19 August 1991 Ministerial Letter 911368 F - Interaction of the General Sales Tax ("GST") with the Income Tax Act ("ITA")

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Re: Interaction of the General Sales Tax ("GST") with the Income Tax Act ("ITA")

This is in reply to your memorandum of May 16, 1991, concerning the issue of consequential adjustments to an Income Tax return caused by adjustments made to a GST return or vice-versa.  You seek our opinion with respect to different situations.

(1)      Repayment of Government Assistance:

A)

In your example, on June 1, 1993, an Excise reassessment results in a $100 increase to the 1991 GST liability of a taxpayer.  The increase is attributable to an excess Input Tax credit ("ITC") claim made on June 1, 1991.  In the taxpayer's ITA return for the taxation year ending December 31, 1991, the $100 was included in income as a receipt of government assistance.  You ask whether, in this situation, the "particular time" as stated in subsection 248(18) of the ITA Act is June 1, 1991 (the effective date from which the $100 is owed by virtue of the reassessment) or June 1, 1993 (the date on which it was determined by reassessment that an additional $100 was owed?  You presume the "particular time" in this situation is June 1, 1993.

Our Comments

We agree that the "particular time" in the situation you describe is June 1, 1993.  Where the amount of an input tax credit previously claimed is added back to the taxpayer's GST liability, subsection 248(18) of the Income Tax Act provides that the amount will be treated as a repayment or assistance at the particular time, which in our opinion, means the date it is being added back.

(B)

Assuming the same facts as above, except that the taxpayer appeals the Excise GST assessment on July 1, 1993 and this reassessment is confirmed on August 1, 1993.  Assume further that the issue then goes to court with the first level decision going in the taxpayer's favour on January 1, 1994.  Finally, assume that the Minister appeals this court decision and the higher court finds in favour of the Minister on January 1, 1995. no further appeal is initiated by the taxpayer and the taxpayer's account is settled on June 1, 1995.  You presume that the "particular time" in this situation is still June 1, 1993.  However, you are unsure just how the appeal and court decisions affect the taxpayer's GST liability, and consequently the income for ITA purposes.

Our Comments

We agree that in the situation you describe "the particular time" is June 1, 1993.  However, we note that paragraph 3 of Information Circular 77-11 dealing with sales tax reassessments states that in cases in which part or all of the amount of the reassessment is disputed by the taxpayer, the deduction of the amount under dispute will be allowed against income for the year in which it is finally determined.  Paragraph 4 of the IC states that if the taxpayer does not agree with this approach and it seems likely that all or part of the disputed amount will have to allowed eventually, the Department is prepared to allow the amount in dispute along with the remainder of the liability provided a waiver is obtained at that time pursuant to subsection 152(4) of the Income Tax Act and the adjustment to allow the amount ultimately established will be made in the year the sales tax reassessment notice is received.

In our view, the legal obligation to repay all or part of that deemed assistance arises at the time the final reassessment is made.  At that time an amount must be added in respect of an input tax credit.  The taxpayer's legal liability is not affected by the court decisions in the situation at hand.  The court decisions are not reassessments but rather an order to the Minister who in turn can appeal the decision or make the reassessment ordered by the court.  In your example, the reassessment remains valid as the Minister appealed to a higher court which confirmed the June 1, 1993 assessment.  This would seem to suggest that, at the very least, it would be appropriate to reverse the administrative policy under IC 77-11 that is, to reassess when the GST reassessment is made except in cases where the taxpayer will not provide a waiver. In a case where the taxpayer will not provide a waiver, embarrassment could result if the Department does not reassess and the taxpayer ultimately loses his GST appeal after the taxation year in question has become statute-barred (proposed paragraph 152(4.2)(b) in Bill C-18 would be of assistance to taxpayers who are individuals (other than trusts) or testamentary trusts). Conversely, if the Department does reassess and the taxpayer ultimately wins his GST appeal after the taxation year in question has become statute-barred, there would be a loss to the fisc.

In our view, the best position would be to reassess the taxation year which includes "the particular time" of the GST reassessment in all cases, while obtaining an amendment to section 152 of the Act to permit a further reassessment beyond the statute barred period with respect to reassessments of GST ordered by a court.  You may wish to consult with Current Amendments in this regard.

