27 February 2020 CBA Roundtable

This provides summaries of questions posed to CRA at the February 27, 2020 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 Aircraft importation by lessee after lease novation

Situation and questions

A commercial aircraft, which was owned by a non-registered, non-resident of Canada (“Owner”), was leased to a registered Canadian-resident corporation (“Lessee”) for use in international passenger or freight transportation, was originally delivered to Lessee outside of Canada, with Lessee paying GST on its importation. Ownership of the aircraft is then transferred outside Canada to a non-registered non-resident purchaser (“Purchaser”) while the aircraft is situate outside Canada, whereupon the lease is novated. The aircraft is delivered or made available to Lessee under the novated lease when it is physically situated outside of Canada, following which the Lessee brings the aircraft into Canada in connection with its international transportation business.

Is GST payable on the aircraft under Division III when it is first imported following the novation of the lease and, if so, how should the GST be paid?

Background

Note that, per s. 3(n) of the Non-Taxable Imported Goods (GST/HST) Regulations, goods that are classified under tariff item number 9814.00.00 in the List of Tariff Provisions set out in the schedule to the Customs Tariff are GST-free. This tariff item includes: “Goods, including containers or coverings filled or empty, which have once been released and accounted for under section 32 of the Customs Act and have been exported, if the goods are returned without having been advanced in value or improved in condition by any process of manufacture or other means, or combined with any other article abroad.”

However, s. 3(n) appears to exclude goods that are supplied outside of Canada, prior to importation, by way of lease, license or similar arrangement. In particular, it appears per s. 3(n)(i)(A) that the aircraft would be taxable because the last supply (i.e., the novated lease) was a “tax relieved supply”, because it was delivered outside of Canada and not subsequently imported (until now).

Accordingly, it appears that GST applies on the post-novation importation.

When goods are imported, the GST is usually reported and paid in connection with a CBSA Form B3, but such forms are generally not filed for aircraft that enter Canada and are engaged in international passenger or freight transportation. Under s. 5(1)(d) of the Reporting of Imported Goods Regulations, aircraft that qualify for entry into Canada under tariff item No. 9814.00.00 in the List of Tariff Provisions may be reported orally unless an officer requires the importer of the goods to report the goods in writing. In some cases, the CBSA has refused to accept a B3 in connection with the return of the aircraft to Canada following the novation of the lease.

Can the GST be included on Lessee’s GST return as an adjustment, rather than paid directly to the CBSA?

CRA Comments

Based on the information provided, we agree that the conditions for the importation of the aircraft to be non-taxable for GST/HST purposes under section 213 of the ETA, section 8 of Schedule VII to the ETA and, in particular, paragraph 3(n) of the Non-Taxable Imported Goods (GST/HST) Regulations do not appear to be met.

Under section 214 of the ETA, tax on imported goods is paid and collected under the Customs Act as if the tax were a customs duty levied on the goods under the Customs Tariff. The Canada Border Services Agency (CBSA) administers the imposition and collection of tax on imported goods on the CRA’s behalf. In the circumstances described, we agree that the tax is to be reported and paid to the CBSA using CBSA Form B3. The GST may not be included on the Lessee’s GST return as an adjustment. We have raised the CBA’s comment that the CBSA has refused to accept B3 forms with our counterparts at the CBSA, and they have advised us that they will ensure that their officers are aware of the proper reporting requirements.

Q.2 Waiver of reconsideration

Per s. 301(4), a person wishing to appeal directly to the Tax Court can request the Minister to waive reconsideration, whereupon the Minister “may” then confirm the assessment without reconsideration. It is understood that such requests are reviewed on a case-by-case basis and are rarely granted. The alternative is for a person to wait 180 days, to then appeal directly to the Tax Court, pursuant to s. 306(b).

Further to Q.16 from the 2017 CBA Roundtable, will the Minister consider adopting a policy regarding s. 301(4) rather than forcing taxpayers to wait 180 days?

CRA Comments

On receipt of a request under subsection 301(4) of the ETA for the Minister to not reconsider an assessment objected to, the case will be assigned and reviewed at the earliest opportunity. The Minister will only confirm an assessment under subsection 301(4) in those exceptional circumstances where the Agency wishes to resolve a controversial issue in court. In considering the objector’s request, the CRA will review and consider the following criteria before deciding whether to confirm under subsection 301(4):

1. If there is complete information on file concerning the disputed issue;
2. If the assessment is correct in all aspects;
3. If the objector indicates agreement to all of the facts on which the assessment was based; and
4. If the disputed issue is a question of law which the Agency wishes to resolve in the courts. Headquarters Appeals may be consulted on the waiver request depending on the impact or sensitivity of the case.

If the assessment is confirmed under subsection 301(4), the objector will receive notice by registered or certified mail of that decision. If the request is not granted, the objector will receive a letter advising them of the decision and the case will proceed to be reviewed with the other GST/HST objection workload.

Where there is a concurrent QST matter in dispute on the same issue which precedes the GST/HST case, the QST matter may be placed on hold for coordination.

Q.3 Drop shipment: sale by non-resident back to supplier

A non-resident that does not carry on business in Canada acquired tangible personal property (“TPP”) from a registered supplier in Canada, who retained physical possession of the property after the acquisition. Although the non-resident intended to export the TPP for sale outside Canada, it was unable to find a buyer. Pursuant to the terms of the sales contract with the supplier, the supplier buys back the TPP from the non-resident. Does s. 179(1)(d) apply to the sale to the non-resident by virtue of the subsequent sale of the TPP to a third-party, i.e., after the supplier buys back the TPP from the non-resident?

CRA Comments

The CRA is unable to confirm that paragraph 179(1)(d) of the ETA does not apply based on the facts provided. Rather, based on these facts, it appears that 179(1)(d) would apply and therefore require GST/HST to apply to the supply, subject to the application of the other relieving provisions in the section such as subsections 179(3) or 179(4).

Q.4 Meaning of causing physical possession transfer in s. 179(1)(b)

What factors should be considered in determining whether a registrant “causes physical possession of the particular property to be transferred” for purposes of s. 179(1)(b)? Would CRA look to the terms of the applicable contracts, the intention of the parties, and would the degree of physical control generally carry the most weight?

CRA Comments

The CRA would consider all relevant facts in determining whether the registrant referred to in paragraph 179(1)(b) of the Excise Tax Act has caused physical possession of the tangible personal property to be transferred. Generally, a registrant who has physical possession of the tangible personal property and transfers physical possession of the property would be considered to have caused physical possession of the property to have been transferred for purposes of paragraph 179(1)(b) of the Excise Tax Act.

Q.5 CIBC World Markets and s. 156

In light of CIBC World Markets, does CRA consider a non-resident person with a branch in Canada to be resident in Canada for purposes of the s. 156 election?

CRA Comments

We are aware of the CIBC World Markets case and are currently considering its impact on section 132 of the ETA.

Subsection 132(2) deems a non-resident person with a permanent establishment in Canada to be resident in Canada “in respect of, but only in respect of activities of the person carried on through that establishment”. Based on the clear legislative wording, it has been the CRA’s position that subsection 132(2) does not deem a non-resident person as a whole to be resident in Canada for purposes of the Part IX of the ETA. It has therefore been the CRA’s view that the non-resident person in your scenario would not be eligible to make the section 156 election.

Q.6 Updating SLFI forms

Will CRA be updating the various forms referring to proposed ETA changes and to draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, e.g., RC4601 (Reporting Entity Election), RC4602 (Request for a Group GST/HST Registration Number), RC4603 (Tax Adjustment Transfer Election), RC4604 (Consolidated Filing Election), to reflect the finalized SLFI rules, and will the forms be updated to scope in QST SLFIs completing the forms/making the elections?

CRA Comments

The CRA is currently working on updating various forms that refer to proposed changes to the Excise Tax Act and the proposed draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, such as Form RC4601 (Reporting Entity Election), Form RC4602 (Request for a Group GST/HST Registration Number), Form RC4603 (Tax Adjustment Transfer Election), and Form RC4604 (Consolidated Filing Election), to reflect the finalized selected listed financial institution (SLFI) rules. In addition, the CRA is also working on equivalent forms related to the QST.

However, as we have limited resources, creating new publications to address current issues or proposed, new or revised legislation are usually a higher priority than updating existing publications that still contain a significant amount of current and relevant information. The following publications and forms specifically related to SLFIs are also being updated and, currently, are a higher priority:

• Form RC7291, GST/HST and QST Annual Information Return for Selected Listed Financial Institutions and related Guide RC7219
• Guide RC4050, GST/HST Information for Selected Listed Financial Institutions
• GST/HST Memorandum 17.6, Definition of “Listed Financial Institution”
• GST/HST Memorandum 17.6.1, Definition of “Selected Listed Financial Institution”
• Form RC4606, GST/HST Election or Revocation for a Qualifying Small Investment Plan to be Treated as a Selected Listed Financial Institution and the new equivalent QST form
• Form RC4612, GST/HST Application to Not Be Considered a Selected Listed Financial Institution and the new equivalent QST form

We anticipate that these publications will be available this year.

