8 March 2018 CBA Commodity Taxes Roundtable
This provides summaries of questions posed to CRA at the March 8, 2018 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 provisions in our comments are reference to the ETA unless otherwise noted.
Q.1 Registration of non-resident actors and directors
Where non-resident actors and directors film at Canadian locations in Canada, they may be paid large sums (exceeding $30,000) respecting services performed in Canada by them on an independent contractor basis.
- Are they required to register for GST/HST purposes?
- What if the recipient of the supply is a non-resident?
- What carrying on business factors would result in them being required to register for GST/HST purposes, and how would CRA determine the consideration paid or payable for the services performed in Canada on which GST/HST must be charged?
- Non-resident actors and directors making taxable supplies in Canada in the course of carrying on business in Canada who are not small suppliers are required to register for GST/HST purposes. Whether a non-resident person such as a non-resident actor or director is carrying on business in Canada and required to be registered for GST/HST purposes is a question of fact that requires consideration of all relevant facts.
- The residency of the recipient is not a relevant factor in determining whether the director or actor is carrying on business in Canada and required to be registered for GST/HST purposes.
- GST/HST Policy Statement P-051R2, Carrying on Business in Canada identifies various factors that are considered when determining whether a non-resident person is carrying on business in Canada for GST/HST purposes in a particular situation. The importance or relevance of a given factor in a specific case depends upon the nature of the business activity under review and the particular facts and circumstances of each case.
With respect to the supply of a service, factors that are of particular relevance are whether the service is performed in Canada, and whether the service is being performed by the supplier in Canada through its agents or employees. P-051R2 includes several examples that involve supplies of services.
The determination of the value of consideration on which a GST/HST registrant non-resident actor or director must charge, collect and remit the GST/HST for a taxable (other than zero-rated) supply of a service made in Canada would be made based on a thorough review of all relevant facts, including the agreements between the parties.
Q.2 Meaning of "settles" in s. 268
This is a return to Q. 25 of last year for which the CRA response lacked specificity.
If X settles a trust in 2013 with property and then in 2017 X contributes more property to the trust, is the contribution in 2017 considered to fall under the word “settles”?
If X settles a trust in 2013 with property, and then in 2017 Y contributes property to the trust, is the contribution by Y considered to fall under the word “settles”, and is Y considered a “settlor”?
Section 268 of the ETA provides for GST/HST purposes that where a person settles property on an inter vivos trust, the person is deemed to have made and the trust is deemed to have received a supply by way of sale of the property, and the supply is deemed to have been made for consideration equal to the amount determined under the Income Tax Act to be the proceeds of disposition of the property.
Any transfer of assets into the trust by the original settlor (such as X in the question) upon its establishment or at a subsequent point in time, would be considered to fall within the meaning of the term "settles" and be subject to section 268.
We are currently reviewing the issue of whether contributions made by another person (such as Y in the question) would fall within the meaning of the term "settles" and be subject to section 268. With respect to the meaning of "settlor", section 268 does not refer to a “settlor”.
Q.3 Zero-rating of In Vitro diagnostic kits
Although CRA’s position was that supplies of in vitro diagnostic test kits designed for laboratory use are taxable, Centre Hospitalier Le Gardeur et al v The Queen, 2007 TCC 425 found that certain in vitro diagnostic test kits are zero-rated pursuant to Sched. VI, Pt. I, s. 2(a). In Notice 248, Application of the GST/HST to Supplies of in Vitro Diagnostic Test Kits (December 2009), CRA stated:
The CRA is currently reviewing the impact of the TCC decision, which is dated July 20, 2007. In the interim, the CRA has adopted an administrative position which is in keeping with the TCC decision. This position applies from the date of the TCC decision until such time as the CRA review in this matter is completed.
Has this review been completed?
The TCC decided in Centre Hospitalier Le Gardeur et al v The Queen 2007 TCC 425 (Le Gardeur) that certain in vitro diagnostic test kits are zero-rated pursuant to paragraph 2(a) of Part I of Schedule VI to the ETA. In Le Gardeur, the CRA’s position was that the supply of an IVDD must be defined by the sum of its components. The sum of the components of an IVDD results in a single or unique supply of a new product. The CRA’s position was also that an IVDD was a composite supply of a product that had both a drug component and a device component, as such it would not be a drug specifically included in Schedules C or D to the Food and Drugs Act. The TCC did not agree and concluded that the supply was a single supply of the main ingredient in the mixture.
Further to the TCC decision, the CRA adopted an interim administrative position, described in GST/HST Notice 248, Application of the GST/HST to Supplies of In Vitro Diagnostic Test Kits (Notice 248), whereby the supply of an in vitro diagnostic test kit is zero-rated pursuant to paragraph 2(a) of Part I of Schedule VI to the ETA if it is for use in the diagnosis of a disease in humans and it contains one or more of the following substances (which were listed in the TCC decision):
- monoclonal and polyclonal antibodies;
- blood and blood derivatives;
- snake venom; and
- micro-organisms that are not antibiotics.
Notice 248 indicates that the CRA's administrative position is temporary and that the CRA will announce its decision with respect to the application of the GST/HST to in vitro diagnostic products once an in-depth review of the matter has been completed. The CRA has issued rulings that applied the TCC’s decision for these products while the review of the matter has been underway.
The Le Gardeur decision used the definition of “drug” from the Food and Drugs Act (FDA) when determining what was being supplied in that case. The FDA was amended in 2014 and one of the changes made was to the definition of “device” in section 2 of the FDA. This definition was amended to include in vitro reagents. The Le Gardeur decision concluded that the supply of a mixture of substances is characterized as a supply of the main substance (paragraph 60) in the mixture. The change to the definition of “device” in the FDA may impact the tax status of IVDDs where the main ingredient is an in vitro reagent, which is now defined as a device in the FDA.
As we have already noted, the application of the definition of “drug” from the FDA to section 2 of Part I of Schedule VI to the ETA was an important part of the Le Gardeur decision. There have been other cases since Le Gardeur that have also addressed the definition of “drug” in respect of the zero-rating provisions in section 2 of Part I of Schedule VI to the ETA. These cases are Hedges v. The Queen, 2014 TCC 270 (Hedges) and Patterson Dental Canada Inc. v The Queen, 2014 TCC 2443 (Patterson).
Hedges involved the tax status of the supply of cannabis. In this case, the TCC concluded that for purposes of section 2 of Part I of Schedule VI to the ETA, “drug” has the same meaning as the definition of “drug” in the FDA. This case was appealed to the Federal Court of Appeal (FCA). In its decision, the FCA discussed the legal versus illegal sales of cannabis and did not address the issue of the definition of “drug”.
Patterson is currently before the TCC and the appellant is arguing the application of the Le Gardeur decision. This case does not involve the supply of IVDDs but it centers on the classification of the supply of a drug that contains a zero-rated active ingredient. More specifically, the question is whether the supply of an anaesthetic solution containing epinephrine is a supply of epinephrine and is therefore zero-rated pursuant to subparagraph 2(e)(x) of Part I of Schedule VI to the ETA. The decision in this case may have an impact either limiting or expanding the decision from Le Gardeur.
Since the Le Gardeur decision, the FDA has changed, and the Patterson case that is building its argument on the reasoning of Le Gardeur has been ongoing for the last 6 years. That case was heard in September 2017 and we are awaiting the decision. We anticipate that the decision might bring some clarification to the extent of the application of the principle stated in Le Gardeur and could allow the CRA to finalize its administrative decision.
