11695-7-2 (PM)
Subsections 228(4) and 280(1)
Dear Mr. XXXXX
Mr. W. McCloskey, Director General of the GST Rulings and Interpretations Directorate, has asked me to reply to your letter of September 13, 1995, in which you identify several problems your company is experiencing with respect to the administration of the Goods and Services Tax (GST) and what you feel are some fundamental flaws in the legislation and the forms used to report the GST.
Paperwork requirements
You indicate that one of the problems your company is experiencing with the GST is the amount of paperwork that ensues from the requirement for a registered person (other than an individual buying a residential complex) to file a form GST 60 Goods and Services Tax Return for Acquisition of Real Property for every purchase of taxable real property. Specifically, this requirement results in a GST 60 return having to be filed for each of the approximately 700 purchases of taxable real property made annually by your company. This, combined with the number of rebate applications your company must transmit for new housing rebates paid or credited to home buyers, frequently results in monthly GST returns of one hundred pages or more. You indicate that no other industry is required to do this much detailed reporting for GST and question why there is a need for the detailed information that is required to be provided on form GST 60.
You suggest that much of the paperwork involved could be eliminated by requiring form GST 60 to be filed only for those transactions where the registered purchaser of taxable real property is not entitled to a full input tax credit (ITC) for the tax that is required to be self-assessed on the property. Alternatively, you propose that the Excise Tax Act (ETA) be amended so that a "principal business corporation" be relieved from the requirements to file form GST 60 for real property purchases that are eligible for a full ITC.
As you have indicated, form GST 60 provides the Department with a detailed and separate record of real property transactions for which purchasers are required by subsection 228(4) of the ETA to self-assess the tax. In this way, form GST 60 allows the Department to monitor the typically large tax amounts related to those transactions and to ensure that they have been properly accounted for.
Nevertheless, the Department continues to look for ways to improve and simplify GST procedures. I would like to indicate that we are currently looking into the possibility of reducing the compliance requirements related to taxable real property purchases by allowing registered persons to include the tax they are required to self-assess on those purchases in their regular GST return.
Changes to the legislation that would allow for the implementation of your proposed suggestions will have to be considered by the Department of Finance which, as you are aware, is responsible for establishing tax policy and for proposing changes to tax legislation. It was therefore appropriate that you also wrote to Finance officials on this matter.
Penalty and interest
You believe that the requirement to file form GST 60 for self-assessments of tax on real property purchases and form GST 34 for other transactions results in artificial penalty and interest charges when form GST 34 discloses a refund balance. To illustrate this, you provide the example of a monthly reporting period for which the GST collectible is $100,000, the GST to be self-assessed on real property purchases is $60,000, the amount of the new housing rebates paid or credited is $35,000, the input tax credits for purchases other than real property are $115,000 and the input tax credit for a real property purchase is $60,000. You indicate that completing the forms correctly in this case would result in form GST 34 showing a refund balance of $110,000, form GST 60 showing a balance owing of $60,000, and $50,000 owing to the person after the tax payable has been offset by the refund.
It is correct that a refund of $50,000 would be owed to the person in your example provided the GST 60 return has been filed. As you have indicated, paragraph 169(4)(b) of the ETA prohibits a person from claiming an ITC for tax payable that is required to be self-assessed by that person under subsection 228(4) until such time as the GST 60 return reporting that tax has been filed. This requirement ensures that a net tax refund is not claimed and paid to the person before the Department receives the funds that are owing on the purchase. The purchaser therefore cannot benefit from the use of the refund while the tax payable remains outstanding.
You indicate that a refund of $50,000 would still be owing to the person if the GST 60 return was inadvertently omitted and the ITC for the tax payable of $60,000 was not claimed on the GST 34 return. You further indicate that notwithstanding this, penalty and interest would still be applied on a balance owing of $60,000 if the GST 60 return was filed late. You feel that this application of penalty and interest is unfair and that it only results because two returns are required to be filed. You propose that this could be solved by either allowing the related ITC to be claimed on form GST 60 or transforming form GST 60 into a schedule supporting form GST 34.
It is correct that a refund of $50,000 would still be owing to the person in your example if the GST 60 return was filed late. However, under the ETA the person would also owe $60,000 in tax payable to the Receiver General. This is because the ITC for the tax payable on the real property purchase cannot be claimed, as indicated previously, and subsection 228(6) of the ETA cannot be used to offset that tax as the requirement to have filed the GST 60 return with the regular return has not been met. Consequently, subsection 280(1) of the ETA would require penalty and interest to be applied to the tax payable until it is considered to have been paid, which would be when ministerial discretion to offset the tax payable by the refund is exercised under section 318 of the ETA.
Notwithstanding that the provisions of the ETA could result in the application of penalty and interest in your example, I would like to indicate that an administrative policy has been established to provide for a full waiver of penalty and interest on the late filing of GST 60 returns and that this policy would apply in your example. Tolerance is only available if the GST 60 liability is completely offset by a corresponding ITC and the person does not achieve a monetary gain. A monetary gain would be achieved where a person files a GST 34 return claiming an ITC for the tax required to be reported on the GST 60 return but does not file the GST 60 return.
Again, I would like to indicate that we are looking into the possibility of reducing the compliance requirements for registered purchasers of taxable real property and that the suggestions you have made will have to be considered by the Department of Finance.
Processing of refunds
You indicate that the issuance of refund cheques to your company has regularly been delayed because the refunds requested were perceived to be too large or because results that varied from month to month were questioned. You indicate that it is normal for a real estate company to be in a refund position for GST purposes and to have large fluctuations in monthly results. You feel that assessing procedures should recognize that the real estate industry involves the sale of a relatively small number of high-priced items, and that monthly results are not consistent as in many other industries. You also feel that Revenue Canada employees should be more aware of the cash flow implications of the GST legislation affecting real estate companies.
The Department strives to process refunds as quickly as possible. However, the Department is also responsible for the administration and enforcement of the GST and the protection of Crown revenues. To this end, the Department may undertake verification measures to ensure that the payment of GST refunds is warranted. While the payment of refunds may be delayed in certain instances, I would like to indicate that the legislation does provide for the payment of interest on a refund where it has not been paid within a certain period of time provided certain conditions have been met.
In closing, I would like to indicate that we appreciate the time you have taken to bring your concerns to our attention. I trust that I have been able to address your concerns to your satisfaction.
Yours sincerely,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations Directorate
Policy and Legislation Branch
GTP: 2471(INT)
c.c.: W. McCloskey
Gail Mason, Manager, Ministerial Correspondence
D. Caron
P. McKinnon
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