We are also updating various other GST/HST forms for SLFIs and developing the equivalent QST forms. In addition, a significant amount of work has been done on new Guide RC7233, General Application for GST/HST and QST Rebates for Selected Listed Financial Institutions related to Form RC7289.

Q.7 Email communications with CRA

Is CRA considering whether taxpayers can communicate with CRA auditors using email?

CRA Comments

We are aware of the increasing desire by taxpayers and practitioners for the ability to communicate with CRA auditors via email. We recognize the importance of communication and we are always looking to improve our services. It is important to remember that the right to privacy and confidentiality is one of the underlying principles of the Canadian tax system and a right identified in the CRA's Taxpayer Bill of Rights. Accordingly, we must ensure that any communication solution between the CRA and taxpayers, including the use of email, meets our confidentiality and security requirements. Although it is too early to confirm anything yet, rest assured, all possible solutions are being considered.

At this time, we continue to encourage auditors to promote the use of My Business Account to submit documents during the course of an audit.

Q.8 Handling s. 191(3) self-supply where JV operator is not builder

Q.11 of the February 2019 Roundtable asked whether a financial participant, appointed as operator of a joint venture that constructs a MURC, qualified as a “builder” and could therefore account for all the tax on the deemed self-supply under s. 191(3) and claim the s. 256.2(3) rebate. CRA responded that the operator could do so because it had a beneficial interest in the project and was therefore a “builder”.

Administratively, will CRA also accept that an operator that does not have an interest in the property and is therefore not a “builder”, but that is the operator by virtue of having managerial or operational control, can likewise account for all the tax on the deemed self-supply, and claim all of the s. 256.2(3) rebate? If “no” on the basis that the operator is not a builder, how should the JV participants handle ss. 191(3) and 256.2(3)?

CRA Comments

We would like to begin by clarifying two things mentioned in the CBA’s summary of Question 11 from the February 2019 Roundtable Meeting.

First, Question 11 made no reference to the operator of the joint venture being a “financial participant.” We assume that the term “financial participant,” as used here in the CBA’s summary of Question 11, refers to a person who, under a joint venture agreement evidenced in writing, makes an investment by contributing resources and takes a proportionate share of any revenue or incurs a proportionate share of the losses from the joint venture activities. (Please refer to paragraph (a) of the definition of “participant” as set out in GST/HST Policy Statement P-106, Administrative definition of a “participant” in a joint venture.)

Second, Question 11 included a purported fact that the operator of the joint venture was a “builder,” as defined in subsection 123(1) of the ETA, because the operator had a beneficial ownership interest in the real property on which the multiple unit residential complex (MURC) was situated. The CBA did not explain exactly how the operator of the joint venture had a beneficial ownership interest in the real property. Furthermore, for purposes of responding to Question 11, the CRA simply accepted the purported fact without questioning it, but cautioned that the operator of the joint venture had to meet all of the conditions set out in the definition of “builder.” Specifically, in order to be a builder of a residential complex under paragraph (a) of the definition of “builder,” a person having an interest in the real property on which the residential complex is situated must carry on (or engage another person to carry on for the person) the construction of the complex. Question 11 made no mention as to who was carrying on the construction of the MURC, and consequently, the CRA concluded (based on the purported fact given by the CBA) that the operator of the joint venture was likely a builder of the MURC. The point we are making is that a beneficial ownership interest in the real property, in and of itself, is not enough to make a person (such as an operator of a joint venture) a builder of a MURC for GST/HST purposes.

Part 1 of Question 8

Turning to Question 8, it is our understanding that the CBA would like to know whether the CRA will administratively accept that a person is a builder of a MURC for GST/HST purposes where the person:

• is the operator of a joint venture by virtue of having managerial or operational control of the joint venture (presumably the CBA is referring to a person described in paragraph (b) of the definition of “participant,” as set out in GST/HST Policy Statement P-106, who has been designated the operator of the joint venture); and
• does not have an interest in the real property on which the MURC is situated. Based on the purported fact that the operator of the joint venture does not have an interest in the real property on which the MURC is situated, the operator does not meet the conditions set out in paragraph (a) of the definition of “builder.” The CRA will not administratively accept that a person is a builder of a MURC for GST/HST purposes where the person does not meet the conditions set out in the definition of “builder.”

Part 2 of Question 8

On the assumption that the response to Part 1 of Question 8 would be “no” (that is, the operator cannot account for all of the tax on the deemed self-supply and claim all of the rebates), it is our understanding that the CBA would like to know how the non-operating participants of the joint venture would handle the deemed self-supply under subsection 191(3) of the ETA and claim the new residential rental property rebate under subsection 256.2(3) of the ETA.

It is a question of fact as to how the non-operating participants of the joint venture should handle the deemed self-supply under subsection 191(3) and claim the new residential rental property rebate under subsection 256.2(3). Each of these provisions of the ETA has different conditions that have to be met, and whether these conditions have been met in a given situation has to be determined on a case-by-case basis. Again, we encourage members of the CBA to request a ruling or interpretation if they want certainty as to how these provisions would apply.

Q.9 Required s. 296(2.1) application of rebate

CRA auditors are refusing to apply s. 296(2.1) to allow the taxpayer an unclaimed rebate against the net tax or overdue amount, despite instruction in CRA’s audit manual that this is not at the discretion of the auditor. Is the CRA’s position that this provision is mandatory or at the discretion of the auditor?

CRA Comments

It is the CRA’s position that this provision is mandatory. Current audit procedures require the auditor to verify the validity of the unclaimed rebate and, if the rebate claim is valid, to send the rebate claim to be keyed into our system and processed with an effective date that is the same as the due date of the registrant's return for the reporting period under audit.

Q.10 ITC where net tax adjustment to supplier

Where CRA audits a number of reporting periods on a sample basis, determines an error rate from the samples reviewed, and applies the error rate to all transactions within the population and assesses accordingly, the final amount of tax assessed is not for GST/ HST at the appropriate rate for any specific supply of property or services. The recipient of the supply, subject to documentary requirements, would generally be entitled to claim the GST/HST paid as an ITC.

If the CRA’s error rate is applied to a list of supplies that includes a specific supply of property or services to a particular recipient and this results in an arbitrary amount of tax being assessed on that supply, will the recipient be entitled to claim such tax where, the supplier discloses in writing to the recipient that the Minister has assessed the supplier for that amount of tax, and the tax is paid by the recipient and claimed in the return that is filed for the reporting period in which the recipient paid the tax?

CRA Comments

Paragraph 225(4)(c) provides that where a registrant’s supplier failed to charge tax to the registrant before the end of the last reporting period of the registrant that ends within four years after the end of the particular reporting period in which the tax became payable where the registrant would have been eligible to claim an ITC, the registrant may be eligible to claim an ITC in the return for the reporting period in which the tax is paid by the registrant if the supplier disclosed in writing to the registrant that the Minister has assessed the supplier for that tax and the person paid the tax to the supplier after the expiration of the four-year period and before the ITC is claimed by the registrant.

Although the Minister may have assessed, that is, adjusted the net tax of the supplier based upon audit sampling methodologies, the tax payable with respect to property or services supplied to a person by the supplier is always calculated in the usual manner. The registrant (i.e. recipient) is still expected to maintain sufficient documentary evidence to reasonably substantiate the ITC claim. As always, it is a question of fact whether or not the registrant has done so and must be examined on a case by case basis. It is still the registrant’s responsibility to ensure that they have the proper ITC documentation. Keep in mind that there is no requirement in either subsection 169(4) or the Input Tax Credit Information (GST/HST) Regulations that the information be obtained in a single document or even be obtained all at the same time. In the case described above, as long as the registrant has maintained sufficient evidence to enable verification that the tax paid can be tied to taxable supplies where the supplier originally failed to charge the tax, the registrant would generally meet the ITC documentary requirements.

Q.11 Purchase of future receivables

Ruling 162056, dated February 10, 2017 distinguished between two supplies to two investors (Investor 1 and Investor 2) of rights to royalty interests in the revenue generated by businesses. The supply to Investor 1 was determined to be a “contingent” right, and therefore taxable - whereas the supply to Investor 2 was determined to be a “noncontingent” right, and therefore exempt because the supply included a “minimum monthly amount”, which guaranteed that payments would be made to Investor 2 in each month. (whereas Investor 1 received no such guarantee). Therefore, the CRA concluded the supply to Investor 2, but not to Investor 1, was a “debt security”, and exempt.

