23 March 2017 CBA Commodity Taxes Roundtable
This provides summaries of questions posed to CRA at the March 23, 2017 CBA Commodity Tax Roundtable together with the full text of the CRA responses. (The full text of the questions is available with a membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources.) We have provided our own titles to our summaries of the questions.
CRA disclaimer: The following comments provided during our meeting represent our general views with respect to the subject matter and do not replace the law found in the Excise Tax Act (the ETA) and regulations. These general comments are provided for your reference and do not bind the CRA with respect to a particular situation. Since our comments may not completely address a particular situation, you may wish to refer to the ETA and regulations, or contact any CRA GST/HST rulings centre for additional information. All references to legislative provsions in our comments are reference to the ETA unless otherwise noted.
Q.1 - S. 149(1) “principal business” corporation
The lack of clear guidance on the meaning of “principal business” in s. 149(1) is problematic for leasing companies and third-party administrators (e.g., insurance companies) whose mix of exempt and taxable activities may go above and below 50% from year to year. How is “principal business” determined, and is the determination made on an annual basis?
Holding companies may be seen to be financial institutions described in s. 149(1)(a)(viii), e.g., a holding company holding debt and shares of a subsidiary with respective values of $200,000 and $100,000 and generating respective incomes of $5,000 and $1,000. Would its principal business be considered to be lending, and would income tax concepts be applied so that it would be considered to be earning income from property rather than having a business.
a) GST/HST Memorandum 17.6, Definition of “Listed Financial Institution”, provides guidance on the meaning of the term “principal business” in section 149 of the ETA. The term "business" is defined in subsection 123(1) of the ETA to include a profession, calling, trade, manufacture, or undertaking of any kind whatever, with or without regard to an expectation of profit. Any activity engaged in on a regular or continuous basis involving the supply of property by way of lease, licence, or similar arrangement is also included in the definition. An office or employment is excluded from the definition of business.
The ETA does not define "principal”, and therefore its common or ordinary meaning applies for GST/HST purposes. As a result, in the context of section 149 of the ETA, the CRA considers that "principal" refers to the person's chief or main business activity.
To determine what the principal business of a person is for the purposes of section 149 of the ETA, a review of the facts and circumstances of each case is required. This review may include an examination of each kind of business activity carried out by the person.
Some factors to be considered, but not limited to, include:
- the total number of supplies made and the total value of the revenue received from supplies made in each business activity;
- the relative value of the assets employed in each business activity;
- the commercial practices of the person, including the time, attention, and efforts expended by the employees, managers, or corporate officers in each business activity; and
- the terms of any partnership agreement if the person is a partnership, or corporate objects in the case of a corporation.
Although revenues received by a person are considered in determining the principal business of the person, they are not the only factor that will be considered and is not itself a determinant factor.
It is important to note that if at any time in a particular taxation year a person is described in one of the categories listed in subparagraphs 149(1)(a)(i) through (xi) of the ETA (such as a person whose principal business is the lending of money or the purchasing of debt securities or a combination thereof), the person is a financial institution throughout a particular taxation year of the person. However, generally a person does not need to determine its “principal business” on an annual basis; this determination should be made any time there is a significant change to the person’s business activities.
b) In the example included in your question, the information provided on the holding company is limited to the value of the shares and the debt held by the holding company and the related income received. As discussed in the response to the first part of this question, to determine what the principal business of a person is for the purposes of section 149 of the ETA, a review of the facts and circumstances of each case is required and there are a number of factors to be considered in making this determination which may include the treatment of the income for income tax purposes. However, no one factor in and of itself is determinative. In the example provided, there is insufficient information to determine whether the principal business of the holding company is the lending of money or the purchasing of debt securities or a combination thereof and therefore a listed financial institution under subparagraph 149(1)(a)(viii).
Q.2 - VDP centralization
What measures are being taken in the context of the voluntary disclosure program to address having access to an experienced agent, receiving confirmation as to when and how the file will be processed before the taxpayer’s name is disclosed and having questions answered by Central Management?
As part of the CRA Service Renewal strategy, effective February 20, 2017, VDP operations have been centralized in the Shawinigan-Sud National Verification and Collections Centre. This centralization will enable the CRA to continue to develop and leverage a single centre of expertise to respond to enquiries and process VDP submissions related to the GST/HST.
Q.3 - Supporting documentation for retail purchase
When a business purchases more than $150 (e.g., the purchase of a computer) from a retail store, the cash register receipt will not identify the purchaser, as required. Will this requirement be met if the purchase is made with a credit or debit card, so that the last four digits of the card will appear on the retailer’s receipt, and the purchase will appear on the credit card or bank statement?
Subsection 169(1) of the Excise Tax Act (ETA) provides that a GST/HST registrant is generally entitled to claim an ITC to recover the GST/HST it has paid on the purchase of property or a service based on the extent that the purchase is for consumption, use or supply in the registrant's commercial activity. Subsection 169(4) of the ETA imposes a requirement that a registrant obtain sufficient evidence in such form containing such information as will enable the amount of the ITC to be determined.
There is no requirement that the evidence needed to support an ITC claim be contained in a single document. “Supporting documentation” as defined in section 2 of the Regulations is not limited to invoices, but includes other documentation that can be used to verify the accuracy of a registrant’s claim. Accordingly, if the required information as prescribed in section 3 of the Regulations is available through a combination of supporting documentation that allows for the verification of the ITC then the documentary requirements for purposes of subsection 169(4) would be met.
