A developer sells custom-built modular homes to persons who will occupy them as residential units. The land on which the homes are constructed is leased from the developer. As part of the development, common facilities are constructed, including a recreational facility. The selling price of the homes, which are sold on a GST included basis, includes an amount to cover construction costs of the common facilities. The developer self-assesses GST on the value of the particular lot when the homes are sold. Is the developer entitled to claim input tax credits with respect to the construction costs of the common facilities? Must the developer self-assess GST on the common facilities?

CRA Response

Residential Trailer Park

The particular technical interpretation will vary depending on whether the modular home in question is a “mobile home” in accordance with the Department’s Policy Statement P 223 released January 20, 1999 and effective April 24, 1996. Where the home in question is a mobile home, the underlying land may constitute a “residential trailer park” as defined in subsection 123(1) of the ETA.

Where the land development consists in whole or in part of a “residential trailer park”, as defined in subsection 123(1) of the ETA and the modular home qualifies as a “mobile home” using the Department’s Policy Statement P 223, the developer will be required to self supply on the fair market value of the entire residential trailer park in accordance with subsection 190(4) of the ETA upon the first exempt supply of a site as described in paragraph 7(b) of Part I of Schedule V to the ETA.

Where, and to the extent that, the common facilities are included in the definition of residential trailer park, they will be subject to self supply as stated above. As the goods and services acquired in the course of constructing of the common facilities will be considered to be acquired in the course of commercial activity (as a result of the deemed taxable supply by way of sale), input tax credits will be available with respect the tax paid or payable on the inputs.

Where, and to the extent that, the common facilities are not included in the definition of “residential trailer park”, the developer will not be required to self supply on those facilities. Furthermore, in accordance with subsection 136(2) of the ETA, the supply of the residential trailer park and common facilities, which are not part of the residential trailer park, will be deemed to be separate properties and separate supplies, neither of which are incidental to each other. In such a case there is no provision which would exempt the supply of the right to use the common facilities and such a supply will be a taxable. Accordingly, the developer will be entitled to input tax credits in respect of tax paid or payable on the construction inputs for the common facilities.

Supply of Residential Complex

The developer is a builder who is supplying single unit residential complexes each of which consists of a residential unit and a leasehold interest in the underlying land forming part of the complex. As a result, the developer, who will be considered to be a “builder” as defined for GST/HST purposes, will be required to self supply in accordance with subparagraph 191(1)(b)(ii) of the ETA and be required to self assess tax on the fair market value of each residential complex upon the granting of possession of the unit to the purchaser.

Where, and to the extent that, the common facilities are considered to be part of a “residential complex” for GST/HST purposes within the wording of the definition of “residential complex” as follows, “ . . . that part of any common areas and other appurtenances to the and the land immediately contiguous to the building . . . that is reasonably necessary for the use and enjoyment of the building as a place of residence. . .”, they will be captured under the self supply by the above noted builder.

As the goods and services acquired in the course of constructing of the common facilities will be considered to be acquired in the course of commercial activity (as a result of the deemed taxable supply by way of sale), input tax credits will be available with respect the tax paid or payable on the inputs.

Where, and to the extent that, the common facilities are not included in the definition of “residential complex”, the developer will not be required to self supply on those facilities. Furthermore, in accordance with subsection 136(2) of the ETA, the supply of the residential complex and common facilities, which are not part of the complex, will be deemed to be separate properties and separate supplies, neither of which are incidental to each other. In such case, there is no provision which would exempt the supply of the right to use the common facilities and such a supply will be a taxable. Accordingly, the developer will be entitled to input tax credits in respect of tax paid or payable on the construction inputs for the excluded common facilities.

Q.2 - Condominium Fees (Section 13, Part I, Schedule V)

The following questions concern the exemption of condominium fees under section 13 of Part I of Schedule V of the Act. Revenue Canada has indicated in Policy P-064 entitled "Treatment of Timeshares", dated May 25, 1993, that section 13 will apply to a timeshare ownership plan where each unit has been purchased for a specific one-week period. Will section 13 likewise apply to the sale of a usufruct right under a timesharing arrangement for a one-week period during a year for 49 years? A usufruct right is defined in the Civil Code of Quebec as "the right of use and enjoyment, for a certain time, of property owned by another as one's own, subject to the obligation of preserving its substance". In particular, is the sale of a usufruct viewed by Revenue Canada as a lease, licence or similar arrangement in the definition of "residential complex", will a usufruct satisfy the definition of "residential condominium unit" and will the corporation that manages the building in which the usufruct right is located be considered a "condominium corporation" under section 13? Secondly, will a unit in a timesharing arrangement that was purchased by an individual for a one-week period during a year in a co-ownership established under the Civil Code of Quebec satisfy the definition of "residential complex" and "residential condominium unit", and will the condominium corporation, also established under the Civil Code of Quebec, that manages the building be considered a "condominium corporation" under section 13?

CRA Response

Usufruct

The Department views the supply of a usufruct right, under the Civil Code of Québec (CCQ), as a supply of real property by way of lease, licence or similar arrangement. As such, the supplier of usufruct rights under a timeshare arrangement will be viewed as making supplies by way of lease, licence or similar arrangement that are one week in duration. The real property from which the usufruct rights are created will not be considered a “residential complex”, or a “residential condominium unit” for that matter, as defined in subsection 123(1) of the ETA. This is because of the exclusion to the definition of residential complex; that is, the property is a hotel, motel, an inn, a boarding house, a lodging house or other similar premises and all or substantially all of the leases, licences or similar arrangements are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days. As such, section 13 of Part I of Schedule V to the ETA does not apply to exempt the supply of the usufruct right, (i.e. a supply by way of lease, licence or similar arrangement), or any of the fees relating to the occupancy or use of a timeshare unit as said supplies would not relate to the occupancy or use of a timeshare unit that is a residential condominium unit.

Co ownership

The Department views the supply of a timeshare unit under a co ownership arrangement under the Civil Code of Québec (CCQ) as a supply of real property by way of sale. It is, however, a question fact as to whether the real property being supplied is a residential complex. For example, the supplier of the co ownership interests under a timeshare arrangement may be viewed as making a supply by way of sale of a “residential complex”, or a “residential condominium unit” for that matter (if the unit in question is described separately on a registered condominium or strata lot plan or description), as defined in subsection 123(1) of the ETA where the property will be used by the purchaser for personal use and enjoyment. The previously mentioned exclusion to the definition of “residential complex” is not applicable. Additionally, the condominium corporation that manages the building, if established under the CCQ, will be considered a condominium corporation for purposes of section 13 of Part I of Schedule V to the ETA and that section will apply to exempt the any fees (e.g. maintenance) relating to the occupancy or use of a timeshare unit, that is a residential condominium unit.

Conversely, where the supplier of the co ownership interests under a timeshare arrangement is viewed as supplying something other than a residential complex, and by extension something other than a residential condominium unit, the condominium corporation that manages the building, although considered a condominium corporation for purposes of section 13 of Part I of Schedule V to the ETA, is not making supplies that relate to the occupancy or use of a timeshare unit that is a residential condominium unit, and the fees, hence, would be taxable.

Q.3 - Real Estate Valuation - Dispute Settlement

When a GST appeal involves only a question of valuation, is there a procedure to have the dispute settled by arbitration or otherwise?

CRA Response

The mission of Appeals is to resolve tax controversies, on a basis which is fair and impartial to both the Government and the taxpayer. Aribtration is an extension of the Appeals process and enhance voluntary compliance. Under the present legislation, taxpayers are not allowed to request arbitration as a dispute resolution technique.

The consideration of objection involving real estate appraisals may require the weighing of expert opinions which, by their nature, are often based on a range of values.

The appeals officer will normally discuss the objection with the appraiser or valuator involved at the assessment stage to ensure he is fully familiar with the basis of the value assessed before endeavouring to resolve the issue with the taxpayer. At any stage during the study of the objection, the District Office Appeals Division may wish to have the original appraisal or valuation examined to ensure its accuracy and reasonabless and also to help reach a fair settlement with the taxpayer. This will be acccomplished by a request for an independant review and or a narrative appraisal or valuation.

The independant review is best indicated when the value determined at the assessment stage is substantially different from the one submitted by the taxpayer.

Q.4 - Rebate For Tax Paid in Error

Facts

It is common for real property Agreements of Purchase and Sale to stipulate a Purchase Price and then state that "if GST applies, it shall be included in the Purchase Price". Situations arise where the parties close a transaction on the basis that the supply is exempt (e.g., the Statement of Adjustments indicates that the amount of the Purchase Price was treated fully as consideration), but it is later determined that an error was made and the transaction was clearly subject to GST.

Question

How should a registered purchaser proceed in the circumstances to properly account for GST and also to be made whole in respect of the GST-included amount? Should the purchaser:

(a) claim an input tax credit for the tax paid over to the vendor (i.e., the tax included in the Purchase Price) on closing on the assumption that the vendor had the obligation to remit the tax, even if it was collected in error;

(b) account for the GST on the transaction on its next return by showing the tax due and claiming a corresponding input tax credit, and then recover the tax paid over to the vendor in error by claiming an additional input tax credit for the same amount; or

(c) do as in (b) to properly account for the tax, but instead of claiming an additional input tax credit, file a rebate claim under section 261 for the tax paid over to the vendor in error?

What is the impact, if any, of the Tax Court's decision in Olson Realty, [1998] G.S.T.C. 27, to the effect that a rebate claim might not be possible if Revenue Canada has not actually received the amounts incorrectly charged as tax? In other words, is the approach to be taken by the purchaser impacted by whether or not the vendor remitted the tax to Revenue Canada? This fact situation differs from Olson Realty in that, in these facts, tax was properly payable and the "error" was that the tax was paid over to the vendor and not paid directly by the purchaser to Revenue Canada.

CRA Response

In the circumstances whereby parties close a transaction which is treated as exempt, albeit subject to a proviso that if GST applies it shall be included in the purchase price, and it is later determined that that the transaction was clearly subject to GST, where the purchaser is registered for GST/HST purposes, the following should apply:

1. Tax Paid in Error

Provided there is sufficient evidence to substantiate that the purchaser had in fact paid an amount as, or on account of tax or that was taken into account by the parties to the transaction as tax, the purchaser would be entitled to make a rebate claim for such an amount in accordance with subsection 261(1) of the ETA. Note that an input tax credit entitlement can only arise with respect to tax payable and not with respect to an amount paid as tax. Also note that the vendor is required to remit such amounts collected as or on account of tax in accordance with subsection 222(1) and 225(1) of the ETA.

2. Tax Payable not Self Assessed

Provided the sale of real property is a taxable supply and provided subsection 221(2) of the ETA applies, the purchaser who is registered for GST/HST purposes is required to self assess by paying and reporting GST as required in subsection 228(4) of the ETA.

Where the tax becomes payable after 1996 and where the registered purchaser has acquired the property for use primarily in commercial activities of the person the tax payable is to be reported on line 205 of the GST 34 Return for the applicable reporting period. Otherwise the registered purchaser is required to pay and to report the tax on a GST 60 Return.