Suppose that a financial institution (“Finance Co”) makes a payment to a research company (“A Co”) for its future receivables under a Receivables Purchase Agreement, being monthly royalties that A Co expects to receive (but with no guarantee) pursuant to a Royalty Agreement the with a drug manufacturer (“Drug Co”).

1. Is the sale of receivables by A Co to Finance Co under the Receivables Purchase Agreement exempt from GST/HST?

2. Does the answer change if the receivables will be generated under a Research and Development Services Agreement between A Co and Drug Co (rather than a Royalty Agreement) under which A Co is obligated to perform R&D services for Drug Co, and the receivables will only be created if and when those services are performed?

Comments

Although the receivables are not guaranteed by A Co, in each case the receivables are not “contingent” because they are payable pursuant to contractual obligations between A Co and Drug Co under the Royalty Agreement and the Research and Development Services Agreement. Please confirm.

CRA Comments

1. Based on the facts described, we do not agree that the sale of receivables by A Co to Finance Co are exempt of GST/HST. Although described as a Receivables Purchase Agreement, it is not clear that the “receivables” purchased are debt securities as defined in the ETA.

The amounts that A Co is entitled to pursuant to its Royalty Agreement with Drug Co are contingent upon the occurrence or non-occurrence of future events that may never happen. Consequently, pursuant to the Royalty Agreement, A Co has a contingent right to be paid money from Drug Co. In turn, based on the description set out, A Co will make a supply of these same contingent rights to Finance Co. A Co makes no guarantee that the royalties will be paid. Consequently, it follows that under the Receivable Purchase Agreement, A Co has made a supply to Finance Co of a contingent right to be paid money. This is not an exempt supply of a financial service.

2. Based on the information provided, it is not clear that Finance Co is purchasing a debt security, as defined in the ETA, from A Co. You have stated that A Co and Drug Co will enter into a Research and Development Services Agreement and that the receivables will only be created if and when A Co performs services for Drug Co. The question remains as to what is the supply being made by A Co to Finance Co under the Receivables Purchase Agreement for which Finance Co is paying the consideration. Finance Co may still be purchasing contingent rights to be paid money. However, where Finance Co is purchasing existing receivables, this would be a supply of a debt security by A Co which is a financial service.

In a previous response to CBA in 2009, we noted that accounts receivable are included in the definition of debt security as a receivable constitutes the supplier's right to be paid money generally for the supply of goods or services. We stated that generally, if a supplier enters into a contract with a third party for the assignment of its receivables to the third party, this would be considered a transfer of a debt security and a supply of a financial service by the supplier. Where a right to be paid money is established, the transfer of the receivable (i.e., the debt security) through an assignment is a service under paragraph (d) of the definition of financial service in subsection 123(1) of the ETA.

Q.12 Medallion: participant in a JV

Medallion expanded the concept of a “participant” beyond CRA’s administrative definition of that term, by characterizing a person who contributed services to the joint venture to be a “participant” in the joint venture. P-106 only includes a person who has contributed property to the joint venture, or a person with no financial interest, who is responsible for the managerial or operational control of the joint venture. Has the CRA completed its review of Medallion?

CRA Comments

It is a question of fact and law whether the persons involved in an adventure are participants and the adventure is a joint venture. Whether the Court’s decision in Medallion (2018 TCC 157) would apply to another situation would require examination of all the relevant facts and documents. As part of our ongoing review of the policy, we will continue to consider similar cases as they arise. If you have a question about a particular situation, you may request a written GST/HST ruling where all of the relevant facts and documents are provided.

Q.13 Right to deal with the ARQ in English

A business headquartered in Quebec, which is registered for QST and GST/HST and is audited by Revenu Quebec, may select a GST/HST advisor based outside Quebec in light of particular experience in the issues raised in a GST/HST audit. Does the business have the right to have the GST/HST audit conducted in English or to have an auditor proficient in English assigned to the audit?

CRA Comments

Revenu Quebec (RQ) as the CRA’s agent in the province of Quebec for GST is mandated to provide service in both official languages to the registrant. This requirement to provide service is outlined in two sections of the Modalité entitled “Protocole D’entente” signed August 30, 1990 between the CRA and RQ.

Notably section 4.1 on page 8, which states:

Le Canada et le Québec reconnaissent que, en regard du transfert au Québec des responsabilités administrative à la TPS, ils continueront d’assumer les devoirs qui leurs incombent en vertu de la Loi sur les langues officielles et de la Charte de la langue française respectivement, en ce qui concerne les communications avec le public, y inclus les corporations et les services qui leur sont accordés.

Translated

Canada and Quebec recognize that, with respect to the transfer to Quebec of administrative responsibilities of the GST, they will continue to assume their duties under the Official Languages Act and the Charter of the French Language respectively, with respect to communications with the public, including corporations and the services provided to them.

As well as section 4.2 on page 8-9, which states:

Le Québec déclare que, sous réserve des dispositions de la Charte de la langue française, il communiquera avec les contribuables dans l’administration de la TPS, soit oralement, soit par écrit, en français ou en anglais, dans la même mesure que ces contribuables peuvent communiquer ou recevoir des services du Canada dans ces langues conformément à la Loi sur les langues officielles.

Translated

Quebec declares that, subject to the provisions of the Charter of the French Language, it will communicate with taxpayers in the administration of the GST, either orally or in writing, in English or French, to the same extent that such taxpayers may communicate with or receive services from Canada in those languages in accordance with the Official Languages Act.

Q.14 Waivers: meaning of “matter”

Shortly before a reporting period will become statute-barred, a CRA auditor identifies an issue regarding whether a supply of real property made to Mr. X was taxable rather than exempt, and requests a waiver. The registrant believes that the “matter” in respect of which the waiver should be given under s. 298(7) is the supply to Mr. X.

The auditor, following the receipt of internal CRA advice, considers that as the tax collectible on the supply forms part of net tax, and no provision allows the CRA to assess the registrant for anything other than the net tax for the period in this case, the registrant cannot specify the matter as the supply made to Mr. X – and instead must waive the entire net tax calculation for the period.

The registrant proposes to complete the waiver form (GST145) by ticking “other” and stating that the waiver is in respect of the supply of real property made to Mr. X. Alternatively, it could waive the assessment of “net tax” but indicate that the waiver is only in respect of the inclusion of GST/HST due on the supply of real property to Mr. X.

The auditor’s position appears inconsistent with 943372 Ontario Ltd. v. R., [1997] G.S.T.C. 7 (T.C.C.), paras. 19-20.

Can a registrant limit a waiver provided under s. 298(7) to specific transactions, or other matters that go into the calculation of net tax for the reporting period, rather than being required to waive the net tax calculation in its entirety for the period?

CRA Comments

We are currently reviewing the meaning of the term “matter” as it applies to the filing of a waiver under subsection 298(7) and we are open to comments from the CBA on this issue.

Q.15 Whether FMV of MURC includes GST/HST under income method

The definition of “fair market value” in s. 123(1) excludes those taxes that are excluded by s. 154 from the value of consideration paid for a supply. S. 154(2)(b) excludes GST/HST from the value of consideration that is paid for a supply, thus meaning that GST/HST is not to be included in the fair market value of a MURC under s. 191(3).

In P-165R, the CRA acknowledges that the fair market value (“FMV”) excludes taxes referenced in s. 154 and states that the “FMV referred to in the ETA is the FMV before adding any GST and HST, therefore in order to avoid any confusion, the appraisal should state whether or not the GST and HST is included in the appraised value”.

CRA’s auditors are reluctant to accept that a valuation that is derived under the “direct comparison method” and the “discounted cash flow” method (income method) are inclusive of GST/HST. Furthermore, when a CRA appraiser values a MURC under these methods, the FMV derived is not treated as being inclusive of GST/HST.

Question

In situations where the “income method” is being used to determine the FMV of a MURC and the GST/HST that is payable under subsection 191(3) is not included as an upfront cost that reduces the present value of the projected income of the MURC, please confirm that the FMV derived should be considered to be inclusive of GST/HST.

For example, if the present value of a MURC’s net income results in it having a value of $1,000,000, the FMV of that building should equal $1,000,000 provided there was no requirement for the builder to pay GST/HST on the deemed self-supply. If the builder was required to pay GST/HST on the MURC to earn the $1,000,000 in net income, then the value of the building would only equal $1,000,000 after the GST/HST was in fact paid. In other words, the FMV excluding GST/HST at the rate of 13% would equal $884,956. This is the GST/HST excluded amount that a third party buyer would pay to acquire the MURC when it is liable to pay GST/HST at the rate of 13% on a deemed sale.

Support for treating the FMV as being inclusive of GST/HST is found at Sira Enterprises, at paras. 56, 80, and Desjardins v. Canada [2010] G.S.T.C. 147, at para. 25.