Therefore, with respect to the example, if all the information related to the supply is accessible and is prescribed information that enables the CRA to determine the amount of the ITC, then that information will be acceptable to the CRA as satisfying the documentary requirements under subsection 169(4).
Q.4 - Whether non-resident lessor carrying on business
A non-resident leasing company enters into an agreement outside Canada for the lease of industrial equipment to a Canadian lessee. The lessor acquires the equipment outside Canada and delivers it to the lessee’s Canadian facility. The lessor has no other relevant connection to Canada, e.g., agents, employees or facilities in Canada, soliciting of Canadian business, Canadian bank accounts or servicing obligations under the lease. This example is the same as No. 3 in P-051R2 except that the lease is concluded outside Canada, no Canadian bank account and no cash receipts in Canada. Would the lessor be considered to be carrying on business in Canada?
Whether a non-resident is carrying on business in Canada for GST/HST purposes is a question of fact requiring consideration of all relevant facts. The factors that the CRA considers in determining whether a non-resident person is carrying on business in Canada for GST/HST purposes are set out in GST/HST Policy Statement P-051R2, Carrying on Business in Canada.
Based on the information provided, the non-resident would not be considered to be carrying on business in Canada for GST/HST purposes. The only relevant factor present in Canada in the scenario is the place of delivery, which is insufficient to conclude that the non-resident is carrying on business in Canada.
Q.5 - U.S. absorptive merger with Canadian branch
As a result of the merger of USCo1 into USCo2 with USCo2 as the survivor (“MergeCo”), all of the assets of the Canadian branch business of USCo1 are transferred to USCo2. Would s. 271 deem such transfer not to be a supply?
We have advised previously that section 271 of the ETA applies to “statutory amalgamations”, meaning that the procedures for amalgamating follow amalgamation rules set out in a Canadian or provincial statute under which the corporation is incorporated. Generally, where an amalgamation occurs under a statute, the amalgamating corporations are continued as one corporation, with the new successor corporation being regarded as a continuation of the predecessor corporations. However, section 271 deems for purposes under Part IX of the ETA (other than for specific provisions and for prescribed purposes set out under the Amalgamation and Windings-Up Continuation (GST/HST) Regulations) the new successor corporation to be a separate person from either predecessor corporation.
Section 271 would not apply if the merger or amalgamation of two or more corporations results from
- one corporation purchasing the property of the other corporation (in this situation, the general GST/HST rules apply), or
- the property of the other corporation being distributed to the one corporation as a result of the winding-up of the other corporation.
There is no specific restriction in the wording of section 271 that such corporations must be resident in Canada or that such a merger or amalgamation must occur under Canadian law.
Where pursuant to the state, provincial or federal laws under which the entities are incorporated, the predecessors are continued as one corporation with the new successor being a continuation of the predecessors (otherwise than as a result of a purchase or distribution of property described above), it appears that section 271 would apply.
Q.6 - GST reporting by agent rather than principal
In circumstances where an agent has been accounting for the net tax of its principal in its own return and a voluntary disclosure is made, the CRA practice is to treat the agent as requesting return amendments and the principal as making a voluntary disclosure request. Will CRA expand the VDP to treat this situation as a wash transaction?
The Standing Committee on Finance’s October 2016 report (The Canada Revenue Agency, Tax Avoidance and Tax Evasion: Recommended Actions) recommended that the CRA conduct a comprehensive review of the VDP. In addition, in December 2016, the Offshore Compliance Advisory Committee (OCAC) released its Report on the Voluntary Disclosures Program, which contained 11 recommendations. As a result, the CRA is currently in the process of reviewing the VPD and the OCAC recommendations. Comments from the CBA will be considered in the context of this review.
Q.7 - Auditor General’s Report on Objections
What steps are proposed to improve the GST/HST objection process?
A comprehensive action plan has been developed to address the recommendations of the OAG report. Initiatives stemming from this action plan will be implemented for income tax as well as GST/HST objections.
In particular, we have already begun to improve communications to taxpayers by enhancing content on the Agency’s website. Taxpayers and tax preparers can now find information on the date of the GST/HST and Income tax objection files currently being assigned to appeals officers.
We have also updated the CRA website to include enhanced information on how to resolve typical tax issues, such as requesting an adjustment to a tax return, prior to filing an objection.
From an operational perspective, we are reviewing all CRA programs’ letters and manuals to ensure that the taxpayer is provided with all available recourse options when submitting new or additional information. We have also created a formal, structured communication between Appeals and the assessing and audit programs as well as the regions on the results of objections decisions. This feedback, and any trend analysis could lead to other programs enhancing policy, procedures and/or training.
We are reviewing our processes using a LEAN methodology to identify delays and we are looking at implementing different workload management strategies (for example, specialization, centres of expertise) to improve our effectiveness in resolving objections in a timely manner.
In particular, on April 1, 2017, we are introducing a new process where we will be requesting additional information much earlier in the objections process for low-complexity objections. This will ensure objections are fully “work-ready” once assigned to appeals officers, and provide added value to appeals officers in the form of a recommendation.
Q.8 - Offshore Compliance Advisory Committee on VDP
What is the impact of the December 8, 2016 report of the Offshore Compliance Advisory Committee on the GST/HST VDP?