(2)      Receipt of Government Assistance

You ask us to consider a situation where a taxpayer is informed on June 1, 1993, by a GST auditor that previously unclaimed input tax credits of $100 are available in respect of a June 1, 1991 expense. We are told to assume that the taxpayer requests a 1991 Input tax credit refund for this previously unclaimed amount.  It is your opinion from your reading of section 248(16) of the Act that the $100 in the above example would be deemed to be government assistance as of June 1, 1991, since the ITC claim (albeit a retroactive one) is made in respect of the 1991 GST reporting period.

Our Comments

Input tax credits claimed on a return under the Excise tax Act for a reporting period are deemed to have been received for the purposes of subsection 248(16) of the Income Tax Act at the time the related GST was paid or payable.  Where the GST was not paid or payable in the reporting period, the assistance is deemed to have been received at the end of the reporting period.  Also, a GST rebate is deemed to have been received at the time it is actually received or credited.

It is our opinion that the input tax credit received would be deemed to be government assistance as of June 1, 1993, because the claim is made in the 1993 GST reporting period.  Subsection 225(4) of the Goods and Services Tax allows up to four years for a registrant to claim an input tax credit.  The four year period commences on the day on or before which the return for the particular reporting period in which the credit could first have been claimed was required to be filed.  (This would also be the case when a GST auditor informs the taxpayer of available unclaimed input tax credits from a prior period).  Note that under section 296 of the Goods and Services Tax the Minister may take into account any amount unclaimed as an input tax credit, deduction or refund and any overpayment of tax with respect to the reporting period being assessed.

(3)      Effect of the GST on Sales Proceeds

You ask that we consider the following comments and provide our opinion with respect to the issue.

Assume it is a taxpayer's policy to include the GST in the retail price of goods sold to customers; if a sale of $100 is made (which includes the 7% GST), it is unclear whether the sale for Income Tax purposes is $100 with a $6.54 GST expense or $93.46 with no corresponding GST expense.  Moreover, it is unclear whether or not the answer would change if it is the taxpayer's policy to charge

the GST separately, rather than include it in the cost of the good. The issue is relevant where an ITA auditor discovered unreported sales (of goods taxable for GST purposes) during the course of an audit.  Assume proceeds of $100 from an unreported sale, should $100 or $93.46 be added to the taxpayer's income for ITA purposes.  If $100 is added, this could imply that the sale was actually $107 and that the taxpayer neglected to collect GST from the customer.  It could also imply that the unreported sale was $100 and the taxpayer owes $6.46 of GST thereof.  If the latter is the case, and Excise raises a GST reassessment (ie of $6.46), it is unclear whether or not the GST would be a deductible for ITA purposes (i.e. when the GST assessment is raised, in the taxation year where the unreported sale belongs, or perhaps only after it is actually paid by the taxpayer.)

Our Comments

As with provincial sales tax, businesses will collect the GST from their customers and clients when a sale is made and will remit the taxes owing to the government at regular intervals.  Generally, tax from the customer is to be collected at the time payment for a good or service is made to the supplier or on the date an invoice is issued, whichever comes first.  Special rules apply, however, for GST purposes that would require the Income Tax auditor, in your example, to have specialized knowledge of whether the goods and services in question are Zero rated or are tax-exempt for GST purposes, which we believe is beyond his mandate.  Further, complications arise as GST sales made on consignment also provide for a certain leeway period before GST is considered due.  In our view, the $100 of unreported sale should all be added to income under subsection 9(1) of the Income Tax Act and the taxpayer, after being assessed additional amounts under the Excise Tax Act as a result of the GST underpayment would in turn request a paragraph 20(1)(hh) deduction under the Income Tax Act for the amount as a result of the additional GST reassessment.  Where time permits, if both the Income Tax and the GST officials adopted the practise of sending to each other a notice of intent to reassess before they send out the notice of reassessment to the particular taxpayer, both reassessments could be applied at the same time for the same taxation year.

We trust our comments are of assistance.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch