Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.
Excise and GST/HST Rulings Directorate
320 Queen Street
Ottawa ON K1A 0L5
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Case Number: 97602
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January 22, 2008
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Subject:
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Wash Transactions Policy
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Dear XXXXX:
Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) and the Canada Revenue Agency (CRA) wash transaction policy.
REQUEST:
You ask that Canada Revenue Agency (CRA), consider an amendment to the wash transaction policy in Memorandum 16.3.1 – Reduction of Penalty and Interest in Wash Transaction Situations, to permit its application to a public service body (PSB) who, as a supplier, has disclosed a tax liability where a PSB rebate is available to the recipient, an associated charity.
STATEMENT OF FACTS:
1. The supplier is a hospital authority that receives support from a charitable foundation. The hospital authority is registered for GST/HST and is a PSB. The foundation is also a PSB.
2. The hospital authority and the foundation entered into a license agreement whereby the hospital authority provided the foundation with certain lands for the purpose of operating a parking lot.
3. The recipient of the supply is the foundation.
4. The foundation pays the license fees to the hospital authority.
5. No GST was charged, collected or remitted by the hospital authority with respect to the license fees and no PSB rebate claim with respect to such GST was made by the foundation.
6. Upon recognition of the error, the hospital authority made a voluntary disclosure and requested that consideration be given to the waiver of interest consistent with the intent of the wash transaction policy described in GST/HST Memorandum 16.3.1.
7. The foundation is not entitled to claim full input tax credits (ITCs) but is eligible to claim a PSB rebate of 50% of the amount so charged.
RESPONSE:
Section 280 imposes penalty and interest charges where a person has failed to pay or remit GST/HST or instalments on account of GST/HST.
Until March 31, 2007, section 280 imposed a penalty of 6 per cent per year, compounded daily, on the unpaid or unremitted amount. In addition, the person was required to pay interest at the prescribed rate on the amount not remitted or paid. (The prescribed rate of interest under the Interest Rate (Excise Tax Act) Regulations for unpaid or unremitted tax or instalments of tax is determined by reference to the rate charged on 90-day Treasury Bills, adjusted quarterly, and rounded to the nearest one-tenth of a percentage point.)
Section 280 was amended effective April 1 2007 whereby the prescribed rate of interest was changed to the rate charged on 90-day Treasury Bills, adjusted quarterly, rounded up to the nearest whole percentage point, and adding 4 per cent. Section 280 was also amended by removing references to the 6-per-cent penalty as a result of the additional 4 per cent being included in the new prescribed rate.
Hence, interest at the prescribed rate and additional 6 per cent per year shall apply to the period before April 2007 and the new rate will apply to the period after March 2007.
Section 281.1 of the Excise Tax Act (ETA) provides the Minister the discretion and the authority to waive or cancel penalty and/or interest payable by a person. In a wash transaction the decision to reduce the penalty and/or interest to a flat amount computed as 4% of the tax assessed is within ministerial discretion. The supplier who has been assessed the reduced 4% penalty and/or interest may of course apply for relief from the remaining 4% penalty and/or interest through Taxpayer Relief procedures, formerly referred to as the Fairness Guidelines.
Memorandum 16.3.1 outlines CRA's administrative policy on wash transactions and outlines how this administrative authority will be exercised.
A "wash transaction" occurs when a supply that is taxable at 5% or 13% is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who, as a registrant, would have been entitled to claim a full ITC if the tax had been correctly applied. Where a full ITC is not available to the recipient the transaction will not be considered to be a wash transaction, as the remittance amount would not be completely offset by the amount of ITC.
Recognizing that a wash situation does not represent a revenue loss to the government given the recipient's entitlement to claim a full ITC, the CRA may waive or cancel the portion of any penalty and/or interest that is in excess of 4% of the tax not collected by the supplier. The relief is therefore only meant for entities involved in commercial activities and entitled to claim full ITCs. It is not intended to apply to entities that are eligible for a rebate. Examples of some recipients who may not be entitled to full ITCs include persons such as listed financial institutions, charities, non-profit organizations and municipalities, small suppliers and consumers.
In conclusion, in the situation you outlined, the hospital authority, as the supplier, will be liable for the net tax not collected on its supply of the licence to the foundation. As explained above, for those transactions that took place prior to April 1, 2007, penalty at 6% and interest at the prescribed rate will apply on the net tax assessment. Where the transactions took place after March 31, 2007, interest at the prescribed rate will apply. As a result of its voluntary disclosure, the 6% penalty assessable under subsection 280(1) of the ETA may be waived. The interest as provided for in subsection 280(1) however applies.
If you require clarification with respect to any of the issues discussed in this letter, please call the under-signed directly at 613-952-0301.
Yours truly,
Owen Newell
Manager
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
2008/01/31 — RITS 97989 — Documentary Requirements for FCTIP Rebate