CRA Comments

It is the CRA’s position that the fair market value (FMV) derived from the income approach is net of GST/HST assuming the market comparables used in deriving the overall capitalization rate (OCR) are exempt sales.

It is important to distinguish between GST/HST imposed under Part IX in respect of a taxable supply and an amount in respect of GST/HST that may be imbedded in the consideration for a supply as a result of the GST/HST having been imposed at an earlier time.

Section 154 refers to the GST/HST imposed under Part IX in respect of a taxable supply, not to any amount imbedded on account of HST that may be attributable to a prior supply. Therefore, when arriving at FMV, section 154 does not provide a legislative basis to discount the consideration of an exempt supply in an attempt to remove an amount imbedded in the consideration of that supply.

For example, where the consideration of a taxable supply of a residential complex is used as a comparable in a valuation methodology, the GST/HST imposed on that supply, even where the supply was “GST/HST included”, is excluded from the consideration. However, if a comparable used in the valuation method is an exempt sale of a residential complex, section 154 does not permit the consideration of that exempt sale to be discounted to remove an amount imbedded on account of HST as a result of a prior taxable supply.

Q.16 Payments to a retired partner

Are payments of partnership income to retired partners (i.e., a person who is no longer a partner at the payment time) considered to be for an exempt supply of a financial service?

There is no comparable provision to s. 96(1.1) in the ETA. However, s. 123(1) defines a financial instrument to include an interest in a partnership “and any right in respect of” such an interest; and pursuant to para. (f) of the definition of “financial service,” payment of money as dividends, interest or similar payments of money “in respect of” a financial instrument constitutes a financial service. It would be reasonable to interpret a payment to a former partner as being in respect of a right relating to a partnership interest, even if the person no longer owns the partnership interest.

CRA Comments

In order to determine if a payment made by a partnership to a retired partner is consideration for a supply, it must be determined if a supply is being made by the retired partner to the partnership. In the absence of any specific details with the question, it is unclear whether a supply is being made and what the nature of the supply would be.

If a retired partner makes a supply to the partnership such as, for example, a consulting service, the payment may be consideration for the supply and the GST/HST may be applicable to the supply.

When a partner acquires partnership units (i.e. an interest in a partnership), the partner has acquired certain rights which include a right to receive distributions. To the extent that payments made by a partnership to a retired partner are in respect of an interest in the partnership, or any right in respect of such an interest, the payment would be consideration for an exempt supply of a financial service pursuant to section 1 of Part VII of Schedule V of the Excise Tax Act and the GST/HST would not be payable in respect of such payments.

Q.17 Residence of amalgamated or continued corporations

(a) Is a corporation formed by the amalgamation of one or more corporations, pursuant to the laws of Canada or a province, considered to be “incorporated” in Canada and, therefore, deemed by s. 132(1)(a) to be resident in Canada for purposes of the ETA, provided it is not continued elsewhere; and

(b) Is a corporation incorporated in Canada that was continued in a jurisdiction outside Canada considered to be resident in Canada, if its central management and control is exercised in Canada, or to the extent that it maintains and carries on activities through a permanent establishment in Canada?

Re (a), Deltona considered the formation by amalgamation of a corporation to be its “incorporation.” Accordingly, s. 132(1)(a) should deem an amalgamated corporation to be resident in Canada until such time it is continued outside Canada.

Re (b), if a corporation incorporated in Canada is continued outside of Canada, there is no equivalent to ITA s. 250(5.1) deeming the corporation to be incorporated in the jurisdiction to which it has been continued. Since s. 132(1)(a) would no longer deem the corporation to be resident in Canada, its residency would be determined under the “central management and control” tests (except to the extent the corporation maintained a permanent establishment in Canada to which s. 132(2) applied).

CRA Comments

a) Under paragraph 132(1)(a) of the ETA, a corporation incorporated or continued in Canada and not continued elsewhere is deemed to be resident in Canada. Where two or more Canadian corporations amalgamate under the rules for amalgamation set out in the Canadian federal or provincial statute under which they were incorporated, and a certificate of amalgamation is issued, the amalgamated corporation will generally be deemed to be resident in Canada because it would be considered to be incorporated in Canada.

b) A corporation incorporated in Canada that is continued in a jurisdiction outside of Canada would not be deemed, under subsection 132(1)(a), to be resident in Canada. However, such a corporation may be considered resident in Canada if the central management and control of the activities of the corporation is exercised in Canada. This determination is a question of fact.

Under subsection 132(2), if a non-resident corporation has a permanent establishment in Canada, the corporation is deemed to be resident in Canada in respect of, but only in respect of, activities of the corporation carried on through that establishment.

Q.18 Retroactive registration for JV participant

Where a valid s. 273 election was in place with respect to an ongoing joint venture, and a new co-venturer purchased an interest in the joint venture real property at a time when it was not a registrant, could it become retroactively registered to the date of acquisition so as to claim an ITC for the taxable supply of the real property, and to relieve the supplier from collecting tax under ss. 221(2)(b) and 228(4)?

To the extent the transfer of the joint venture interest constituted part of a business for s. 167purposes, would that transfer be non-taxable or would the sale of the underlying real property be excluded pursuant to s. 167(1.1)(a)(iii) on the basis that the recipient was not a registrant at the time of sale?

CRA Comments

In general, retroactive registration is only available if a person was required to be registered for GST/HST purposes pursuant to subsection 240(1). It is not clear from the information provided that the co-venturer was required to be registered on the date of the acquisition of the real property.

However, if the co-venturer, subsequent to the acquisition of the real property, registered for GST/HST purposes in accordance with the requirements of subsection 240(3) and, immediately before that time, the co-venturer was a small supplier, then subsection 171(1) may apply to allow the co-venturer to claim ITCs for property it held immediately before that time. In order to make a section 167 election, if all of the other conditions have been satisfied and the supplier is a GST/HST registrant, the recipient must also be a GST/HST registrant. If the recipient is not a GST/HST registrant, no section 167 election can be made and subsection (1.1) does not apply. In accordance with paragraph 167(1)(a), the supplier is deemed to have made a separate supply of each property and service that is supplied under the agreement for consideration equal to that part of the consideration for the supply of the business or part that can reasonably be attributed to that property or service.

However, if both the supplier and the recipient are GST/HST registrants and all of the other conditions have been satisfied, the parties can make a joint election and have subsection (1.1) apply. In these circumstances, subparagraph (1.1)(a)(iii) would not apply. Subparagraph (1.1)(a)(iii) only applies in circumstances where neither the supplier nor the recipient are GST/HST registrants.

Q.19 Drop shipment application to warehouser

(A) If a registered, resident person imports goods that are owned by a non-registered, non-resident for the purpose of storing (warehousing) and then ships the goods as directed for re-export (and assuming that there is no “carrying on business in Canada” issue), do the drop shipment rules apply as follows:

1. Goods imported by the registrant as IOR (Importer of Record) generate ITCs to the registrant as a “commercial service” is being provided;
2. The re-exported goods are non-taxable on export, and there is no tax on the storage services pursuant to s. 179(4);
3. If, at the option of the registrant, the registrant purchases some goods from the non-resident, non-registrant for purposes of resale in Canada by the registrant, the drop shipment rules in s. 179(1) will not apply because there is no transfer of possession of goods by a nonresident, non-registrant to a third party in Canada, and the registrant will simply collect and remit the GST/HST on resale in the usual course.

(B) Further to (A), there is no tax on the storage or shipment services regarding the re-exported goods pursuant to s. 179(4) given the changes in the drop shipment rules at the end of 2017, i.e., as long as the services are not considered to be “commercial services”; in other words, if the shipping services are not performed by a freight carrier pursuant to Sched. VI, Pt. VII there is no tax under s. 179 (such services will presumably be zero rated in any event if they are cross-border shipments).

CRA Comments

Scenario A - 1

Based on the information provided and assumptions made in the question, where it is determined based on a complete set of facts that the supply being made by the registered resident is a supply of a commercial service and the non-resident recipient owner of the goods is not registered for GST/HST purposes, the conditions for the registered resident to be eligible for an ITC under subsection 169(2) of the Excise Tax Act appear to be met.

Scenario A - 2

Based on the information provided and assumptions made in the question,, it appears that paragraph 179(1)(d) of the ETA would not apply to deem the making of a taxable supply of the goods by the registered resident person to the non-registered non-resident person and the storage services would be deemed under paragraph 179(4)(d) of the ETA to be made outside Canada.

Scenario A – 3

We are not able to confirm that subsection 179(1) of the ETA would not apply in this scenario as there are insufficient facts to do so. Rather, if the registered resident person, at any time in the future, transfers physical possession of the goods to another person in Canada (for example where it sells them), it appears that the rules in subsection 179(1) would apply subject to any of the other relieving provisions in section 179 applying.

