A proposed amendment to the Financial Services (GST/HST) Regulations will ensure that clearing and settlement services will be taxable even where such services are provided by a person at risk in respect of the financial instrument to which the services relate. Does this mean that such services (including the processing of credit card vouchers) supplied to merchants with respect to credit card transactions are taxable?

Answer

The proposed amendment to the Regulations affecting clearing or settlement services will not affect the tax status of the processing of credit card vouchers supplied to merchants with respect to credit card transactions. The processing of credit card vouchers supplied to merchants is not viewed as a clearing or settlement service and this will remain an exempt financial service under paragraph (i) of the definition of “financial service”.

The change to the Regulations is intended to clarify that those companies which are remotely at risk only because they provide clearing or settlement or authorization services for credit card issuers are not considered to be a “person at risk” and therefore the services they provide which are essentially administrative, do not fall into the definition of “financial service”.

The amendment is deemed to have come into force on December 31, 1990.

Q.2 - Draft Policy Statement - “Arranging For”

The draft GST/HST policy statement on the meaning of the term “arranging for” as provided in the definition of “financial service”, contains an example involving a business broker who facilitates the sale of shares of a company from one party to another. The ruling in that example held that the financial service would be an exempt supply.

(a) Please confirm that where a business broker facilitates the sale of assets of a company from one party to another the fees charged would be taxable.

(b) Would the fee be exempt or taxable in the case where the sale of the company is aborted? In other words, where a fee is charged even though the sale of shares or assets does not take place.

Answer

(a) Where a business broker facilitates the sale of assets of a company from one party to another the fees charged for services provided by the business broker would not be considered exempt since they are not agreeing to provide or arranging for a financial service referred to in any of paragraphs (a) to (i) of the definition of “financial service”. We confirm that the fees charged would be consideration for a taxable supply.

(b) Where a fee is charged even though the sale of shares or assets does not take place, the fee would be consideration for the taxable supply of financial advisory services.

Q.3 - “Arranging For” – Financial Service

Facts

Assume that XCo carries on business as an insurance broker placing group health insurance policies with arm’s length employer corporations (“Customers”). Assume that XCo is controlled by YCo, a holding corporation owning the shares of XCo and other related corporations.

The key employee (and shareholder/director) of YCo (Mr. Y) actively participates in the business of XCo through YCo. In consideration for its efforts, YCo is compensated by management fees calculated on an annual basis. YCo/Mr. Y provide the following services to XCo:

introduction of new Customers; and
assistance in negotiating the price and coverage for new Customers.

Issue

Are the services provided by YCo “arranging for” the supply of insurance, and therefore exempt supplies? XCo’s services would be regarded as exempt financial services of “arranging for” the placement of an insurance policy (a financial instrument) pursuant to paragraphs (l) and (d) or (h) of the definition of “financial service” in subsection 123(1). Since YCo’s services are an integral part of the success of XCo’s services, and in and of themselves constitute the arranging for placement of insurance, the services provided by YCo also should be regarded as an exempt financial service. Therefore, the fees received by YCo should not be subject to GST.

Answer

The term “arranging for” as used in paragraph (l) of the financial service definition in the Excise Tax Act (the “Act”) can generally be described as the activities of an intermediary as a “go-between” who brings together, in an active manner, two or more persons for the supply of a financial service by one person to the other. Whether the intermediary’s service is a service of “arranging for” the supply of the financial service is a question of fact and depends on the degree of involvement of the intermediary in the particular case. As discussed in the Draft Policy Statement on the Meaning of the Term “Arranging For” in Paragraph (l) of the Definition of “Financial Service” in Subsection 123(1) of the Excise Tax Act, it is our position that to qualify as a service of “arranging for” the supply of a financial service, each of the following elements should be present:

the intermediary will help both the supplier and the recipient in an active manner, in the supply of the financial service;
both the supplier and the recipient count on the intermediary for assistance where necessary in completing the supply of the financial service by the supplier; and
the intermediary should be fully and directly involved in the process of the provision of the financial service by the supplier and will therefore, expend necessary time and effort to ensure a successful supply of the financial service.

Based on the limited information provided, the degree of involvement of Y Co. in the issue of the group health insurance policies by the insurer is not clear. Accordingly, we are unable to confirm that the service provided by Y Co. qualifies as an “arranging for” service for purposes of paragraph (l) of the definition of financial service. However, if the service provided by Y Co. to X Co. is in fact an “arranging for” service with respect to the issue of the group insurance policies, then any consideration paid by X Co. to Y Co. for the supply of this service will not be subject to GST.

Q.4 - Lease vs. Financing

Assume a piece of industrial equipment is leased by a Lessor to a Lessee. Further assume that the lease in question is, at law, a finance lease (i.e., a loan) rather than a true operating lease. The lease is accounted for (under GAAP), and treated for income tax purposes, as a loan. Assume the Lessee can exercise an option (“Option”) to acquire the leased asset at certain specified times.

Question

Are the lease payments subject to GST? Would a conveyance of title of the equipment from the Lessor to the Lessee pursuant to an exercise of the Option be considered a supply to which section 134 applies?

Answer

The legislation does not define leasing transactions and does not differentiate operating leases from finance or capital leases, which may be treated by the lessees as purchases of property for purposes of their financial statements and/or income tax computations. The Canada Customs and Revenue Agency has indicated that virtually all transactions structured as leases will be treated as such for GST/HST purposes, regardless of their accounting for financial statement and income tax purposes. A financing lease (such as a bargain purchase option lease), where the agreement is considered to be a lease at law (i.e., the agreement is in form and substance a lease), will be treated the same as an operating lease for GST/HST purposes.

Subsection 136(1) of the Act stipulates that a supply by way of lease, licence, rental or other similar arrangements for the use or right to use real property or tangible personal property is deemed to be a supply of that property. Since the supply of the industrial equipment would be a taxable supply, the lease is also subject to the GST/HST. Subsection 136.1(1) provides that supplies of property by way of lease, licence or similar arrangement will be treated as a series of separate supplies for each period (referred to as a "lease interval") to which a particular lease payment is attributable. For each lease interval, the supplier is deemed to have made, and the recipient is deemed to have received, a separate supply of the property on the earliest of the first day of the lease interval, the day on which the payment for that interval becomes due, and the day on which the payment attributable to the lease interval is paid.

The conveyance of title of the equipment from the Lessor to the Lessee pursuant to an exercise of the Option would be considered a supply and any consideration paid to exercise the Option would be subject to the GST/HST. Section 134 applies to security interests and is not applicable in this scenario.

Q.5 - Goodwill

In Aubrett Holdings Ltd. [1998] G.S.T.C. 17, the Tax Court dealt with the purchase of assets of 2 insurance agencies. One of the assets involved customer lists. The following quote is from the judgment:

“The Excise Tax Act has been amended so that there is no longer any doubt that the present transaction would not be taxable if carried out today. Paragraph 141.1(1)(b) deems supplies of personal property to be made otherwise than in the course of commercial activities if the property was acquired or produced in the course of activities which are not commercial activities. In addition, section 167.1 states that goodwill is not included in calculating the tax payable when a business is sold. The bulk of the value of the supply at issue, the customer lists, are considered to be goodwill.”

Does the CCRA agree with the foregoing statement (i.e., that the sale of goodwill used exclusively in exempt activities can be sold exempt pursuant to paragraph 141.1(1)(b))?

Answer

Subparagraph 141.1(1)(b)(ii) of the Excise Tax Act allows that where a person makes a supply (other than a supply made by way of lease, licence or similar arrangement in the course of a business of the person) of personal property that was:

“manufactured or produced by the person in the course of activities of the person that are not commercial activities exclusively for consumption or use in the course of activities of the person that are not commercial activities, …”

that the person shall be deemed to have made the supply otherwise than in the course of commercial activities.