3. Input Tax Credit not Claimed

The registered purchaser will be entitled to claim an input tax credit to the extent that the real property is acquired for use in commercial activities of the person. Such an input tax credit entitlement does not arise until such time as the registered purchaser has reported the tax payable on a return required under Part IX, in accordance with paragraph 169(4)(b) of the ETA. In most cases where the property is used all or substantially all in commercial activities, the input tax credit entitlement will completely offset the tax payable under subsection 228(4).

In summary, the course of action as described in option (c) of the submitted question is in accordance with the current legislative provisions.

Q.5 - Bare Trusts

There continues to be practical problems surrounding the purchase of real property through a bare trustee corporation. In particular, it is often difficult for the supplier to confirm who the beneficial owners of the corporation are and whether or not they are registered. Will Revenue Canada consider providing a certificate to the bare trustee corporation certifying that the beneficial owners of the corporation are registered under Part IX. This certificate would then be provided by the bare trustee corporation to the supplier on closing with the intention that the supplier could rely on said certificate in not collecting the tax.

CRA Response

It would be burdensome for the Department to develop a certification program. The owners of a particular bare trust or their registration status could change anytime prior to the making of the supply. With the number of real property transactions involving bare trusts being substantial it would be difficult for the Department to provide the service. In addition, all suppliers of real property may wish to request a certification program to protect themselves.

One possible option is for the CBA to support the prescribing of a supplier of real property to a bare trust under s. 221 so that it could collect the tax even if the beneficial owners are registered. Of course this would negate the current scheme’s intended purpose of not requiring the payment of GST/HST up front on.

Q.6 - New Housing Rebate

Revenue Canada has publicly confirmed that an individual is eligible for the new housing rebate where a residential property has been damaged and substantial renovations, as this expression is defined in Part IX of the Act, are made by a contractor who issues invoices to the individual. Consequently, a portion of the GST paid by the individual to the contractor with respect to the substantial renovations, may be refunded to the individual by virtue of subsection 256(2) of the Act. In this kind of situation, the insurer of the individual will generally pay as an indemnity for damages the consideration payable to the contractor plus the GST payable with respect to that consideration. However, an insurer in this situation will generally not indemnify the individual for the portion of the GST that may be refunded as a new housing rebate.

It would appear that this general rule does not apply so easily in the case of residential property that is held in divided co-ownership in the province of Quebec.

In 1994, the new Civil Code of Quebec ("C.C.Q.") was enacted to replace the Civil Code of Lower Canada. Section 1039 of the C.C.Q. enacted a legal person referred to as the "syndicate", made up of the co-owners of a property. The role of the syndicate is generally to administer the divided co-ownership. More precisely, upon the publication of the divided declaration which establishes the co-ownership, the co-owners collectively constitute a legal person, whose objects are to preserve the immovable, to maintain and manage the common portions, to protect the rights appurtenant to the immovable or the co-ownership and to take all measures of common interest.

Consequently, it appears, at first glance, that subsection 256(2) of the Act would not apply in the case of substantial renovations made to an immovable property held in divided co-ownership, as the syndicate is the legal person authorized under the C.C.Q. to reconstruct the immovable property and who concludes contracts with the contractor for such renovations. By virtue Section 1073 of the C.C.Q., the syndicate has an insurable interest and is insured by an insurance company in that respect.

We are of the view that the tax treatment for the divided co-owners constitutes an unfair tax application of the new housing rebate to divided co-owners in Quebec. In the case of an individual who is the sole owner of a residential unit, the individual will be eligible to receive the new housing rebate where his residential property is damaged and substantial renovations are necessary to reconstruct the immovable property. However, Revenue Canada seems to be of the view that the divided co-owners of a residential immovable property, in the Province of Quebec, will not be eligible for the new housing rebate as they are obliged, by virtue of the C.C.Q., to be represented by the syndicate, a legal person under the C.C.Q.

We are of the opinion that the syndicate constitutes an agent or an intermediary of the divided co-owners of the residential complex as these co-owners have the power to supervise, control and dictate the conduct of the syndicate. The syndicate was created by the new C.C.Q. in order to facilitate the administration of the immovable property held in divided co-ownership. We consider that this institution depends on the direct representation of the co-owners by the syndicate. It should also be noted that any action taken by the syndicate may affect the patrimony of any of the divided co-owners.

The syndicate created by the C.C.Q. is composed of two decision-making bodies: the Board of Directors and the co-owners. The Board of Directors is made up of co-owners. However, in contrast with a legal person created by corporate law any decision made by the syndicate is directly dictated by the co-owners themselves. In addition, the syndicate is liable for any damage caused to the co-owners or third persons.

Therefore, we submit that the syndicate does necessarily act as an agent or an intermediary when it takes action. As such, we consider that any contract made between the syndicate and the contractor for substantial renovations pursuant to a damage caused to the residential complex held in divided co-ownership, should be interpreted as having been made between this contractor and the co-owners themselves as the principals. Therefore, subsection 256(2) of the Act should apply to render these co-owners eligible for the new housing rebate.

We would appreciate it if you could confirm that in the case of substantial renovations made to a residential complex held in divided co-ownership in the Province of Quebec, any co-owners will be eligible for the new housing rebate even though the co-owners are legally represented by the syndicate created by the new C.C.Q..

CRA Response

Although it was agreed at the February 25th meeting that a formal interpretation would not be forthcoming as this question related to a specific fact scenario, we do wish to provide the following general comments.

For purposes of the GST/HST new housing rebate pursuant to section 256 of the ETA, a construction or substantial renovation of a single unit residential complex or residential condominium unit must be carried out by a “particular individual”. In the case at hand, a syndicate, created pursuant to section 1039 of the Civil Code of Québec (CCQ), has undertaken the substantial renovation of a residential complex.

The syndicate is a separate legal person pursuant to section 1039 of CCQ and would not satisfy the meaning of “particular individual” as contemplated not only in section 256 of the ETA, but in sections 254, 254.1 and 255 as well. The term “individual” is defined in subsection 123(1) of the ETA to mean a natural person.

It has been suggested that the syndicate might be acting as an agent for the individual co owners. In accordance with our draft Policy Paper P 182, whether a person is considered for GST/HST purposes to be an agent is based on fact and principles of law. It is generally our view that a person such as a syndicate does not act as agent for the divided co owners of the residential complex, but rather on its own accord. As such, the conditions found under section 256 of the ETA are not satisfied and the GST/HST new housing rebate will not be available. We would ascribe the same view to a strata or condominium corporation that operates on behalf of an owner or lessee of a residential condominium unit.

Q.7 - Employee Housing

Facts

Company A is registered for GST and is engaged in mineral exploration in Canada. Company A owns a number of houses in different parts of the country which it rents out to employees. The employees pay rent at fair market value and these are long-term residential rents. Company A does not collect GST on the rents. Company A is required to make available this type of housing in order to attract employees to remote locations in Canada. Company A has not made an election under subsection 191(7) of the Act.

Question

Can Company A claim input tax credits relating to the housing since it relates to its mineral exploration business?

CRA Response

If the housing at issue is a “residential complex” as defined for GST/HST purposes and provided an election under subsection 191(7) of the ETA has not been made and Company A has not acted as if an election applied, it is our view that any tax paid with respect to the acquisition and ongoing operation of the housing is an input into Company A’s mineral exploration business. However, part of the business involves the making of long term supplies of residential accommodation to employees. As these supplies are exempt pursuant to section 6 of Part I of Schedule V to the ETA, that part of the business is not a “commercial activity” as that term is defined in subsection 123(1) of the ETA. Accordingly, Company A will not be entitled to input tax credits with respect to that tax paid on the acquisition and ongoing operation of the housing.

It should be noted that where the conditions under subsection 191(7) of the ETA are satisfied such that a “remote work site” exists and an election is made, the input tax credit eligibility will differ. The effect of subsection 191(7) is that the supply of the residential complex or the residential unit in the complex as a place of residence or lodging is deemed not be a supply and any occupation of the complex or unit as a place of residence or lodging is deemed not to be occupation as a place of residence or lodging. Revisiting the case of Company A, provided an election under subsection 191(7) of the ETA has been made, the effect of the applicable deeming provisions is that no part of the business involves the making of long term supplies of residential accommodation to employees and therefore all supplies made in the business are supplies made in a commercial activity. Therefore, any tax paid with respect to the acquisition and ongoing operation of the housing is an input into the mineral exploration, which is a commercial activity, and full input tax credits would be available.

Q.8 - Sale of Real Property by a Non-Registrant#

Where a non-registrant sells taxable real property, it is required to collect GST/HST from the purchaser where that purchaser is not registered for GST/HST purposes. Would the supplier be required to register to collect GST/HST if this is the only transaction entered into?

Take for example a non-registrant doctor who owns a building that has been used exclusively for the doctor's medical practice. Upon acquiring the building, the doctor paid tax and did not claim input tax credits. The doctor sells the building to a non-registrant and that sale is a taxable supply. The doctor is required to collect GST from the recipient of the supply since the recipient is not registered. Does the doctor have to register for GST in order to remit the tax or can the doctor remit the tax without registering and filing a return? If registration is not required, on what form should the remittance be made?

B.PARTNERSHIPS

CRA Response

As you have stated in the scenario presented, the doctor who is a non registrant would be required to collect GST from the recipient of the supply who is not registered.

Based on the information provided, the doctor is not required to register for the GST/HST. In the case of a doctor whose business involves only the making of exempt supplies, the doctor would not be required to register. As well, paragraph 240(1)(b) provides an exception to the registration requirement in a case where “the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business.”

Where a non registrant is required to collect and remit the tax on a supply of real property to a non registrant, the tax should be remitted by filing a GST/HST Remittance form, GST426 (Non Personalized), The business number portion of the form should be left blank and a note should indicate that the amount remitted is for a real property transaction.

Q.9 - Supplies to Partnership (Subsection 272.1(3))

This topic was raised at our meeting last year. Revenue Canada indicated that the policy in this area is under development. Does Revenue Canada intend to issue guidelines on the application of the new partnership rules under section 272.1? The meaning of the words "otherwise than in the course of the partnership's activities" in subsection 272.1(3) is ambiguous. The following examples can be used to illustrate the application of this provision.

Example No. 1

Assume that a partnership registered for GST purposes is engaged exclusively in a logging business. One of the partners is an accountant who is registered for GST purposes. The accountant provides accounting services to the partnership. If the partner charges a monthly fee for the accounting services, is the partner required to collect GST from the partnership? Where the partner provides the services, but does not charge a fee for the accounting services, is GST payable on the fair market value of the services?

Example No. 2

Assume that a partnership which not registered for GST, invests exclusively in mutual funds. Assume one of the corporate partners is registered for GST and is an investment manager. This business operates separately from the partnership. The investment manager also agrees to provide similar services to the partnership (i.e., investment advice). The corporate partner earns revenue from the partnership for its services based on a percentage of the asset value. If the services are performed by the corporate partner as a member of the partnership, then subsection 272.1(3) does not appear to apply since the services are being provided in the course of the partnership's activities rather than "otherwise than in the course of the partnership's activities". Is the corporate partner required to collect GST on the investment advice provided to the partnership?