The OCAC supported the VDP as an integral part of the CRA’s administrative and enforcement regime and offered recommendations for enhancement and improvement for the benefit of Canadians. In addition to the OCAC recommendations, in October 2016, the House of Commons Standing Committee on Finance recommended that the CRA conduct a comprehensive review of its VDP by March 31, 2017. The CRA is looking at the program holistically to ensure that it continues to provide individuals and corporate taxpayers/registrants with an opportunity to correct inaccurate or incomplete information or to disclose information not previously reported to the CRA, while ensuring that the program is fair to the vast majority of Canadians who pay their fair share of taxes. The CRA is in the process of reviewing these recommendations. Public consultations on the changes are expected to start in the spring and the CRA plans to communicate changes to the program in the fall of 2017.
Q.9 - Self-supply rule where 2 builders
Under the s. 123(1) “builder” definition, it is possible to have more than one “builder” of a building at the same time. Under s. 191(10), if A is a builder and leases a building to B who is also a builder and who subleases a unit in the building to an individual, then A is deemed to have made the sublease and it has a self-supply. On a literal reading of s. 191(10), however, nothing deems B not to have made the sublease. That could (but should not) mean it also has a self-supply at the same time as A has a self-supply. Note that for s. 191(10) to apply, para. (c) thereof requires A to give possession of the complex to B. A is then deemed to have leased the unit in the complex to the individual at the time it gave possession of the complex to B. Assuming that A gives B possession of the buildings before B subleases any unit to an individual, A will be deemed to have given possession of the unit to the individual before B actually gives possession to that individual, so that B will not be within s. 191(3)(c). Does CRA agree?
Although it may be possible to have more than one builder of a residential complex at the same time, based on the limited information provided, it is not clear how both persons A and B would be considered builders. For example, if person A were the owner of the land on which it constructs or engages another person to construct a residential rental building (we assume a multiple unit residential complex given your reference to subsection 191(3) of the ETA), person A would be a builder under paragraph (a) of the definition of “builder” in subsection 123(1) of the ETA. If subsequent to the construction, person B were to enter into a head lease for the complex with person A for the purpose of subleasing residential units within the complex directly to individuals for use as their place of residence, person B would not be a builder and would not face a self-supply (that is, person B is not a builder under paragraph (d) of the definition of “builder” in subsection 123(1)).
Alternatively, if person A were to have purchased a newly constructed multiple unit residential complex for the primary purpose of entering into a head lease for the complex with person B for the same purpose described above, person A would be a builder under paragraph (d) of the definition of “builder” in subsection 123(1). Again, however, person B would generally not be a builder and would not face a self-supply.
As such, it is not clear how person B would face a self-supply.
If there is a situation where person B is also builder, we would appreciate an opportunity to review all of the facts of the given situation to consider the application of the self-supply rules, and, where necessary, engage in discussions with our colleagues at Finance Canada.
Q.10 - Re-registration on wind-up
SubCo, which was a registrant (and not a small supplier) with an “RT 0001” number, is wound up into ParentCo, which was a holding company not carrying on any business and that was not a registrant. For the next several months, ParentCo will liquidate the inventory acquired from SubCo
(a) Is ParentCo permitted to claim ITCs and file its returns using SubCo’s GST/HST account number?
(b) If yes, is it required to formally request this?
(c) If no, is ParentCo required to obtain its own GST/HST account number? In particular, if its forecasted taxable sales from the liquidation of the remaining inventory are expected to be less than $30,000, would the small supplier exclusion apply?
Our comments are based on the assumption that SubCo’s assets have already been transferred to ParentCo and that SubCo has been dissolved.
a) ParentCo would not be permitted to claim ITCs and file its GST/HST returns using SubCo’s GST/HST account number. Each “person”, which is defined in subsection 123(1) of the ETA to include a corporation, is assigned a single unique business number (BN) when first registering for a program account with the CRA. Under its unique BN, every corporation is assigned a program account for corporation income tax purposes and, depending on its particular situation, it may also request a program account for GST/HST, payroll, import/export, or other purposes.
The provisions in section 272 of the ETA would deem ParentCo to be the same corporation as SubCo only for those purposes specified in that section and the Amalgamations and Windings-up Continuation (GST/HST) Regulations (Regulations). However, ParentCo is still a separate legal entity and, as such, is a separate person with its own BN. Where SubCo has been dissolved due to being wound up into ParentCo, SubCo would no longer exist as a separate person. As a result, its BN must be cancelled, including its GST/HST program account.
Furthermore, where SubCo’s assets have been transferred to ParentCo as part of the winding up process, ParentCo would be considered the supplier in respect of any subsequent sales of those assets. As a result, where ParentCo is a GST/HST registrant (refer to (c) below), those sales must be accounted for under ParentCo’s GST/HST account number.
b) This is not applicable. As discussed in our response to question (a), ParentCo is not permitted to retain SubCo’s GST/HST account number.
c) As ParentCo would not be permitted to claim ITCs and file its GST/HST returns using SubCo’s GST/HST account number:
i. ParentCo will be required to obtain its own GST/HST account number under its existing BN where it is a registrant for GST/HST purposes.
ii. A “registrant” is defined in subsection 123(1) of the ETA as a person who is registered, or who is required to be registered for GST/HST purposes. In accordance with subsection 240(1) of the ETA, every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to register for GST/HST purposes. One exception to this requirement is where the person is a “small supplier”.