Although the Act does not define the term “produced”, it is the CCRA’s position that goodwill does not appear to be something that could be “produced” for the purposes of paragraph 141.1(1)(b) of the Act. Accordingly, this provision would not be applicable to the supply of goodwill.

In addition, the supply of goodwill only arises in the context of the supply of a business or part of a business. As such, its treatment is specifically addressed in the legislation through sections 167 and 167.1. Notwithstanding the preceding, we would be pleased to consider any written comments you may wish to submit for purposes of reviewing this issue or with respect to the application of section 141.1 to supplies of specific assets such as customer lists. These submissions would also assist in our discussions with the Department of Finance on this matter.

B. REAL PROPERTY

Q.6 - Real Property – Goodwill

Pursuant to the Land Transfer Tax Act (Ontario), “land” is defined to include “goodwill attributable to the location of land or to the existence thereon of any building or fixture, and fixtures.” Land transfer tax is payable on conveyances or beneficial dispositions of land. Generally, in the allocation of the purchase price, such goodwill is subsumed in the allocation to land. Does the CCRA consider the goodwill to be part of the real property so that a registered purchaser may self-assess, or do the vendor and the purchaser have to allocate between land and land goodwill and pay GST in respect of the land goodwill to the vendor?

Answer

In our response to this question we assume that “goodwill” refers to goodwill arising on the sale of a business as a going concern.

The term “goodwill” generally refers to the potential of a business to earn “above-normal” profits. Black’s Law Dictionary defines goodwill to include “every positive advantage that has been acquired by a proprietor in carrying on his business, whether connected with the premises in which the business is conducted, or in the name under which it is managed, or with any other matter carrying with it the benefit of the business.”

For GST/HST purposes goodwill is intangible personal property and not real property.

Consequently, neither subsection 221(2) nor subsection 228(4) of the Excise Tax Act (ETA) apply to a sale of goodwill.

The recognition and valuation of goodwill is only relevant for purposes of the ETA where it is acquired by way of sale as an intangible asset in the sale of a business. It is significant to note that goodwill cannot be sold as a single asset separate from the other assets of the business.

Black’s Law Dictionary also defines goodwill as “[t]he excess of cost of an acquired firm or operating unit over the current or fair market value of the net assets of the acquired unit.” “Generally accepted accounting principles require that goodwill should be recorded only when a business is purchased and the price paid [for the business] exceeds the market value of all tangible and identifiable intangible assets acquired minus liabilities assumed.”

Therefore, for GST/HST purposes, where:

the sale of a particular business is made between persons who are dealing at arms length;
both real property and goodwill are included in the assets of the business being sold as a going concern; and
the consideration assigned to the real property is reasonable based upon the fair market value of the real property as an asset of the business;

the CCRA will accept the consideration assigned to the real property and to the goodwill for GST/HST purposes.

However, where the consideration paid for the supply real property is significantly understated in comparison to the fair market value of the real property as an asset of a business and where it is reasonable to conclude that the consideration paid for the goodwill is overstated by a similar or greater amount, subsection 153(2) may apply to, in effect, reallocate the consideration between these assets. In this case, where the conditions of subsection 153(2) are met, the consideration for the real property and the goodwill will be deemed to be an amount which is reasonably attributable to each of the supplies.

Q.7 - Real Property –Section 261

A registrant recipient enters into an agreement of purchase and sale in respect of real property from a registered supplier. A significant deposit is paid at the time the agreement is signed and no GST is paid at that time. At closing, the recipient’s counsel indicates that the recipient will self-assess GST, but, the supplier’s counsel demands that the recipient pay the GST to the supplier and threatens to keep the deposit and treat the recipient as in breach of the agreement if GST is not paid. Under protest, the recipient pays the GST to the supplier. Assume that it is clear from the agreement what amount is purchase price and what amount is GST. Also assume that the recipient is engaged in commercial activities. Is the recipient entitled to claim an input tax credit as GST was “paid” to the supplier? Or, is the recipient entitled to claim a rebate of GST paid in error?

Answer

In circumstances where subsection 221(2) applies in respect of a particular taxable supply such that the person who made the supply is not required to collect tax under Division II of the Excise Tax Act (ETA), any amount so paid by the recipient and collected by the supplier in respect of such a supply is not tax paid in accordance with the ETA.

Further, an input tax credit (ITC) entitlement can only arise with respect to tax paid or payable in accordance with the ETA and not with respect to any other amount paid as, or on account of tax. Therefore, in this case, the recipient would not be entitled to claim an input tax credit.

The recipient would however be entitled to claim a rebate in respect of such an amount paid in accordance with subsection 261(1) of the Excise Tax Act (ETA) provided there is sufficient evidence to substantiate that the purchaser had in fact paid an amount as, or on account of tax or that was taken into account by the parties to the transaction as tax.

Note, that despite recipient’s payment of an amount as tax to the supplier “under protest” in circumstances where subsection 221(2) applies in respect of a particular supply, the recipient is still required to self-assess and report the tax payable in accordance with subsection 228(4) of the ETA. Where the recipient is engaged exclusively in commercial activities, the recipient will be entitled to claim an ITC in respect of self-assessed tax in accordance with subsection 169(1) of the ETA.

Q.8 - Real Property – Section 194

This issue deals with the application of section 194 of the Act. Assume that a certificate under section 194 provided by a vendor to a purchaser of real estate established that a particular sale was exempt pursuant to section 9, Part I, Schedule V.

If the Vendor is a non-registrant and the Purchaser is a registrant, were the sale taxable, the Vendor would not collect tax pursuant to subsection 221(2) and the Purchaser would self-assess pursuant to subsection 228(4). However, if the Vendor takes the position that he is no longer carrying on a rental business for instance, from the Purchaser’s point of view, the sale will be exempt, and he should not self-assess nor claim the ITC pursuant to subsection 228(4), provided the section 194 certificate was provided to the Purchaser. If upon reassessment, the CCRA determines that the supply is taxable, section 194 provides that the Purchaser is deemed to have paid the tax. There does not appear to be a requirement in the Act to notify the Purchaser that he is deemed to have paid the tax, and hence, to have the ability to claim an input tax credit. Should there be added a provision to force disclosure by the supplier that the certificate provided to the Purchaser was incorrect?

Answer

Section 194 may not apply in all cases where the vendor makes an incorrect statement as described in that section. In circumstances where the purchaser knew or ought to have known that the supply was not an exempt supply, section 194 will not apply even where the vendor has provided a written statement or certification that the sale is exempt from GST/HST.

In circumstances where section 194 applies, the purchaser may not become aware of the tax that the purchaser is deemed to have paid under section 194. Any legislative amendment to require the vendor to disclose to the purchaser that the an incorrect certificate of exemption has been issued is a matter for the Department of Finance to consider.

The Canada Customs and Revenue Agency will refer this matter to the Department of Finance for further consideration.

C. REORGANIZATIONS

Q.9 - Section 167 Election – Reorganizations

This question relates to the use of the 167 election in circumstances which are quite common. Assume for example, that Opco is registered for GST and is exclusively involved in commercial activities. Opco owns 100% of the shares of Newco.

Assume the following steps:

Opco sells 100% of the assets of its business to Newco.
The shares of Newco are immediately sold to a third party purchaser corporation.
Newco is subsequently wound-up or amalgamated with the third party purchaser corporation.

Questions

(a) Can Newco register for GST and use the section 167 election on the purchase of the business from Opco?

(b) Will the answer depend on whether Newco carries on business for any period of time?

Answer

Based on the information provided in this question, it is difficult to provide an accurate response given the complexity of the subject matter. It does not appear that the legislation clearly addresses the scenario outlined in your question.

It is the Agency’s view that commercial activity is required in order that Newco be entitled to register and make the section 167 election.

Notwithstanding, policy number P-045, Butterfly Transactions, sets out the CCRA’s administrative position for a particular set of transactions. Based on the specific circumstances outlined in this administrative position, where a Newco is incorporated solely for the purposes of facilitating a transfer of property between two other corporations, and then is wound-up into one of the two corporations immediately after the transfer, Newco may register and claim input tax credits on tax paid on the acquisition of the property. The assets in the transfer are ultimately destined for use exclusively in the course of commercial activity of the ultimate owning corporation and were used exclusively in the course of commercial activities of the transferring corporation.

The facts outlined in the scenario above do not meet the requirements found in Policy number P-045. As a result, Newco would be ineligible to register. Given Newco’s inability to register, the election under section 167 is not available for transfers of a business between a registrant and a non-registrant.

We would welcome any representations addressing the possibility of updating and expanding policy P-045, Butterfly Transactions, to circumstances outside the ambit of the policy.

Further to a review of such comments, it will be necessary to determine whether such reorganizations can be addressed from an interpretive standpoint or whether an amendment to the ETA is required.

Q.10 -Section 167 Election – Oil and Gas Facilities

Facts

Assume a corporation (XCo) has carried on the business of leasing oil and gas facilities. Assume such facilities are numerous and located in many distinct locations throughout a province or provinces. Further assume that XCo requires no material employees or office premises (real property) to carry on its business. XCo sells in excess of 90% of its leased assets (and total assets) as a going concern to a purchaser, retaining only a portion of certain facilities with total value and number well below 10% of XCo’s total assets. Both XCo and the purchaser are GST registrants.

Issue

Does the transfer by XCo constitute a sale of a business or part of a business to which the section 167 election would apply?

The sale of substantially all of XCo’s business as a going concern should qualify for a section 167 election and should not be tainted by the retention of a nominal interest in certain facilities. The property sold represents a business or part of a business, given that it is indeed almost all of the business of XCo. In addition, the properties sold are functionally and physically discrete within the meaning of Policy Statement P-188. Given the minimalist nature of the business carried on by XCo, no other assets are necessary to transfer or indeed could be transferred to the purchaser. The 90% threshold for property necessary to carry on the business also has been met.

Answer

It is a question of fact whether a supply of a business or part of a business is made and the requirements of subsection 167(l) of the ETA are met. Among the requirements for the election, two tests must be met in subsection 167(l) of the ETA:

(1) the supplier must make a supply of a business or part of a business that was established or carried on by the supplier or by another person and acquired by the supplier; and

(2) the recipient must be acquiring under the agreement for the supply, ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.

As indicated in Policy Statement P 188, no one type of property is determinative that there is a supply of a business, as it is the nature of the business that will generally determine what elements comprise a business or part of a business.

We understand that in the situation at hand, Xco has carried on the business of leasing oil and gas facilities located in many locations throughout a province. It has been purported that Xco requires no material employees or office premises to carry on its leasing business, and that Xco sells more than 90% of its leased assets as a going concern to a purchaser. However, it is not clear what is meant by the term “as a going concern” and also what is meant from the background information by the terms “retaining only a portion of certain facilities” or “retention of a nominal interest in certain facilities”. Further, the information provided suggests that only assets used in the business, and nothing more than that, are being supplied, as it has not been substantiated that a supply of a business or part of a business is being made to which the election may apply.

However, if upon examination of the facts Xco is indeed selling its business or part of its business to the purchaser and the other requirements of subsection 167(1) of the ETA are met, then the supplier and recipient may make a joint election under subsection 167(1) of the ETA to have no tax payable in respect of the supply. Otherwise, if Xco is selling assets rather than a business or part of a business, regardless of the value of the assets, the requirements of subsection 167(1) are not met and therefore, the election is not available.

Q.11 -Reorganizations Using Section 156 Election

During a corporate reorganization it is common for parties to incorporate a Newco which will be the recipient of taxable property from a parent or related party immediately following its incorporation. (Assume that Parent and Newco are engaged exclusively in commercial activities.) Such property may have very significant dollar value but may not constitute all or substantially all of the property of a business in order to permit a section 167 election.

In these circumstances, Newco will not own any property nor have made any taxable supplies prior to its acquisition of assets pursuant to the reorganization. Consequently, a technical issue has been identified with respect to whether Newco may utilize a section 156 election on acquisition of property from its parent since paragraph 156(1)(c) provides that an electing party must either have (i) acquired property all or substantially all of which was for use in a commercial activity or, (ii) where the corporation has no property, have made supplies all or substantially all of which are taxable supplies.

A strict reading of paragraph 156(1)(c) would appear to suggest that Newco could not rely on the election since it has no property and has made no supplies. Some commentators have suggested that the CCRA will recognize the foregoing issue is strictly technical in nature and that relief will be afforded by field auditors. Others have suggested that it is necessary for the taxpayer to enter into token transactions whereby Newco must purchase office supplies or other materials prior to acquiring the property which is the subject of the corporate reorganization.

Can the CCRA clarify whether it has established an administrative position with respect to this issue or whether it has identified the matter to the Department of Finance and sought a technical amendment?

Answer

In order for this transfer of the assets to Newco to be deemed to be made for no consideration, Newco must qualify as a specified member under subsection 156(1) prior to this transaction, i.e., we can only look at Newco’s property (or its supplies) exclusive of the assets of Parentco which will be transferred to Newco. It is our understanding that in a typical reorganization, Newco has no assets before this transfer and has not made any supplies. With this reasoning, Newco would not appear to qualify as a specified member for the purposes of subsection 156(2) of the Act as it would not meet either of the "all or substantially all" requirements found in paragraph 156(1)(c). Accordingly, we agree that Newco would not be eligible to make the joint election under subsection 156(2) with Parentco, with respect to the transfer of the assets from Parentco to Newco.

We have received a number of general inquiries with respect to this issue in the past and have discussed the matter the Department of Finance. We are continuing to review the interpretation of this provision, taking into account any suggestions and comments we receive.

We would very much appreciate receiving the CBA’s comments as well as being provided with factual situations that would illustrate the types of reorganization that are being discussed under this scenario. Factual situations will provide us with a better appreciation of the contemplated transactions and would provide us with the necessary background in our ongoing discussions with the Department of Finance. Further to our review, it will be necessary to determine if the matter can be addressed from an administrative standpoint or whether an amendment to the Excise Tax Act is required.

Q.12 -Input Tax Credit Entitlement for Newco in Reorganization

Pursuant to GST Policy Statement P 045, in the context of a butterfly transaction, a Newco is permitted to register for GST purposes and claim ITCs on property acquired prior to its wind up into Successorco. Does the CCRA apply this administrative policy to transactions similar to butterflies, as long as there is no revenue loss to the government? (e.g., a partnership dissolves and distributes assets to the corporate partners, which then amalgamate with the parent of each of the partners). A supplementary question is whether the ability of Newco to register and claim ITCs is based solely on the CCRA’s "administrative" policy. For instance, in the circumstances of such a reorganization, is Newco entitled to rely on the provisions of subsection 141(2) and 141.1(3) to register and claim ITCs, since it acquires assets of a taxable business for the purpose of continuing to operate the business (i.e., deemed to be engaged in a commercial activity), and then amalgamates into a corporation which does continue to operate the business?

Answer

It is the CCRA’s position that the administrative policy outlined in Policy P-045 is restricted to the scenario and transactions outlined in that policy.

Persons who are in a start-up position and not yet making taxable supplies may be considered as being engaged in a commercial activity. However, persons commencing a business who apply to be registered, and where the provision of taxable supplies has not yet begun, should be able to demonstrate a clear intention to carry on a business and be engaged in a commercial activity. It is a matter of fact whether or not Newco itself intends to carry on a business and be engaged in commercial activity. Typically, Newco is not involved in commercial activities to the extent required and only the administrative position provided for in Policy P-45 allows Newco’s registration in this specific scenario.

