charged for the storage and freight services together is only marginally higher than the amount that StorageCo would charge for the storage services alone. As such, none of the fee from StorageCo to the Non-Resident Company should be subject to GST.

Alternatively, the services of arranging and paying for the freight should be considered an expense incurred by StorageCo in the provision of its storage services rather than an expense incurred by StorageCo as agent for the Non-Resident Company. Since the freight expenses are an input to StorageCo, and are not incurred by StorageCo as an agent for the Non-Resident Company, the freight charges should be taxed in the same manner as the storage services provided by StorageCo. This conclusion is in line with former section 178 of the Excise Tax Act, which though repealed, still applies under general legal principles.

Question

Will the freight services be considered incidental to the storage services under section 138 of the Excise Tax Act, such that the freight services will be deemed to form part of the storage services? Will all of the services be considered to be a single supply of storage services? If the freight services are rebilled by StorageCo as a disbursement, will they be considered an input to StorageCo's storage service, and thus be taxed in the same manner as the storage services, or will StorageCo have to charge the Non-Resident Company GST on the portion of its disbursements that relate to the freight services?

CRA Comments

Based on the information provided, in the circumstances described, the freight services would not appear to be incidental to the storage services based on the application of GST/HST Policy Statement P-159R1 Meaning of the phrase "reasonably regarded as incidental" nor part of a single supply of storage services based on the application of GST/HST Policy Statement P-077R: Single and multiple supplies.

It is unclear how the freight service would be considered an input to the supply of the storage that has previously occurred. It is also unclear how the freight service would be considered to have a minor or subordinate role to the storage service. In the circumstances described, it would appear that the objective of the supplier would be to provide both a storage service and a freight transportation service and that each supply would be of importance.

Whether single or multiplies are being made and whether one supply is incidental to another in any particular case is ultimately based on a determination of fact requiring consideration of all relevant facts. The manner in which amounts are billed is not a conclusive factor.

If it were to in fact be determined that a separate supply of a freight transportation service is being made by StorageCO, that separate supply would not be deemed made outside Canada under subsection 179(2) of the Excise Tax Act and the application of GST/HST to that supply would be determined under the normal rules.

Q.30 - Drop Shipment Rules Subsection 179(2)

Facts/Background

Company A is a corporation resident in Canada and a manufacturer of credit cards. Company A will supply credit cards to Company B, a corporation resident in the United States. Company B will supply credit card processing services for Company C, a corporation resident in Canada and a retailer. Company B will charge Company C one bundled fee for the credit card processing services. The fees include the cost of providing the credit cards to Company C.

Company B wishes to have Company A deliver the credit cards directly to Company C. Company C is prepared to issue Company A a drop-shipment certificate, as required pursuant to subsection 179(2) of the Excise Tax Act.

Company A and Company C are registered for GST purposes. Company B is not registered for GST purposes, nor carrying on business in Canada.

Question

Please confirm that subsection 179(2) of the Excise Tax Act would apply to deem the supply of the credit cards from Company A to Company B to be made outside Canada, and therefore, not subject to GST, even though Company B is essentially charging Company C for the supply of credit card processing services (and not for providing the credit cards, per se).

Would the response be different if the agreement between Company B and Company C clearly provided for two separate fees for two separate supplies: one for the supply of credit card processing services and another for the supply of the credit cards.

CRA Comments

Based on the information provided in the first scenario, subsection 179(2) of the Excise Tax Act (the “ETA”) would not appear to apply to deem the supply of the credit cards by Company A to Company B to be made outside Canada.

Pursuant to paragraph 179(2)(c) of the ETA, the drop-shipment certificate issued by the registered consignee must acknowledge that the consignee, on taking physical possession of the property, is assuming liability to pay or remit any amount that is or may become payable or remittable by the consignee under subsection 179(1) or Division IV of the ETA in respect of the property. In order to be a consignee who may validly issue a drop-shipment certificate under subsection 179(2) of the ETA, the registered person must be someone who may in fact be potentially liable to pay or remit an amount under subsection 179(1) or Division IV. That is, the person must either be a person who is acquiring the property for the purpose of supplying to a non-registered non-resident recipient a commercial service in respect of the property as indicated in subsection 179(1), or a person who is the recipient of a taxable supply of the property made by a non-registered non-resident person as indicated in paragraph 217(b). If Company C is the recipient of a single supply of a credit card processing service made by Company B, as opposed to a recipient of a separate supply of tangible personal property, then Company C may not issue a drop-shipment certificate to A under subsection 179(2) of the ETA.

The response would not be different if the agreement provided for two separate fees since it is unlikely in our view that the cards could be a separate supply of tangible personal property.