Scenario B

Additional information would be required to determine how the drop-shipment rules would apply in this scenario.

Generally, a “commercial service” in respect of tangible personal property is defined in subsection 123(1) of the ETA to be mean any service in respect of the property other than a service of shipping the property supplied by a carrier. If the service referred to in the question is a service of shipping the property supplied by a carrier, the service is excluded from the definition of commercial service and excluded from the application of subsection 179(4) of the ETA. The freight transportation services rules in Part VII of Schedule VI to the ETA may alternatively apply to zero-rate the supply where it is not a commercial service. If the service supplied is a service of shipping the property that is not provided by a carrier, the service may be considered to be a commercial service in respect of the goods.

Q.20 JV participant based on a marginal ownership interest

Further to Q.11 at the 2018 CRA/CBA Roundtable, will a marginal interest (e.g. 0.001%) in a joint venture allow a nominee to be considered to be a “participant” in that joint venture for the purposes of electing that the nominee to be the operator of the JV for GST/HST purposes?

CRA Comments

It is a question of fact whether such an arrangement is a joint venture at law. A joint venture at law is considered to be a joint venture for purposes of the joint venture election under section 273. Where particular joint venture agreements contain provisions that cause us to question the status of the joint venture, the agreements will need to be examined. A corporation with a marginal financial contribution to a joint venture in exchange for a co-ownership interest and proportionate share of profit (or losses) as well as other necessary attributes may be a "participant” as defined in paragraph (a) of the term as defined in GST/HST Policy Statement P-106, Administrative Definition of a “Participant” in a Joint Venture, for purposes of section 273 of the ETA. To the extent that the corporation is earning its own income brings into question whether the corporation is a nominee corporation; in other words, whether the nominee corporation is a trustee of a bare trust. If you have a question about a particular situation, you may request a written GST/HST ruling where all of the relevant facts and documents are provided.

Q.21 Cryptocurrency mining and server as PE

Based on Bulletin B-090, a server may constitute a fixed place of business if the server is at the non-resident’s disposal and the server’s functions, on their own, are an essential and significant part of the business activity of the enterprise as a whole, or constitute other core functions of the enterprise. We understand that the essential functions of an enterprise are those that are typically related to a sale or a supply such as conclusion of contracts, processing of payments and delivery of the product. These factors are similar to those set out in P-051R2 to determine if a non-resident is carrying on business in Canada.

In the context of cryptocurrency mining, the server plays a more limited role in the business activity of the owner – solving algorithms. Under what circumstances, if any, would CRA consider servers in Canada through which mining is conducted to be a permanent establishment?

CRA Comments

The determination regarding whether a particular person has a permanent establishment in a particular situation is a question of fact that must be determined based on all the relevant facts. The CRA’s administrative guidance on the issue can be found in GST/HST Policy Statement P-208R – Meaning of “Permanent Establishment” in Subsection 123(1) of the Excise Tax Act (the Act).

As indicated in the policy statement, the location of a server may constitute a permanent establishment in Canada of a person provided it is a fixed place of business through which the person makes supplies.

In the context of electronic commerce, a server may constitute a fixed place of business of a non-resident person if it is at the disposal of the person and its degree of permanence at the location is of a sufficient period of time to be considered fixed. To be a permanent establishment the non-resident person must make supplies through that fixed place of business – meaning the activities carried out by the non-resident server must, on their own, be an essential and significant part of the business activity of the non-resident person as a whole.

Cryptocurrency Mining

The CRA currently has a couple of ruling requests that involve cryptocurrency mining, and is currently reviewing whether a non-resident miner with servers in Canada would be considered to have a permanent establishment in Canada by virtue of the mining activities that are carried on through those servers.

Q.22 Meaning of affiliated college

Memorandum 20-3, para. 7 states:

An organization is only considered to be operating a college affiliated with a university where there is a formal affiliation agreement that states that the parent organization (the university) agrees to grant degrees to graduates of the affiliated college in exchange for a certain amount of control over the academic standards of, and the courses offered by, the affiliated college.

This statement is contrary to Fraser International College Ltd. v. The Queen, 2010 TCC 63, which held that a private college was “affiliated” with a university, and hence qualified as a “university”, even though the parent organization (Simon Fraser University) did not grant degrees to graduates of Fraser International College Ltd. Can CRA explain the legal basis for its interpretation?

CRA Comments

Subsection 123(1) of the Excise Tax Act (ETA) defines a “university” to mean a recognized degree-granting institution or an organization that operates a college affiliated with, or a research body of, such an institution.

It had been the CRA’s administrative position in Policy Statement P-220, Domestic Entities that Qualify as a “University” in the Excise Tax Act (ETA) (P-220) that an organization is considered to be operating a college affiliated with a university only where there is a formal affiliation agreement between the university and the affiliated college wherein the university agrees to grant degrees to graduates of the affiliated college in exchange for a certain degree of control over the academic standards and course offerings of the affiliated college. Therefore, if an organization operated a college that did not meet these criteria, the CRA would not consider the organization to be a university for GST/HST purposes.

In December 2019, the CRA cancelled P-220 and replaced it with GST/HST Memorandum 20-3, Universities (Memorandum 20-3) that was issued together with eight other memoranda in the Education Chapter of the GST/HST Memoranda Series. While Memorandum 20-3 is a new publication, paragraph 7 restates the CRA’s administrative position on affiliated colleges formerly outlined in P-220.

The lack of reference to the decision in Fraser International College Ltd. V. The Queen, 2010 TCC 63 (Fraser) in paragraph 7 of Memorandum 20-3 is an oversight on our part. We thank you for bringing this to our attention.

In light of your observation, the CRA is reviewing Memorandum 20-3 to include additional information on whether an organization operating a college affiliated with a university qualifies as a university under subsection 123(1) of the ETA. In the interim, where the facts in a case are materially similar to the facts in Fraser, the CRA will consider the organization to be a university for GST/HST purposes.

Q.23 Review on real estate appraisal on appeal

Where the issue in dispute in a Notice of Objection is the fair market value of real property, CRA Appeals refers the issue back to the relevant local office of the CRA Real Estate Appraisal Section. Given that CRA Audit and CRA Appeals both rely on the same person or people to advise as to the fair market value of real property, being the relevant local office of the CRA Real Estate Appraisals section, what steps are taken to ensure that CRA Appeal’s review of the registrant’s objection is, in fact, impartial and independent?

CRA Comments

Ensuring CRA Appeal’s review of the registrant’s objection is impartial and independent: Generally, where a valuation is in issue, the Appeals Branch will seek a second opinion from a different CRA evaluator in another office. CRA appraisers are members of the Appraisal Institute of Canada (AIC) and must comply with the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). In exceptional cases, an outside valuator may be hired.

The hiring of an outside valuator must be cost effective. Generally, a contractor is engaged when:

• The valuator may be required to give expert testimony critical to the success of the Crown's position if an appeal is filed;
• The projected cost to retain the valuator is less than the tax in dispute, or
• The issue has risk impact.

Q.24 Effect of s. 179(9) on test of carrying on business in Canada

Scenario 1. Sale/leaseback of tangible personal property

Example 1 in Policy Statement P-051R2 provides:

Facts

1. A non-resident lessor that has a leasing business outside Canada enters into a sale-leaseback agreement to purchase a conveyance and supply it by way of lease to a resident registrant who will use the conveyance partly in Canada. The lease begins on the day on which the agreement is entered into.
2. Pursuant to the agreement, delivery of the conveyance sold to the non-resident lessor occurs in Canada.
3. The lessee has physical possession of the conveyance when the agreement is concluded.
4. The agreement is concluded outside Canada.
5. The conveyance is to be maintained by the lessee at its own expense.
6. The non-resident lessor has no agents or employees in Canada.
7. Payments are made to the non-resident lessor outside Canada.
8. The non-resident lessor does not have a bank account in Canada and is not listed in a directory in Canada.
9. The non-resident lessor does not solicit business in Canada.

Decision

The non-resident lessor is carrying on business in Canada.

Rationale

For GST/HST purposes, a "business" includes any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease. The non-resident lessor is considered to be in the business of supplying tangible personal property by way of lease. For GST/HST purposes, the supply of property under a lease is considered to be made on a regular and continuous basis. The non-resident lessor is considered to have made a separate supply of the property for each period to which a lease payment is attributable. Also, a supply by way of lease, license or similar arrangement of the use or the right to use tangible personal property is deemed to be a supply of the tangible personal property.

In this case, delivery of the conveyance to both the lessor and the lessee under the agreement occur in Canada and the conveyance is based in Canada during the term of the lease. Based on these facts and the application of the GST/HST provisions that relate to the supply of property by way of lease, the non-resident lessor is carrying on business in Canada.