Q.4 Ss. 168(3)(c) and (6) application to P3 Projects
Typically “P3” (public private partnership) infrastructure projects are long term (e.g., 35 to 40 years) and include the design, construction, financing and ongoing maintenance of a public facility such as a hospital, prison, bridge or highway. S. 168(3)(c) appears to require a supplier to charge “accelerated” GST/HST for the value of consideration applicable to the service of the construction of real property. CRA rulings have taken years to obtain and some of the advice obtained from the CRA has been contradictory or difficult to reconcile from project to project.
- Will CRA publish clear guidance on the application of s. 168(3)(c) to infrastructure projects?
- What guidance can CRA provide where the project agreements do not specify particular amounts as payable in consideration for the construction service?
(a) No clear guidance yet
P3 agreements are diverse and complex in nature, and as a result, the application of section 168 of the ETA to a particular P3 agreement does not necessarily apply to another P3 agreement.
Generally, the diversity and complexity among P3 agreements does not lend itself to the CRA publishing clear guidance on how to apply paragraph 168(3)(c) to P3 projects. That being said, we will keep this request in mind, and as we review P3 agreements as part of the GST/HST rulings process we will look for common patterns and factors that influence our decision to take one position as opposed to another with respect to the application of section 168. If this lends itself to publishing clear guidance in the future, then we will certainly undertake to do so at that time.
The parties to a P3 agreement are encouraged to seek a GST/HST ruling in the early stages to obtain certainty as opposed to waiting until the construction is substantially completed.
(b) Whether s. 168(6) applies
Generally, paragraph 168(3)(c) can be said to “accelerate” the payment of GST/HST for the supply of a construction service in respect of real property where all or any part of the consideration for the supply has not been paid or become due by the last day of the calendar month immediately following the calendar month in which the construction is substantially completed. For simplicity in responding to this question, we will refer to that time as the substantial completion date. However, where the value of the consideration (or the part) that has not been paid or become due at the substantial completion date is not ascertainable, subsection 168(6) provides that the payment of GST/HST on that consideration (or that part) is deferred until such time as the consideration (or part) becomes ascertainable.
P3 agreements may provide for monthly service payments that are payable over the course of decades, and that typically include an amount that is consideration for the supply of the construction service. However, instead of specifying a fixed dollar amount or fixed percentage that is the amount of the consideration for the supply of the construction service, such P3 agreements may use a complex formula to calculate that amount. The formula often relies on a fixed dollar amount as a base, but then applies one or more variable factors or amounts that cannot be determined until the time the monthly service payment is calculated and becomes payable. From a GST/HST perspective, the fact that these variable factors or amounts may not be known until several years later when the calculations are made raises the question as to whether the value of the consideration (or part) for the supply of the construction service is ascertainable (or unascertainable) at the substantial completion date.
In some cases, the nature of the formula is that the unknown variable factors and amounts have an impact on calculating the part of the monthly service payment that is consideration for the supply of the construction service. Generally, paragraph 168(3)(c) would not apply with respect to the part of the monthly service payment that is consideration for the supply of the construction service where that part of the consideration is not ascertainable. At the time each monthly service payment is calculated and becomes payable (that is, at the time the part of the monthly service payment that is consideration for the construction service is ascertainable), the supplier must account for GST/HST on the monthly service payment and the amount included therein that is consideration for the supply of the construction service in accordance with subsection 168(6).
In other cases, it is possible that the unknown variable factors and amounts have no impact on calculating the part of the monthly service payment that is consideration for the supply of the construction service. Instead, it is possible that said unknown variable factors and amounts may be adjustments to the consideration (or part) or relate to amounts that are not in respect of the supply of the construction service. Generally, if this is the case, the consideration (or part) that is the consideration for the supply of the construction service is ascertainable and that GST/HST is payable on the substantial completion date.
These are the types of things we are currently looking for when we review P3 agreements. Although we appreciate the industry wanting clear guidance with respect to applying paragraph 168(3)(c), it is not always possible to apply a single position to such a diverse and complex range of agreements.
Q.5 35% ITCs for orthodontists following Brian Hurd
Brian Hurd contrasts with an administrative “agreement” of CRA with the Canadian Dental Association (CDA) permitting input tax credits (ITCs) for orthodontists at a rate of 35% in certain circumstances. CRA did not publish that agreement, but instead relied on the CDA to disseminate the information that was issued by GST/HST Rulings to its membership.
When CRA auditors determined that orthodontists were not following the agreement, orthodontists (like Dr. Hurd) were assessed and denied ITCs. When tax advisors requested copies of the agreement from the CRA, they learned that in fact no documented agreement could be found, but there was a CDA newsletter reporting that an agreement had been reached, and the CRA relied on that newsletter as the basis for the agreement. Brian Hurd determined that the agreement did not comply with the law.
- Will CRA follow Dr. Brian Hurd Dentistry Professional Corp., and deny all ITCs to orthodontists?
- Will CRA publish a notice to the orthodontic industry explaining the current rules following the case, and the agreement? Will the current rules include a complete set of grandfathering rules for past ITCs claims?
- Will CRA allow orthodontists and dentists to follow this decision only on a going-forward basis?
The CRA agrees with the conclusions reached by the TCC in the case of Dr. Brian Hurd Dentistry Professional Corporation v. The Queen, 2017 TCC 142.
The CRA had previously concluded that the above-referenced administrative arrangement was no longer appropriate for various reasons, including:
- There is a growing body of case law relating to the characterization of supplies confirming that a transaction should be looked at as a whole rather than broken out into separate components or constituent elements;
- The GST/HST legislation does not contain any provisions for the separation of the elements of what constitutes a single supply so as to provide different tax treatment to each element as described in the administrative arrangement;
- While an artificial tooth or orthodontic appliance is an important aspect of dental treatment, the diagnostic, assessment and treatment services provided by dentists are not accessories or incidental, nor are they separate supplies. Any property provided is integrally connected to, and an input into, the provision of a treatment service;
- The administrative arrangement frustrates the GST/HST legislation, which provides that health care services are exempt supplies. Further, the administrative arrangement is an anomaly and is not in keeping with the CRA’s approach with respect to other health care services and professions;
- The administrative arrangement, which permits dentists to claim ITCs based on a percentage of general operating expenses, is contradictory to the ITC provisions of the Excise Tax Act (ETA). Generally, ITCs are only available for the GST/HST paid or payable on property and services acquired, imported or brought into a participating province for consumption, use, or supply in the course of a commercial activity. A commercial activity excludes the making of an exempt supply. Also, the ETA does not provide for a fixed percentage rate to be applied/used in determining the ITCs claimable on GST/HST paid or payable.
The CRA agrees with the TCC that to constitute a useful treatment for a patient, both the orthodontic appliance and orthodontic services must be combined and supplied together. The combination of the orthodontic appliance and treatment is a single supply of an orthodontic treatment (that is, a service), rather than a zero-rated supply of an orthodontic appliance, or multiple supplies. In this case, the supply of the orthodontic treatment was rendered to an individual by a medical practitioner and the supply was exempt pursuant to section 5 of Part II of Schedule V to the ETA (and not excluded from exemption by virtue of sections 1.1 and 1.2 of Part II of Schedule V to the ETA).
As to the consequences of the decision, the Excise and GST/HST Rulings Directorate has informed other CRA stakeholders (including officials with the Domestic Compliance Programs Branch) that the administrative arrangement will remain in effect until further notice. The administrative arrangement will continue to apply where a dentist or dental corporation follows the terms of the arrangement: the dentist identified the two separate supplies, for example, the invoice issued to the patient identifies the consideration for the supply of the orthodontic appliance or artificial tooth separately from the consideration for the supply of the dental service, and the ITC claim relates to mixed-use purchases (to make both taxable and exempt supplies) such as overhead and general operating expenses and certain direct expenses or inputs (for example, personal property such as arch wires used exclusively to fabricate orthodontic appliances). The administrative arrangement does not include ITCs for capital property.
However, because it is an administrative arrangement, if a dentist has not followed the terms of the administrative arrangement; for example, the dentist considered their supplies to be exclusively zero-rated orthodontic appliances when in fact dental treatments were provided, did not separately identify on the invoice to the patient the consideration for the supply of the orthodontic appliance or artificial tooth and the consideration for the supply of the dental service in order to determine the extent of the dentist’s commercial activity as well as perform a year-end reconciliation based on actual figures to support its ITC claim, the CRA will not find itself bound by the arrangement. Therefore, no ITCs will be allowed based on the principles of that arrangement.
The CRA intends to apply the Hurd decision on a prospective basis. The CRA recognizes that given the circumstances, it will be necessary to communicate appropriate guidance to affected stakeholders (including CRA officials), and to provide a period of time allowing industry to transition away from the administrative arrangement. The CRA is currently preparing a publication in keeping with the principles set out in the Hurd decision, which will explain the application of the GST/HST to the services rendered by dentists and orthodontists and which will discuss the ITC entitlement of dentists and orthodontists in a general manner. As a result, the current administrative arrangement will continue to apply until further notice and stakeholders will be provided with advance notice so they can prepare accordingly.
Q.6 Notices of Objection where multiple ref. nos.
Multiple assessment packages are being issued where the “Period Covered” refer to a Summary referring to a specific reporting periods each containing its own “Reference Number”. For some audits, several assessment packages like this are issued, covering the same issues, but with different periods. Form GST159, Notice of Objection, contains the following instruction: “If possible, enclose a copy of the notice of assessment or notice of reassessment that you are objecting to, otherwise, give the following information.” A requested item is the “Notice No.”
- If a taxpayer is objecting to multiple Notices of Assessment, where the same issues are raised, will CRA accept a single Form GST159 with the relevant Notices of Assessment that are being objected to and the applicable facts and reasons and exhibits all enclosed?
- The “Notice No.” referred to in the Form GST159 appears to be the same as the “Reference Number” on each Summary page of the Notice of Assessment. These numbers are very long and they are sometimes issued for each month assessed. Can they be included instead on a separate attached sheet along with the statement of facts and reasons?
- The CRA confirms that it will accept a single Form GST159 to be filed for multiple assessments under objection. To enable us to determine the validity of the objection, it is important that the periods covered and the information on the assessments (notice number and date) be properly identified on the Notice of Objection. If there is insufficient space on the form, a separate sheet can be attached. It is also important that you include applicable facts and reasons for your objection, as well as include any additional supporting documents. This will ensure your objection is processed in a more timely fashion.
- Whenever there is insufficient space on the Notice of Objection form to provide facts and reasons for the objection or the assessment information, you can always attach a separate sheet(s). If additional documents are available to support your objection, those can also be included with the objection.
Q.7 Bitcoins as money or IPP
Virtual currencies, such as Bitcoins, are not considered to be a currency issued by a government of a country… . Therefore using Bitcoins to purchase goods or services would be treated as a form of barter transaction … .” (emphasis added)
This suggests that the conversion of Canadian dollars into Bitcoin (viewed as intangible property and not “money”) would generally be subject to GST/HST - notwithstanding that the definition of “money” in s. 123(1) is non-exhaustive and includes specifically, “any currency … and other similar instrument.”
- Does this remain CRA’s current position or does CRA consider the purchase and sale of crypto-currencies to be an exempt supply of a financial service (specifically, of money)?
- What is CRA’s analysis of “money”?
- How will a supply by a GST/HST registrant of a taxable service in Ontario worth $1,000 to another GST/HST registrant (also engaged 100% in commercial activities) for a payment of $1,000 in Bitcoins be treated?
(a) Position under review
The CRA is presently considering its position regarding the GST/HST treatment of Bitcoin and similar crypto-currencies given the increasing use of crypto-currencies. The CRA would welcome the Canadian Bar Association’s views on this issue.
“Money” is defined in subsection 123(1) of the ETA as follows:
“money” includes any currency, cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument, whether Canadian or foreign, but does not include currency the fair market value of which exceeds its stated value as legal tender in the country of issuance or currency that is supplied or held for its numismatic value;
Very briefly, the CRA has previously taken the position that, to qualify as “currency”, a medium of exchange must be issued by a country as legal tender. Furthermore, to qualify as a “cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument”, an instrument must be issued to pay a debt or to transfer funds upon the credit of the issuer. Based on these positions, bitcoins are not a currency, and they are not a cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance or other similar instrument for the purpose of the definition of “money”.
(c) Treatment if not money
If bitcoins are not characterized as “money” for GST/HST purposes, then they would likely be characterized as IPP. In such circumstances, a supply of a bitcoin in exchange for a supply of property or a service would be regarded as a barter transaction. If both parties to the transaction are GST/HST registrants, and if both supplies are made in the course of a commercial activity, both parties would be required to charge and collect the GST/HST on their respective supplies. The value of the consideration for the supplies would be equal to the fair market value of the supplies at the time the supplies are made, in accordance with paragraph 153(1)(b) of the ETA.
Q.8 S. 175 re reimbursement of candidate expenses by headhunter
A candidate identified by an executive recruitment firm is required to travel from Los Angeles to meet the consultants from the executive firm or client in Toronto, and incurs travel and meal expenses for which the candidate is reimbursed by the firm after submitting receipts, with such reimbursed expenses then being invoiced to the client of the firm in accordance with the engagement agreement. Will CRA view this and other such candidates as volunteers for the purpose of s. 175?
Based on the information provided, it does not appear that we would identify these individuals as volunteers with the required nexus to the firm that would satisfy the conditions established in section 175 of the ETA.
In order for section 175 to apply, the candidate must be an individual who is employed by the person providing the reimbursement, be a member of a partnership that is providing the reimbursement, or be a volunteer who gives service to a charity or a public institution that is providing the reimbursement. Although it has not been established whether the firm is a bona fide charity or public institution, the candidate is not a volunteer giving service to the firm. Based on the information provided, the only connection between the firm and the candidate appears to be the seeking of a future employment opportunity.
Q.9 Whether supply in Canada where Incoterms® modified with indemnity
Company A sells taxable tangible personal property (the Property) to Company B (also a GST/HST registered corporation) using the Incoterms® 2010 EXW Company A’s premises Halifax, Nova Scotia (the First Sale), so that delivery and transfer of title occurs when the Property is placed at the disposal of Company B at Company A’s premises in Halifax.
Company B immediately resells the Property to Company C, an unregistered non-resident, using the Incoterms® 2010 DAP Port of Liverpool, U.K. (the Second Sale), so that delivery and transfer of title of the Property will occur at the named U.K. destination – although Company B and Company C modify the Incoterms® 2010 DAP Destination and provide for a specific commercial indemnity from Company C to Company B in the event the Property is lost or damaged during transit from Halifax to Liverpool. Thus, even if the seller normally bears all risks of loss or damage until delivery, in this instance, this was modified by the commercial indemnity granted by Company C for the pre-delivery period during transit. Nonetheless, it could be considered that the Property was still delivered or made available by Company B outside of Canada.
The Property is then loaded onto Company C’s vessel at the Port of Halifax and is immediately exported. Import documentation required by the U.K. customs authorities is provided to Company B and then Company A.
- Is the supply of the Property between Company B and Company C (the Second Sale) deemed to be made outside of Canada under s. 142(2)(a)?
- What if Company C’s affiliate (and not Company C itself) provided the commercial indemnity in a side agreement?
- Is the First Sale zero-rated under Sched. VI, Pt. V, s. 1?
- Although we are unable to conclusively determine the place of supply of the supply of the Property by Company B to Company C under the Second Sale without a thorough review of all the relevant facts, including the agreements between the parties, it appears, based on the fact that Company C acquires physical possession of the Property in Canada pursuant to the terms of the agreement, that paragraph 142(2)(a) of the ETA would not apply to deem the supply to be made outside Canada.
- Our response in Part (a) would not change if it were established that Company C’s affiliate (and not Company C itself) provided the commercial indemnity in a side agreement.
- As in the response to Part (a), we are not able to conclusively determine the GST/HST status of the supply by Company A to Company B under the First Sale without reviewing all the relevant information. However, if it is determined, based on a thorough review of all the agreements, that Company B is making a supply of the Property to Company C where delivery of the Property to Company C occurs in Canada, it appears that the supply by Company A to Company B would not be considered to be a zero-rated supply under section 1 of Part V of Schedule VI to the ETA.
Q.10 Meaning of payable under SAM formula and s. 221 exclusion
A Canadian financial institution makes a taxable supply of services (Services) to an unrelated Canadian selected listed financial institution (SLFI), for cash consideration but erroneously fails to invoice and collect any GST/HST in respect thereof.
Under s. 225.2(2), the SLFI is required to determine its net tax under the formula [(A-B) x C x (D/E)] - F + G (SAM Formula). Element A is defined as the total of “(a) all tax… that became payable under any of subsection 165(1) and sections 212, 218 and 218.01 by the financial institution during the particular reporting period or that was paid by the financial institution during the particular reporting period without having become payable.” S. 168(1) indicates that the GST/HST would have become payable respecting this supply no later than the date that the consideration was actually paid.
S. 228(2.3) provides that “where a person who is a [SLFI] is required to file a final return … (a) the person shall calculate … the net tax … (b) where the net tax of the person… is a positive amount, the person shall remit that amount to the Receiver General on or before the day the final return for the reporting period is required to be filed.”
In contrast, s. 278(2) provides, respecting remittance obligations, that “[e]very person who is required under this Part to pay or remit an amount shall, except where the amount is required under section 221 to be collected by another person, pay or remit the amount to the Receiver General.”
- Do these provisions require the SLFI to include the tax payable respecting the Services when calculating its net tax under the SAM formula for its final return, notwithstanding that the tax was not invoiced by, or paid to, the supplier?
- Notwithstanding CRA’s answer to (a), would s. 278(2) still prevent the SLFI from having to remit any tax in respect of the Services, on the basis that the supplier should have collected and remitted such tax under s. 221?
- How should the SLFI report?
Our comments are based on our understanding that tax is payable on the Services under subsections 165(1) and (2) of the ETA.
(a) and (c) Uninvoiced tax
As part of calculating net tax for a reporting period, a person that is an SLFI is required to use the special attribution method (SAM) formula in subsection 225.2(2) of the ETA to calculate the SLFI’s tax liability for the provincial part of the HST for the participating provinces.
As a recipient of a taxable supply, the SLFI generally would be required to include the GST/HST with respect to the supply in certain elements of their SAM formula calculation for a particular reporting period, such as elements A, B and F.
Element A of the SAM formula includes all the GST or federal part of the HST (other than a prescribed amount of tax [FN1: A prescribed amount of tax for purposes of element A of the SAM formula is an amount described in section 40, subsection 55(2) and paragraphs 60(a) and 63(a) of the Selected Listed Financial Institution Attribution Method (GST/HST) Regulations (SLFI Regulations).]) that became payable under any of subsection 165(1) and sections 212, 218 and 218.01 of the ETA by the SLFI during the particular reporting period or that was paid by the SLFI during the particular reporting period without having become payable.
Element B of the SAM formula includes all input tax credits (ITCs) for the GST and federal part of the HST (other than ITCs for a prescribed amount of tax referred to in paragraph (a) of element A) claimed for the current or preceding reporting periods in the SLFI’s return for the particular reporting period.
Element F of the SAM formula includes all tax (other than a prescribed amount of tax [FN2: A prescribed amount of tax for purposes of paragraph (a) of element F is an amount described in section 40 and subsection 55(2) of the SLFI Regulations.]) under subsection 165(2) that is the provincial part of the HST in respect of a supply made to the SLFI in the participating province or under section 212.1 of the ETA that is calculated at the tax rate for the participating province, that became payable or was paid without having become payable by the SLFI during the particular reporting period, or under certain conditions any other reporting period that precedes the particular reporting period where the particular reporting period ends within two years after the fiscal year that includes the other reporting period.
Tax would have become payable by the SLFI under subsection 168(1) of the ETA on the earlier of the day the consideration for the supply was paid and the day the consideration for the supply became due. Under subsection 152(1) of the ETA the consideration, or a part thereof, for a taxable supply is deemed to become due on the earliest of:
- the earlier of the day the supplier first issues an invoice in respect of the supply for that consideration or part and the date of that invoice;
- the day the supplier would have, but for an undue delay, issued an invoice in respect of the supply for that consideration or part; and
- the day the recipient is required to pay that consideration or part to the supplier pursuant to an agreement in writing.
Under subsection 238(2.1) of the ETA, a person that is an SLFI that has a monthly or quarterly reporting period is required to file an interim return and a final return for the reporting period.
According to subsection 228(2.1) of the ETA, where an SLFI is required to file an interim return (for example, Form GST34) for a reporting period, the SLFI is required to calculate its interim net tax which is the amount that would be the net tax of the SLFI for the reporting period if the description of element C in the SAM formula in subsection 225.2(2) were read as “is the lesser of the financial institution's percentage for the participating province for the taxation year and the financial institution's percentage for the participating province for the immediately preceding taxation year, each determined in accordance with the prescribed rules that apply to financial institutions of that class”. Where the interim net tax for the reporting period is a positive amount, the SLFI must pay that amount, on account of its net tax that it is required to remit under paragraph 228(2.3)(b), on or before the day that the interim return is required to be filed.
Under subsection 228(2.3), where an SLFI is required to file a final return (for example, Form GST494) for a reporting period, the SLFI is required to calculate its net tax for the reporting period. Where the net tax of the SLFI for the reporting period is a positive amount, the SLFI is required to remit that amount to the Receiver General on or before the day on or before which the final return for the reporting period is required to be filed and the SLFI is required to report the positive amount, if any, that the SLFI paid on account of its net tax for the period in the interim return or the negative amount, if any, that the SLFI claimed in the interim return for the period. Where the SLFI claimed an interim net tax refund for the reporting period, if the interim net tax refund exceeds the amount that would be the net tax refund for the period payable to the SLFI if the SLFI had not claimed that interim net tax refund, the SLFI is required to pay an amount equal to the excess to the Receiver General on or before the day on or before which the final return for the reporting period is required to be filed. If the SLFI’s net tax for the period is a positive amount, the SLFI is required to pay an amount equal to the interim net tax refund to the Receiver General on or before the day that the final return for the reporting period is required to be filed.
Although in your example there is insufficient information to determine when tax was payable under subsection 168(1) and subsection 152(1), we can confirm that the SLFI would generally be required to include the tax payable in respect of the Services in its net tax calculation and interim net tax calculation, where applicable, for the particular reporting period during which the tax became payable. Specifically, in your example, the amount of tax payable in respect of the Services by the SLFI in that reporting period would be included in its SAM formula calculation [FN3: The tax payable would not be included in element B of the SAM formula even if the SLFI would generally be eligible to claim an ITC with respect to the Services as the ITC documentation requirements in respect of the tax payable would not be met.] which is used to determine the SLFI’s tax liability for the provincial part of the HST for the participating provinces and which is an adjustment to the SLFI’s net tax calculation and interim net tax calculation where applicable. This would be the case whether the SLFI has a monthly, quarterly or annual reporting period.
(b) S. 278(2)
Under subsection 278(2) of the ETA, a person is required to pay or remit an amount (that is, any amount required to be paid or remitted under Part IX of the ETA) to the Receiver General except where the amount is required under section 221 of the ETA to be collected by another person. In your example, the supplier of the Services is required to collect the HST payable by the SLFI under subsection 221(1) and include the HST in the supplier’s net tax calculation. If the supplier’s net tax is a positive amount, the supplier will remit that amount to the Receiver General. However, this does not have an impact on the SLFI’s net tax calculation or its SAM formula calculation.
In a particular reporting period, an SLFI includes an amount of tax payable, or paid without having become payable, by the SLFI during the reporting period in its SAM formula calculation in order to determine its tax liability for the provincial part of the HST for the participating provinces which could result in the net tax or interim net tax for a reporting period being a positive amount that is required to be remitted to the Receiver General. In your example, any amount of tax payable by the SLFI in a particular reporting period with respect to the Services will be included in the SLFI’s SAM formula calculation for that reporting period and consequently, its net tax or interim net tax calculation. If the SLFI’s net tax or interim net tax amount is a positive amount, the SLFI will remit that amount to the Receiver General in accordance with subsection 278(2).
Q.11 Nominee with small JV interest/JV determined notwithstanding label
Does a nominee title holder of the joint venture property that makes a small financial contribution to the joint venture, in exchange for a small co-ownership interest in the property of the joint venture and an entitlement to share in the profits (or losses) of the joint venture in proportion to its co-ownership interest, qualify as a “participant” in the joint venture as described in para. (a) of the definition of “participant” in Policy Statement P-106? Also, can CRA confirm our understanding that it will be issuing its position that where an agreement is a joint venture at law, it is a joint venture for purposes of the election under s. 273, notwithstanding any provision in the particular agreements governing the joint venture which may state otherwise?
Yes, the nominee with a financial contribution to the joint venture in exchange for a co-ownership interest and proportionate share of profit (or losses) is a "participant” as defined in paragraph (a) above.
Regarding a future publication, we will confirm the position that a joint venture at law is considered to be a joint venture for purposes of the joint venture election under section 273 in a planned publication. Where particular joint venture agreements contain provisions that cause us to question the status of the joint venture, the agreements will be examined.
Q.12 Engaging s. 296(2.1) before audit
A non-registered corporation did not self-assess under s. 191(3) on completing the construction of a triplex nor did it claim ITCs. In response to Q.9 at the 2015 Roundtable, CRA indicated that, if the corporation sent to CRA, in the same envelope, a return declaring and remitting the GST under s. 191(3), and rebate claims under ss. 257 and 256.2(3) (resulting in a net refund position), s. 296(2.1) would not apply and s. 228(6) would apply, with the result that the tax would not be considered to have been paid until the filing of the return so that a s. 280.1 penalty and s. 280(1) interest would apply.
Would the answer change if, in the same envelope, the corporation made the s. 191(3) filing (the same as before) but, rather than making the rebate claims, instead only provided the invoices and other documentary support showing the availability of such claims and, in its covering letter, indicating that it was not making such rebate claims and instead was requesting CRA to apply s. 296(2.1)?
In general, if the corporation submits the documents as described above, our response would remain the same as that provided in 2015. It would appear that subsection 228(6) of the ETA would apply in this case.
Provided that the corporation met all the requirements for qualification, it could make a request under the voluntary disclosure program to request relief from the application of penalties and interest.
Q.13 Wire transfer issues
A non-resident client pays by wire transfer and follows the instructions on the CRA website, which suggests sending a fax to the Revenue Processing Section to confirm payment - but still receives an assessment for non-payment. Please comment including on whom to contact.
The Payment Processing section at the CRA should be contacted if you encounter any difficulties making a wire transfer payment to the CRA. The Call Centre Services Directorate can be contacted regarding any issues with agents on the telephones.
The CRA receives approximately 400 wire transfers per day and strives to process them as accurately and efficiently as possible.
Unfortunately, many of the wire transfers that the CRA receives do not include an account number. The wire transaction may have had an account number when it started out but by the time it goes through intermediary banks and is received at the CRA, the information is no longer included in the file.
Wire transfers are sent through the banking system based on the originating bank. Intermediary banks often have a limit on the number of characters allowed in the transaction, so this can result in some essential information being cut off.
Currently, the best way to ensure that a wire transfer is successful is to also send a fax with the account information. The fax should be sent to the attention of the CRA’s Revenue Processing Section at fax number 204-983-0924.
With the launch of the new ISO 20022 standard (expected in 2019), the information on a wire transfer will be fixed information and we will be able to ensure the “fixed field” is at the front of the data stream instead of the end. Additionally, there will be additional characters allowed. We expect this will resolve the current payment allocation challenges for these wire transfers.
Q.14 S. 186 treatment post-Miedzi of parent governance expenses
CRA has required a direct link to exist between the use or consumption of the good and the service by a parent and the shares of the capital stock of the related corporation such that s. 186(1) would for example not apply to:
- document preparation services for the board of directors of the parent;
- expenses related to discussions regarding the replacement of members of that board;
- updating the share register of the parent.
To the extent that a parent corporation has as its sole activity the ownership of shares of another corporation, will parent be entitled to claim ITCs, pursuant to s. 186(1), respecting the services described above (to the extent the other conditions are met) as decided in Miedzi Copper?
Our position on the interpretation of section 186 of the ETA has not changed. It is a question of fact whether subsection 186(1) would apply in a particular situation. With respect to the court decision mentioned in the question, we would, for example, apply the Court’s decision in the Miedzi case (Miedzi Copper Corporation v. The Queen, 2015 TCC 26) where a particular situation has the same facts as Miedzi. Although the facts presented in the question appear to be similar to those in Miedzi, they are not the same. However, if you have a question about the application of subsection 186(1) to a particular situation, you may request a written GST/HST ruling and provide us with all of the relevant facts and documents.