Q.31 - Telecommunications Services Provided to Non Resident

Facts/Background

Company A is resident in Canada and registered for GST purposes. Company A is a reseller of telecommunications services. Company A contracts with telecommunication service providers in Canada and the United States to rent a private, dedicated telecommunication line in both countries.

Company A then enters into a contract with Company B, resident in the United States and user of the telecommunication line. Company B is not registered for GST purposes. Company A charges Company B a flat, monthly fee for the usage of the private, dedicated line. The line connects users in Canada with users in the United States.

Company A cannot zero-rate the flat, monthly fee charged to Company B pursuant to section 22.1 of Part V of Schedule VI of the Excise Tax Act because Company B does not carry on the business of supplying telecommunication services.

Assume that the monthly fee is $30. Assume further that $15 of the $30 is attributable to the U.S. portion of the telecommunication service (i.e., the rental of U.S. lines, plus appropriate mark up). Assume that the other $15 of the $30 is attributable to the Canadian portion of the telecommunication service. Company A proposes to separately itemize or break out on its month invoice to Company B both the U.S. and Canadian portions of the monthly fee and charge GST only on the Canadian portion of the monthly fee (i.e., $15 x .07% = $1.05), rather than charge GST on the entire $30 fee ($30 x .07% = $2.10).

Company A considers the U.S. portion of the monthly fee to be a supply of a telecommunication service performed entirely outside of Canada pursuant to paragraph 142(2)(g) of the Excise Tax Act, and not deemed to be made in Canada pursuant to section 142.1 of the Excise Tax Act, and therefore, not subject to GST.

Question

Please confirm that Company A is entirely to separately itemize both the U.S. and Canadian portions of the monthly fee and required to only charge GST on the Canadian portion of the monthly fee.

CRA Comments

The GST at 7% or the HST at 15% only applies to the Canadian portion of a dedicated telecommunications line that is supplied by a telecommunication service provider who is a registrant. The amount of the consideration relating to the Canadian portion should be calculated on a direct line distance basis between the two Canadian end points. This may be measured based on mileage.

Q.32 - Exported Services

Facts/Background

Assume a Canadian company receives a prototype or sample on which to conduct research and development pursuant to a contract with a non resident. Canadian company uses the prototype or sample as an input to provide the services to a non resident, for example, engineering services or services of product development (for example, in the automotive area it is common to provide a prototype for sample development of components). While the output is a service to the non resident, the input is personal tangible property (for example, prototype).

Question

Are the services zero-rated to the non resident on the basis that they are not “in respect of” tangible personal property located in Canada because the tangible personal property will only be in Canada on a temporary basis if the prototype will be shipped out of Canada when no longer needed and the Canadian company is not the owner? Would the answer change if the prototype stayed in Canada in case it was needed for future use (for future research projects) or sold as scrap?

CRA Comments

Whether the service supplied to the non-resident would be zero-rated would depend on the particular circumstances.

Section 7 of Part V of Schedule VI to the ETA is the general zero-rating provision for the supply of a service made in Canada to a non-resident person. Subject to the other exclusions in the provision, a supply of a service may be zero-rated when made in Canada to a non-resident person provided the service is not “a service in respect of tangible personal property situated in Canada at the time the service is performed”.

For a supply of a service to be excluded from being zero-rated there must be more than a mere indirect or incidental nexus or connection between the service and the underlying tangible personal property.

Whether the relationship between the service and the prototype in this scenario is sufficiently direct for the service to be considered by the CRA to be "in respect of" the tangible personal property will ultimately depend on the specific nature of the service to be performed. It is entirely possible that the service would not be considered to be in respect of tangible personal property. The mere fact that tangible personal property in the form of a sample or prototype is being provided to the supplier of the service does not on its own result in the service being in respect of that property. The information in the question does not provide sufficient detail to make a conclusive determination. Neither the term of the period that the prototype is in Canada or whether it is sold as scrap will have an impact on whether the CRA considers the service performed by the Canadian supplier to be “in respect of” the prototype.

E. CARRYING ON BUSINESS IN CANADA

Q.33 - Carrying on Business in Canada

Facts / Background

It is our understanding that the CRA is currently reviewing its position on what constitutes "carrying on business in Canada" and when a non-resident is required to register for GST purposes.

Question

Is our understanding correct, and if so, could you please discuss why the review is being undertaken and the policy goals the CRA is trying to achieve? Is the intent to bring within the GST net move non-residents engaged in e-commerce?

CRA Comments

The CRA is currently revising GST/HST policy statement P-51R Carrying on Business in Canada.