CRA Response

Discussion regarding partnerships was deferred. The Department intends to develop an administrative policy with respect to the phrase “otherwise than in the course of the partnership’s activities” in subsection 272.1(3).

As part of the policy development process, the Department would appreciate receiving fact situations from the CBA regarding this issue.

Q.10 - Successor Partnerships (Subsection 272.1(7))

We are not clear on the application of subsection 272.1(7). When a partnership ("Partnership I") ceases to exist, and is reconstituted as a new partnership ("Partnership II") in circumstances where subsection 272.1(7) may apply, how will Revenue Canada deal with the various components to the transaction? An overview of the relevant facts can be illustrated as follows:

	          Beginning                		                     End
────────────────────────────────────    ────────────────────────────────────
 ┌───────┐  ┌────────┐ ┌────────┐        ┌────────┐ ┌────────┐ ┌────────┐
 │Partner│  │Partner │ │Partner │        │        │ │Partner │ │Partner │
 │   A   │  │   B    │ │   C    │        │   A    │ │   B    │ │   C    │
 └───┬───┘  └───┬────┘ └───┬────┘        └────────┘ └────┬───┘ └───┬────┘
     │          │          │                             │         │
     │          │          │                             │         │
     │          │          │                             │         │
     │          │          │                             │         │
     └────┬─────┴───────┬──┘                       ┌─────┴─────────┤
          │Partnership I│                          │Partnership II │
          │   Assets    │                          │    Assets     │
          └─────────────┘                          └───────────────┘

We assume that any wind-up of Partnership I would be effected on a tax-deferred basis for the purposes of the Income Tax Act. A careful review of the typical transaction would suggest that there is a supply of an interest (i.e., undivided interest) in the Partnership I assets to Partners A, B, and C, followed by a further supply of an interest in said assets by Partners B and C to Partnership II.

We raise the following queries for your consideration.

(a) What supplies occur when Partnership I ceases to exist?

(b) What supplies occur when Partnership II is subsequently created?

(d) What are the implications on the transactions described above when the prerequisites of subsection 272.1(7) are satisfied such that the subsection applies? That is, does subsection 272.1(7) operate to "cancel" the effect of those supplies identified in (a) and (b), above? If so, is that cancellation only effective for, and in respect of, the "continuing" partners or does it apply to, and for the benefit of, all former partners (i.e., does it apply for the benefit of Partner A)?

(e) Assuming that all of the registrants are monthly filers, what happens if three (3) months after the partnership restructuring an employee of Partnership II inadvertently applies for a new GST number for Partnership II because some corporate lawyer had included that task on the "housekeeping" checklist that was to be completed in due course?

CRA Response

Discussion regarding partnerships was deferred. The Department intends to develop an administrative policy with respect to partnerships.

Q.11 - Continuation of Predecessor Partnership (Subsection 272.1(7))

Does the reference in paragraph 272.1(7)(b) to "more than half of the members" mean that you count partners and ignore the size of their partnership interests (e.g., is this test satisfied where two "old" partners each hold a 10% partnership interest and one "new" partner holds an 80% interest?)

C.NON-RESIDENT ISSUES

CRA Response

Discussion regarding partnerships was deferred. The Department intends to develop an administrative policy with respect to partnerships.

Q.12 - Non-Resident Regis#tration (Section 240)

Paragraph 240(1)(c) of the Act provides that every person engaged in a commercial activity is required to be registered except where "the person is a non-resident person who does not carry on business in Canada". In other words, a non-resident person who carries on business in Canada is required to be registered.

Paragraph 240(3)(a) in turn provides that any person "engaged in a commercial activity in Canada" is permitted to become registered.

In the result, it appears that a distinction exists between the obligation of a non-resident person "carrying on business in Canada at common law" to become registered and the opportunity for a non-resident person engaged in a commercial activity in Canada, albeit one that falls below the threshold of carrying on business at common law, to register voluntarily. Could the Department confirm that persons engaged in a commercial activity (i.e., supplying property by way of sale or lease but not necessarily carrying on business in Canada at common law) will be afforded an opportunity to register voluntarily pursuant to paragraph 240(3)(a).

CRA Response

Subsection 240(1) of the Act requires that every person who makes a taxable supply in the course of a commercial activity carried on in Canada is required to be registered for GST/HST purposes. Subsection 123(1) of the Act contains a definition of “commercial activity”.

There are three exclusions from the requirement to register, as follows:

the person is a smaller supplier;
the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business; or
the person is a non resident person who does not carry on any business in Canada.

(NOTE: Policy Statement P 051 outlines the various factors to be considered in determining if a non resident person is carrying on business in Canada.)

However, paragraph 240(3)(a) of the Act permits certain persons engaged in a commercial activity in Canada to apply to become registered for GST/HST purposes. This provision applies equally to residents and non residents who are not otherwise required to register.

For example, a non resident person may be engaged in a commercial activity in Canada but may not be required to register because the person qualifies as a smaller supplier. Paragraph 249(3)(a) of the Act permits that non resident to voluntarily apply to be registered.

It should also be mentioned that subsection 123(1) of the Act provides a definition of “commercial activity” for GST/HST purposes. This definition states, in part, that commercial activity means:

a business carried on by the person;
an adventure or concern of the person in the nature of trade; or
the making of a supply (other than an exempt supply) by the person of real property of the person.

Therefore, to the extent that a non resident person is engaged in an adventure or concern in the nature of trade in Canada or making a supply (other than an exempt supply) of its real property, but that activity cannot be included within the term “business”, paragraph 240(3)(a) of the Act would permit that person to apply to be registered.

The provisions of paragraph 240(3)(b) of the Act only apply to non residents. This provision permits non residents, who are not required to register because they do not carry on any business in Canada (refer to the exclusion in paragraph 240(1)(c) of the Act), to apply to be registered, as follows:

the non resident regularly solicits orders for the supply by the person of tangible personal property for export to, or delivery in, Canada, or
the non resident has entered into an agreement for the supply by the person of services to be performed in Canada, or intangible personal property to be used in Canada or that relates to real property situated in Canada, tangible personal property ordinarily situated in Canada, or services to be performed in Canada.

In the situation described in the question, i.e., a non resident is supplying property way of sale or lease but is not necessarily carrying on business in Canada, it would appear that the provisions of 240(3)(b) would be more applicable in allowing the non resident to apply to be registered. The non resident is regularly soliciting orders for the supply of tangible personal property for export to, or delivery in, Canada.

Q.13 - Services Provided to Non-Residents (Section 7, Part V, Schedule VI)

Facts

There are Canadian companies which provide the service of receiving and processing orders from customers of mail order vendors. In the course of their work, the Canadian companies will open correspondence from the vendor's customer, examine the purchaser's order form, separate cheques from the order form, record the order information and ultimately send or transmit the data, and possibly the actual cheques, to the mail order vendor.

Question

In cases where the Canadian company does this work for a non-resident person who ships goods to customers from outside of Canada after orders are processed, would such a service be zero-rated pursuant to section 7 of Part V of Schedule VI to the Act? It makes sense to regard the services as being "in respect of" goods located outside of Canada or "in respect of" the processing of a transaction; however, there is some concern that the service might be precluded from zero-rating pursuant to paragraph (e) of section 7 on the basis that the service is "in respect of" tangible personal property (i.e., the physical envelope, cheque, etc.) situated in Canada at the time the service is performed.

CRA Response

Policy Statement P 169 outlines the Department’s administrative position concerning whether a service is “in respect of” tangible personal property that is situated in Canada at the time it is performed. There must be more than a mere indirect or incidental nexus or connection between a service and the underlying tangible personal property before the supply of the service will be excluded from zero rating by virtue of Schedule VI, Part V, paragraph 7(e) to the Excise Tax Act (Act). The relationship between the service and the tangible personal property must be more direct than indirect in order for the service and the property to be considered by the Department to be “in respect of” each other.

Schedule VI, Part VII, subsection 1(1) to the Act states that a freight transportation service means a particular service of transporting tangible personal property. Paragraph (a) of the definition states that, for greater certainty, a freight transportation service includes a service of delivering mail. Therefore, mail is considered to be tangible personal property.

In the scenario outlined in your letter, the service involves opening mail (i.e., tangible personal property) addressed to the non resident mail order company, presumably utilizing a Canadian address, and examining the purchase orders, sorting the cheques, etc. The tangible personal property is situated in Canada when the service is performed. Therefore, as there is a direct relationship between the service and the tangible personal property, the supply is excluded from zero rating under the provisions of Schedule VI, Part V, section 7 to the Act.

Q.14 - Cross Border Charges to Canadian Branches - Imported Taxable Supplies

A foreign-based corporation with offices in one or more locations in Canada (for example, an insurance company) centralizes its financial accounting functions at its foreign head office location. The financial accounting system will charge through to the Canadian locations, on a cost-recovery basis, the costs attributable to corporate activities referable to the Canadian branch's activities. Some of the costs will be traceable to specific functions such as data-processing, including administrative processing of the insurance policies placed by Canadian offices, and reinsurance. If the Company is a financial institution, the reinsurance and data-processing of financial instruments - insurance policies or loan accounts - would in the proper circumstances constitute "financial services".

Other charge-backs include costs related to employees who work in the Canadian branches - salaries and travel expenses that are claimed on expense reports that are processed through the head office.

Other charges may be more generically "administrative" - financial reporting, strategic executive management, marketing and so forth.

In many cases the head office accounting system will print out a detailed allocation of each cost account, broken down and applied to each Canadian location. No "invoice" is ever issued. The cost allocations may, however, not be descriptive of "services" performed for the branch: for example, the cost allocation may be for "EDP" or "H/O Salaries", when in fact the computer facilities performed data-processing of the branch's insurance policies, and the salaries are for head office EDP personnel.

Policy Statement P-126 states that cost recoveries will be treated as taxable administrative services for purposes of Division IV tax, in the case of a branch of an insurance company where "the head office of the insurance company is pursuing a policy of almost total control and decision making for the branch". The sample ruling sets out a case where there are minimal operations in the branch, and virtually all functions are carried out by the head office.

What is Revenue Canada's view in the situation where the branch does carry out significant functions, and the head office does not assert "almost total control and decision making"? Under what circumstances is the branch entitled to segregate cost entries that are identifiable as for financial services, and exclude them from the base on which to calculate Division IV tax? What documentary support does Revenue Canada require?

D.FINANCIAL SERVICES

CRA Response

The question of whether the provision of goods and/or services constitute one supply or separate supplies of property and/or services is a question of fact and the Department would make a determination following the guidelines outlined in Policy Statement P 077 entitled “Single and Multiple Supplies”.