D. PARTNERSHIPS

Q.13 -Partnership Issues

Could you please provide us with a status report of the CCRA’s review on the application of the GST/HST to partnerships.

Answer

The CCRA is not yet in the position to propose a comprehensive administrative policy with respect to the application of the GST/HST to partnerships. The CCRA is currently developing elements of the comprehensive policy that will address specific issues, e.g. the meaning of “otherwise than in the course of the partnership’s activities” as found in subsection 272.1(3). Further research and analysis, as well as consultations with the Department of Finance, the Income Tax Rulings Directorate and the Verification, Enforcement and Compliance Research Branch are required.

Notwithstanding the preceding, we are prepared to discuss and consult with the CBA on a number of interpretative issues.

Q.14 -Supplies to Partnership (Subsection 272.1(3))

This question was presented at our meeting last year. It was indicated that the policy area is under development.

The meaning of the words "otherwise than in the course of the partnership's activities" in subsection 272.1(3) is ambiguous. The following examples can be used to illustrate the application of this provision.

Example No. 1

Assume that a partnership registered for GST purposes is engaged exclusively in a logging business. One of the partners is an accountant who is registered for GST purposes. The accountant provides accounting services to the partnership. If the partner charges a monthly fee for the accounting services, is the partner required to collect GST from the partnership? Where the partner provides the services, but does not charge a fee for the accounting services, is GST payable on the fair market value of the services?

Example No. 2

Assume that a partnership which is not registered for GST, invests exclusively in mutual funds. Assume one of the corporate partners is registered for GST and is an investment manager. This business operates separately from the partnership. The investment manager also agrees to provide similar services to the partnership (i.e., investment advice). The corporate partner earns revenue from the partnership for its services based on a percentage of the asset value. If the services are performed by the corporate partner as a member of the partnership, then subsection 272.1(3) does not appear to apply since the services are being provided in the course of the partnership's activities rather than "otherwise than in the course of the partnership's activities". Is the corporate partner required to collect GST on the investment advice provided to the partnership?

Answer

As stated in the previous question, the CCRA is currently in the process of researching and developing administrative policy that will assist in the interpretation of subsection 272.1(3). The policy will explain the CCRA’s interpretation of the phrase “otherwise than in the course of the partnership’s activities” and will assist in understanding the interaction and scope of subsection 272.1(1) and subsection 272.1(3).

It is our view that it is a question of fact whether supplies to a partnership by a person who is or agrees to be a member of the partnership are made “otherwise than in the course of the partnership’s activities”, pursuant to subsection 272.1(3). As such, the application of subsection 272.1(3) would need to be determined on a case-by-case basis.

The CCRA is in the process of developing criteria that will assist in determining when a partner is providing property or services “otherwise than in the course of the partnership’s activities”. These criteria are preliminary and are being examined, tested and analyzed against fact situations (which are to date, very limited in number). It is also important to note that the criteria are not exhaustive and that no one criterion, in isolation or in combination with other criteria, will necessarily lead to a specific result. As such input and comments from the CBA on the applicability of the criteria is welcome. In addition, comments and suggestions as to other criteria that may be applicable would also be welcome. (Criteria to be submitted to the CBA under separate cover).

Example No. 1

As very few facts were presented in example No. 1, it is difficult to come to any conclusion with certainty. Nonetheless, it is the CCRA’s preliminary view that the supply of accounting services in example No. 1 would not fall within the ambit of subsection 272.1(1). It is the CCRA’s preliminary view that the partner is not providing accounting services as a member of the partnership. Rather, the partner would be viewed as providing accounting services to the partnership “otherwise than in the course of the partnership’s activities”. As such, the partner would need to charge GST.

Should the accounting services be provided “otherwise than in the course of the partnership’s activities”, the value of the consideration upon which GST is charged by the partner will depend on whether the accounting services are acquired by the partnership for use, consumption or supply exclusively in the course of the partnership’s commercial activities. Where the accounting services are acquired by the partnership for such use, consumption or supply, the partner would be required to collect GST on the amount the partnership agrees to pay or credit (i.e. the monthly fee), as this amount is deemed to be consideration for the supply, pursuant to paragraph 272.1(3)(a). Where the registered partner does not charge a fee for the accounting services supplied to the partnership, no GST would be payable if these services are acquired for use, consumption or supply exclusively in a commercial activity.

However, if the accounting services are not acquired for use, consumption or supply exclusively in the commercial activities of the partnership, the partner would be deemed to have made the supply of accounting services to the partnership for consideration equal to the fair market value at the time the accounting service is acquired by the partnership, determined as if the partner were not a member of the partnership and as if the parties were dealing at arm’s length, pursuant to paragraph 272.1(3)(b). This is true whether the partner charges a monthly fee to the partnership or whether the supplies are made for no consideration. In the case where the partner charges the monthly fee, the partner will need to make a determination as to whether the fee charged is equal to the fair market value of the service provided (for GST purposes).

Example No. 2

As very few facts were presented in example No. 2., it is difficult to come to any conclusion with certainty. Nonetheless, it is the CCRA’s preliminary view that the supply of investment advice would not fall within the ambit of subsection 272.1(1). It is our preliminary view that the partner is not providing the services as a member of the partnership. Rather, the partner would be viewed as providing the services to the partnership “otherwise than in the course of the partnership’s activities”. As such, the partner would need to charge GST.

Given the CCRA’s view that the services are provided “otherwise than in the course of the partnership’s activities”, the value of the consideration upon which GST is charged by the partner will depend on whether the services are acquired by the partnership for use, consumption or supply exclusively in the course of the partnership’s commercial activities.

Where the services are acquired by the partnership for such use, consumption or supply, the partner would be required to collect GST on the amount the partnership agrees to pay or credit (i.e. fee based on a percentage of the asset value), as this amount is deemed to be consideration for the supply, pursuant to paragraph 272.1(3)(a).

However, and pursuant to paragraph 272.1(3)(b), if the services are not acquired for use, consumption or supply exclusively in the commercial activities of the partnership, the partner would be deemed to have made the supply of services to the partnership for consideration equal to the fair market value at the time the service is acquired by the partnership, determined as if the partner were not a member of the partnership and as if the parties were dealing at arm’s length. This deemed consideration occurs whether or not the partner charges a fee to the partnership. In the case where the partner charges a fee (in this case based on a percentage of asset value), the partner will need to make a determination as to whether the amount actually charged is equal to the fair market value of the service provided (for GST purposes).

Q.15 -Interplay of Subsection 272.1(2) and Section 156

There are circumstances where a corporation (ACorp.) that is a member of a partnership (“Partnership”) is closely related to another corporation (BCorp.), whereas Partnership is not a “Canadian Partnership”, because another member of the partnership is an individual or a non-resident.

Partnership is engaged exclusively (i.e., more than 90%) in commercial activity. BCorp. provides services relating to the operations and administration of Partnership under a contract for services with ACorp. ACorp. is obligated under the partnership agreement to procure these services; and is required to pay for the services of BCorp. on ACorp.’s account, not on the account of Partnership.

Questions

(a) If ACorp. and BCorp. enter into an election under section 156, will the election deem BCorp.’s services to ACorp. to be for nil consideration, by virtue of paragraph 272.1(2)(b) deeming ACorp. to have been engaged in Partnership’s commercial activity when it procured BCorp.’s services?

(b) Would the answer to (a) be different if BCorp. also provided other services that were on account of Partnership under a separate contract?

Answer

(a) No, an election under section 156 would not deem BCorp.’s supplies to ACorp. to be for nil consideration by virtue of its interaction with paragraph 272.1(2)(b). Paragraph 272.1(2)(b) serves to deem a member of a partnership to be engaged in the activities of the partnership only for the purpose of permitting the member to claim ITCs or rebates in specific circumstances (i.e. where property or service is acquired by the member of a partnership on his/her own account, for the use, consumption or supply in the course of activities of the partnership). Paragraph 272.1(2)(b) does not deem the member to be engaged in the partnership’s activities (and therefore engaged exclusively in commercial activity) for purposes of the section 156 election.