The main objective of this is to update the policy so that it fully reflects our position regarding carrying on business for GST/HST purposes, particularly in an electronic commerce environment, as set out in GST/HST Technical Information Bulletin B-090 GST/HST and Electronic Commerce. As set out in TIB B-090, the determination of whether a non-resident is carrying on business in Canada continues to be a question of fact to be determined on a case-by-case basis with reference to all relevant facts. Our position continues to be based on the consideration of various factors. As always, a non-resident must have a significant presence in Canada to be considered to be carrying on business in Canada.

The policy is also being updated to explicitly address and clarify, particularly through examples, the circumstances in which a non-resident making supplies of tangible personal property by way of lease or supplies of services will be considered to be carrying on business in Canada.

Q.34 - Soliciting Orders in Canada

Facts / Background

The CRA revoked GST Policy Statement P-038 -- Soliciting Orders for Imported Publication on October 27, 2003. Also, the policy statement contained examples of what would not be regarded by the CRA as soliciting sales or offering supplier in Canada.

Question

Why was this policy statement revoked?

Given the revocation of this policy statement, is it now the CRA's view that these activities do constitute soliciting sales or offering suppliers in Canada?

CRA Comments

GST/HST Policy P-038 - Soliciting Orders for Imported Publications was revoked as our current position regarding solicitation in this context is fully addressed in the recently updated guide GST/HST Information for Suppliers of Publications (RC4103).

The fact that the P-038 was revoked does not mean that we have altered our position regarding the examples of what we would not regard as solicitation in the policy. In fact, although phrased slightly differently, the same exclusions are described in RC4103.

Q.35 - Carrying on Business in Canada

Facts / Background

In light of our understanding that the CRA is currently reviewing its position on what constitutes "carrying on business in Canada" for GST purposes, for both Canadian income tax and Canadian GST/HST purposes, the CRA has previously ruled that a non-resident would not be considered to be carrying on business in Canada as a result of a Canadian corporation performing under a subcontract services that the non-resident had agreed to provide. (See CRA Advanced Income Tax Ruling Document number 9720713 and CRA GST/HST Interpretation Letter HQR0001680.) In other words, when a non-resident of Canada contracts to provide services in Canada, but then subcontracts the actual performance of those services to a Canadian corporation (i.e. its Canadian subsidiary), the CRA does not view the non-resident as carrying on business in Canada.

Question

Does the CRA still hold this view?

CRA Comments

The determination of whether a particular non-resident person is carrying on business in Canada is a question of fact to be determined on a case-by-case basis by reference to all relevant facts. Our position regarding carrying on business is based on the consideration of various factors as described in GST/HST Technical Information Bulletin B-090 - GST/HST and Electronic Commerce. A non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada.

In the absence of additional information regarding the non-resident person’s operations, we are unable to provide a conclusive determination in this scenario. However, we would likely not consider a non-resident person with no other factors indicating they are carrying on business in Canada, to be carrying on business in Canada solely by virtue of the fact that they have subcontracted services to another person to be performed in Canada.

Q.36 - Carrying on Business in Canada

Facts / Background

It has been our general understanding that where a non-resident of Canada leases tangible personal property to a resident of Canada, but has no other physical presence in Canada other than the equipment under lease that the non-resident is not required to register for GST purposes given that it is not carrying on business in Canada.

(a) A non-resident lessor is approached by a Canadian seeking to lease TPP that the non-resident lessor is aware will be used in Canada. The lessee will be responsible for maintenance of the equipment. The non-resident lessor has no other Canadian customers. The contract is concluded in outside of Canada and the TPP is delivered outside of Canada at the start of the lease.

(b) Same fact pattern as above, but the contract is concluded in Canada.

(c) Same fact pattern as stated in (a), but the equipment is delivered by the lessor to the lessee at a location in Canada at the start of the lease.

(d) Same fact pattern as stated in (a), but assume that the non-resident lessor has other lessees to whom it leases TPP and the TPP is used by the lessees in Canada.

(e) Same fact pattern as stated in (a), but assume the original term of the lease is up and the lease will be renewed for an additional term. Accordingly, the equipment is in Canada at the start of the renewal period.

(f) Same fact pattern as stated in (a) and (d), but instead of "renewing" the existing lease, a new lease agreement is concluded.

(g) A non-resident lessor has leased TPP to two or more lessees. The lessees are using the equipment in Canada, but the contract was concluded outside of Canada and the TPP was delivered at the start of the leases outside of Canada. The non-resident lessor now enters into an agreement to sell its portfolio of leased assets to another person. The assets will be sold subject to the existing leases.

Question

Please advise whether the CRA would consider the non-resident lessor to be carrying on business in Canada and required to register for GST purposes in each of the above scenarios.

CRA Comments

The CRA may consider the non-resident to be carrying on business in Canada depending upon additional facts regarding the non-residents operations in Canada. For example, the CRA generally considers a non-resident person who acquires tangible personal property in Canada and supplies it by way of lease in Canada to be carrying on business in respect of these activities.

As noted, the determination of whether a non-resident person is carrying on business in Canada and therefore required to register for GST/HST purposes is a question of fact to be determined on a case-by-case basis by reference to all relevant facts.

As all the relevant facts are not present in the question, we are unable to make a conclusive determination with respect to whether the non-resident lessor is carrying on business in Canada.

For purposes of the following responses, a non-resident person that is considered by the CRA to be carrying on business in Canada is required to register for GST/HST purposes. In the circumstances described, where the non-resident person is not considered to be carrying on business in Canada, they will not be required to register for GST/HST purposes but may be permitted to register voluntarily.

(a) Based on the information provided, the CRA would likely not consider the non-resident person to be carrying on business in Canada by virtue of its leasing activities. The fact that the lessee uses the tangible personal property in a particular jurisdiction does not necessarily lead us to conclude that the lessor is carrying on business in that jurisdiction. Further analysis regarding the operations of the non-resident would be necessary to make a conclusive determination.

(b) See the response to (a). As described in TIB-090 – GST/HST and Electronic Commerce, the place where the contracts are made is just one factor that the CRA will consider in making the determination.

(c) Without additional information the CRA is unable to provide a conclusive determination. We note that where the tangible personal property supplied by way of lease is both acquired and delivered by the non-resident in Canada, this would generally result in the non-resident being considered to be carrying on business in Canada for GST/HST purposes.

(d) See the response to (a). If the non-resident enters into more than one lease as described in question (a), this will likely not have an impact on the CRA’s determination. If the other leases are not as described in question (a), all relevant facts pertaining to those leases would have to be considered in order to make a conclusive determination with respect to whether the non-resident is carrying on business in Canada.

(e) Based on the information provided, including the specific facts in (a), the non-resident lessor would not appear to be carrying on business in Canada.

(f) All relevant facts would have to be considered to make a conclusive determination, including as indicated in the response to (d), all relevant facts regarding the other leases. However, based on the information provided, including the specific facts in (a), the non-resident lessor would not appear to be carrying on business in Canada.

(g) Based on the information provided, the CRA would not consider the non-resident person to be carrying on business in Canada based solely onthe existence of an agreement to supply the leased assets to the other person.

We note that where the recipient of the leased assets is a non-resident person, the CRA would likely consider that person to be carrying on business in Canada if it were to be established that the non-resident acquire the assets in Canada and is in the business of leasing the assets in Canada.

Q.37 - Carrying on Business in Canada

Facts / Background

A non-resident of Canada enters into an agreement with a Canadian contract manufacturer for the Canadian to produce product on behalf of the non-resident. As part of the contract, the non-resident will send a series of pieces of equipment to the Canadian contract manufacturer which the Canadian contract manufacturer will use to produce the product for the non-resident. At the end of the term of the agreement, the equipment is to be returned by the Canadian contract manufacturer to the non-resident.

Question

Will the non-resident be considered to (a) carry on business in Canada or (b) have a permanent establishment in Canada for GST purposes as a consequence of the presence of equipment it owns being at the Canadian contract manufacturer's premises during the term of the contract. (Assume that the product produced will be exported from Canada or if sold by the non-resident in Canada, drop-shipped to the non-resident's Canadian customers.)?

CRA Comments

(a) The determination of whether a particular non-resident person is carrying on business in Canada is a question of fact to be determined on a case-by-case basis by reference to all relevant facts. Our position regarding carrying on business is based on the consideration of various factors as described in GST/HST Technical Information Bulletin B-090 - GST/HST and Electronic Commerce. A non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada.

We would likely not consider a non-resident person to be carrying on business in Canada solely by virtue of it providing equipment to a resident person for the purpose of providing a manufacturing service to the non-resident person. However, in the absence of additional information regarding the extent to which the other factors are met, we are unable to provide a conclusive determination.

(b) A permanent establishment in Canada would not exist merely because of the physical location of the manufacturing equipment in Canada.

Authority over the equipment at its physical location must be present. For example, if the non-resident maintains control, direction and responsibility of the equipment while it is in Canada (situated with the Canadian manufacturer), that is, they participate in the decisions on how and when the equipment is used, or they operate, service or maintain the equipment.

Furthermore, for there to be a permanent establishment, there must be a certain degree of continuity and permanency to the arrangement. The physical location of the equipment may constitute a permanent establishment even though it is present, in practise, for a finite time due to the nature of the business.

Q.38 - Carrying on Business in Canada

Facts / Background

A non-resident of Canada enters into an agreement with a non-resident customer whereby the non-resident customer will outsource its information technology functions to the non-resident supplier. The non-resident customer sells its computer servers to the non-resident supplier. The non-resident supplier then subcontracts part of the contract to a Canadian ISP facility. The non-resident supplier sends the computer servers to the Canadian ISP facility with the Canadian ISP facility being responsible for the maintenance and operation of the servers. The contract between the non-resident supplier and the Canadian ISP facility provides that at the end of the term of the subcontract, the ISP facility must return the servers to the non-resident supplier outside of Canada.

Question

As a consequence of the subcontract arrangement between the non-resident supplier and the Canadian ISP facility, will either the non-resident supplier or its non-resident customer be considered to be (a) carrying on business in Canada or (b) have a permanent establishment in Canada?

CRA Comments

a) The determination of whether a particular non-resident person is carrying on business in Canada is a question of fact to be determined on a case-by-case basis by reference to all relevant facts. Our position regarding carrying on business is based on the consideration of various factors as described in GST/HST Technical Information Bulletin B-090 GST/HST and Electronic Commerce. A non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada.

Based on the limited information provided, we would likely not consider either the non-resident supplier or the non-resident customer to be carrying on business in Canada as a consequence of the subcontract arrangement between the non-resident supplier and the Canadian ISP facility. However, in the absence of additional information including the extent to which the other factors are met, we are unable to provide a conclusive determination regarding whether either non-resident is carrying on business in Canada.

b) The conclusive determination of whether a non-resident has a permanent establishment in Canada in a particular case requires the disclosure and consideration of all relevant facts.

To be considered as having a permanent establishment in Canada, it must be established based on the facts that the non-resident has a fixed place of business of the non-resident through which the non-resident makes supplies. A server of a non-resident can be considered to be a permanent establishment of the non-resident in certain circumstances.

Generally, in order to be considered a permanent establishment of the non-resident supplier it would have to be established that the servers are at the disposal of the non-resident (i.e. owned or leased and operated by the non-resident). Also, the activities of the non-resident carried out through the servers must on their own be a significant and essential part of its business activity.

Based on the limited information provided, although the non-resident supplier owns the servers, they are operated and maintained by the Canadian ISP facility. Additional information would be required to conclusively establish whether the non-resident supplier has a permanent establishment in Canada including specific information regarding the exact nature of the extent of the non-resident and Canadian ISP's respective involvement with respect to the use of the servers in Canada.

Based on the limited information provided, the non-resident customer would not appear to have a permanent establishment in Canada.

Q.39 - Carrying on Business in Canada

Facts/Background

A non registered non resident seconds staff to a registered, Canadian-resident affiliate. The non registered non resident is reimbursed for the salary costs of the seconded employees. The contract was accepted in the U.S., and the non resident has no Canadian office or bank account.

Question

Is the non resident carrying on business in Canada?

CRA Comments

In the absence of additional information regarding the contractual arrangement between the non-resident and the Canadian resident affiliate, such as: the length of time the non-residents staff are performing services in Canada, the nature of the services performed, among others, we are unable to provide a conclusive determination. However, the CRA would likely consider a non-resident person to be carrying on business in Canada where, pursuant to a service agreement, the non-resident or its employees enter Canada to render services for a significant period of time.

Q.40 - Carrying on Business in Canada

Facts/Background

A non resident, non registered lessor with no office, permanent establishment or employees in Canada, leases an aircraft to a Canadian resident lessee. Assume the aircraft is initially delivered outside Canada. Assume the aircraft is located in Canada at the time the lease is renewed for a further term.

Question

Is the non resident carrying on business in Canada:

(a) at the commencement of the lease?

(b) at the time of renewing the lease?

CRA Comments

The determination of whether, and when a non-resident person is carrying on business in Canada is a question of fact to be determined on a case-by-case basis by reference to all relevant facts. However, based on the information provided, the CRA would likely not consider the non-resident person to be carrying on business in Canada by virtue of its leasing activities at either the commencement of the lease or at the time the lease is renewed.

F. MISCELLANEOUS

Q.41 - Voluntary Disclosures

Facts / Background

A number of local CRA offices are telling representatives that the initiation of a no-name disclosure will not afford any protection to their client if enforcement action (i.e., audit) is commenced after the date of initiation of the no-names disclosure and before the client is identified. This is in complete contradiction to the stated guidelines of the policy. We understand that the policy may be under review by headquarters but in the interim, certain offices are blatantly refusing to administer the policy.

Question

1. Could the CRRA confirm that a client on whose behalf a no-name voluntary disclosure is initiated will be afforded protection for the 90-day period allowed to complete the disclosure?