Where a foreign based head office of an insurance company allocates a portion of its office expenses to its Canadian branch on a cost recovery basis, the Canadian Branch will generally have no control over the method of the allocation and the amount of the costs allocated to it. In this case, it is the Department’s view that the elements of the cost allocation are interrelated and interdependent; they are inputs to a single supply of the head office management service rather than multiple supplies of services whose tax status would be considered separately. Section 220 of the Excise Tax Act (the “Act”) applies and the rendering of the management service by the head office to the Canadian branch is deemed to be a supply of the service made between separate persons at fair market value. This amount would be subject to tax under Division IV of the Act.

Q.15 - ATM Machines

When persons use an ATM machine at certain locations, they are charged the Interac fee, plus a separate surcharge for use of the machine. The surcharge is paid to the owner of the ATM. Persons are alerted to the surcharge before completing the transaction. The Interac fee is an exempt financial service. Is the surcharge subject to GST?

CRA Response

Subsection 123(1) of the Excise Tax Act defines “financial service”, in part, as

(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise,

(b) the operation or maintenance of a savings, chequing, deposit, loan, charge or other account, and

(l) the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (i).

When a person uses an ATM machine, the owner of the ATM machine is providing a person with access to his/her bank account or charge account and allows the person to withdraw cash from their account. The surcharge paid to the owner of the ATM is an exempt financial service pursuant to paragraphs 123(1) (a), (b), and (l) of the definition of “financial service” and is not subject to GST.

Q.16 - Collection Fees - Accounts Receivable

Facts

Some vendors with outstanding accounts receivable (which may be in respect of a taxable or exempt supply) pay a fee (either a flat fee or a percentage) to third parties for collecting the receivables. The account is not assigned to the collecting third party. Where an account is collected and a fee is paid to the third party, the vendor in turn imposes a flat collection charge on its customer, which is separate and apart from any accruing interest charges on the overdue amount.

Question

Is the collection charge by the vendor to its customer subject to GST? In particular, is the collection charge an exempt fee for "the operation or maintenance of ... [an] other account" within the meaning of paragraph (b) of the definition of financial service? What is the impact, if any, of the Federal Court of Appeal's decision in On Guard Self Storage, [1996] G.S.T.C. 88?

CRA Response

We have not been presented with enough information to provide a definitive answer to the given scenario. In this case it would be necessary to examine the agreement between the vendor and the customer to determine the tax status of the charge. The flat collection charge imposed by the vendor on its customer, which is separate and apart from any accruing interest charges on the overdue amount, could be considered to be an exempt financial service within the meaning of paragraph (b) of the definition of “financial service” since it may be a fee for “the operation or maintenance of ... [an] other account”, or it could be an exempt financial service within the meaning of paragraph (d) as “...repayment of a financial instrument”.

The Federal Court of Appeal’s decision in On Guard Self Storage, [1996] G.S.T.C.88 indicated that the respondents had not provided sufficient evidence to support their position that the extra amounts paid by the overdue renters were used to collect accounts receivable and were consequently exempt as financial services. Further to the Leasing Agreement, the Court determined that the agreement used created a twotiered pricing arrangement on the basis of the time of payment and not a credit arrangement for the overdue payment of the monthly rental charge. In order to determine whether or not the On Guard Self Storage case would have an impact on the above scenario would require an examination of the agreement.

Q.17 - Mutual Fund Redemption Fees

Investors who acquire units in a mutual fund typically have the option of either (i) purchasing the units with the payment of an up-front commission to their broker or (ii) purchasing units on a Deferred Sales Charge basis. If the latter option is chosen, the investor pays no commission at the time the units are purchased but is required to pay a redemption fee if the units are redeemed within a certain period of time. A dealer who sells units in a Mutual fund on a Deferred Sales Charge basis is nevertheless entitled to receive a commission. To deal with the issue of funding such commissions, the Manager of the Mutual fund often will agree to pay the dealer commissions in exchange for the right to receive the redemption fees payable by the unitholders on redemption. The redemption fees are deducted from the unitholder's proceeds of redemption and forwarded to the Manager. It is clear from the documentation distributed to investors such as, the prospectus, that the redemption fees payable in respect of Deferred Sales Charge units are payable to the Manager.

Some uncertainty has arisen as to whether in some circumstances, redemption fees received by the Manager are subject to GST. Apparently, some Revenue Canada auditors have suggested that the manner in which the payment of redemption fees is described in the documentation can affect whether the Manager has to collect and remit GST on redemption fees paid to it out of the proceeds of redemption.

Can Revenue Canada confirm that redemption fees received in exchange for agreeing to fund sales commissions are not subject to GST received by the Manager?

E. SALE OF ASSETS

CRA Response

In arriving at a determination of the tax status of any transaction each fact situation will be considered on its own merits. Evidence found in the books and records and any agreements between the parties involved will determine the tax status of transactions between them.

Where the facts confirm that the customer is paying “redemption fees” as a fee for redeeming their units in the fund, directly to the fund manager or directly to the dealer, those redemption fees will be treated as consideration for financial services pursuant to paragraph 123(1)(l) of the Excise Tax Act and will be exempt of tax. If as stated, it is clear from the documentation distributed to investors such as through the prospectus that the redemption fees payable are payable to the manager, then we are unclear as to how the agreement is structured between the dealer and the manager as these fees are not any amount to which the dealer would otherwise be entitled. In order to determine the tax status of any payments between the fund manager and the dealer, documentation would have to be reviewed. Where it was clear upon reviewing the documentation that the monies paid by the fund manager to the dealer was for the “arranging for” a financial service, such fees would not attract the GST.

Q.18 - Section 167 Election - Real Property

A vendor of a business sells all of the assets of his business. The sale is structured as follows: all tangible and intangible personal property is sold to Opco; all real property is sold to Holdco, which immediately leases the property to Opco. All of these arrangements are set out in a single Agreement of Purchase and Sale and all three entities are parties to the Agreement. Opco is the wholly owned subsidiary of Holdco. As a result of these arrangements, Opco acquires ownership of all assets of the business except the real property, and Opco acquires possession and use of the real property assets of the vendor. Please confirm whether the Department agrees that the conditions for making the section 167 election set out in subsection 167(1) of the Act appear to have been satisfied in these circumstances. In other words, to the extent a "recipient" acquires ownership, possession or use of 100% of the assets of a vendor, within a single agreement, albeit indirectly, please confirm the section 167 election is available as between the assets sold by vendor directly to Opco. Would the sale of real property to Holdco also be governed by section 167?

CRA Response

It is a question of fact whether in a particular situation the supply of assets used in a business meet the conditions in subsection 167 (1) of the ETA (i.e. the supplier is supplying a business or part of a business, and under the agreement the recipient is acquiring all or substantially all of the property necessary to carry on the business). The assets of a business generally include real property, equipment, inventory and intangibles. If the nature of the vendor’s business is such that the assets other than real property are sufficient to meet the tests in the section, a section 167 election may be available to the vendor and Opco where the real property is excluded. Real property alone would generally not be considered the supply of a business and therefore vendor and Holdco would not normally be eligible for the election. (Note that the vendor may not be required to collect GST/HST on the real property pursuant to subsection 221 (2) of the ETA.)

Section 167 of the ETA provides for an election between the supplier and the recipient. Where an agreement includes more than one supplier and/or recipient, the supply between each supplier and recipient e.g. the vendor and Opco, would be reviewed separately for the purposes of section 167 of the ETA. The Department intends to develop policy on this issue.

Q.19 - Section 167 Election - Filing Requirements

The section 167 election is available where the supplier and recipient are non-registrants. Section 167 does not appear to require the filing of the election in this case since it must be filed with the recipient's GST return and the recipient is not required to file a return since it is not registered. Does the election need to be filed in this case?

CRA Response

A non registrant supplier and a non registrant recipient may make a joint election under subsections 167(1) and (1.1) of the ETA in respect of a supply of a business or part of a business if all the conditions of the provision are met.

In a situation where the recipient is not a registrant there is no requirement to file the election with its return, but the recipient should notify its local tax services office that it is making an election under subsection 167(1) and (1.1) of the ETA.

Q.20 - Goodwill

Section 167.1 provides a general relief from GST on the sale of goodwill when all or part of a business is sold. The preconditions set out in section 167.1 are generally the same as those in subsection 167(1). Section 167.1 appears to have an extremely narrow application. For example, if the section 167 election is available and the parties enter into the election, goodwill will not be taxable and section 167.1 is not relevant. Where the section 167 election cannot be used (i.e., the tests cannot be satisfied), goodwill appears to be taxable. If the section 167 election is available, but the parties elect not to use it, then in this case the goodwill will not be taxable because of section 167.1.

Section 167.1 would not be needed if paragraph 141.1(1)(b) would apply to deem the property to be sold otherwise than in the course of commercial activities. Can the supply of goodwill be exempt under paragraph 141.1(1)(b); in other words, is goodwill "acquired", "imported", "manufactured" or "produced" so that it can potentially fall within the scope of this paragraph?

CRA Response

It is a question of fact whether goodwill was “acquired” or “imported”. Although the ETA does not define the terms “manufactured” or “produced”, it is the Department’s position that goodwill does not appear to be “manufactured” or “produced” for the purposes of subsection 141.1(1) of the ETA. As a result, if the goodwill was not “acquired” or “imported”, paragraph 141.1(1)(b) would not apply to the goodwill where a business is supplied and an amount in respect of goodwill is included in the supply.

Q.21 - Non-Competition Payments

What is the Department's position on the GST treatment of non-competition payments which are often made within the context of a sale of a business? For example, in the case where a business is sold and the section 167 election is used, GST would not be payable on the transaction. If in this case, one of the principal shareholders of the vendor receives a payment from the purchaser and in return agrees not to compete in the same business for a number of years, is that payment subject to GST? Assume the shareholder is not registered and the payment is greater than $30,000.

CRA Response

Section 167 of the ETA applies where, generally, a supplier makes a supply of a business or part to a recipient. Where the conditions of subsection 167(1) are met, no GST/HST is payable in respect of the supply by the vendor to the purchaser of any property or service made under the agreement, with certain exceptions. In the example, it is a principal shareholder that is agreeing not to compete, not the vendor corporation. Therefore, subsection 167(1.1) will not apply to exclude the supply from GST/HST.

GST/HST is applicable to the consideration for a taxable supply made in Canada. Thus, the shareholder may be required to collect, and the purchaser may be required to pay, GST/HST calculated on the value of the consideration for the supply.

Q.22 - Section 156 Election

Can Canco #1 and Canco #2 enter into the section 156 election under the following corporate structure:

                                   ┌─────────┐
                                   │         │
                                   │  U.S.   │
                              ┌────┴─────────┴────┐
                              │                   │
                          100%│                   │100%
                              │                   │
                         ┌────┴────┐         ┌────┴────┐
                         │         │         │         │
                         │ U.S. #1 │         │ U.S. #2 │
                         └────┬────┘         └────┬────┘
                              │                   │
                          100%│                   │100%
                              │                   │
                         ┌────┴────┐         ┌────┴────┐
                         │         │         │         │
                         │Canco #1 │         │Canco #2 │
                         └─────────┘         └─────────┘

Assume that:

(i)Canco #1 and Canco #2 are corporations resident in Canada and are registered for GST;

(ii)U.S., U.S. #1 and U.S. #2 are non-residents of Canada and are not registered for GST.