(b) No, the answer would not be different if BCorp. also provided other services to ACorp. that were acquired on account of the partnership under a separate contract.

Q.16 -Section 186 and Holdings in Partnerships or Trusts

Additional Facts

The value of BCorp.’s partnership interest in Partnership represents 20% of the value of BCorp.’s property.
All or substantially all of BCorp.’s property (without reference to its interest in the partnership) is for consumption, use or supply in commercial activity.
All or substantially all of the property of the Partnership is for consumption, use or supply exclusively in commercial activity.

Subsection 186(1) deems ACorp. to acquire inputs in relation to shares or indebtedness of BCorp. to be for consumption or use in the course of commercial activities of ACorp., provided all or substantially all of the property of BCorp. was last acquired or imported for consumption, use or supply exclusively in the commercial activity of BCorp.

In order to determine whether BCorp. meets the all-or-substantially-all test for purposes of subsection 186(1), subsection 186(3) allows BCorp. to include the value of property of a subsidiary related corporation. Subsection 186(3) does not specifically refer to partnerships.

(a) Does the CCRA have an interpretative policy that would allow the read-up under subsection 186(3) to apply in the case of business entities other than corporations - such as partnerships and trusts?

(b) Can ACorp. rely on BCorp.’s undivided interest in the partnership property for purposes of determining whether “all or substantially all” of BCorp.’s property is used in commercial activity?

If the answer is negative to both (a) and (b), this appears to constitute a constraint against carrying on commercial activity, using business organizations other than corporations, even within closely-held groups.

Answer

(a) Subsection 186(3) of the ETA specifically deems the shares of the capital stock or indebtedness of a corporation (where all or substantially all of the property of the corporation was acquired for consumption, use or supply exclusively in the course of its commercial activities), that is owned by or owed to a related corporation to be property that was acquired by the related corporation for use exclusively in its commercial activities. It is only shares and indebtedness of corporations, and not interests in partnerships and trusts, that are subject to this deeming provision. As the application of the subsection is clear in this regard, we do not have an interpretative policy to allow the application of this provision to interests in partnerships and trusts.

(b) For purposes of Part IX of the ETA, partnership property is considered property of the partnership and not of the partners. As such, partnership property is considered to be for use by the partnership in its commercial activities, and is not considered to be for use of the partner in the partner's commercial activities. Given the preceding, Acorp. cannot rely on BCorp.'s undivided interest in the partnership property for purposes of determining whether "all or substantially all" of BCorp's property is used in commercial activity.

It should be noted that whether section 186 should be amended to include business organizations other than corporations is a matter of tax policy, which is the responsibility of the Department of Finance.

E. IMPORTS

Q.17 -Temporary Importation of Goods

Employees of a non-resident entity (not registered for GST) may come to Canada and bring with them goods to be used in their work (e.g., laptop computers). These items are frequently duty-free, but GST seems to be payable on importation. Is there any relief available from GST, given that these goods are only used in Canada temporarily and will be subsequently removed from Canada?

Answer

If Customs regards the goods as personal effects of the non-resident traveler and classifies them under tariff heading 98.03 then they would be non-taxable for purposes of the GST under section 1 of Schedule VII to the Excise Tax Act (the Act).

If this is not the case, there are no temporary entry provisions, in either, the Non-taxable Imported Goods (GST/HST) Regulations or the Value of Imported Goods (GST/HST) Regulations, to allow for the temporary importation of such goods on a non-taxable or a proportionate tax basis (such as payment on a 1/60th basis). The value for tax would be determined under Subsection 215(1) of the Act. Once full tax is paid, however, paragraph 17 of Customs Notice N-118 which outlines the Tax Treatment to be Accorded to Imported Goods Considered to be Canadian Goods and Goods once Accounted for, Exported, and Returned indicates that goods temporarily imported and then exported, which have been subject to full tax at the time of importation, are considered to be tax-paid for purposes of any subsequent importation.

To be accorded non-taxable status on a subsequent importation, they must be the same goods, re-imported by the same person.

Q.18 -Importation of Goods – Place of Supply

The following is an example of a scenario which still appears to cause some confusion on whether or not GST should be collected on sales to Canadian customers by a non-resident who is registered for GST.

Assume for example, that we have a non-resident registered for GST purposes. The non-resident sells goods to Canadian residents FOB the non-resident’s place of business and title passes at that point. Also assume that the non-resident is the importer of record. The goods are delivered to a Canadian customer (registered for GST) in Canada by a courier (e.g., Federal Express) retained by the non-resident. The non-resident pays for the transportation of the goods.

The non-resident will pay GST at the time of importation and claim an input tax credit. The question is whether or not the non-resident is required to collect GST on its sale to its Canadian customer given that the terms of sale are FOB the non-resident’s place of business.

Answer

A supply made by a non-resident to a recipient in Canada is deemed to be made outside Canada if the goods are delivered or made available outside Canada to the recipient. A supply is deemed to be made in Canada if the goods are delivered or made available in Canada to the recipient.

The terms FOB plant/destination and the designation of the place where title to the goods passes to the recipient may provide an indication as to where the delivery is intended to take place, but do not always determine where delivery actually takes place. This determination is made by reference to the applicable law and all of the relevant circumstances of each case.

In the scenario described above, the terms are that delivery is FOB the non-resident’s place of business. The term F.O.B a designated point generally means that the buyer is responsible for the shipment of the goods from that point onward. While the seller may arrange for the carriage of goods, it is the buyer that settles the carrier’s account in such cases. Delivery to a carrier is considered to be delivery to the buyer in such a case, if the seller in fact gives possession of the goods to the buyer through the buyer’s intermediary (the carrier). Consequently, where the contract calls for delivery on an F.O.B basis and this is in fact what occurs, the place of delivery will be the place specified in the contract.

In the example at hand, while the terms are F.O.B. the non-resident’s place of business, the non-resident not only arranges for the shipping, but also pays to have the goods shipped to the recipient in Canada, indicating that actual delivery is in Canada.

In order to make a conclusive determination as to where the goods are delivered in these circumstances, we would require all of the relevant details of the transaction. However, I would refer you to the decision of the Tax Court (confirmed on appeal) in ADV Ltd. V. R, [1997] G.S.T.C. 60 and.[1998] G.S.T.C. 64.

If it is determined that the goods are delivered or made available outside Canada to the recipient, the supplier would not be required to collect GST/HST (Division II tax) on its sale to the recipient, as the supply is deemed to be made outside Canada.

Conversely, if it is determined that the goods are to be delivered or made available in Canada to the recipient, the non-resident supplier would be required to collect GST/HST (Division II tax) on the supply to the Canadian customer.

Q.19 -Imports and ITCs

The most recent legislative amendment to section 169 gives rise to some confusion.

(a) Does the importer have to “own” the goods upon importation or merely import the goods for someone else?

(b) What is the CCRA’s definition of “commercial service” under subsection 169(2)?

Answer

(a) The person who is entitled to claim ITCs under subsection 169(1) of the Act in respect of tax paid or payable under Division III on the importation of goods into Canada is the person who caused the goods to be brought into Canada (the de facto importer). Generally, that person will be the owner of the goods.

A person who reports and clears the goods being imported through Customs and therefore pays tax on importation (the importer of record) but who is not the de facto importer, would not be entitled to claim ITCs under subsection 169(1) of the Act, as that person is not considered to have imported the goods. However, the importer of record may be able to recover the tax paid through the provisions of subsection 169(2) of the Act if the conditions described in that subsection are met.