CRA Comments

Paragraph 11 of IC 00-1R states “Clients, representatives, and agents who are unsure they want to make a voluntary disclosure are entitled to discuss their situation on a no-name (hypothetical) basis with an officer responsible for handling voluntary disclosures.” The CRA will continue to offer advice on a no-name basis prior to a client making a disclosure. Headquarters is reviewing the no-name process because of reports of suspected abuse of the process and reports of inconsistencies in the application of the process. As the process is under review it is premature to offer any comments on the date at which protection to the client will be offered. In the interim, each case will be decided on its own merits. The client should be identified as soon as practical in the process and they may be allowed a reasonable amount of time to complete the disclosure after the client is identified.

Question

2. Could the CRA confirm that a GST disclosure that relates to a period that is less than one year will be accepted as voluntary under the VDP? Again, there is inconsistency as to the application of this policy among local offices.

CRA Comments

The CRA policy on the Voluntary Disclosures Program is contained in IC 00-1R. If the CRA determines that all of the validity conditions listed in paragraph 6 are met the CRA will accept the disclosure as a valid voluntary disclosure. If the disclosure is for a period that is less than 1 year past due it must not be initiated to avoid the late filing penalties. The VDP is not intended to act as a vehicle for clients to avoid their legal obligations. Consequently, this validity condition allows the timely correction of previously filed returns. The CRA is constantly striving for consistency in the application of the policy. However, each voluntary disclosure request must be judged on its own merits.

Q.42 - Administrative Updates

Question

Please advise of any change in administrative policy as a result of the following court decisions:

(a) B.J. Services Co. Canada v. R., [2002] GSTC 124 (TCC);

(b) Riverfront Medical Evaluations Ltd., v. R. [2002] GSTC 110 (FCA);

(d) Colleges of Applied Arts & Technology Pension Plan v. R., 2001 GTC 899 62.

CRA Comments

(a) B.J. Services Co. Canada v. R. [2002] GSTC 124 (TCC)

Our position with respect to the B.J. Services decision is that it applies to a specific fact situation. We will apply the Court’s decision in that case to target corporations in similar fact situations.

(b) Riverfront Medical Evaluations Ltd., v. R. [2002] GSTC 110 (FCA);

As a result of the Riverfront decision, the Canada Revenue Agency (CRA) drafted a discussion paper entitled “The Application of the GST/HST to Independent Medical Evaluations and Other Independent Assessments”. The document was made available on the CRA’s website on January 27, 2004 and we requested comments, if any, by February 29, 2004. We have received some calls from persons interested in providing comments and have agreed to extend the date to April 30, 2004.

The document discusses our proposed approach to sections 5 and 7 in light of the Riverfront decision. The document provides specific examples regarding supplies by medical practitioners and operators of health care facilities. Of significant importance is the requirement for the facility to fall within the definition of “health care facility”, that is, in the context of independent medical evaluations, the facility must by operated for the purpose of providing medical care.

In the Riverfront case the Court found that an IME consisted of medical care because it involved a physical examination of an individual by a physician. In addition, the Court found that Riverfront was a health care facility because these examinations were provided at its facility. The Court concluded that because Riverfront provided the examination rooms and other necessary equipment and remunerated the physicians for the examinations provided on its premises, the examinations rendered by the physicians and supplied by Riverfront fell within section 2.

The Discussion Paper provides three examples:

1) All activities are provided in the health care facility

In this scenario, the operator of the health care facility acquires the services of a physician for the purpose of supplying an IME and report to a third party. The services rendered by the physician are provided in the operator’s facility and consist of examining an individual and formulating a medical opinion on the individual’s health status. The operator contacts the individual to arrange for the examination, and the individual attends the operator’s facility for the examination. The physician receives remuneration from the operator for rendering the examination and formulating the medical opinion.

The physician’s supply made to the health care facility operator of examining an individual and providing a medical opinion concerning the health status of that individual is considered to be a health care service rendered to an individual. This supply is exempt under section 5 of Part II of Schedule V to the ETA.
The services rendered by the physician for which the physician is remunerated by the health care facility operator fall within the definition of “institutional health care service” because these services are provided in the operator’s facility. In this scenario, the individual attends the operator’s facility to receive the institutional health service (i.e., a physical examination and the formulation of a medical opinion on the individual’s health status). On this basis, the individual is considered a patient of the facility and the physician’s services are considered rendered to that patient. The supply made by the operator to the third party (i.e., the services of the physician) is an institutional health care service rendered to a patient of the facility, which is exempt under section 2 of Part II of Schedule V to the ETA.

2) Activities are provided in the health care facility and in another facility

Scenario A: In this scenario, the operator of the health care facility acquires the services of a physician for the purpose of supplying an IME and report to a third party. The services rendered by the physician are provided in the operator’s facility and consist of examining an individual and formulating a medical opinion on the individual’s health status. The operator contacts the individual to arrange for the examination, and the individual attends the operator’s facility for the examination. The physician receives remuneration from the operator for rendering the examination and formulating the medical opinion.