It seems that in order for s. 179(9) to apply, the conclusion in Example 1 would need to be reviewed and amended. If CRA were to maintain its prior restrictive views, s. 179(9) ETA would never apply which could not have been the legislative intent. Does CRA intend to review its prior guidance in light of the introduction of s. 179(9)?

Scenario 2

The facts are similar to Scenario 1, but instead of Company C entering into a sale and leaseback operation after purchasing the TPP, Company B purchases the TPP from Company A and leases the TPP to Company C. Company C exports the TPP immediately after taking possession under the lease in Canada.

For greater clarity, in this scenario, Company B has no employees or agents in Canada, does not solicit business in Canada, has no inventory in Canada, does not execute agreements in Canada, does not have any bank account in Canada, does not perform any services in Canada, does not in have any offices or physical presence in Canada. The only event occurring in Canada is the transfer of physical possession as the TPP was manufactured in Canada.

(i) Whether a non-resident person carries on business in Canada is a question of fact. In the above scenario, the vast majority of factors would lead to the conclusion that the non-resident person is not carrying on business in Canada. Is the non-resident carrying on business in Canada?

(ii) What are CRA’s views regarding the application of s. 179(9)?

CRA Comments

Scenario 1

The CRA has reviewed the leasing examples in P-051R2 and has determined that the introduction of new subsection 179(9) of the ETA does not impact the rationale or carrying on business conclusions in those examples. In effect, the carrying on business conclusions in those examples reflect the CRA’s current position on the issue.

Scenario 2

As noted in the question, the determination regarding whether a particular person is considered to be carrying on business in Canada for GST/HST purposes is a question of fact that requires consideration of all relevant facts. The modified facts in the scenario are not sufficiently different from the facts in scenario 1 to allow for a different conclusion regarding carrying on business. It appears based on the facts provided that Company B would be carrying on business in Canada for GST/HST purposes.

Q.25 On-line discount or coupon

Company A, a registrant, provides an online platform through which customers can book animal care services with service providers (“Service Providers”). Company A runs promotions whereby promo codes are emailed to all customers who enter their email addresses on Company A’s website. The promo codes can be shared with and used by others.

Customers can use the promo codes when booking the animal care services on the online platform to obtain $2 off the animal care services that are provided by the Service Providers. Pursuant to the agreement between Company A and Service Providers:

• Service Providers agree to reduce their animal care service fees by $2 when customers book the animal care services using the promo codes.

• Service Providers pay Company A a per-transaction administration fee for the use of Company A’s online platform equaling 20% of the fees that are earned through the online platform (before any promo codes are applied) minus $2 if a promo code is applied.
• Service Provider 1, a registrant, provides animal care services for $40 through the platform to a customer who uses a promo code for $2 off, so that Service Provider 1 charges the customer $38 as its fee.

1. Should Service Provider 1 should charge GST/HST on $38?
2. Would the answer change if the promo code that was used offers $2 off one animal care service visit at $40 or $5 off two animal care service visits at $80?
3. Should Company A charge Service Provider GST/HST on the administration fee of $6 (where the administration fee is calculated based on the formula of 20% of gross earnings of $40 less $2)?

CRA Comments

We would need to review a complete set of facts, including the terms of all relevant agreements between the parties, in order to provide conclusive responses to the following questions. We are therefore providing the following general comments.

a. The amount of consideration on which GST/HST is calculated would depend on whether the promo code that is applied fits within the definition of “coupon” and thus subject to the special GST/HST rules for coupons under section 181 of the ETA. Based on the limited information provided, we are unable to determine the nature of the emailed promo code. Pursuant to subsection 181(1), a coupon includes a voucher, receipt, ticket or other device but does not include a gift certificate or a barter unit. If it were established, based on a complete set of facts, that an emailed promo code that is applied meets the coupon definition, and that such a coupon were reimbursable, then subsection 181(2) would apply, such that Service Provider 1 would charge GST/HST on the $40 consideration for the supply of animal care services before subsequently applying the value of the promo code. However, if the facts were such that an emailed promo code was not a coupon, then use of the promo code could potentially reduce the amount of consideration on which tax is calculated, such that GST/HST could be calculated on $38 by Service Provider 1.

b. If it were established on a complete set of facts that the promo code that is applied met the GST/HST definition of coupon, then the answer provided in (a) would change. Specifically, subsection 181(4) would apply to the scenario and the consideration for the supply of the animal care services would be deemed to be reduced by the discount value of the promo code, before the GST/HST is calculated.

The answer provided in (a) would not change if it were determined, based on the facts, that an emailed promo code that is applied was not a coupon. In other words, the consideration for the supply of animal care services could be reduced before Service Provider 1 charges GST/HST.

c. Generally, if it were to be established based on a complete set of facts that the amount of the consideration for the administration fee is reduced, then the GST/HST would be calculated on that reduced amount.

Q.26 Investment Limited Partnership

Facts

An investment limited partnership ("ILP") as defined in s. 123 is owned by five partners, each of which is resident in a single province under ETA s. 132.1(1) ETA and s. 5 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the “Regulations"). One of the five partners also is a selected listed financial institution ("SLFI").

There is no provision in the partnership agreement that the ILP is permitted or not permitted to sell or distribute its units in another province.

Given that an ILP is a "financial institution" under s. 149(1)(ix) and is, therefore, a listed financial institution, whether the ILP is a SLFI pursuant to s. 225.2(1) turns on whether, under s. 9(a) of the SLFI Regulations, it has a permanent establishment in a participating province and a permanent establishment in another province. Moreover, an ILP qualifies as an "investment plan" and a "distributed investment plan" for the purposes of the Regulations.

An investment plan determines whether it has a permanent establishment in a province in accordance with the deeming provisions of s. 3 of the SLFI Regulations. Being a “distributed investment plan”, the ILP would be deemed under s. 3(e) of the SLFI Regulations to have a permanent establishment in a province throughout its taxation year if, at any time in that year:

• The ILP is qualified, under the laws of Canada or a province, to sell or distribute units of the financial institution in the particular province, or
• A resident in the particular province holds one or more of its units. The term “unit” is defined in subsection 1 (1) of the SLFI Regulations and includes an interest of a person in the partnership.

Should the ILP be considered to be qualified under the laws of Canada or a province, to sell or distribute its units in the particular province, as contemplated by s. 3 of the SLFI Regulations?

CRA Comments

As you are aware, under subsection 225.2(1) of the Excise Tax Act (ETA), for purposes of Part IX of the ETA, a financial institution is a selected listed financial institution (SLFI) throughout a reporting period in a fiscal year that ends in a taxation year if the financial institution is:

a) a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) during the taxation year; and

b) a prescribed financial institution throughout the reporting period.

An “investment limited partnership” as that term is defined in subsection 123(1) of the ETA is a listed financial institution under subparagraph 149(1)(a)(ix) of the ETA, as it is an “investment plan” under paragraph 149(5)(f.1) of the ETA.

Under section 9 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations), subject to sections 10 to 15 of the SLFI Regulations, for purposes of paragraph 225.2(1)(b) of the ETA, an investment plan is a prescribed financial institution throughout a reporting period in a particular fiscal year that ends in a taxation year of investment plan if it has, at any time in the taxation year, a permanent establishment in a participating province and has, at any time in the taxation year, a permanent establishment in any other province.

An investment plan that is an investment limited partnership (ILP) is included in paragraph (i) of the definition of “distributed investment plan” in subsection 1(1) of the SLFI Regulations. As a distributed investment plan, an ILP is deemed under paragraph 3(e) of the SLFI Regulations to have a permanent establishment in a particular province throughout a taxation year of the ILP if, at any time in the taxation year:

(i) the ILP is qualified, under the laws of Canada or a province, to sell or distribute units of the ILP in the particular province; or

(ii) a person resident in the particular province holds one or more units of the ILP.

Under paragraphs (d.1) and (d.2) of the definition of “unit” in subsection 1(1) of the SLFI Regulations, a unit in respect of a partnership means an interest of a person in the partnership, and a unit in respect of a series of a partnership means a unit of the partnership of that series. Under paragraph (c) of the definition of “series” in subsection 1(1) of the SLFI Regulations, a series in respect of a partnership means a class of units of the partnership. It is CRA’s understanding that the policy intent is that the words of subparagraph 3(e)(i) of the SLFI Regulations are intended to be broadly interpreted. Similar to other distributed investment plans, the ILP would be required to determine if it is qualified under the laws of Canada or a province, to sell or distribute its units in a particular province in order to determine whether the ILP is deemed to have a permanent establishment in a particular province.

Q.27 Documentation Requirements: Temporary Labour

In many instances, CRA has been denying ITCs claimed by businesses regarding temporary labour supplied to them. Where there is no dispute that temporary labour was actually supplied, ITCs are being denied on the basis that the ITC documentary requirements were not met because:

(i) the invoices were issued by a registrant other than the actual supplier; and/or

(ii) the invoices of the supplier/intermediary do not accurately reflect the consideration paid and thus do not reflect the tax payable.

To address CRA’s concerns, businesses have sought to remit the GST/HST payable on the temporary labour directly to CRA, typically through a branch account of the supplier or intermediary.

Where the recipient remits the tax directly to CRA on behalf of the supplier, will the recipient be allowed ITCs for such GST/HST remitted, provided it has retained an invoice from the supplier or intermediary showing the same amount of GST/HST remitted directly to the CRA?

CRA Comments

In the circumstances described above, there is no legislative or administrative mechanism to allow a recipient of a supply to remit the tax payable directly to the CRA on behalf of a supplier and as such we will not comment any further on this portion of the question. Whether or not a particular registrant has maintained sufficient documentary evidence to substantiate an input tax credit (ITC) claim is a question of fact, and must be examined on a case by case basis. It is the registrant’s responsibility to ensure that they have the proper ITC documentation. Subsection 169(4) requires that "the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed." There is no requirement in either this subsection or the Input Tax Credit Information (GST/HST) Regulations that the information be obtained in a single document or even be obtained all at the same time. Accordingly, as long as the required information has been obtained in any manner prior to claiming the ITC and is available for verification, the registrant would generally meet the ITC documentary requirements.

Q.28 Exported property: Dow & Duggan

Regarding the zero–rating of exported tangible personal property that is initially supplied in Canada, will CRA be appealing Dow & Duggan and, if not, will it follow the indication therein (at paras. 31-39) that the evidentiary burden to prove the application of Sched. VI, Pt. V, s. 12 differs from s. 1 and that the Minister does not have the same discretion to determine what constitutes satisfactory evidence?

No CRA Written Comments

Q.29 Real property statement of adjustments

In the context of sales of real property, the parties will normally prepare a “table of adjustments”, where expenses pre-paid by the vendor (e.g., lawn mowing or snow removal fees, property taxes, amenities fees) and/or revenues of the vendor that should partly be attributed to the purchaser (e.g. rents paid in advance by tenants) are listed, result in a net amount either owed to, or by, the vendor, therefore resulting in a purchase-price adjustment. Questions:

a. Regarding pre-paid expenses made by the vendor and adjusted in its favour at closing, does the CRA consider that they constitute a re-supply of the expense, thus triggering the application of GST/HST?

b. Regarding revenues received by the vendor to be adjusted in favour of the buyer (such as rents paid in advance by tenants), does CRA consider them as “income-splitting” and not a GST/HST event, or that the vendor makes a supply to the buyer (and if so, of what)?

c. With respect to the net amount of all adjustments (the $100,000 in our example), does this reduce the value of the consideration of the real property, or must it be treated separately? In other words, does the registered recipient self-assess on the full $10M, or on $9.9M? Does the answer to this question vary depending on how an agreement is drafted, or is there a general answer?

d. If the adjustments are made post-closing, and therefore the payment from either the vendor or the recipient is made at a different time that the payment for the property, how would GST/HST apply to the adjustment amount?

CRA Comments

As we understand it, it is common for a vendor and a purchaser that are parties to an agreement of purchase and sale for real property to negotiate a price for the sale of the real property and to indicate that price in the agreement. Also, it is common for the lawyer representing the vendor to prepare a statement of adjustments prior to finalizing the sale.

As we understand it, the purpose of the statement of adjustments is to allocate between the vendor and the purchaser the responsibility for certain financial obligations relating to the real property being sold. For example, in situations where the vendor has:

• paid amounts (for example, lawn mowing or snow removal fees, property taxes, etc.) relating to the period during which time the purchaser will be the owner of the real property, the vendor’s lawyer will, in the statement of adjustments, add an amount equivalent to the amount so paid by the vendor – generally, this increases the balance owing to the vendor by the purchaser; and
• has collected amounts (for example, rents from tenants occupying the real property who will continue their tenancy after the purchaser becomes owner of the real property) relating to the period during which time the purchaser will be the owner of the real property, the vendor’s lawyer will, in the statement of adjustments, subtract an amount equivalent to the amount so collected by the vendor – generally, this decreases the balance owing to the vendor by the purchaser.

Generally, the matter of how adjustments are treated for GST/HST purposes (that is, do the adjustments increase or decrease the value of consideration for the sale of the real property) is a question of fact that depends on the terms and conditions of the agreement of purchase and sale and the nature of the adjustment.

Questions (a), (b) and (c)

As explained in our response to Question 12 from the February 2019 Roundtable Meeting, it is our view that the adjustment for prepaid property taxes that relate to the period during which time the purchaser will be the owner of the real property is additional consideration for the sale of the real property. The rationale for our view can be found in the response we gave last year. With respect to other adjustments for amounts that the vendor has paid or collected and that relate to the period during which time the purchaser will be the owner of the real property, it is a question of fact as to whether the adjustments increase or decrease the value of consideration for the sale of the real property. For example, if after conducting a single/multiple supply analysis in accordance with GST/HST Policy Statement P-077R2, Single and multiple supplies, it is determined that the obligation giving rise to the adjustment

• is not a separate supply from the sale of the real property, or
• is a separate supply, but the supply is incidental to the sale of the real property

then the adjustment for the obligation likely increases or decreases the value of the consideration for the sale of the real property, as the case may be. Put differently, if an obligation is inextricably tied to the real property itself, then it is likely not a separate supply from the sale of the real property and the adjustment likely increases or decreases the value of consideration, as the case may be.

Conversely, if it is determined that an obligation giving rise to the adjustment is a separate supply from the sale of the real property that is not incidental to the sale of the real property, then the application of the GST/HST to the adjustment depends on the nature of the separate supply itself.

Question (d)

With respect to any adjustment described above that is made post-closing (that is, made after the transaction has been finalized and the purchaser has paid the balance owing to the vendor), the application of the GST/HST to the adjustment would be as described above.

However, the matter of how the vendor or the purchaser accounts for the GST/HST in respect of such an adjustment could depend on a number of things including the tax status of the sale of the real property, the GST/HST-registration status of the purchaser, the degree to which the purchaser acquires the real property for use or supply in the course of commercial activities, etc.

We encourage members of the CBA to request a ruling or interpretation if they have a specific scenario involving how to account for GST/HST on adjustments made post-closing.

Q.30 S. 167 and FMV of non-transferred lease

For the purposes of a s. 167 election, in establishing the value of the rights in a lease agreement, do the standard rules of fair market value (FMV) apply as defined in P-165R, i.e., the highest price obtainable in an open market between knowledgeable, informed and prudent parties acting at arm's length, instead of the actual rent provided by the lease agreement.

In this regard, GST/HST Memorandum 14.4 states, at para. 7:

7. The value of any property that is not acquired under the agreement for the supply, but that the recipient requires to carry on the business must generally be not more than 10% of the fair market value of all the property necessary to carry on the business. The recipient must be capable of carrying on the same kind of business that was established or carried on, or acquired, by the supplier, with the property that the recipient has acquired under the agreement.

When the lease agreement is not transferred to the purchaser, the “property necessary to carry on the business” that is not transferred is the right to the lease agreement. A person could simply sign another lease agreement and carry on its business in that other location. Accordingly, in determining the value of that right, pursuant to P-165R, a person must establish the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact, to obtain the right to be party to the lease agreement.

This FMV concept seems to be at odds with the CRA approach, i.e., obtaining the value by multiplying the rent payable by the number of months left to a given lease.

CRA Comments

Where certain property can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business but that property is not supplied by the supplier to the recipient under the agreement for the supply (for whatever reason), the value of that property would need to be less than 10% of the value of all the property required to carry on the business. The value of less than 10% involves expressing the value of the property that has not been supplied to the recipient under the agreement for the supply of a business as a fraction of the total value of the property of the supplier that is necessary for the continued operation of the business.

The question addresses circumstances whereby a supplier has a lease agreement in place with a property owner for the lease of premises and those premises can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business however the supplier’s interest in the lease agreement is not transferred to the purchaser by the supplier under the agreement for the supply. Given the assumption that those premises are necessary to carry on the business, the property in question is the supplier’s interest in the leased premises.

In line with paragraph 7 of GST/HST Memorandum 14.4 Sale of a Business or Part of a Business, the fair market value (FMV) of the property that is necessary to carry on the business and is not being supplied by the supplier under the agreement for the supply must be considered for the “all of substantially all” requirement in section 167. Accordingly, in these circumstances, the FMV of the supplier’s interest in the leased premises must be considered for this requirement.

The Act does not prescribe a specific methodology for determining FMV. In accordance with GST/HST Memorandum 1. 4, Excise and GST/HST Rulings and Interpretations Services, the CRA does not issue rulings relating to the determination of the FMV. Further, the CRA cannot commit to a specific methodology to determine FMV as each situation is unique. The CRA recognizes that there are various methods that may be used and the appropriateness of any valuation methodology used in a particular case is a matter of valuation principles and practice. In this regard, the guidance provided in GST/HST policy statement P-165R Fair Market Value for Purposes of Part IX of the Excise Tax Act should be adhered to.

Q.31 GST/HST remitted by a General Partner on behalf of a Partnership

A limited partnership owning commercial rental real estate must normally register for GST/HST purposes, and collect, remit and report the GST/HST on the rents. However, pursuant to s. 272.1(1), anything done by a person as a member of a partnership is deemed to have been done by the partnership in the course of the partnership’s activities and not to have been done by the person.

Would CRA accept remittance of the GST/HST by the partnership’s general partner, in the general partner’s GST/HST return, as it would be deemed to be done by the partnership and not by the general partner?

CRA Comments

The definition of “person” in subsection 123(1) includes a partnership. The inclusion of a partnership in this definition provides that a partnership is to be treated for GST/HST purposes as if it were a legal entity. Therefore, a partnership exists as a separate person from its members on whose behalf the business is carried on. Section 272.1 provides a set of deeming rules that apply to the activities of partnerships. Under subsection 272.1(1), any act done by a person acting as a member of a partnership is deemed to have been done by the partnership in the course of the partnership’s activities and not by the person.

The inclusion of a partnership in the definition of “person” and the deeming rule in the subsection 272.1(1) provide that for GST/HST purposes, the partnership is the person who carries on the partnership business. If the business of the partnership is to make taxable supplies in Canada in the course of a commercial activity, the partnership, and not any individual member, is the person that must register for GST/HST purposes and file GST/HST returns to account for any GST/HST owing or to receive any GST/HST refund to which it is entitled.

A limited partnership carries on business through its general partner. The GST/HST return is signed by the general partner who manages the business of the partnership. However, pursuant to the definition of “person” in subsection 123(1) and the deeming rule in subsection 272.1(1) the general partner is required to report the remittance of the GST/HST on the partnership’s GST/HST return.

If a general partner has incorrectly accounted for the GST/HST in respect of the partnership’s commercial activity on the general partner’s GST/HST return instead of the partnership’s GST/HST return, the general partner and the partnership may consider whether they would meet the conditions of making a voluntary disclosure under the Voluntary Disclosures Program.

Q.32 Audit Issues

Please provide an update on CRA audit issues.

No CRA Written Comments

Q.33 Court Cases / Objections

Please provide an update on recent and current court cases and objections.

CRA Comments

Canadian Imperial Bank of Commerce v. the Queen, 2019 TCC 79 (Aeroplan Miles)

• CIBC sought a rebate for GST paid in error of approximately $44.6 million in relation to payments it made to Aeroplan Limited Partnership (“Aeroplan”) under the Aeroplan Mile loyalty program (the “Aeroplan Mile Program”).
• After considering the rebate application, the Minister of National Revenue denied the rebate on the basis that the Aeroplan Supplies were taxable supplies.
• At trial, CIBC argued that the Aeroplan Miles issued by Aeroplan to CIBC’s customers were “gift certificates”, and that the Aeroplan Supplies were therefore deemed not to be a supply pursuant to section 181.2 of the Excise Tax Act (the “Act”) and were therefore not subject to GST.
• The Crown argued that the Aeroplan Supplies made by Aeroplan to CIBC were taxable supplies subject to GST, and were not gift certificates and section 181.2 of the Act had no application.
• The Crown also argued that $2.25 million of GST claimed by the appellant was paid two days after the end of the period set out in the rebate application and as such, those amounts could not be recovered by the appellant pursuant to this appeal.
• After hearing the evidence and considering the terms of the contracts between CIBC and Aeroplan, Justice Visser concluded that the Aeroplan Supplies were taxable supplies of promotional and marketing services by Aeroplan to CIBC. In the alternative, he concluded that the Aeroplan Miles at issue in this Appeal were not “gift certificates” for the purpose of section 181.2 of the Act, and section 181.2 did not apply to deem the Aeroplan Supplies not to be a supply for the purposes of the Act.
• With respect to the GST paid outside of period under appeal, Justice Visser would have allowed CIBC to claim the rebate if CIBC had been successful on the main issue. However, he considered the issue to be moot because he found the Aeroplan supplies to be taxable and the GST paid on the supplies was not paid in error.
• CIBC has appealed the decision to the Federal Court of Appeal. The case will be heard in May 2020.

CIBC World Markets Inc. v. The Queen, 2019 FCA 147.

• The Agency had denied input tax credits claimed by the appellant, CIBC World Markets Inc., on the basis that the appellant made a joint election pursuant to subsection 150(1) of the Act with CIBC to deem all supplies between them to be exempt supplies of financial services. This included the supply of services exported to CIBC’s permanent establishments as constituted by its foreign branches.
• At the Tax Court, the appellant argued that as CIBC “was deemed to be a non-resident person in respect of […] the activities […] carried on through” its foreign branches (ss. 132(3) of the Act), it could not be a party to the joint election insofar as the supplies made to the branches are concerned.
• The appellant further argued that even if the services in issue were covered by the subsection 150(1) election, they were exported financial services which are zero-rated by virtue of Part IX of Schedule VI.
• The Tax Court judge agreed with the Agency and concluded that the subsection 150(1) election had the effect of deeming all supplies between CIBC World Markets and CIBC to be exempt supplies, including the supply of services exported to CIBC’s foreign branches.
• The Tax Court judge found that the deeming rules in subsections 132(3) and 150(1) of the Act conflict with one another. Subsection 150(1) provides commensurate tax treatment between parties to the election for every supply made by a closely related member. On the other hand, subsection 132(3) has an opposite effect: it creates a distinction between an entity and its own ‘subsidiary’ non-resident branch such that an exported supply is effectively deemed to have taken place between them and the right to claim an ITC arises.
• In order to resolve this conflict, the Tax Court judge held that the deeming provision rule in subsection 132(3) has a limited application. Specifically, it only applies to the activities carried on through the permanent establishments and does not provide that the deemed supplies are made to separate persons. Had Parliament intended to deem the existence of separate persons, it would have said so. Similarly, it would have been a simple matter for Parliament to exclude supplies made to foreign branches from the application of subsection 150(1) if that was the intent.
• The registrant appealed the decision to the Federal Court of Appeal. It concluded that because CIBC is deemed to be a separate non-resident person with respect to the activities conducted through its foreign permanent establishments, the services provided to those establishments in the course of those activities fall outside the scope of subsection 150(1), and therefore are not deemed to be financial services under that provision. They are to be treated as zero-rated exported supplies by the combined operation of subsection 132(3) and sections 7 and 23 of Part V of Schedule VI.

Villa Ste-Rose

• Villa Ste-Rose (Villa) is not registered for GST/HST purposes. It operates a residential centre for semi-autonomous and non-autonomous seniors. Following a fire in 2013, the residential centre was completely destroyed. As part of the reconstruction of the building, Villa paid GST to a contractor. The reconstruction was completed in whole, or in large part, on November 1, 2014.
• Villa filed its GST/HST return late for the amount of GST payable on self-assessment of the building. The appellant attached rebate claims for reimbursement of the GST paid on the construction costs.
• On October 30, 2015, Revenu Québec (RQ) issued a notice of assessment for the GST payable on the self-supply of the building in question. In addition, RQ imposed a penalty for failure to file and interest charges.
• On October 3, 2016, Villa appealed to the Tax Court of Canada (TCC) the assessment issued by the RQ.
• Villa argued before the TCC that interest and penalty can only apply on the difference between the amount of GST payable on the property and the amounts of rebates to which it was entitled under subsection 228(6) of the Act.
• Since the net tax which had to be paid was lower than the refunds to which it was entitled, the interest and penalty assessed by RQ had to be cancelled. In this case, Villa filed its GST return and rebate claims on September 28, 2015. On that date, RQ had to compensate between the GST to be paid on the building and the rebates.
• The Crown argued that, in the case of late filings, the CRA is not required to offset the amount of GST payable with the amounts of rebates claimed by Villa for the purposes of calculating interest under subsection 280(1) and the penalty under section 280.1 of the ETA.
• The offset provided for under subsection 228(6) of the ETA applies only in situations where the person files their GST return within the prescribed time limits.
• On March 15, 2019, the TCC allowed the appeal and concluded that interest under subsection 280(1) of the ETA and the penalty for late filing under section 280.1 of the ETA may apply only to the net amount, that is, the amount of GST payable offset by refunds under subsection 228(6) of the ETA.
• The CRA appealed the decision to the Federal Court of Appeal.

A claimant does not include the PPA in the pool of deductible SR&ED expenditures and does not deduct it when calculating income for income tax purposes.