The determination of whether a person is a small supplier is made with reference to section 148 of the ETA. According to the Regulations, the application of section 148 is a prescribed purpose with respect to section 272 of the ETA. As a result, ParentCo would be deemed to be the same corporation as SubCo when determining whether it is a small supplier under section 148.
This means that ParentCo would be required to take into account SubCo’s consideration from taxable supplies over its previous four calendar quarters when determining whether it is required to register for GST/HST purposes. Since SubCo operated a retail business with annual taxable sales in excess of $30,000 and was therefore not a small supplier, then ParentCo would not be a small supplier either. As a result, ParentCo would be required under subsection 240(1) of the ETA to register for GST/HST purposes. Under subsection 240(2.1), ParentCo would be required to apply for GST/HST registration before the thirtieth day after the day it makes its first taxable supply in Canada.
Q.11 - S. 156 election extension/amalgamation to fix bad s. 156 election
(a) How can registrants obtain permission pursuant to s. 156(4)(b)(ii) to file an election after the dates in s. 156(4)(b)(i) have passed? Letters from the registrant explaining the delay and requesting authority to file on a later date are answered with a form letter denying availability of the election.
(b) Mistakenly relying on a s. 156 election, Corporation A did not charge GST/HST on inter-corporate supplies of management services to Corporation B, which is owned by the same individual. Corporation A is assessed for the failure to collect GST/HST. If Corporation A and Corporation B thereafter amalgamate to form Amalco, pursuant to s. 271, can Amalco claim the input tax credits that Corporation B would be entitled to, so that Amalco’s liability is reduced to only the interest and penalty?
a) In July 2016, GST/HST Policy Statement P-255, Late-filed Section 156 Elections and Revocations, was released. This policy statement provides guidelines on when the CRA will accept a late-filed section 156 election or revocation of the election. A written request to have the election or revocation of the section 156 election filed late must be submitted to the Assistant Director of Audit of the tax services office of the first specified member making or revoking the election as identified on the election form (Form RC4616, Election or Revocation of an Election for Closely Related Corporations and/or Canadian Partnerships to Treat Certain Taxable Supplies as Having Been Made for Nil Consideration for GST/HST Purposes).
At the end of January 2017, a memorandum to introduce new internal procedures for the review and processing of requests received by tax services offices to accept late-filed Form RC4616 was issued to the field offices. As a result of these new procedures, all requests should now be reviewed by audit staff to determine if the parties listed on Form RC4616 meet all of the legislated eligibility conditions for making or revoking the section 156 election and if the late-filed Form RC4616 should be accepted based upon the guidelines listed in GST/HST Policy Statement P-255.
b) Generally, where an amalgamation occurs, the amalgamating corporations are continued as one corporation, with the new successor corporation being regarded as a continuation of the predecessor corporations. However, for GST/HST purposes, section 271 of the ETA deems that the new successor corporation is a separate person from each of the predecessors except for specific provisions and for prescribed purposes set out under the Regulations (for example, section 225 Net tax). In accordance with section 271, for the purposes of applying the GST/HST provisions in respect of property or a service acquired, imported or brought into a participating province by a predecessor, the new successor corporation is considered to be the same corporation as and a continuation of each of the predecessors.
Assuming that a predecessor met the conditions for claiming input tax credits (ITCs) (other than having the documentary evidence) in respect of tax that became payable or was paid without having become payable, and subsequently the documentation is obtained, the predecessor (or after amalgamation, the new successor) may claim that ITC in its net tax calculation for another reporting period, subject to the four or two year time limitation under subsection 225(4) of the ETA.
Depending on the timing involved and the facts of the situation, audit policies provide that it may be feasible to accept alternative documentation to support an ITC. The Input Tax Credit (GST/HST) Regulations set out the possibility to use as supporting documentation “any other document validly issued or signed by a registrant in respect of a supply made by the registrant on which GST/HST is paid or payable”. Where the predecessor (the supplier) did not provide the documentary evidence to the other predecessor prior to the amalgamation, the new successor could provide the necessary documentation thereby allowing the new successor to claim the ITC effectively reducing their liability to any applicable interest and penalty.
Q.12 - “Arranging for” insurance by car dealer or travel agent
The November issue of the Excise and GST/HST News stated respecting the “arranging for” concept regarding car dealers or travel agents that “In the context of insurance, the term “arranging for” in paragraph (l) of the definition of a financial service in subsection 123(1) of the Excise Tax Act is generally intended to include intermediation activities that are normally performed by a person whose principal business is as an insurance agent or broker.” It may be that some car dealers are providing a promotional and administrative service, and other car dealers are truly “arranging for”. Is there still a place for an examination of all of the facts on a case-by-case basis, or is CRA proclaiming that a car dealer or travel agent may never “arrange for” a financial service?
It is a question of fact whether a person is making a supply of a financial service or another service. In the context of the insurance industry, relevant facts include the nature of the insurance product and the activities performed by the person. In the situations that we have examined to date, the facts indicated that the car dealer or travel agent was making a supply of a promotional and administrative service and not a supply of an “arranging for” service under paragraph (l) of the definition of “financial service” under subsection 123(1) of the Excise Tax Act.
Where the facts in a given situation are the same or similar to those that we have reviewed, it is reasonable to expect that the same conclusions may be reached.