CRA Response

In order for Canco #1 and Canco #2 to make an election under section 156 of the ETA, one of the conditions which must be met is that Canco #1 and Canco #2 must be closely related pursuant to section 128 of the ETA.

Subsection 128(1) of the ETA requires that the companies examined when evaluating the corporate relationship be registrants and residents of Canada. In this case, the parent companies are not registrants or residents of Canada and therefore subsection 128(1) does not apply.

Subsection 128(2) of the ETA provides that where, under subsection (1), two corporations resident in Canada are closely related to the same corporation, or would be closely related to the same corporation if all of the corporations were resident in Canada, the two corporations are considered closely related. However, the requirement that the companies in the group be registered remains, and since the parent companies in this case are not registered, Canco #1 and Canco #2 are not closely related.

Since Canco #1 and Canco #2 are not closely related, they do not meet a condition of section 156 of the ETA and therefore cannot file the election under that section.

Q.23 - Reorganizations (Section 156 Election)

During a reorganization, it is common to want to use a section 156 election to allow the transfer of assets on a GST-free basis to avoid issues of the interpretation of section 167 or to avoid the cash flow or administrative burden of accounting for the tax when there is no economic change in the assets (i.e., a related party re-structuring). Revenue Canada previously suggested there was a need for pre-organization business activity of Newco to be able to use the section 156 election, which effectively negates its purposes in this context. Presumably, the parties could enter into an agreement covering post reorganization services (if appropriate and if Newco is to continue) and then the section 156 election would be available for the post reorganization services; but what is the policy and technical basis for this interpretation (i.e., the need for pre-organization business activity) and is this the Department's position?

CRA Response

Discussion regarding this issue was deferred. The Department intends to develop policy on this issue.

Q.24 - Corporate Partnerships (Section 156 Election)

Is the Department currently administering the new subsections 156(1.1) to (1.3) so that the election would be available to corporate partners and partnerships? What is the Department's view on the current wording of section 156 and its application to corporate partnerships; for example supplies by partners to the partnership if all the partners are corporations and meet the closely related test as they are really making supplies to each other (common law is clear that a partnership is not a separate legal entity and the assets are owned jointly by the partners).

F.DAMAGE PAYMENTS

CRA Response

Proposed amendments to section 156 were announced in the Department of Finance press release dated October 8, 1998. The announcement indicated that these amendments are proposed to come into force on that date. However, until such time as the amendments receive Royal Assent, they are only proposed. Consequently, it is possible that the amendments may not be enacted as announced. Persons wishing to take advantage of these proposed amendments may do so, however, the proposed amendment may not be applicable to their operations if it is not enacted as announced.

With respect to the current wording of section 156 and its application to corporate partners, notwithstanding the common law treatment of partnerships, the Excise Tax Act defines “person” to include partnerships. Given this definition, and the provisions of subsection 272.1(1), the corporate partners cannot be said to be making supplies to each other. Consequently, the election available pursuant to subsection 156(2) is not applicable.

Q.25 - Section 182 - #Tax Disclosure Issues

In the case where a damage payment falls under section 182, the GST is deemed to be included in the payment. Since section 182 deems the tax to be included in the payment, is it still necessary to disclose in the actual settlement agreement that the damage payment includes GST? What documentation is necessary to claim input tax credits for GST so deemed to be paid?

CRA Response

Where the GST is deemed to be included in a payment that falls under section 182 of the ETA, the disclosure requirements of section 223 of the ETA must still be met by the person receiving the payment.

In order for the person making the payment to claim an input tax credit the documentary requirements in subsection 169 should normally be met. Paragraph 169(4)(a) specifies that a registrant wishing to claim an input tax credit must obtain sufficient evidence in such form, containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed. This information is prescribed in the Input Tax Credit Information Regulations.

However, where it is not possible for a registrant to obtain the required evidence prior to the filing of a return in which such an ITC is claimed, the Minister may pursuant to subsection 169(5), exempt the specific registrant, or a specified class of registrants, or registrants generally, from any of the requirements of subsection 169(4), subject to specified terms and conditions of the exemption provided the Minister is satisfied that there are or will be sufficient records available to establish the particulars of the supply.

Q.26 - Forfeitures (Section 182)

In the case of amounts forfeited as a result of the breach, modification or termination of an agreement for the making of a taxable supply, paragraph 182(1)(a) deems the person forfeiting the amount to have paid an amount (calculated by formula) as consideration for the supply. Where subsection 182(2) applies, the registrant is deemed not to have collected the tax payable under subsection (1). Consequently, the person forfeiting an amount is required to pay tax in addition to the forfeited amount. Where the agreement breached, modified or terminated is for the supply of real property by way of sale, is there any obligation on the supplier to collect the tax payable by virtue of paragraph 182(1)(a) or is the recipient required to self assess?

G.AGENCY PROVISIONS

CRA Response

Where an agreement for the taxable supply of real property by way of sale is breached, modified or terminated, and paragraph 182(1)(a) of the Excise Tax Act (ETA) deems the person forfeiting the amount to have paid an amount (calculated by formula) as consideration for the supply, the supplier is not required to collect the tax if subsection 182(2) of the ETA applies and the exception in subsection 221(2) of the ETA also applies. Instead, the recipient of the supply would be required to remit the tax pursuant to subsection 228(4) of the ETA.

Q.27 - Accounting for ITCs (Section 177)

Subsection 177(1) as amended in 1996 changed the rules applicable to principal-agent relationships and supplies to third parties. Previously, unless the principal's name and number was disclosed, the agent was deemed to have made the supply and accounted for the tax. The general rule now is that, if an agent makes a supply on behalf of a principal who is registered or otherwise required to collect tax, the principal is required to collect and account for the tax, pay the applicable tax on the agent's services and may claim the appropriate ITCs for the activity (i.e., for GST incurred to make the supply and on the agent's services if a commercial activity). These rules apply irrespective of whether the relationship is disclosed. Subsequently, new subsection 177(1.1) was enacted to allow principals and agents in certain circumstances to effectively elect into the previous treatment (the pre-April 23, 1996 rules) regarding the accounting for the tax.

(i) In the case where the election is made, can the agent also account for the ITCs relating to the activity (e.g., GST on purchases where the agent buys goods or services to make the supply on behalf of the principal) in its return, provided there is an agreement between the parties to ensure the principal will not take the ITCs? Note the documentation will be in the agent's name and the principal will not have ITC documentation in the absence of an agreement to the contrary (i.e., the principal could receive the ITC documentation from the agent and take the ITC - but this is quite complex administratively, particularly where there is more than one principal).

(ii) Given there was no prescribed form until recently, can the parties rely on prior written notification to Revenue Canada of the intent to operate under the election?

CRA Response

Summary : An agent cannot claim an ITC that belongs to a principal.

It is a question of fact and law whether a taxable supply that is eligible for an ITC is incurred as an agent of another party. If the expense is incurred as agent, it is the principal that would be able to claim the ITC not the agent. In this regard, the Input Tax Credit Regulations contemplate instances where a supplier may not be aware of an agency relationship. Supporting documentation (invoice) that is in the name of the principal’s agent remains acceptable for an ITC claimed by the principal.

If however, the agreement provides for the agent to acquire supplies for their own account, irrespective of the fact that they act in a broader capacity as an agent, then the agent would be able to claim an ITC.

The entitlement to an ITC will be determined through the facts. Generally, the entitlement rests with the person who acquires the supply and that has the legal obligation to pay the consideration for that supply. To allow an agent to claim an ITC for tax paid on behalf of the principal would be administratively very difficult from a verification perspective since legally the principal would still remain eligible.

The issue of allowing an election for an agent to claim the principal’s ITCs ( just like they can now elect to collect and remit the tax) will be suggested to Finance.

ANSWER #27(ii)

Yes, the parties can rely on such prior written notification as long as they have also clearly documented their decision to account for tax as provided under the election in the records of both the parties. In fact, there is no need for the parties to have notified Revenue Canada of their decision. What is essential is that the decision to make the election be clearly documented. In response to enquiries regarding the election, Revenue Canada prepared a document in which it outlined the information that should be contained in the records of both parties making such an election. The completed prescribed election form should be cross referenced to this previously recorded information.

Q.28 - Auctioneer and Principal Election (Subsection 177(1.3))

When will the Property Supplied by Auction (GST/HST) Regulations be available? What property will be prescribed?

H.INPUT TAX CREDIT ISSUES

CRA Response

The Draft Property Supplied by Auction (GST/HST) Regulations for purposes of subsection 177(1.3) of the Excise Tax Act were released on March 21, 1997 and deemed to have come in force on April 1, 1997. Revenue Canada continues to administer subsection 177(1.3) based on these draft regulations. Prescribed property includes,

1) motor vehicles designed for highway use,

2) cut flowers, live plants and plant bulbs,

3) horses, and

4) certain heavy machinery and equipment for use in construction, forestry and manufacturing.

Q.29 - ITC Claims - Recipient Assessed

Can Revenue Canada confirm that a recipient who is assessed directly for tax payable under paragraph 296(1)(b) can claim ITCs for such tax notwithstanding that it may not meet the documentary requirements under subsection 169(4) because the supplier, although a registrant, was not registered?

CRA Response

In the situation where the recipient is assessed tax payable, the Minister pursuant to subsection 169(5) will normally, waive the documentary requirements and permit the recipient to claim any available ITC.

Q.30 - ITC Documentary Requirements

Facts

Assume that Company A has made a taxable supply of equipment to Company B in the course of a commercial activity. Company B would like to pay the GST to Company A and claim an input tax credit. However, Company A is not registered for GST purposes and refuses to register. There is no mechanism in the legislation for Company B to self-assess the GST (i.e., remit the tax to Revenue Canada directly) and claim an input tax credit. The Input Tax Credit Information Regulations require that the recipient obtain the GST registration number assigned to the supplier. Company B is therefore reluctant to pay the GST without receiving Company A's GST number.

Question 1

Can Company B remit the GST directly to Revenue Canada and claim an input tax credit?

Question 2

If Company B does not pay the GST to Revenue Canada or to Company A, could Company B be assessed GST, interest and penalties under the circumstances since there is essentially no supplier that could remit the tax payable by Company B? (sections 165, 221 and subsection 278(2)).

CRA Response

The “place of payment” provision under ss. 278(2) was intended to ensure the integrity of the tax system by requiring taxpayers to pay GST/HST to the registrant supplier. However, under unique situations where a purchaser has not been able to confirm the registration status of the supplier the Department would usually accept the payment. This situation should be discussed with the local Tax Services Office. In the example cited, Company B could remit the tax payable directly to Revenue Canada using form GST426. This form contains a field for “Other Payments”.