Q.15 Required date of supplier’s registration for ITC purposes
Systematix Technology Consultants (2006 TCC 277, aff’d 2007 FCA 226) stated that “there must be a registration number assigned to the supplier in conformity with subsection 241(1) is the time of the supply or, at the latest, the time of the filing of the return.” SNF L.P., 2016 TCC 12, held that an ITC cannot be claimed for GST/HST that was paid to a supplier where the supplier’s registration number was cancelled by the CRA as of the date of the sale. What is the exact date on which the registration number must be valid?
Generally, the registration number assigned to the supplier must be valid at the time the tax in respect of the supply becomes payable by the recipient or is paid by the recipient without having become payable. This is consistent with when the ITC of the recipient first arises under subsection 169(1) of the ETA, and when the tax becomes collectible or is collected by the supplier. The requirement under paragraph 169(4)(a) and the Input Tax Credit Information (GST/HST) Regulations to obtain the GST/HST registration number assigned to the supplier is intended to substantiate that the supplier is validly registered for purposes of claiming the ITC.
The CRA provides a GST/HST Registry on the Canada.ca website which enables a person to verify if a particular supplier that is charging the GST/HST in respect of a supply is registered for GST/HST purposes. As indicated on the GST/HST Registry webpage, this will help ensure that a recipient's claims for ITCs only include GST/HST that is charged by someone who is registered for GST/HST.
The determination of a registrant’s entitlement to an ITC under subsection 169(1) and whether the ITC documentary requirements under subsection 169(4) have been met is subject to verification by the CRA at the time of audit. However, under subsection 169(5), the Minister is given discretionary power in certain circumstances to exempt a specified registrant, a specified class of registrants, or registrants in general from the documentary and information requirements stated in subsection 169(4), if the Minister is satisfied that there is, or will be, sufficient evidence to establish the particulars of a supply and the tax paid or payable in respect of the supply. The Minister may also specify the terms and conditions for applying such an exemption.
Q.16 Timing and tracing of s. 211 elections
Charities often make a s. 211 election where there are leasing real property to others.
- Can a charity with no other commercial activities register for GST/HST prior to (as contrasted to contemporaneously with) filing a s. 211 election (on the basis of the future taxable supplies it will make once it files its s. 211 election)?
- Can a charity find out from CRA if it has previously filed a s. 211 election?
a) Prospective commercial activity
Generally, where a charity files an election under section 211 of the ETA that would result in the charity making taxable supplies of real property for GST/HST purposes, the charity may be eligible to voluntarily register for GST/HST purposes before the effective date of the election if paragraph 141.1(3)(a) of the ETA applies to deem something done by the charity (other than making a supply) in connection with the acquisition or establishment of a commercial activity to be done in the course of a commercial activity of the charity.
In order for paragraph 141.1(3)(a) to apply, the charity would have to demonstrate a clear intention to engage in a commercial activity. For example, consideration would be given to the date on which the charity intends to start making taxable supplies; the existence of proposed contracts for the supply of the property; and other evidence that would support the charity’s intention to make taxable supplies. Such a demonstration would be required regardless of whether the charity is, before the effective date of the election, not making any supplies or only making exempt supplies in respect of the real property included in the election.
Although a charity may be eligible to voluntarily register for GST/HST purposes before the effective date of the election, any ITC eligibility would be determined based on the purpose for which a particular input is acquired, imported or brought into a participating province. In addition, consideration would have to be given to whether an ITC is eligible under the net tax calculation method for charities in subsection 225.1(2) of the ETA.
We would like to clarify that:
- The election under section 211 is applied on a property-by-property basis (that is, the election applies to the entire legal description and not just to a portion of the real property).
- The deeming rules in paragraphs 211(2)(a) and (b) do not apply where the charity:
- acquires the real property on the day the election takes effect; or
- becomes a registrant on the day the election takes effect.
b) Retrieving election history
Generally, a GST/HST registrant or its authorized representative can sign-in to the registrant’s My Business Account and select the “view elections” feature in order to access information about certain elections that have been processed for the account. However, information about an election filed under section 211 (that is, Form GST26, Election or Revocation of an Election by a Public Service Body to Have an Exempt Supply of Real Property Treated as a Taxable Supply) is not available under this feature.
To find out if an election under section 211 has been filed in the past, authorized persons can submit an enquiry through the “enquiries service” feature in My Business Account/Represent a Client. If the charity or public service body does not have access to My Business Account they can contact the CRA at 1-800-959-5525.
Q.17 Unscheduled railway car repairs under Sched. VI, Pt. V, s. 6.1
In the railway industry, maintenance orders generally are tracked as either scheduled maintenance - or as “bad orders,” being for repair services of railway rolling stock other than regularly scheduled maintenance, many of which arise where required repairs to rolling stock cannot be timely completed at U.S. facilities. Would all “bad orders” qualify as an emergency repair service for the zero-rating purposes of Sched. VI, Pt. V, s. 6.1 (and what are the relevant factors)?
As described in GST/HST Memorandum 4-5-3, Exports - Services and Intellectual Property, an “emergency” is an unforeseen event or combination of events that calls for immediate action. The repairs must be of an urgent nature, such that if not immediately undertaken, the existing conditions could seriously affect the safety of the conveyance, the property or passengers being transported, or the people working on or about the conveyance. Whether a particular repair service referred to as a “bad order” would qualify as an emergency repair service for purposes of section 6.1 of Part V of Schedule VI to the ETA would depend on the facts of each situation.
Q.18 Whether sales on consignment cause non-resident to carry on business in Canada
VCo, which is a non-resident GST/HST registrant. sells goods to PCo on consignment, with the goods being shipped under the Incoterm® “Free Carrier” (FCA) VCo’s warehouse in the U.S., so that the goods are considered to be delivered to PCo at VCo’s warehouse there; and PCo assumes all risks regarding the goods once such delivery occurs. Under the consignment arrangement, once PCo finds a customer, there will be a flash sale of the goods by VCo to PCo and a subsequent sale by PCo to its customer. Six months after the date of delivery of the goods, PCo must either agree to purchase any remaining unsold goods at a 60% discount or destroy the remaining goods, in which case it would pay no consideration to VCo.
Given the above facts, would the CRA consider the place of supply to be outside Canada in the following scenarios:
- Is the supply outside Canada if PCo imports the goods into Canada after it takes delivery in the U.S. and, as the importer of record, pays all applicable tax on importation. PCo then sells the goods in Canada and charges the customer the applicable GST/HST. Under the consignee agreement, VCo is considered to sell the goods to PCo, and title transfers to PCo immediately prior to PCo’s sale of the goods to its customer in Canada.
- If VCo instead were not registered for GST/HST and had no presence in Canada other than as described under this consignment arrangement (that is, no employees or agents in Canada, no bank account in Canada, payment by PCo to VCo takes place outside Canada), would it be considered to be “carrying on business in Canada” and required to register for GST/HST purposes.
As indicated in the background section of the question, the issue of determining the place of supply of goods made by a non-resident supplier pursuant to a consignment arrangement was raised by the CBA in Q23 of the 2016 Round Table meeting. The CRA response to Q23 was:
There are insufficient facts in the question for the CRA to conclusively determine the place of supply of the goods in the two scenarios described. Additional information, including the specific terms of the arrangement between the two parties would be necessary for us to make a place of supply determination.