Q.13 - Sending acknowledgement of Notice of Objection filing to advisor
When a professional advisor filing a Notice of Objection on a client’s behalf includes therewith a Form RC59 appointing the advisor as a representative, CRA’s practice currently is to send the acknowledgement of the objection only to the client, unless a Form RC59 for the advisor is already on file. Could CRA send a copy of the acknowledgement to the advisor once Form RC59 has been processed?
The CRA can only send a copy of the acknowledgement to the representative if Form RC59 has already been processed or the representative is identified on the Notice of Objection and the objection has been signed by the taxpayer. It is recommended that the representative submit the authorization electronically prior to filing the objection. Where an unauthorized representative is identified on an objection that was not signed by the taxpayer, the acknowledgment letter will advise the taxpayer/registrant that there is no authorization for the representative and that a Form RC59 is required.
Tax professionals may wish to note that the CRA website describes faster alternatives to Form RC59, Business Consent.
Q.14 - Provision of draft gross-negligence penalty report
CRA’s practice currently is to only advise the registrant in the proposal letter that the gross negligence penalty is being considered, and the factors motivating the CRA official’s consideration of the penalty are not included until preparation of the Penalty Recommendation Report, which is only completed when the assessment is made. Will CRA consider changing this practice by instructing auditors and examiners contemplating the gross negligence penalty to enclose a draft Penalty Recommendation Report along with the proposal letter?
The CRA agrees that a person under audit or examination has a right to know and understand the reasoning behind an assessment and any applicable penalties. Currently, auditors and examiners are only required to advise registrants that a penalty under section 285 of the ETA is being considered in their proposal letters. We understand that in certain cases further clarification on why the penalty under section 285 of the ETA is being considered is warranted and therefore we will take your comments under consideration.
Q.15 - Double-tax where lessee purchases equipment previously imported by it
An Ontario private vocational college leases equipment valued at CAD $1 million from a non-registered European supplier, with the equipment being delivered to the college outside Canada and imported by it. As a result, the college pays non-refundable tax: 5% GST under s. 212.1; and self-assessed Ontario HST under s. 220.07.
After one year, the college exercises its option under the lease to purchase the equipment for its amortized value (of $800,000), so that s. 136.1(1.1) appears to deem it to have received delivery by way of sale of the equipment in Ontario, thereby triggering Ontario HST under s. 220.06. The intention of the legislation is not to charge tax a second time. S. 11 of the New Harmonized Value-Added Tax System Regulations provides an exemption where “the supply is made by a person that paid tax under section 220.05 or 220.07 … in respect of bringing the property into the participating province.”
The reference to the supplier having paid the tax does not work in a case where the recipient was liable to pay the tax under s. 220.07. Is this the intention? Or is there an alternative provision that would avoid the second application of the provincial part of the HST?
Based on the information provided, we agree with the conclusion that tax would apply under section 220.07 of the ETA, and then under section 220.06 of the ETA based on the exercising of the option to purchase the equipment. We have made the Department of Finance Canada aware of the tax policy issue that is raised by this situation.
Q.16 - Expediting review where s. 301(4) direct appeal
Where taxpayers do not wish an objections officer to review their re-assessment before appealing it directly to the Tax Court, what process is there to expedite this?
When Appeals becomes aware that a request under subsection 301(4) of the ETA has been made, the case is reviewed at the earliest opportunity to determine if it is an appropriate case to proceed with the request. The authority to confirm the assessment without reconsideration is delegated to specific officers of the Appeals Branch. The decision to accept the request and confirm the assessment without reconsideration is a discretionary decision made by the proper delegated officer. If the decision is to accept the request, the objection will be confirmed without reconsideration.
Q.17 - Retroactice registration of non-resident supplier where resident recipient has already self-assessed
An unregistered non-resident corporation (USCo) provides consulting services to a Canadian financial institution for use exclusively in its exempt activities, so that the financial institution self-assessed Division IV tax on the fees. In late 2016, CRA determined that USCo had been carrying on business in Canada, registered it effective July 1, 2013, and assessed USCo for GST/HST not collected for the periods from then onwards. USCo is seeking to recover the amount assessed by charging the GST/HST to the financial institution. The financial institution refuses because it already paid the tax under Division IV.
(a) Would the financial institution be able to claim rebates to recover the tax self-assessed as tax paid in error under s. 261 (at least for the normal two year limitation period)?
(b) Does CRA have an administrative policy to address the collection of tax in these circumstances similar, for example, to the principles in GST/HST Policy Statement P-131R?
CRA response (a)
Where the return that included the amount self-assessed as Division IV tax has been previously assessed, the financial institution would not be entitled to claim a section 261 rebate in respect of the self-assessed amount. Otherwise, yes, the financial institution would be entitled to claim a tax paid in error rebate under section 261 in respect of the amount self-assessed as Division IV tax.
However, where the financial institution can demonstrate that it has or had a liability under Division II for the amount in question and therefore was not required to self-assess under Division IV, the financial institution would be able to request to have its return reassessed in order to have the amount that was originally included as Division IV tax removed and refunded to the financial institution subject to the applicable legislative time limit.
CRA response (b)
There is not currently an administrative policy in place that would address the issue you have raised. Any administrative position taken would be at audit’s discretion at the time of audit and based on the facts of the case at hand. In the example provided, the possibility of double remittance is due to the non-compliance of USCo and not through a business arrangement between two parties for collection and remittance of tax such as one that is indicated in P-131R.