If it is established that the tax paid by the importer of record was paid on behalf (as an agent of) the de facto importer, the de facto importer may be able to recover the tax paid under the provisions of subsection 169(1) or to apply the flow-through provisions of section 180 of the Act.

Notwithstanding the above, it is CCRA’s position that if Division III tax is paid on the importation of TPP by a registered Canadian recipient of a supply of TPP by way of sale (i.e. the Canadian recipient is the “importer of record”), the Canadian recipient would be considered the importer of the TPP for the purposes of subsection 169(1) of the Act, whether the supply to him is made in Canada or outside Canada. Therefore, the registered Canadian recipient may, in such a situation, claim any ITCs in respect of Division III tax paid, provided that the other relevant conditions are met.

(b) "Commercial service" is defined in subsection 123(1) of the Act as a service in respect of tangible personal property other than a service of shipping supplied by a carrier and a financial service.

The following services are considered by CCRA as commercial services in respect of imported goods: performing a manufacturing, production or processing operation on the property; assembling, blending, mixing, cutting to size, diluting, bottling, packaging or repackaging the property or applying coatings or finishes to the property; inspecting, testing, evaluating, repairing or maintaining the property; or recording or storing instructions or data on the property in such manner and form that the instructions or data can be read by data processing equipment.

Other services could also be considered commercial service in respect of imported goods if there is a "functional relationship" between the service and the goods, and if the functional relationship is more direct than indirect. Generally, a direct functional relationship exists where the commercial service is performed to or on the goods themselves.

Please refer to policy statement P-151 entitled The establishment of criteria for interpreting the words “commercial service” for the purposes of claiming an input tax credit (ITC).

F. EXPORTS

Q.20 -Zero-Rating of Intangibles

Section 10 of Part V of Schedule VI to the Act is the zero-rating provision for intangible personal property. It zero-rates the supply of “an invention, patent, trade secret, trade-mark, trade-name, copyright, industrial design or other intellectual property” supplied to an unregistered non-resident. Given the broad place of supply rules for intangible personal property in section 142, the meaning of “intellectual property”, as a subset of “intangible personal property”, is critical with respect to supplies to unregistered non-residents.

There does not appear to be any commonly accepted meaning to the phrase “intellectual property”. While Memorandum 300-3-5 states that intellectual property “is broadly interpreted to include ‘know how’”, what else does it include besides the items specifically listed in section 10? Is the provision broad enough to allow the zero-rating of all intangible personal property? Does it, for example, include goodwill, software, customer lists or contracts for the right to distribute products in Canada?

Answer

Section 10 of Part V of Schedule VI to the Act is the zero-rating provision for certain intangible personal property. It provides that supplies of “an invention, patent, trade secret, trade-mark, trade-name, copyright, industrial design or other intellectual property or any right, licence or privilege to use any such property” made to an unregistered non-resident are zero-rated.

Blacks Law Dictionary defines ‘intangibles’ as “property that is a ‘right’ such as a patent, copyright, trademark, etc., or one which is lacking physical existence; such as goodwill.” A distinction needs to be drawn between ‘intangible personal property’ and ‘intellectual property’ for the purposes of this section. Intangible personal property covers a number of different types of property whereas intellectual property is a subset of intangible personal property. The two terms are clearly not interchangeable.

Intellectual property is generally defined as property which is the product of invention or creativity (see, for example, Oxford English Dictionary, Second Edition). The CCRA has indicated that ‘intellectual property’ will be broadly defined for the purposes of section 10 and will include such things as know-how (GST Memorandum 300-3-5).

Other examples of ‘intellectual property’ or ‘the right to use intellectual property’ include: plant breeders rights and rights to integrated circuit topography, a universal non-transferable licence of a right to use computer software, and the supply of a licence to use custom computer software.

The section does not cover intangible personal property that is not considered intellectual property. This is property that is similar to intellectual property in that it is lacking in physical existence, but may be distinguished on the basis that it is not the product of invention or creativity.

Examples of intangible property that is not considered intellectual property include: the right to use a membership, contractual rights (including those under distribution agreements), options, shares in the common stock of a corporation, the right to recover debt, the supply of an access code for programs downloaded from a bulletin board service, and goodwill (which includes customer lists).

Q.21 -Zero-Rating: Carrying on Business in Canada

Some zero-rating provisions turn on whether a supply made to a non-resident was in respect of a supply made outside Canada by the non-resident (e.g., section 5 of Part V of Schedule VI). The CCRA will normally accept a certificate from a non-resident as “satisfactory evidence” of its non-resident or non-registrant status (see, for example, Appendixes A and B to New Memorandum 4.5.1). Where a supply is deemed to be made outside Canada pursuant to section 143, will a certificate from the non-resident that it does not carry on business in Canada be accepted on a similar basis?

Answer

Part V of Schedule VI to the Excise Tax Act (the Act), provides for zero-rating of certain supplies of property or services supplied by Canadian GST/HST registrants to non-resident persons. One of the primary conditions, that a GST/HST registrant must take into account for the supply to be zero-rated, is whether the recipient of the supply is in fact a non-resident of Canada. Another is whether the non-resident is registered for GST/HST purposes.

The onus of obtaining and maintaining “satisfactory evidence” that the person is in fact a non-resident of Canada or that the person is not registered, is upon the supplier. To this end, the supplier may, in certain circumstances, accept a certificate from the person, as described in the GST/HST Memorandum Series, Chapter 4.5.1, Appendices A and B.

As for subsection 143(1) of the Act, the question asked is whether a certificate from the non-resident supplier - that the supplier is not carrying on business in Canada - will be accepted on the same basis.

While there is currently no administrative or legislative provision for such a certificate, a registrant when zero-rating a supply to a non-resident under section 5 of Part V of Schedule VI to the Act, for example, would be required to maintain satisfactory evidence that all of the conditions of the above zero-rating provision are met. Consequently, while there is no requirement for a certificate or declaration as to the status of the non-resident, in respect of carrying on business in Canada, it may be prudent for the registrant to obtain such a declaration in the contract or other documentation relating to the supply.

Q.22 -Zero-Rated Export Services

Paragraph 7(a.1) of Part V of Schedule VI was amended to create an exclusion for services “rendered to an individual while that individual is in Canada”. Previously the exclusion only applied to services “made to” a non-resident individual who was inside Canada at any time the service was performed, or services “primarily for consumption, use or enjoyment in Canada”.

Our understanding is that the CCRA takes the position that if there are any individuals in Canada who are provided with, receive, or are the “direct beneficiaries” of a service, then the service is fully taxable and not eligible for zero-rating. It does not matter, for example, whether the person is an employee of the non-resident or a person wholly unrelated to the non-resident (e.g., a Canadian customer).

The Technical Notes make this quite clear, in some respects, by indicating that paragraph 7(a.1) applies whether or not the supply is “made” or “supplied” to an individual – i.e., whether the individual is the “recipient” of the service within the meaning of subsection 123(1). On the other hand, the Technical Notes also appear a bit more limiting, by referring only to an example featuring a non-resident company that pays a fee for an employee to attend a management training session in Canada, and considering the service to be taxable, as rendered to that employee, an individual, while in Canada.

Is the rationale that the employee is considered part of the non-resident corporation – and therefore the contracting party – or does the example have a broader application?

Answer

Paragraph 7(a.1) of Part V of Schedule VI to the Excise Tax Act (the Act) was introduced by Bill C-70 (1997, c.10, s.143), applicable to supplies for which all the consideration becomes due or is paid without having become due on or after July 1, 1996. This legislative amendment replaced paragraph 7(a), which provided for the “consumption, use or enjoyment in Canada” test, and introduced new paragraph 7(a.1) which excludes from zero-rating a service that is rendered to an individual while that individual is in Canada.

Paragraph 7(a), as amended, provides for the exclusion to the general zero-rating of section 7 of a supply of a service made to an individual who is in Canada at any time when the individual has contact with the supplier in relation to the supply. New paragraph 7(a.1), mentioned above, also provides for an exclusion from zero-rating if the supply of a service is rendered to an individual while in Canada. Therefore, whether the supply of a service is made to an individual who is in Canada or rendered to an individual while the individual is in Canada, such a supply of a service would not qualify for zero-rating under section 7 of Part V of Schedule VI to the Act.

Paragraph 7(a.1), is broad in its application, in that it would apply to resident individuals, such as a Canadian customer of a non-resident recipient, as well as, non-resident individuals, such as an employee of a non-resident recipient. The example highlighted in the Explanatory Notes to Bill C-70, refers to a situation involving a non-resident’s employee who is in Canada to attend a management training session. This would be the classic case of a supply of a service made to a non-resident employer but rendered in Canada to one of its employees. Paragraph 7(a.1) would apply to exclude such a supply of a service from the general zero-rating provisions of section 7 of Part V of Schedule VI to the Act.

G. INPUT TAX CREDITS

Q.23 -Input Tax Credit Claims

Who can claim ITCs when the billing and payment flow does not match the flow of goods or services?

Case (1): X contracts and pays for a service in the course of X’s business, but the service is physically rendered to Y. Can X claim an ITC for the GST paid on the service?

Case (2): A (an agent) purchases goods as agent of P (the principal). Who is entitled to the ITC, A or P?

Conceptually, X and P should be able to claim the ITCs. Does the CCRA agree that they can do so in practice?

Comments and Suggested Analysis

Recipient

In Case (1), X is the “recipient” as defined in subsection 123(1) of the Act.

In Case (2) P may or may not be the “recipient”, since, if A is an undisclosed agent, P may or may not be liable to the third party if A does not pay for the goods. (In common-law provinces, the supplier can choose to sue the principal: Watteau v. Fenwick (1895), 1 QB 346; Lawson v. Kenney (1957), 9 DLR (2d) 714.)

For the GST system to work properly, P should be considered the recipient (since P can be sued), even though A may also technically be the recipient since A can be sued.

Conditions of Subsection 169(1)

Subsection 169(1) now requires that the person “acquire” the property or service. Is this the same as being the “recipient”? The pre-April 1997 wording was that the supply had to be “made to” the person, which is the same as referring to the “recipient”.

In Case (1), has X “acquired” the service when it is rendered to Y?

In Case (2), P has clearly “acquired” the goods.

Documentation Requirements

Subsection 169(4) requires documentation as prescribed in the Regulations. Subparagraph 3(c)(ii) of the Input Tax Credit Information Regulations, requires that the documentation include “the recipient’s name, the name under which the recipient does business or the name of the recipient’s duly authorized agent or representative”.

In Case (2), since A is P’s “duly authorized agent” for purposes of the purchase, an invoice in A’s name should be acceptable to support an ITC claim by P. Does the CCRA agree? How do you deal with the practical audit question of ensuring that A and P do not both claim the same ITC?

Answer

Case (1)

For purposes of section 169(1) of the Excise Tax Act, where X enters into a contract for the supply of a service and is liable to pay for the service thereby meeting the definition of recipient, X is generally considered to have acquired the service. As such, provided that the other conditions with respect to the claiming of ITCs are met, X may claim an ITC.

Case (2)

In this situation, for GST purposes, the principal is considered to be the recipient of the supply acquired by the agent on behalf of the principal. Provided that the conditions for claiming ITCs are met, P would be entitled to claim the ITC. We concur that in accordance with the documentary requirements, the name of the agent on the documentation as opposed to the principal is acceptable. In cases where there may a possibility that ITCs have been claimed by two persons in respect of the same supply, the CCRA will review the records of both parties to ensure that the ITCs are only claimed by the person who is entitled to claim the ITC.

Q.24 -Input Tax Credit Claims – Documentary Requirements

(a) A non-registered vendor sells real property to a registered purchaser. The registered purchaser self-assesses pursuant to subsection 228(4). Would the CCRA allow the registered purchaser (engaged exclusively in commercial activities) to claim an input tax credit even though the documentary requirements cannot be satisfied since the vendor is not registered. (b) A non-registered vendor is the importer of record and pays GST at the border. The purchaser is a registrant. Assume that the requirements of section 180 of the Act are satisfied. Would the CCRA allow the registrant (engaged exclusively in commercial activities) to claim an input tax credit even though the documentary requirements cannot be satisfied?

Please confirm that input tax credits would be available in the foregoing examples on the basis of subsection 169(5).

Answer

(a) Yes - an input tax credit can be claimed.

The registered purchaser is required to self-assess the tax and, since the real property is being used primarily in the course of commercial activities, the recipient is required to report the tax on the regular GST/HST return rather than file a separate return (form GST 60). As a registrant, the purchaser would be eligible to claim an input tax credit, equal to the amount of tax self-assessed, in the regular GST return if the real property is to be used in a commercial activity. As you have indicated, paragraph 169(4)(a) of the ETA prohibits a person from claiming an ITC unless sufficient documentation, including prescribed information, is obtained. Since the supplier, in this instance is not a registrant, and the prescribed information requires a registration number assigned to the supplier the requirements of subsection 169(4) cannot be fulfilled. Thus, in the case of a self-assessment of tax on real property this general requirement will be varied in recognition of the circumstance under the authority of subsection 169(5) which allows the Minister to waive the documentary requirements provided the tax payable has been accounted for by the recipient in the return in which it must be reported.

(b) Assuming the above facts are accurate, section 180 of the Act would apply to deem the Canadian purchaser to have paid tax on the supply of the property, if the vendor provides the purchaser with evidence, satisfactory to the Minister, that the vendor actually paid Division III tax in respect of the importation. A copy of the relevant Customs documentation (B3 Canada Customs Coding form) would provide such information.

If the purchaser is deemed to have paid tax on the supply pursuant to section 180 of the Act, the purchaser would be entitled to claim ITCs under the provisions of subsection 169(1) of the Act, provided the documentary requirements of subsection 169(4) of the ACT are met. A copy of Customs documents, such as the B3, together with the commercial contract between the vendor and the purchaser or the commercial invoice issued by the vendor to the purchaser in respect of the supply of the property or any other similar document would provide the information required under subsection 169(4) of the Act.

From the information provided, we believe the requirement for the vendor to provide such documents to the registrant would not create special difficulties that would justify an exemption from the documentary requirements.

Q.25 -GST Refunds on Supplies to Provincial Government

Where a person acts as a paying agent for supplies made to the provincial government, what mechanism is in place to permit the supplier to obtain a refund of GST charged incorrectly to the government? We understand that the CCRA has allowed input tax credits to be claimed by the paying agent but only for items such as fuel which is "GST included" and in respect of which breaking out the GST portion is impossible or not practical from the fuel supplier's perspective. However, the various Reciprocal Taxation Agreements provide for exclusions from the general exemption only in respect of "indirect purchases" such as travel, meals, accommodation, taxi and petty cash expenses. Therefore, what mechanism is available for either the paying agent or the provincial government to obtain GST refunds for GST charged in error?

Answer

When an otherwise taxable supply is made to a provincial government organization that is exercising its immunity from GST/HST, it is generally relieved from tax at the point of purchase. However, there may be cases when a province has paid an amount as tax in error or the amount paid by the province was tax included (e.g. gasoline). In these cases the province may use the rebate mechanism set out in section 261 of the Excise Tax Act to recover amounts paid as tax.

Where a paying agent has paid the supplier an amount equivalent to the GST/HST with respect to a supply made by the supplier to the province, and the province refuses to reimburse the agent the cost of tax incurred on its behalf, the supplier may be in a position to issue a credit note to the province. Unfortunately, there is no formal mechanism in place under the Excise Tax Act to allow the paying agent to claim the amount as a rebate or refund. This is a matter between the province and the paying agent, in which the CCRA cannot intervene. However, it should be noted that in limited circumstances it has been the past practice of the CCRA to consider requests on a case by case basis for alternate recovery mechanisms at the paying agent level.