In situations where the tax payment is accepted by the Department, the normal documentation requirements to claim the ITC would be waived under ss. 169(5).

Background

The Input Tax Credit Information Regulations state that the registration number assigned to the supplier is prescribed information for sales of $30 or more. That being said, subsection 169(5) of the ETA does provides the Minister with authority to exempt a registrant from the documentary requirements found under subsection 169(4) of the ETA. The example presented would be a case where ministerial discretion would be appropriate, since Company A does not have a registration number.

Provided Company B satisfied the other requirements with respect to input tax credits, it would be entitled to an input tax credit with respect to the taxable supply of equipment.

Yes, Company B could be assessed tax, interest and penalties under the circumstances described above, however, the Department will not generally intervene to collect the tax payable directly from a recipient except in circumstances of potential revenue loss. Where circumstances warrant, the Department may exercise its authority under paragraph 296(1)(b) of the ETA and assess Company B directly.

Within the scheme of the ETA, there are parallel procedures for assessment leading to collection. The net tax status of Company A, as determined under sections 225 and 228 of the ETA, does not extinguish the Crown’s entitlement to pursue all available collection remedies. Subsection 278(2) of the ETA does not relieve Company B of its liability to pay tax where that amount was not collected by Company A.

Q.31 - Making Taxable Supplies - ITC Availability

Do audit services provided by a firm of chartered accountants to a public company that is engaged exclusively in commercial activity qualify under paragraph 141.01(2)(a) as being acquired by the company for the purpose of making taxable supplies?

CRA Response

Discussion regarding this issue was deferred. This issue is related to a case under audit and is currently being reviewed.

Q.32 - Due Diligence Defence

Facts

The Federal Court of Appeal in the Consolidated Canadian Contractors Inc. case has now confirmed that the automatic 6% penalty imposed under subsection 280(1) of the Act is subject to the due diligence defence.

Question

How will this principle be administered in the audit, assessment and appeal process? For example, will auditors proposing to assess registrants ask for submissions regarding possible due diligence prior to assessment, like the process that normally takes place regarding director's liability situations? This would likely be more efficacious than having independent submissions made to a Revenue Canada internal committee (in the way that requests for wash transaction relief are sometimes handled) or leaving the matter to be dealt with at first instance by Appeals?

CRA Response

The Department is developing both policy and operational procedures to give effect to the Federal Court’s decision. In the meantime, any requests to put forward a due diligence defence will be dealt with on a case by case basis.

Q.33 - GST and Retail Sales Taxes (Section 154)

Facts

In J.A. Porter Holdings (Lucknow) Ltd., [1996] G.S.T.C. 25, the Tax Court held that retail sales tax paid by a manufacturing contractor in respect of a supply and install contract was not subject to GST pursuant to section 154 of the Act. This same principle was applied by the Tax Court in Consolidated Canadian Contractors Inc., [1997] G.S.T.C. 34 and we note that Revenue Canada did not raise this issue in its appeal to the Federal Court of Appeal (only the due diligence point was appealed).

Question

It is understood that Revenue Canada does not agree with this principle (e.g., see TIB B-53). These cases are causing uncertainty for supply and install and manufacturing contractors. How will the law in this area be clarified, particularly since the legal reasoning in the cases suggests that the position advanced by Revenue Canada would result in the retail sales taxes being applied unconstitutionally (and the provinces agree with Revenue Canada)?

CRA Response

With respect to the clarification of the law in this area, it is our understanding that the department will be presenting its position to the Courts in the near future. When a formal decision has been rendered the department will reassess its position to determine if any changes to interpretative policy are required. In the meantime, the department’s position remains the same as enunciated in Technical Information Bulletin B 053.

Q.34 - Voluntary Disclosures - Zero-Sum Circumstances et al.

(a) What is the status of Revenue Canada's deliberations on voluntary disclosures. In "wash transaction" circumstances, will all penalties and interest be waived?

(b) In voluntary disclosure circumstances, will Revenue Canada agree to waive all penalties and interest where GST is collected and reported (or ITCs are claimed) by the wrong entity within a closely related group, all of the members of which are engaged exclusively in commercial activities?

CRA Response

(a) In “wash transactions” circumstances, will all penalties and interest be waived?

Further to a recent change in the departmental policy relating to voluntary disclosures involving wash transactions, the 4% penalty will no longer be applied to transactions identified as wash transactions, as long as they are reported in the course of a voluntary disclosure. In such circumstances, only the taxes that should have been collected originally by the supplier for that transaction will be sought by the Department.

If wash transactions are not reported in the course of a voluntary disclosure, as it would be for a wash transaction uncovered during an audit, the tax that should have been collected initially, plus a penalty of 4% of that amount, would be assessed to the person.

(b) Will Revenue Canada agree to waive all penalties and interest where GST is collected and reported (or ITCs are claimed) by the wrong entity within a closely related group, all the members of which are engaged exclusively in commercial activities?

The Department is re examining its WASH transaction policy. We are considering broadening the application of the policy to include additional circumstances where, subject to certain conditions, the Minister will consider waiving or canceling the portion of the penalty and interest payable at the time of assessment, that is in excess of 4% of the tax not properly collected by the supplier.

If the application of the policy is broadened, it may include a situation similar to the one below:

Corporation A claims ITC’s to which it was not entitled but to which related Corporation B was entitled to claim but did not. A post audit of Corporation A disallows the ITC’s resulting in an assessment of $139,408 in net tax, $31,000 in penalty and $27,000 in interest. The related corporation has since claimed the ITC’s that were disallowed to Corporation A. Corporation A has a satisfactory history of voluntary compliance, has not been previously assessed for the same mistake and has taken steps to ensure that in the future it does not claim ITC’s to which it is not entitled.

The previous situation is clearly a case where an error in applying the tax does not result in any net revenue loss to the government. In a case such as this one, the policy may be broadened to include it as a circumstance where the Minister may consider waiving or canceling a portion of the penalty and interest in respect of a “wash transaction”.

Once the “Wash Transaction” policy has been re examined, the Department will issue a revised policy paper in the near future.

The Department and the large corporations subject to continual audit usually agree to an audit protocol listing the audit issues to be audited for a given period. The issues to be audited are usually not the same from audit to audit, which means that a different protocol is agreed to every time. It also means that while the corporation may be audited continuously, all of its transactions are not.

It is very difficult, without a specific factual situation, to accurately define the rules that would apply to all voluntary disclosures made by a corporation subject to continual audit. A voluntary disclosure from such a corporation could be acceptable if it relates to transactions or issues that are totally unrelated to the ones listed in the protocol being used in an ongoing audit.

It could also include those issues that were listed in previous protocols, as long as that audit is closed at the time of the disclosure and the transactions being disclosed are not part of the current audit protocol.

Q.35 - Voluntary Disclosure-Example

A company has calculated its GST liability manually. When the manual system is converted, a systems error is uncovered with respect to GST remittances. The company is prepared to make a voluntary disclosure to Revenue Canada. About the same time as the error is uncovered, the company receives a letter that a GST audit will be conducted. Will penalties be waived if a voluntary disclosure is made?

CRA Response

As a rule, if unfiled returns or missing information is filed subsequent to receiving a request to file or a notice of an upcoming audit from the Department, the filing of the returns or information is no longer considered to have been initiated voluntarily by the taxpayer/registrant and as such would not be considered a voluntary disclosure.

Q.36 - Joint Venture Elections - Retroactivity (Section 273)

A joint venture is formed for the purpose of constructing a warehouse and one co-venturer is appointed as operator. The co-venturers have entered into a written joint venture agreement. During the construction phase, the operator claims input tax credits on behalf of the joint venture. After the warehouse is constructed, the operator collects GST and claims input tax credits on behalf of the joint venture. To date a joint venture election form has not been completed. Please confirm that in accordance with Policy P-187, a joint venture election can be executed with an earlier effective date. Will the activities related to the operation of the warehouse qualify as a prescribed activity under paragraph 3(1)(b) of the Joint Venture (GST) Regulations? We understand that additional activities (at least 16) are being administered by Revenue Canada as though they were prescribed under the Regulations. When will these activities be added to the Regulations?

CRA Response

36Q1. Please confirm that in accordance with Policy P 187, a joint venture election can be executed with an earlier effective date.

36A1. Assuming that the joint venture is eligible to make the election, P 187, Prescribed Form for Joint Venture Elections, does indicate that participants in a joint venture may complete the form for a joint venture election after the fact. As indicated in that policy, the effective date for the election can be no earlier than the date on which the joint venture agreement was evidenced in writing and the day the joint venture was formed. The effective date for an election may be earlier than the date on the formal joint venture agreement. However, in order for an election to be valid, certain information requirements must be met and these are set out in P 187.

36Q2. Will the activities related to the operation of the warehouse qualify as a prescribed activity under paragraph 3(1)(b) of the Joint Venture (GST) Regulations?

36A2. Provided that the other eligibility conditions for making a joint venture election are met, for example, the operation of the warehouse is not excluded from being a prescribed activity under subsection 3(2) of the regulations, it would appear that the operation of the warehouse would qualify as a prescribed activity under paragraph 3(1)(b) of the Joint Venture (GST) Regulations. Additional information would be required to make a definite determination.

36Q3. We understand that additional activities (at least 16) are being administered by Revenue Canada as though they were prescribed under the Regulations. When will these activities be added to the Regulations?

36A3. Revenue Canada will not rule that joint ventures that do not conform to those activities permitted in the existing legislation and regulations are eligible for the election. Amending the regulations is the responsibility of the Department of Finance.

Q.37 - HST Place of Supply - Services

Can Revenue Canada confirm that the reference in Part V of Schedule IX to where services are performed is interpreted to mean where the services are physically performed?

Example

A recipient in Halifax contracts with a supplier in Toronto to provide marketing and promotional services which consist of the printing of a brochure to be mailed either by the supplier or by another party to the recipient's customers in Halifax. The brochures are printed and mailed in Toronto. Are such services considered under Section 2 of Part V of Schedule IX to be performed in Ontario?

CRA Response

The place of supply rules in paragraphs 142(1)(g) and 142(21)(g) if the Exise Tax Act (Act) are based on where the service is, or is to be, performed. The Department has always taken the position that these provisions refer to physical performance of the service. There is no change in this position when dealing with the provisions of Schedule IX, Part V, section 2 to the Act.

In the example above, the assumption is made that the contract is for a single supply of marketing and promotional services (i.e., advertising services) and not for the supply of advertising services and brochures. The assumption is also being made that the brochures are being acquired by the supplier in Toronto as an input that person making the supply of the advertising service to the receipient in Halifax.

As the service is (physically) performed in Ontario, the supply is deemed to be made in a non participating province pursuant to section 144.4 of the Act and Schedule IX, Part V, section 2 to the Act.