Q.18 - ITC documentation where purchase is made by partner or employee
A partner in a registrant law firm partnership (Great Law Firm LLP) acquires a new Apple MacBook Pro primarily for use in its commercial activities using his personal credit card. All information required under the Input Tax Credit Information (GST/HST) Regulations is present in the receipt issued to him (Apple Receipt), including GST/HST of $252.07, although his name shows as the “recipient” name. After presenting the Apple Receipt and a copy of his credit card bill to Great Law Firm LLP, the partner is reimbursed for the entire cost of the computer, including the $252.07 he paid in GST/HST.
(a) Can Great Law Firm LLP claim an input tax credit (ITC) of $252.07, supported only by the Apple Receipt and Great Law Firm LLP’s records for the partner’s reimbursement for these charges?
(b) If on the same facts except that the individual is an employee of a registrant corporation (Great Corporation Inc.), can Great Corporation Inc. claim an ITC of $252.07, supported by the Apple Receipt and Great Corporation Inc.’s records for the reimbursement of the employee for these charges?
CRA response (a)
As explained below, we confirm that under subsection 175(1) of the ETA, Great Law Firm LLP would be deemed to have paid, at the time the reimbursement is paid to the partner, tax in respect of the supply of the MacBook Pro equal to the total amount of tax reimbursed. As Great Law Firm LLP is a GST/HST registrant, it may claim an ITC, under subsections 169(1) and 199(2) of the ETA for the GST/HST paid by the partner.
With respect to the documentary evidence, as Great Law Firm LLP is deemed to have acquired the Apple MacBook Pro, no additional supporting documentation is required where subsection 175(1) applies. Documentation identifying the partner, rather than the partnership, should satisfy the documentary requirements.
Under subsection 175(1) of the ETA, if an employee of an employer, a member of a partnership, or a volunteer who gives services to a charity or public institution acquires or imports property or a service or brings it into a participating province for consumption or use in relation to the activities of the employer, partnership, charity or public institution (each referred to as the "person") and pays the related GST/HST payable for which the employee, member or volunteer is reimbursed by the person, the person is deemed to have received a supply of the property or service and to have paid tax at the time the reimbursement is paid. Furthermore, any consumption or use of the property or service by the employee, member or volunteer in relation to the activities of the person is considered to be the consumption or use of the person.
Generally, documentation issued in respect of the expense identifies the employee, member or volunteer as the recipient of the property or service. For this reason, subsection 175(1) of the ETA deems the person to have received a supply of the property or service, paid tax in respect of that supply, and consumed or used the property or service in its activities. Accordingly, no additional documentation is required where subsection 175(1) applies since the person who acquired the property or service is considered to be the person who reimbursed the expense, and not the employee, member or volunteer. Therefore, documentation identifying the employee, member or volunteer should satisfy the documentary requirements.
The amount of the ITC in respect of a reimbursement that can be claimed may be based on the deemed tax paid (the “exact calculation method” based on the actual tax paid by the employee, partner or volunteer) or using a factor of deemed tax paid.
Registrants who use the exact calculation method to determine their ITC eligibility for reimbursements are subject to the general documentary and information requirements as prescribed under subsection 169(4) of the ETA.
Supporting documentation for claiming an ITC is prescribed by the Regulations and includes:
a) an invoice;
b) a receipt;
c) a credit card receipt;
d) a debit note;
e) a book or ledger of account;
f) a written contract or agreement;
g) any record contained in a computerized or electronic retrieval or data storage system; and
h) any other document validly issued or signed by a registrant in respect of a supply made by the registrant on which the GST/HST is paid or payable.
When the factor method is used, 90% or more of the supplies for which the reimbursement is paid must have been subject to the related tax rate. The factor rates are lower than the tax rates in recognition of the fact that the total expenses may include tips, provincial sales tax, and other amounts that are not subject to the GST/HST.
A person using the factor method is exempt from the statutory and regulatory documentary and information requirements in respect of the expenses reimbursed to the employee, member or volunteer. However, the person must maintain books and records, including all documentation required to substantiate such deductions under the Income Tax Act, and capture information such as:
- the name and GST/HST number of the employer, partnership, charity, or public institution that paid the reimbursed amount;
- the name of the employee, member or volunteer who received the reimbursement;
- the total amount of the reimbursement paid to the employee, partner or volunteer;
- the total GST or HST deemed to have been paid in respect of the reimbursement;
- the reporting period in which the reimbursement was paid; and
- the nature of the expense. Refer to GST/HST Memorandum 9.4, Reimbursements, for more information on reimbursements and documentary requirements.
CRA response (b)
Subsection 175(1) of the ETA applies to reimbursements made by an employer, a charity, a public institution or a partnership. Therefore, the comments provided in Part I would also apply to a reimbursement made by Great Corporation Inc. to its employee.
Q.19 - Corrected invoice or side letter where erroneous invoice
Yco misaddressed its invoice to Xco (also a registrant) for a taxable supply by either (i) misspelling Xco’s name, or (ii) using a different name (for example, that of Xco’s sole shareholder, who actually placed the order). In either case, if Xco obtains a corrected invoice from Yco, will it be accepted as “supporting documentation” as defined in s. 2 of the Input Tax Credit Information (GST/HST) Regulations? What if Xco obtains from Yco a letter confirming that Yco misaddressed the original invoice and that it should have been addressed to Xco?