Although there are additional facts in this request, we are not in a position to provide a conclusive determination of the place of supply or the carrying on business determination for the non-resident supplier (VCo in this instance) that would substantially differ from the responses to Q13 of the 2008 CBA, Q13 of the 2012 CBA or Q23 of the 2016 CBA.
However, if it is determined, based on all the relevant facts, including the terms of their agreement, that PCo acquires ownership of the goods that remain unsold 6 months after taking delivery of them outside Canada by virtue of their obligation to either purchase them at a 60% discount or destroy them, then the supply of the goods by VCo to PCo would likely be considered to be made outside Canada pursuant to paragraph 142(2)(a) of the ETA. Where this is determined to be the case, and VCo has no other presence in Canada as indicated in Question (b), VCo would not be considered to be carrying on business in Canada for GST/HST purposes and would therefore not be required to register for GST/HST purposes.
As has been discussed in previous meetings, should certainty be required with respect to the place of supply determination and whether a particular non-resident supplier is carrying on business in Canada and required to be registered for GST/HST purposes, a GST/HST ruling may be requested. The CRA would issue a determinative ruling with respect to a particular situation provided all the facts and relevant information, including the relevant agreements, are provided.
Q.19 No adoption of ARQ fast track ITC claim procedure
Under CRA’s previous “fast track” ITC procedure, a registered recipient, in specific circumstances targeting high-dollar transactions, could obtain an ITC directly from CRA in order to remit the GST/HST to the supplier, without having to wait for its refund. Although CRA suspended this procedure, Revenu Québec currently now accepts “fast track” requests, when various criteria are met, including:
- the requested refund is over $500,000 of net tax;
- the GST/HST and QST filing frequency of the recipient and the supplier is monthly;
- there are no late returns or payments in any tax account respecting the recipient; and
- there is no agency relationship between the recipient and supplier.
Will CRA reinstate its “fast track” procedures?
The CRA had, until a few years ago, an informal process, however, no requests were received and the service was discontinued. At this time, there is no intention to put in place an administrative policy in respect of “Fast track” procedures for ITCs. In our current risk assessment model, high dollar claims are highlighted and prioritized for screening thus alleviating the need for a supplementary fast track process.
Q.20 Bifurcating supply into taxable/non-taxable components (Intrawest)
Club Intrawest held that that although there was a single supply of services respecting real estate situated inside and outside Canada, the single supply could be split for purposes of applying the place of supply rules in s. 142, stating:
[T]he services are inherently distinct in one important respect: the services relating to the operation of the vacation homes located in Canada are services in relation to real property situated in Canada and hence are a taxable supply—the services relating to the operation of the Intrawest vacation homes situated outside of Canada are services related to real property situated outside of Canada and hence are a non-taxable supply.
- Will CRA apply the FCA’s decision to all similar situations where a single service is made in relation to real property situated inside and outside Canada for purposes of the place of supply rules (and, if so, when will it consider that services are “inherently distinct in one important respect”?
- Can a single supply be broken down into “inherently distinct” parts for other purposes, e.g., (i) exempt v. taxable, or (ii) zero-rated v. taxable, where specific deeming rules to this effect (e.g., s. 163, 138 or 139) do not apply?
The CRA will apply the FCA’s decision regarding services relating to real property (that is, splitting up a single supply of services in relation to real property) to similar situations where a single supply of a service is made in relation to real property situated inside and outside Canada for purposes of the place of supply rules in section 142 of the ETA only.
We note that the end result of the FCA decision is generally consistent with the CRA’s position (as set out in GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax - Place of supply rules for determining whether a supply is made in a province) regarding the application of the place of supply rules in section 142 to services in relation to real property, pursuant to which only the proportion of the service that relates to the real property that is situated in Canada is considered to be made in Canada and subject to GST/HST.
Q.21 Post-fire repair services to condo corp (Sched. V, Pt. I, s. 13)
After a fire in a condominium unit, the contractor performing restoration work charges GST/HST to the condo corporation. The insurer denies coverage for the GST/HST portion of such charge on the basis the condo owner is able to claim an input tax credit (ITC).
- Do the restoration services come within Sched. V, Pt. I, s. 13 as a service that “relates to the occupancy or use of the unit” – or is the condo corporation regarded as a bare trustee for and on behalf of all residential unit owners, so that there is a supply of the restoration services directly to each of the owners or the particular owner whose unit sustained the damage?
- Does the insurer’s position respecting an available ITC have any merit?
The condo corporation’s declaration, the condominium act of the province in which the condominium complex is located, and the insurance policy held by the condo corporation will help determine who is responsible for restoring a residential condominium unit back to its original state where the unit has sustained damage due to a fire.
Generally, insurance policies covering property damage contain provisions under which the insurer agrees to indemnify the insured person for damage to property by:
- making a cash settlement with the insured person;
- paying the cost of replacing the property; or
- paying the cost of repairing the property.
Under the principle of indemnity, an insurer is required to pay an insurance claim to the extent of the actual loss suffered by the insured person in accordance with the terms of the insurance policy. The net-of-GST/HST method adheres to the principle of indemnity in the settlement of insurance claims under the GST/HST. If the insurer uses the net-of-GST/HST method, the amount paid by the insurer to settle the insurance claim generally does not include that part of the GST/HST that the insured person is entitled to claim as an ITC or rebate. Please refer to GST/HST Memorandum 17-16, GST/HST Treatment of Insurance Claims for further information relating to the treatment of insurance claims for GST/HST purposes.
For the insured person to be eligible to claim an ITC in respect of the GST/HST payable on the acquisition of property or services (for example, restoration services) all requirements for claiming an ITC must be met. Specifically, the insured person must be a GST/HST registrant, the property or services must be acquired for consumption, use or supply in the course of the insured person’s commercial activities, and it must be the insured person who is legally liable to pay the consideration and the GST/HST on the acquisition of the property or services (that is, the insured person must be the recipient of the supply of the property or services).
To the extent that the insured person is not eligible to claim an ITC or a rebate, the amount paid by the insurer to the insured person to settle the insurance claim generally includes the amount of GST/HST that the insured person is not entitled to claim as an ITC or rebate.
Where a condo corporation is the insured person and is responsible for restoring a residential condominium unit back to its original state where the unit has sustained damage due to a fire, it is likely the condo corporation that is legally liable to pay the consideration and the GST/HST for the restoration services. Therefore, in order to be eligible to claim an ITC with respect to the acquisition of the restoration services, all conditions for claiming an ITC must be met, including that the condo corporation be a GST/HST registrant and the restoration services be acquired for consumption, use or supply in the course of the condo corporation’s commercial activities.
Section 13 of Part I of Schedule V to the ETA exempts a supply of property or a service, made by a corporation or syndicate established upon the registration, under the laws of a province, of a condominium or strata lot plan or description or similar plan or description, to the owner or lessee of a residential condominium unit described by that plan or description, if the property or service relates to the occupancy or use of the unit.
Generally, a condo corporation’s supply, to a resident, of a service of restoring a residential condominium unit back to its original state where the unit sustained damage due to a fire would relate to the use or occupancy of the unit. As such, the condo corporation’s supply of the service to the resident would be exempt under section 13 of Part I of Schedule V to the ETA. Any restoration services acquired by the condo corporation for the purpose of making such a supply to a resident would not be acquired for consumption, use or supply in the condo corporation’s commercial activities. As such, the condo corporation would not be eligible to claim an ITC for the GST/HST payable on the acquisition of the restoration services from the contractor.