Q.38 - Takeover Fees (Subsection 186(2))

Assume that AcquisitionCo intends to acquire shares of TargetCo. Prior to effecting the takeover, AcquisitionCo is required to raise financing by, for example, issuing convertible debentures to finance the acquisition. Such debentures are to be void in the event the takeover does not proceed. AcquisitionCo argues that expenses relating to the financing costs are eligible for an input tax credit pursuant to subsection 186(2) since AcquisitionCo is a corporation resident in Canada which acquires services "relating to the acquisition or proposed acquisition by it of all or substantially all of the issued and outstanding shares of the capital stock of another corporation".

Revenue Canada's position appears to be that subsection 186(2) does not apply since the ordering provisions in subsection 141.01(2) requires that expenses relating to obtaining financing of TargetCo do not constitute expenses relating to the acquisition of the shares of TargetCo (i.e., the expenses were not incurred for the purpose of making taxable supplies).

When applying the wording of subsection 186(2) on its plain meaning and in conjunction with the policy intent behind sections 185 and 186, it is reasonable to conclude that financing expenses related to the share purchase are expenses related to the share purchase. This position is consistent with definitions of the word "related" and with Supreme Court of Canada's decision in Slattery v. Doane Raymond Ltd., [1993] 3 S.C.R. 430 in which it was held that the term must be applied with the "widest possible scope".

Can the Department comment on the rationale in denying input tax credits on such financing costs. In addition, if the Department believes there is no technical basis to permit input tax credits in connection with such financing costs, has the Department raised the apparent policy implications with the Department of Finance.

CRA Response

Discussion regarding this issue was deferred. This issue is related to a case under audit and is currently being reviewed.

Q.39 - Multi-Tiered Holding Companies (Section 186)

Subsection 186(3) allows for the read-up into a holding company ("Parent"), of assets used all or substantially all in commercial activities by a subsidiary company ("Opco"). When the "all or substantially all" test of use by Opco is met, the shares or indebtedness that Parent owns of Opco are deemed to be property that Parent uses in commercial activity. As a result, a holding company ("Grandparent") that owns shares or indebtedness of Parent, and which is related to Parent, may be entitled under subsection 186(1) to claim input tax credits with respect to its expenditures related to the shares or indebtedness, provided Parent itself meets the "all or substantially all" test, be it through a combination of holdings "read up" by subsection 186(3) and/or assets it holds directly.

Subsection 186(3) was amended in 1993, retroactive to 1990, so that it applied for all of section 186, not just subsections 186(1) and (2). Revenue Canada's GST Memorandum 700-5-6 states that amended subsection 186(3) - "accommodates the situation where the commercial activities are carried out in a subsidiary corporation that is in a multi-tiered corporate structure."

Question

Is there any limit to the number of layers of holding companies through which subsection 186(3) can apply (always assuming that the "all or substantially all" test is met)? For example, could Great-Great-Great Grandparent rely on subsection 186(3) with respect to its subsidiary?

Are there any factors that Revenue Canada has identified (other than the "all or substantially all" test and the related company test) that would alter the result?

CRA Response

Provided the conditions in subsection 186 (3) of the ETA are met, the section will apply. For example if the shares of an Opco, that is engaged exclusively in commercial activity, are all owned by Parentco which has no other assets, and Parentco’s shares are all owned by Grandparentco, subsection 186 (3) would also apply to Parentco’s shares. Subsection 186 (3) does not limit the number of times the section could be applied in a given fact situation. We are not aware of any “factors” beyond meeting the conditions in the section that would affect the use of the section.

Q.40 - Municipal Designations (Section 22, Part VI, Schedule V)#

Kindly update us on designations for persons acting as service providers to municipalities in connection with water and sewer treatment systems (there was a suggestion that the scope of the designation would be widened to allow service providers to be designated). Section 22, Part VI, Schedule V allows the Minister to designate persons who operate the system. The question is whether this extends to a service provider of all services necessary to operate the system where the municipality is still named as the operator (but has contracted out the operational services).

CRA Response

Section 22 of Part VI of Schedule V to the ETA allows the Minister to designate as a municipality an organization that operates a water distribution, sewerage or drainage system. Once designated to be a municipality, the supply of the service of installing, repairing, maintaining or interrupting the operation of the system is exempt. In those situations where the municipality contracts out the operation of the system, these services will be exempt where the contractor has applied/has been granted municipal designation.

The Department has consulted Finance on those situations involving the sourcing out of system operations to organizations who operate partial systems such as a water treatment plant. Designation will only be granted to those organizations that operate entire systems.

Q.41 - Confirmation of GST Registration

Why does a vendor have to confirm the GST registration and numbers of the recipient for purposes of subsection 221(2) or a section 167 election? This is apparently the Revenue Canada administrative policy, but where is the statutory basis? If so, what is Revenue Canada doing to publish numbers or, if there are privacy concerns, to set up a system whereby a vendor can write, fax or e-mail and receive prompt written confirmation of a recipient's GST status and registration number.

CRA Response

Part I

There is no obligation for a registrant to verify the GST/HST registration number (BN number) of a supplier, however, where the registration number is not correct, the related ITC claim may not be valid. There is the risk, when not verifying the accuracy of a registration number that if an ITC that has been claimed is invalid, there would be applicable interest and penalty imposed.

Any Revenue Canada Tax Services office can be contacted to confirm whether a number is valid. Although we cannot provide another person's registration number, filing frequency, compliance status, or other personal information unless the registrant has authorized us to do so, we can confirm registration status. To facilitate this process, please supply us with the registrant's full legal name and address.

Part II

Under the Excise Tax Act, confidential information is information of any nature that Revenue Canada obtains, or information that the Department prepares from this information, while administering the GST/HST, that directly or indirectly reveals the identity of a person. The BN, and all information relating to it, are confidential.

Since a Business Number can be found on the invoices of all registered persons any caller inquiring whether a number is valid is also required to give the name of the person to which the number pertains to. In this manner, the confirmation by Revenue Canada that a registration number is valid does not breach the statutory requirement of confidentiality.

Publishing a list of all registered persons and their corresponding registration numbers, would appear to breach the confidentiality requirement.

Q.42 - Assessment of Supplier

Revenue Canada has recently stated that as a general rule it does not consider the supply of chattels to be incidental to the supply of real property. If the recipient self assesses for tax on the value of both the real property and the chattels, will Revenue Canada still assess the supplier for failure to collect tax on the chattels? If so, how can this position be reconciled with the Carlson & Associates Advertising Ltd., [1998] G.S.T.C. 25 decision?

CRA Response

It is recognized that on occasion, an error in applying the tax occurs that does not result in any net revenue loss to the Department. However, the Department may assess the supplier in the interest of promoting voluntary compliance, especially where such errors are recurrent. The Department is interested in maintaining the integrity of the multi stage, value added tax system. As such, it is important for suppliers to fulfil their obligations under the ETA.

Departmental auditors may use their discretion and not assess the supplier for the tax payable on the chattels where the Department has received the tax from the recipient who self assessed on the chattels rather than paying the tax to the supplier. It is not the Department’s policy to collect the tax twice on the same supply.

Q.43 - Single vs. Multiple Supply - "Brew on Premises"

We understand that Revenue Canada is proposing a policy on the GST treatment of "Brew on Premises".

Assume that a "Brew on Premises" operator sells ingredients, equipment (such as corks and bottles), and provides services to a person who wishes to brew their own beer or wine. The operator charges a single price for the ingredients, equipment, and services. Please confirm whether this is considered the single supply of a zero-rated beverage or a multiple supply involving zero-rated and taxable supplies.

CRA Response

A Revenue Canada notice providing GST information regarding “Brew on Premises” operators was recently made available.

Based on the “Single and Multiple Supplies” policy (P 077R), this specific transaction would likely constitute a single supply of a service that would be taxable at 7%. All the elements (i.e. the ingredients, equipment and services) are necessary to the customer in the context of the transaction and are sold together for a single price.

However, a strong indicator of the existence of multiple supplies would be where there is clear evidence that the wine or beer making ingredients are sold to the customer prior to the beginning of the wine or beer making process and they are held by the operator under a contract of bailment in a clearly segregated and identified manner until they are redelivered to the customer. In this case, the supply of the ingredients would be zero rated. Of course, amounts charged by the operator as bailee or otherwise for the services and the equipment would be subject to GST at 7% including the cost of any additional ingredients that are not held by the operator under the contract of bailment.

Q.44 - Offset of Input Tax Credit Refunds

(copy of letter from Tax Committee of Board of Trade to Minister of National Revenue)

It has come to our attention that inappropriate collections and set-off activities may be developing within Revenue Canada. In particular, we have become aware of instances where certain Revenue Canada offices have withheld GST input tax credit refunds where the affected taxpayer is either undergoing an audit or has been reassessed under income tax or customs legislation.

As you will appreciate, such a practice goes against such legislative provisions as section 225.1 of the Income Tax Act.

The practice of withholding GST input tax credit refunds is even more egregious in the instance of a taxpayer who is merely under audit, as there is no authority for collection procedures in those circumstances.

As you know, GST input tax credit refunds are required to be paid "with all due dispatch" pursuant to subsection 229(1) of the Act. However, judicial interpretation of the phrase "with all due dispatch" is uncertain and has provided little assistance to taxpayers who have chosen to bring an action to require a GST refund to be paid.

In any event, it should not be incumbent on the aggrieved taxpayer to undergo the cost of a legal proceeding in order to require Revenue Canada to cease and desist with a potentially illegal collection process.

The fact that a GST input tax credit refund bears interest is not a satisfactory answer to the problem. GST input tax credit refunds have a significant impact on the cash flow of any business. It is often a matter of survival of the business to ensure the GST input tax credit refunds are processed in a timely fashion.

It is beyond our capacity to determine how pervasive the practice of withholding GST input tax credit refunds while taxpayers are under audit or in the appeals process has become. However, the fact that the practice renders meaningless the entire protection from collection mechanism set out in the Income Tax Act is a matter of grave concern, no matter how infrequent the practice.

We urge you to ensure that all Revenue Canada offices are made aware that it is improper to withhold GST input tax credit refunds in these circumstances. Further, we urge you to issue a formal written policy to clarify the proper standards and procedures that are to be followed by Revenue Canada in its collections and set-off practices.

CRA Response

Subsection 229(1) of the ETA provides that where a net tax refund “payable” to a person is claimed in a return filed under Division V of the ETA, the Minister shall pay the refund to the person with all due dispatch after the return is filed.

However, before paying out a net tax refund, the Department must be satisfied that the amount is actually “payable”. Often this will be done concurrently with an audit that may be in progress. In such situations it seems reasonable for the purposes of efficient administration to verify a registrant’s obligations before paying a refund. Although there are no GST/HST cases on the issue, in the review of the income tax cases it seems that the Tax Court has supported the Department in delaying payment of refunds for a reasonable period of time.

Q.45 - Intangible Personal Property

In Club Med Sales Inc. v. The Queen, [1997] G.S.T.C. 28, the Tax Court found that the sale in Canada of Club "memberships" did not represent a supply of intangible personal property to which subparagraph 142(1)(c)(i) applied but, instead, was part and parcel of the provision of overseas vacation packages. In Sample Ruling No. 2 in P-200 (draft) dated January 1, 1996, there is an implication that the Department may consider the sale in Canada of vacation credits for use off-shore to represent the supply in Canada of intangible personal property. What is the current status of the Department's view on this subject?