In the course of rendering the examination, the physician determines that the individual requires a diagnostic test. The operator sends the individual to a separate facility, i.e., a radiology clinic operated by another person, for the diagnostic test ordered by the physician. The operator of the radiology clinic sends the results of the diagnostic test to the operator of the health care facility, who in turn gives the results to the physician. The physician reviews the results and includes them in the medical report. The operator of the radiology clinic receives payment from the health care facility operator for the diagnostic test.

The physician’s supply to the health care facility operator, which consists of several elements, i.e., examining an individual, ordering a diagnostic test, reviewing the test results and providing a medical opinion concerning the health status of the individual, is considered to be a health care service rendered to an individual. This supply is exempt under section 5 of Part II of Schedule V to the ETA.
If the physician ordered the diagnostic test, then the supply by the radiology clinic is exempt under section 10 of Part II of Schedule V to the ETA.
The services rendered by the physician for which the physician is remunerated by the operator of the health care facility fall within the definition of “institutional health care services” because these services are provided in the operator’s facility. In this scenario, the individual attends the operator’s facility to receive the institutional health care service (i.e., a physical examination and the formulation of a medical opinion concerning the individual’s health status). On this basis, the individual is considered a patient of the facility and the physician’s services are considered rendered to that patient. The supply made by the operator to the third party is an institutional health care service rendered to a patient of the facility, which is exempt under section 2 of Part II of Schedule V to the ETA.

Scenario B: In this scenario, the operator of the health care facility acquires the services of physician A in the course of supplying an IME and report to a third party. The services rendered by physician A are provided in the physician’s office and consist of examining an individual, reviewing previous diagnostic test results, and formulating a medical opinion on the individual’s health status. The operator contacts the individual to arrange for the examination, and the individual attends physician A’s office for the examination. Physician A receives consideration from the operator for the supply of the examination rendered to the individual and the medical opinion.

The operator of the health care facility then acquires the services of physician B for the purpose of supplying an IME and report to a third party. The services rendered by physician B are provided in the operator’s facility and consist of reviewing physician A’s medical opinion concerning the individual, the previous diagnostic test results, formulating a medical opinion on the individual’s health status, and producing a final report, which the operator supplies to a third party. The operator remunerates physician B for these services.

Physician A’s supply made to the health care facility operator of examining an individual, reviewing diagnostic test results, and providing a medical opinion on the individual’s health status is considered to be a supply of a health care service rendered to an individual. This supply is exempt under section 5 of Part II of Schedule V to the ETA.
Physician B’s supply made to the health care facility operator of reviewing physician A’s medical opinion and the previous diagnostic test results, formulating a medical opinion on the individual’s health status and producing a final report concerning the individual’s health status is considered to be a supply of a health care service rendered to an individual. This supply is exempt under section 5 of Part II of Schedule V to the ETA.
In this scenario, the operator has communicated with the individual and arranged for the individual to undergo a physical examination by physician A. At the operator’s facility, physician B reviews the results of the examination and previous diagnostic test for the purpose of formulating a medical opinion concerning the individual’s health status and producing a final report. On this basis, the individual is considered a patient of the facility and physician B’s services are considered to be an institutional health care service rendered to that patient. The supply made by the operator to the third party is an institutional health care service rendered to a patient of the facility, which is exempt under section 2 of Part II of Schedule V to the ETA.

3) No examination or opinion relating to the IME is rendered in the health care facility.

In this scenario, the operator of the health care facility acquires the services of a physician in the course of supplying an IME and report to a third party. The services rendered by the physician are provided in the physician’s office and consist of examining an individual and formulating a medical opinion on the individual’s health status. The operator contacts the individual to arrange for the examination, and the individual attends the physician’s office for the examination. The physician receives consideration from the operator for the supply of the examination rendered to the individual and the medical opinion. The operator may instruct the physician to send the medical opinion directly to the third party or if the physician sends it to the operator, the operator will forward the medical opinion to the third party.

The physician’s supply made to the health care facility operator of examining an individual and providing a medical opinion concerning the health status of that individual is considered to be a health care service rendered to an individual. This supply is exempt under section 5 of Part II of Schedule V to the ETA.
The services rendered by the physician for which the physician receives consideration from the health care facility operator do not fall within the definition of “institutional health care service”. Therefore the supply made by the operator of the health care facility to the third party of the medical report is not exempt under section 2 of Part II of Schedule V to the ETA. The GST/HST is charged at the rate of 7% or 15% on the consideration charged by the operator of the health care facility for this supply. In this scenario, the physician’s services do not meet the criterion in the definition of “institutional health care service” of being rendered in the operator’s facility; therefore the supply made by the operator is not an institutional health care service.

Our position with respect to the State Farm decision is that it applies to a specific fact situation. Our policy position with respect to section 220 of the Excise Tax Act remains unchanged.

(d) Colleges of Applied Arts & Technology Pension Plan v. R., 2001 GTC 899 62.

The CRA is not considering changes in its administrative policy following the court decision in Colleges of Applied Arts & Technology Pension Plan. The CRA’s position is that the decision applies specifically to that pension plan trust, and whether the investment of funds was its principal activity during the relevant period.

Q.43 - Court Challenges

Question

Please provide a summary of important cases before the courts or the CITT.

CRA Comments

Q.44 - Hot Audit Issues / Initiatives

Question

Please provide a brief summary of current “hot” audit issues or initiatives.

CRA Comments

One of the main areas that we focus our attention on in Audit for GST/HST is the detection of fraud in the pre-payment program for both credit returns and rebate claims. We have implemented various risk assessment processes to ensure the validity of refund claims before they are paid. These processes are reviewed for improvements on an ongoing basis. There are also projects in place that significantly improve our ability to detect high-risk claims at an early stage.

Some of the issues that are assessed regularly include:

Acceptable translation methods: GST/HST is understated because the funds are not converted or are improperly converted into Canadian dollars
Taxable benefit calculations: GST/HST is not reported on the amount calculated for tax purposes
Miscellaneous revenues: GST/HST is not being charged
Export sales: lack of proper documentation to substantiate zero-rated sales

An area that we are devoting resources to is the identification and audit of small and medium sized businesses operating over the Internet in Canada. There was a project conducted to determine the compliance level of these internet transactions versus the traditional methods of conducting business. This project will be expanded to determine if the risk of non-compliance is greater when conducting business over the internet.

Additional question asked regarding documentary requirements for the claiming of ITCs.

It has recently come to our attention that there may be inconsistency among the Tax Services Offices (TSO) with respect to what constitutes acceptable documentation to support ITCs. We are currently reviewing the applicable court cases and our existing policy to determine the appropriate circumstances for denying ITCs. Once our review is completed, we will be communicating to all TSOs the proper treatment for ITCs to ensure consistency.

Additional question asked on verifying the validity of a GST/HST number online.

Currently, electronic access to the registration database to confirm the validity of a registration number is not available. However, a system is in place whereby the CRA will give verbal or written confirmation of a GST/HST registration number where there is a valid need to know that a person is a registrant. To facilitate this process, please supply the registrant’s full legal name and address.

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26 February 2004 CBA Roundtable

A. REAL PROPERTY

Q.1 - Allocation of Itcs – Multiple Residential Complex

Facts / Background

Question

CRA Comments

Q.2 - New Residential Property Rebate

Facts / Background

Question

CRA Comments

Assumptions

Q.3 - Les Immeubles Le Séjour Inc. V. The Queen

Facts / Background

Question

CRA Comments

Q.4 - Real Proeprty Transactions: Liability To Remit Gst

Facts / Background

Analysis

Question

CRA Comments

Q.5 - Small Supplier Threshold: Multiple Owners of Bed & Breakfast

Facts / Background

Question

CRA Comments

Q.6 - Nursing Homes

Facts / Background

Questions

CRA Comments

Q.7 - 191(3) And Itcs

Facts / Background

Question

CRA Comments

B. AUDIT / GENERAL

Q.8 - Allowable Spillage

CRA Comments

Q.9 - Non-Compete Clauses

Facts / Background

Questions

CRA Comments

Q.10 - Section 232 Price Adjustments

Facts / Background

Question

CRA Comments

Q.11 - Tax Payable – Recipient Assessment

Facts / Background

Question

CRA Comments

Q.12 - Bad Debt Adjustments Claimed in the Receivership Context

Question

CRA Comments

Q.13 - Dividends in Kind

Facts / Background

Question

CRA Comments

Q.14 - Change of Use Rules and Calculation Of Gst

Facts / Background

Question

CRA Comments

Q.15 -Financial Services/Exempt Supplies; and Definition of “Debt Security”

Facts / Background

Question

Discussion

CRA Comments

Q.16 - Purchase Of Defective Goods By Manufacturer

Facts / Background

Question

CRA Comments

Q.17 - Remitting GST by a Billing Agent

Facts / Background

Question

CRA Comments

Q.18 - Retroactive GST Registration

Facts/Background

Question

CRA Comments

Q.19 - Assignment of Conditional Sales Agreement and Section 222.1

Facts/Background

Question

CRA Comments