We would encourage CBA members to request a GST/HST ruling if they are uncertain about the application of section 13 of Part I of Schedule V to the ETA to their particular situation.
Q.22 Franchisor fees charged to exempt educational business
A franchisor operates a business through franchises of an educational service that is an exempt supply. The franchisor for an educational services business charges a franchise fee to the franchisee, as well as charging ongoing royalties based on a fixed percentage of the revenues from the exempt business. Given that the essence of the contractual relationship is the operation of a business involving the making of exempt supplies, are the franchise fees and ongoing royalty payments incidental to the exempt educational services and therefore also exempt supplies?
The determination of whether single or multiple supplies are being made depends on a complete set of facts, as well as consideration of the criteria outlined in P-077R2, Single and Multiple Supplies. Where multiple supplies are made, the conditions of section 138 of the Excise Tax Act, such as a particular property or service being supplied together with other property or service for a single consideration, would also need to be met. Further information on whether one supply is incidental to another for GST/HST purposes is available in P-159R1, Meaning of the Phrase “Reasonably Regarded as Incidental” and P-160R, Meaning of the Phrase “Where a Particular Property or Service is Supplied together with any other Property or Service”.
To conclusively respond to the question would require consideration of all relevant facts. A GST/HST ruling may be requested from the CRA if a conclusive response with respect to a particular situation is required.
Q.23 Printed book requirement for audio recordings
Where there is a recording of a spoken reading of a book that was published electronically, such as a book published only on Kindle, with no printed version, will there be considered to be an audio recording of a “printed book? What if the publisher keeps one copy of the book so that a “printed book” does exist, although it is not sold to the public?
Section 259.1 of the ETA, in part, provides for the rebate of the GST or the federal part of the HST payable by specified persons on the acquisition of “an audio recording all or substantially all of which is a spoken reading of a printed book”. Under provincial legislative authority, the participating provinces of Ontario, Nova Scotia, New Brunswick, Newfoundland and Labrador, and Prince Edward Island, provide for a rebate of the provincial part of the HST payable on the acquisition of such property, in their respective provinces, by all persons. The Deduction for Provincial Rebate (GST/HST) Regulations is part of the administrative framework that allows the CRA to administer the provincial rebates on behalf of the provinces.
Under subsection 259.1(2), a rebate is generally not available where an audio recording all or substantially all of which is a spoken reading of a printed book, is acquired for the purpose of sale or is to be given away. However, specified persons that are prescribed charities or prescribed qualifying non-profit organizations, whose primary purpose is the promotion of literacy, are not subject to this restriction. In contrast, the provincial rebates are provided without restriction.
Electronically published written works are not printed books and thus, when an audio recording is made that is a spoken reading of an electronically published written work, neither of the aforementioned rebates would be allowed. However, if it is established based on the facts, that a printed book pre-exists the “audio recording all or substantially all of which is a spoken reading of a printed book” it would appear that the audio recording would qualify for both rebates (subject to the noted restrictions). The determination as to whether a printed book exists in a particular situation is a question of fact requiring consideration of all relevant facts.
Q.24 Interaction between Wash Transaction Policy and s. 296(2)
ABC Drilling and ABC Mining (closely-related corporations involved exclusively in commercial activity) receive invoices in proper form from a consultant for $100,000 (plus 13% HST) and $50,000 (plus 13% HST), respectively, but due to a mix-up, each claims an input tax credit based on the other’s invoice.
- Upon discovering this on audit, how would CRA assess ABC Mining respecting this issue for that monthly period?
- Does the Wash Transaction Policy result in the waiver/cancellation of interest in excess of 4% of the ITCs disallowed ($13,000), or 4% of the difference in net tax ($6,500)?
- The examiner or auditor would assess $6,500 as over-claimed ITCs. They would then flag this amount as the “wash base amount”. The amount of interest waived or cancelled would be based upon this particular amount.
- The system automatically calculates the amount of penalty/interest based upon the wash base amount identified by Audit. The system will compare the 4% flat calculation on the wash base amount to the statutory interest/penalty calculation on that same wash base amount. It will then apply the lower of the two.
- If the 4% is less than the statutory penalty/interest amount, we will use the 4% amount and post that amount to the period.
- If the 4% is greater than the statutory penalty/interest amount, we will ignore the 4% and post the statutory penalty/interest amount.
Note that the 4% is interest bearing and accrues interest from the date of the Notice of Assessment until the balance is paid in full. The statutory prescribed interest has an effective date equal to the balance due date (reporting period).
Q.25 Commercial use of CRA Registry
The CRA website states: "Any commercial reproduction of the registry results is strictly prohibited.” Are third parties permitted to use the GST/HST Registry to confirm, on behalf of their clients, the GST/HST registration status of their respective suppliers?
Creating any kind of database or commercial product that would sell the information that is available on the registry, would not be acceptable. In other words, it is ok for a lawyer to charge a fee for their time searching the registry – that is a service provided to their client. What is not ok is the creation of a database or listing of all the information from the registry and the charging of a fee for access to that information.
Q.26 Scope of Voluntary Disclosure Program
- Large, sophisticated corporations may be involved in “wash” transactions that involve large dollar amounts over long periods of time. Are wash transactions entitled to presumptive relief under Category 1, rather than Category 3?
- Memo 16-5, para. 17 appears to make a strong link between $250M of gross revenues and Category 3 treatment. Should large corporations always assume that they will only be considered under Category 3, or does the flexibility afforded in Memo 16-5, para. 19 for “reasonable errors” soften this connection?
- The criteria in paras. 17 – 19 of Memo 16-5 go far beyond the stated purpose of para. 15 of Memo 16-5 of dealing with “intentional conduct” or “gross negligence” and, appear intended to include taxpayers who the CRA thinks “should have known better.” Is this intended?
- Generally, large corporations and their related entities who make applications for relief involving GST/HST wash transactions that are eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations will be eligible for relief related to the wash transactions submitted under the General Program (“Category 1”). For examples of eligible wash transactions, please see this memorandum. Wash transactions not eligible for relief under the policy set out in GST/HST Memorandum 16-3-1, will normally be treated under the General Program (“Category 2”).
- While striving for consistency in approach to the administration of applications received from large corporations and their related entities for income tax and GST/HST (and Excise taxes), we recognize that the transactional basis of GST/HST and Excise taxes can result in reasonable errors. VDP officers responsible for reviewing applications for relief made by large corporations and their related entities will make referrals to a program specialist responsible for large case audits in order to fully analyze the application.
- Generally, relief under the Limited program (Category 3) provides limited relief for applications that disclose non-compliance where there is an element of intentional conduct on the part of the registrant or a closely related party. While the primary driver for determining the program (category) under which relief will be granted is the existence or absence of an element of intentional conduct on the part of the registrant or a closely related party, in all cases, the following factors may be considered as either contributing or mitigating factors when determining under which category a VDP application should be processed:
- the dollar amounts involved;
- the number of years of non-compliance;
- the sophistication of the registrant; and
- how quickly the registrant took corrective measures to address their non-compliance upon its discovery.
Q.27 Update on Audit Issues
A verbal update was provided.
Q.28 Update on Court Cases/Objections
A verbal update was provided.