CRA Response

The issue in Club Med Sales Inc. v. The Queen was whether the supply of a Club Med membership was an integral part of a single supply of zero rated vacation package and whether the fee paid for the membership was a partial payment for a single supply, or whether there were multiple supplies of a vacation package and a membership.

Policy Statement P 200 does not address the issue of single/multiple supplies. That issue is addressed in Policy Statement P 077R which was revised on April 1, 1998.

Sample Ruling No. 2 of Policy Statement P 200 deals with the single supply by way of sale of vacation credits by a non resident company to residents of Canada. All sales occur in Canada. The purchasers of the vacation credits are entitled to reserve vacation time at any of the non resident's 20 resort properties in Canada or the non resident's 40 resort properties in the United States.

The sample ruling states that if the supply of the vacation credits is considered to be a supply of intangible personal property, the provisions of subparagraphs 142(1)(c)(ii) and 142(2)(c)(ii) of the Excise Tax Act (Act) do not produce a definitive result because the supply appears to be deemed to be made both in and outside Canada. In addition, if the supply of the vacation credits is considered to be a supply of real property, the provisions of subparagraphs 142(1)(d) and 142(2)(d) of the Act do not appear to provide a definitive result because the supply appears to be deemed to be made both in and outside Canada. Because a definitive result is not produced in either instance, it is necessary to look to the facts of the case. The facts in the sample ruling indicated that the supply was made in Canada.

The Department's position as outlined in Sample Ruling No.2 has not changed. However, if the supply of the vacation credits only related to real property situated outside Canada, the supply would be deemed to be made outside Canada under either the provisions of 142(2)(c)(ii)of the Act, if intangible personal property, or 142(2)(d) of the Act, if real property.

Policy Statement P 200 is currently in the process of being revised to take into account the amendment to subparagraph 142(1)(c)(i) of the Act, which came into effect April 24, 1996, as well as to reflect the introduction of the Harmonized Sales Tax.

Q.46 - Revenue Canada Appeals

There are a number of informal decisions of the Tax Court of Canada which Revenue Canada has not appealed but which the Audit and Appeals Branches are not following (for example, R. Mullen Construction).

(a) If Revenue Canada does not intend to follow a Tax Court decision, why does it not appeal?

(b) Would Revenue Canada consider issuing formal policy statements advising taxpayers and their advisers of its position not to follow particular decisions of the Tax Court and the underlying rationale.

CRA Response

(a) If Revenue Canada does not intend to follow a Tax Court decision, why does it not appeal?

Any decision arising from the Informal Procedure is not precedent setting and is not further appealed except under very limited circumstances. The Headquarters of the Appeals Branch consider the following factors when identifying cases that may have such impact.

(a) Quantum

Does the individual case have a large revenue impact, either because of the amount directly involved or because of its potential on a significant number of taxpayers?

(b) Tax policy or administration

Are important principles of law or fundamentals of tax administration at stake( e.g. GAAR, tax avoidance, tax relations with other countries. Could the issues raised have a major impact on the procedures of the Department of National Revenue or the duties and powers of the Minister? Could the outcome of the cases result in changes to published policies or legislative amendments.

Rather than issuing a new or revised policy statement in response to every Tax Court decision, a policy statement is issued to advise taxpayers and their representatives only at the time the Department is adopting the decision of the Tax Court and changing an existing policy. As well, where no current policy exists, where it is appropriate, a policy is developed to reflect the change in the Department’s interpretation.

Q.47 - Tax Paid in Error (Section 261)

There a number of issues which have arisen in connection with the availability of rebates under section 261 for tax paid in error by both suppliers and recipients.

(a) As regards claims by recipients, can Revenue Canada clarify when it considers an amount to have been paid as or on account of tax. In particular, what is the rationale behind Revenue Canada's position that if, contrary to the belief of the parties, there was no supply of property or services, that no amount paid by one party to the other can be considered to be on account of tax notwithstanding that amounts were identified as such in the agreements and/or documentation as between the parties?

(b) If a supplier is entitled to a section 261 rebate because it remitted an amount collected from another person which, because there was no supply, is not considered tax by Revenue Canada, why can't the purchaser recover such amount directly from Revenue Canada under section 261?

(c) Subsection 261(1) provides that the Minister shall pay a rebate to a person of tax, or net tax that was not payable or remittable by the person.

In R. Mullen Construction Ltd., [1997] G.S.T.C. 106, the Tax Court held that a builder could claim a rebate of net tax incorrectly collected and remitted by the builder on an exempt sale of a previously occupied house.

In light of the Mullen decision, what is Revenue Canada's position as to when a registrant can claim the section 261 rebate with respect to net tax?

CRA Response

Whether a person has paid an amount as or on account of tax is a question of fact to be determined on a case by case basis. Generally, where the recipient of a supply pays an amount identified as GST to the registrant supplier, in good faith, in respect of a zero rated supply, an exempt supply or in excess of the proper tax payable, the Department will usually consider the amount to have been paid as or on account of tax.

A person who claims the rebate for an amount paid to another person must be able to credibly show that it had reason to believe that it was paying the amount on account of an obligation to pay GST/HST. Given that this obligation is triggered by the making of a taxable supply, the person’s rebate becomes questionable in a case where no supply has been made. In such situations, often it becomes a matter for the parties to resolve amongst themselves.

A supplier is not entitled to a section 261 rebate if it collected an amount as tax in error from someone to whom it purported to make a taxable supply since the amount is required to be included in the supplier’s net tax.

If a supplier properly collects the right amount of tax from the recipient of a supply but by mistake remits too much as net tax, a rebate could be claimed by the supplier to correct the mistake.

(c) Subsection 261(1) provides that the Minister shall pay a rebate to a person of tax, or net tax that was not payable or remitable by the person.

In light of the Mullen decision, what is Revenue Canada's position as to when a registrant can claim the section 261 rebate with respect to net tax?

Response

Mullen Construction Ltd. had a unique set of facts and was decided upon by the Tax Court under the informal process.

Revenue Canada’s position is that a registrant can claim a section 261 rebate any time an amount was over remitted as net tax. However, any amounts charged or collected from the purchaser as GST/HST must be included in the registrants net tax calculation (sections 222 and 225). If an amount is charged incorrectly as GST/HST, the supplier should follow the provisions under section 232 to refund or credit to the purchaser the excess amount collected and as well, adjust its net tax.

Q.48 - Reconveyances (Section 232)

Subsection 232(2) is generally considered to be the provision which allows retailers to refund the purchase price (including GST thereon) of tangible personal property returned to the retailer. The subsection requires the vendor to reduce the consideration charged to the purchaser. Technically, however, in such circumstances the consideration charged by the retailer is not reduced. Rather, the goods are reconveyed by the purchaser to the retailer for consideration.

(a) Will Revenue Canada be recommending amendments to section 232 to clarify its operation?

(b) Will Revenue Canada also apply subsection 232(2) where real property is reconveyed to a vendor (for example, where the reconveyance is mandatory or optional to the vendor if the purchaser has failed to build on said property)? What if the real property is reconveyed (i.e., returned) to the vendor at the purchaser's option?

[Note: If section 232 does not apply, double-taxation will result where, for example, the original vendor is a developer and the purchaser is a non-registered individual. The original supply would be taxable and the reconveyance generally would be exempt pursuant to section 9 of Part I of Schedule V to the Act. This would leave the purchaser out of pocket for the GST paid by him to the vendor. As a practical matter, we see no reason why Revenue Canada should not permit subsection 232(2) to apply to real property in these circumstances in the same way they apply it to reconveyances of tangible personal property.]

CRA Response

It is our understanding that the term "reconveyance” refers to the return of title and ownership in real estate to a party that previously held title to it. Where the reconveyance of the real property occurs as a result of a rescission of the contract related to the taxable sale of the real property subsection 232(2) will generally apply to permit a registered supplier to refund the GST to the recipient of the supply.

Where subsection 232(2) does not apply to the reconveyance of real property, this may result in cascading tax in some situations.

The Department of Finance has been made aware of this result, and is currently reviewing section 232. We understand that they would welcome submissions on this matter.

Q.49 - Status of Jurisprudence

Please provide a summary of important GST, FST and excise tax cases pending before the Tax Court and federal and provincial courts.

CRA Response

This report will be send later on this month.

You are here

25 February 1999 CBA Roundtable

A.REAL PROPERTY

Q.1 - Self-Assessment/Input Tax Credits

CRA Response

Supply of Residential Complex

Q.2 - Condominium Fees (Section 13, Part I, Schedule V)

CRA Response

Usufruct

Co ownership

Q.3 - Real Estate Valuation - Dispute Settlement

CRA Response

Q.4 - Rebate For Tax Paid in Error

Facts

Question

CRA Response

Q.5 - Bare Trusts

CRA Response

Q.6 - New Housing Rebate

CRA Response

Q.7 - Employee Housing

Facts

Question

CRA Response

Q.8 - Sale of Real Property by a Non-Registrant#

B.PARTNERSHIPS

CRA Response

Q.9 - Supplies to Partnership (Subsection 272.1(3))

CRA Response

Q.10 - Successor Partnerships (Subsection 272.1(7))

CRA Response

Q.11 - Continuation of Predecessor Partnership (Subsection 272.1(7))

C.NON-RESIDENT ISSUES

CRA Response

Q.12 - Non-Resident Regis#tration (Section 240)

CRA Response

Q.13 - Services Provided to Non-Residents (Section 7, Part V, Schedule VI)

Facts

Question

CRA Response

Q.14 - Cross Border Charges to Canadian Branches - Imported Taxable Supplies

D.FINANCIAL SERVICES

CRA Response

Q.15 - ATM Machines

CRA Response

Q.16 - Collection Fees - Accounts Receivable

Facts

Question

CRA Response

Q.17 - Mutual Fund Redemption Fees

E. SALE OF ASSETS

CRA Response

Q.18 - Section 167 Election - Real Property

CRA Response

Q.19 - Section 167 Election - Filing Requirements

CRA Response

Q.20 - Goodwill

CRA Response

Q.21 - Non-Competition Payments

CRA Response

Q.22 - Section 156 Election

CRA Response

Q.23 - Reorganizations (Section 156 Election)

CRA Response

Q.24 - Corporate Partnerships (Section 156 Election)

F.DAMAGE PAYMENTS

CRA Response

Q.25 - Section 182 - #Tax Disclosure Issues

CRA Response

Q.26 - Forfeitures (Section 182)

G.AGENCY PROVISIONS

CRA Response

Q.27 - Accounting for ITCs (Section 177)

CRA Response

Q.28 - Auctioneer and Principal Election (Subsection 177(1.3))

H.INPUT TAX CREDIT ISSUES

CRA Response

Q.29 - ITC Claims - Recipient Assessed

CRA Response

Q.30 - ITC Documentary Requirements