The Regulations provide that “supporting documentation” as defined in section 2 of the Regulations is not limited to invoices, but includes other documentation that can be used to determine the ITC claim of a registrant. Where all the prescribed information as defined in section 3 of the Regulations is set out in the supporting documentation, a registrant may be able to claim an ITC in respect of a supply they acquired in the course of their commercial activity even though the invoice issued for that supply may contain errors related to the registrant name or be issued to the wrong registrant. The determination of whether sufficient information is available to support the ITC claim is fact specific and can only be determined on audit.
Regarding the fact scenario described above:
We wish to point out that where invoices are incorrectly made out to another person, the incorrectly identified person is not entitled to claim the ITC because the person is not the recipient of the supply. Before the actual recipient of the supply is able to claim the applicable ITC using an invoice that indicates the name of an incorrect person, the actual recipient must obtain evidence substantiating that they are the recipient of the supply.
If an attempt is made to remedy the situation by obtaining an amended invoice in compliance with the disclosure requirements, then the CRA will accept the amended invoice as supporting documentation.
With respect to the letter from the supplier confirming and correcting the error in the invoice, such a letter could be included as supporting documentation for purposes of determining the recipient’s ITC. Paragraph (h) of the definition of “supporting documentation” includes “any other document validly issued or signed by a registrant in respect of a supply made by the registrant on which GST/HST is paid or payable”. Consequently, a letter issued by a supplier in respect of a supply made by that supplier would qualify under this paragraph.
Q.20 - Builder buyout of new home purchase contract
Where an individual has agreed to purchase a newly constructed home from a corporation that is its builder and subsequently, one month before teh scheduled closing date for the purchase, decides that he no longer wants to purchase the home, does s. 221(2) apply to relieve the builder from having to pay GST/HST on any consideration that is paid by the builder (e.g., $100,000) to the individual in relation to the termination of the agreement of purchase and sale (viewed as an interest in real property) if the purchaser is registered?
With respect to the scenario provided, the following comments are based on the assumption that Mr. X makes a taxable supply of real property to the builder (the Vendor). However, the language used in the question and in the scenario provided raises the possibility that the amount paid by the Vendor is not consideration for a supply of real property, but rather an amount paid in respect of the termination of an agreement of purchase and sale. It seems peculiar that the Vendor would agree to pay an amount to Mr. X for Mr. X’s agreement to terminate the agreement of purchase and sale, particularly given that it is Mr. X who wants to be relieved of his obligations under the agreement of purchase and sale. If anything, one would expect that Mr. X would pay or forfeit an amount to the Vendor for terminating the agreement of purchase and sale. Furthermore, if the Vendor and Mr. X were to mutually agree that it is in their best interests to terminate the agreement of purchase and sale, then one would expect that the Vendor might return any deposits previously given by Mr. X. However, one would not expect that the Vendor would compensate Mr. X for the increase in the fair market value of the property between the time that the agreement of purchase and sale was entered into and the time of its termination. At any rate, although the scenario provided is not clear, we will nonetheless respond to your question on the assumption that Mr. X is making a supply of real property by way of sale to the Vendor, and that the amount paid by the Vendor is consideration for that supply.
As you know, subsection 221(2) of the ETA relieves a supplier who makes a taxable supply of real property by way of sale from the requirement to collect the tax payable by the recipient if any one of the exceptions in paragraphs 221(2)(a) to (c) is applicable.
In the scenario provided, before determining whether any one of those exceptions is applicable, it must first be established that the supplier is making a taxable sale of real property. Generally, when a purchaser, such as Mr. X, enters into an agreement of purchase of sale for the acquisition of a newly constructed house, the purchaser, Mr. X, is acquiring an interest in real property, namely an interest in a residential complex. If Mr. X subsequently receives consideration to transfer that interest to builder (the Vendor), Mr. X would be considered to be making a sale of the interest in the residential complex. Whether the sale of that interest is taxable generally depends on whether or not Mr. X is a builder.
If Mr. X is not a builder in his own right (for example, at the time of entering into the agreement of purchase and sale, he intended to acquire the house for his personal use), the sale of that interest would generally be exempt under section 2 of Part I of Schedule V to the ETA. Where that is the case, tax would not be payable by the recipient and, therefore, subsection 221(2) would not apply.
If Mr. X, however, is considered to be a builder in his own right (for example, at the time of entering into the agreement of purchase and sale, he did so for the primary purpose of selling the interest or the house itself), tax would be payable by the Vendor calculated on the value of consideration ($100,000) for the supply. If Mr. X is a non-resident or is resident by reason only of subsection 132(2), or the Vendor in the scenario is GST/HST registered, pursuant to paragraph 221(2)(a) or (b) respectively, Mr. X would be relieved of his obligation to collect the tax payable.
Q.21 - S. 254 rebate where purchase agreement assigned before closing
Mr. A no longer wishes to purchase a new home and has agreed to assign the agreement of purchase and sale to Mr. B for $150,000 (representing the appreciation over the purchase price of $250,000) plus GST/HST. On closing, title is transferred directly by the builder to Mr. B.
(a) Can Mr. B claim a new housing rebate in situations where the ss. 254(2)(e) through (g) conditions are satisfied?
(b) Can Mr. B assign the rebate to the builder pursuant to s. 254(4)?
c) How would the value of the consideration for the rebate be calculated?
In general, section 254 of the ETA provides a new housing rebate to an individual for a portion of the tax paid on the purchase of the housing if certain conditions are met. Those conditions, as set out in paragraphs 254(2)(a) to (g), must all be satisfied before the Minister can pay the rebate. The amount of the rebate is calculated under the formula provided in paragraphs 254(2)(h) and (i).
In a situation where a builder enters into an agreement of purchase and sale with an individual (Mr. A in your example), and Mr. A assigns the agreement of purchase and sale to Mr. B, Mr. B may be entitled to the rebate provided all of the conditions in paragraphs 254(2)(a) to (g) are met, not just the conditions in paragraphs 254(2)(e) through (g) as suggested in your submission.
In your example, the formula outlined in paragraph 254(2)(i) would apply. In determining the amount of the rebate, that formula makes reference to the “total consideration” as described in paragraph 254(2)(c). Under paragraph 254(2)(c), the “total consideration” is the sum of the consideration payable for the housing itself (that is, the purchase price of $250,000) and the consideration payable for any other taxable supply of an interest in the housing (that is, the assignment fee of $150,000). Please note, the fact that Mr. A is charging GST/HST to Mr. B suggests that Mr. A is a “builder” as defined in subsection 123(1); if Mr. A were not a builder, his assignment of the agreement of purchase and sale would be an exempt supply under section 2 of Part I of Schedule V and the consideration for the exempt assignment would not be included in determining the “total consideration” as described in paragraph 254(2)(c). In your example, the total consideration used to calculate the rebate is $400,000.
Although the new housing rebate cannot be assigned per se to a builder, generally the builder who has sold the housing may, pursuant to subsection 254(4), pay or credit the amount of the rebate to the individual purchaser. However, in the situation where there are two builders, such as in your example, the individual purchaser (that is, Mr. B) could file a rebate directly with the Canada Revenue Agency.
More information can be found in Guide RC4028, GST/HST New Housing Rebate.
Q.22 - Situs of supply of IPP relating to TPP ordinarily situated both outside and inside Canada
A supplier makes to a non-registered non-resident recipient of a supply of intangible personal property (IPP) that may not be used in Canada and that relates to tangible personal property (TPP) ordinarily situated in Canada. Is the place of supply of the IPP in or outside Canada; and would the answer change if the IPP related to both TPP ordinarily situated in Canada and TPP ordinarily situated outside Canada?
If it is determined based on a complete set of facts that the supply being made by a registrant is a supply of IPP that relates to TPP and that the TPP is ordinarily situated in Canada, the supply would be deemed to be made in Canada for GST/HST purposes pursuant to subparagraph 142(1)(c)(ii) of the ETA. This would not change if the supply of the IPP relates to TPP that is ordinarily situated in Canada and TPP that is ordinarily situated outside Canada.
Q.23 - New CRA publications/focus on HTML
Which CRA publications are being reviewed or revised, and when will updates be released?
The CRA is constantly updating its publications. More particularly, the GST/HST Rulings program in the CRA has in place and regularly reviews detailed work plans to update a wide range of GST/HST technical publications on the CRA website. Barring any unforeseen needs that may require us to redirect and reprioritize efforts to reflect new legislative or policy changes in other publications, we expect that the following publications will be published to the CRA website within the next six months.
GST/HST Memoranda [FN: It should be noted that we had prepared and planned to publish a series of nine GST/HST memoranda on educational services in the near future, however, these have been delayed because of a recent Federal Court of Appeal decision]
- Rebate for Cooperative Housing
- GST/HST Registration for Listed Financial Institutions
- Freight Transportation Services
- Passenger Transportation Services
- Imported Goods
GST/HST Technical Information Bulletins
- Point of Sale Rebate on Books
- Application of the GST/HST to the Practice of Acupuncture
GST/HST Info Sheets
- Water Haulers
- Builders and GST/HST NETFILE
- Determining Whether a Public Service Body is Resident in a Province for Purposes of the Public Service Bodies’ Rebate
- GST/HST Pension Plan Rules for Master Trusts
Other information relevant to publications
You may also be interested to know that the CRA is transitioning its website to the new government-wide Canada.ca website. Up to now, we had been posting our technical publications in both HTML and PDF formats on the CRA website (while most other areas of the CRA had moved to HTML only). In preparation for our migration to Canada.ca, we are now posting any new technical publications in HTML format only. The following considerations were made in moving in this direction:
- Over 80% of readers already use HTML versions while less than 20% use the PDF versions;
- HTML format allows us to provide useful hyperlinks to other related information while PDF does not;
- HTML is the official primary “accessible” (meaning usable, with appropriate software, by visually impaired persons) format that will be used on the new Canada.ca website;
- Should a change be required in a publication (for example to correct errors or make minor updates), it can be made quickly and easily in HTML format;
- The print produced for HTML webpages has improved significantly over the years. An HTML print version includes the CRA and Government of Canada header, table of contents, and the same tables and subtitles that are available in other formats.
The CRA will continue to retain historical versions of its publications internally and make them available upon request. Historical versions of technical excise and GST/HST publications are also generally available to subscribers of tax publishing houses. It is advisable and likely more convenient for a client to print and retain any technical publication or webpage content being used as reference material, should it be required in the future.
Q.24 - New audit issues
Please provide an update on new or developing audit issues.
A verbal update was provided at the meeting.
Q.25 - Current court cases
Please provide an update on current court cases.
A verbal presentation on current cases was provided at the meeting.