H. ELECTIONS

Q.26 -Joint Venture Election

It is common for several persons to enter into an agreement to acquire commercial real estate as co-owners with the express intention of leasing or constructing real property through a joint venture structure, employing an operator for all activities. The operator would also acquire the property as agent/bare trustee on behalf of the co-owners pursuant to the joint venture agreement.

CCRA officials have indicated verbally on occasion that the consequences of making a joint venture election under paragraph 273(1)(a) might not be legally capable of applying in respect of the initial acquisition of the real estate by the operator in such a situation (i.e. it can only cover post-acquisition joint venture activities) because the wording of the prescribed activities in subsection 3(1) of the Joint Venture (GST) Regulations may not cover the acquisition of the property to be leased or on which the construction will take place (i.e., the acquisition of ownership of the property itself is possibly not within the scope of the prescribed activities under either paragraphs 3(1)(a) or (b) of the Regulations). This would mean that the individual co-owners themselves must become registered to facilitate the acquisition of the real estate (i.e. to claim the input tax credits and GST flow through on acquisition), even though all GST in respect of the subsequent joint venture activity would be accounted for by the operator. This same issue could conceivably arise as well with respect to the acquisition of the joint venture property regarding other activities to be prescribed. In contrast, the joint venture election would appear to clearly cover the disposition of joint venture real property in such cases as, presumably, the disposition is the “exercise of a right, privilege or obligation of ownership of an interest in real property”.

What is the CCRA’s position? Reading prescribed activities narrowly, does not necessarily make sense given that section 273 is intended to simplify GST accounting, the section only applies to the extent input tax credits are otherwise available, and the relevant legislation and regulations seem to leave room for a somewhat flexible interpretation of the scope of the prescribed activities.

Answer

In our view, the legislation is clear. The simplified accounting mechanism available through section 273 only applies once a joint venture election is in place. Prior to the existence of a joint venture election, the normal rules apply. Your question indicates that you feel there is room for a more flexible interpretation. We would be pleased to review any arguments that you may have in that regard.

If you have information that indicates that there is a widespread problem in this area, you may also wish to bring the issue to the attention of the Department of Finance for tax policy consideration.

Q.27 -GST Elections - Retroactivity

(a) Can the section 156 election be made on a retroactive basis, assuming that the conduct of the parties support the non-payment and non-collection of GST and the parties are closely related (i.e. assume that the conditions for the election have been met)?

(b) Can the section 150 election be made on a retroactive basis, assuming that all of the conditions for the election have been met?

Policy Statement P-187 deals with joint venture election and appears to provide a precedent for permitting retroactive elections under certain circumstances.

Answer

(a) Section 156 Election:

This matter is currently under review and a response should be forthcoming in the near future.

(b) Section 150 Election:

Subsection 150(3) of the Act sets out the form and manner of filing an election under subsection 150(1) of the Act. Specifically, the election shall be made in prescribed form containing prescribed information, specify the day the election is to become effective, and be filed by the member with the Minister in prescribed manner on or before the day on or before which a return under Division V for the reporting period of the member in which the election is to become effective is required to be filed.

Because the legislation specifies that that the form must be filed on or before a certain day, retroactive elections are not permitted.

I. DIRECTORS’ LIABILITY

Q.28 -Directors’ Liability – Collections

Some collections officers have a policy of attempting to assess what they consider to be “de facto” directors – or directors who do not amount to “legal directors” (e.g., because they may have resigned, or never have been directors in the first place) – for liability under section 323. (This is apparently on the basis of Wheeliker v. R., [1999] 2 C.T.C. 395 (FCA)). In these cases, we understand the CCRA to be concentrating on instances where the director held him or herself out to be a “director”, at a time when he or she was not legally a director.

Section 323 contains, among other things, a statute of limitations period for assessments. The rule is found in subsection 323(5) and prohibits assessments made “more than two years after the person last ceased to be a director of the corporation”.

In the case of “de facto” directors, how does the CCRA propose to administer that rule?

Answer

A “ Defacto director” is a term used to describe one type of director who, like any other director, may be held liable for the debts of the company and assessed accordingly. Any such assessment would be subject to the related restrictions, including the two year limitation period, contained in section 323. If that person does not agree that he or she is a director and/or does not agree with the assessment, he/she has remedies available to dispute the assessment.

Q.29 -Directors’ Liability Assessments

What is the current protocol regarding the involvement of Justice or Legal Services concerning directors’ liability assessments and the due diligence defence? It was understood a few years ago that most directors’ liability cases were reviewed by Justice or Legal Services prior to any assessment being issued. Now it appears that complex cases, where submissions are being made on behalf of directors by legal counsel, are being handled without legal input. How is the process intended to work, and how can counsel to a director ensure that their submissions are considered by Justice prior to an assessment being issued?

Answer

Our collections officers are trained to make recommendations as to whether a certain due diligence case should or should not be referred to our Department of Justice for their legal opinion prior to assessment. Those recommendations are based on training, experience, and where necessary consultation with subject matter experts. These recommendations are reviewed by the delegated levels of management for their concurrence. While changing jurisprudence and other outside factors will influence this decision there is no set requirement for a referral to Justice.

J. DUE DILIGENCE

Q.30 -Due Diligence Under Section 280

The CCRA confirmed at the 1999 CICA Commodity Tax Symposium that due diligence will be considered as part of an audit prior to the assessment of penalties under section 280. However, many (but not all) auditors have continued to assert that relief from penalty is only available through fairness applications.

(a) What steps have or will be taken to communicate the CCRA’s position on due diligence to the field?

(b) Are guidelines or policies being developed to assist auditors in determining whether or not a corporate registrant exercised due diligence?

Answer

(a) A memo was sent to field offices in February 1999 to advise them that the CCRA accepts the decision of the Federal Court. In regard to the next step, see (b) below.

(b) A policy has been prepared. It is available electronically to all CCRA staff.

Final

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

P-237 Issued: May 29, 2000

POLICY NUMBER P-237:

THE ACCEPTANCE OF A DUE DILIGENCE DEFENCE FOR A PENALTY IMPOSED UNDER SUBSECTION 280(1) OF THE EXCISE TAX ACT FOR FAILURE TO REMIT OR PAY AN AMOUNT WHEN REQUIRED

Subject:

The Acceptance of a Due Diligence Defence for a Penalty Imposed Under Subsection 280(1) of the Excise Tax Act for Failure to Remit or Pay an Amount When Required

Legislative Reference(s):

Subsection 280(1) of the Excise Tax Act

National Coding System File Number(s):

11675-1

Effective Date:

September 29, 1998

Issue and Decision

This policy statement outlines the position of the Canada Customs and Revenue Agency (CCRA) on accepting a due diligence defence in respect of the penalty imposed under subsection 280(1) of the Excise Tax Act (ETA). This particular subsection provides that where a person fails to pay or remit an amount when required under Part IX of the ETA, the person shall pay on that amount a penalty equal to 6% per year and interest at the prescribed rate.

The imposition of a penalty pursuant to subsection 280(1) of the ETA does not specifically require that the intention to avoid tax exists before the penalty will be applied. The penalty is applied automatically under the provision as it provides that the person "shall pay" the penalty in respect of the failure.

The ETA does not specifically provide for a due diligence defence in the case of a penalty imposed under subsection 280(1) of the ETA. The CCRA accepts that in cases where the CCRA determines that a person has exercised due diligence, the penalty is not exigible. In these cases, the penalty imposed under this provision will be cancelled by the CCRA. The acceptance of a due diligence defence is limited to the cancellation of the penalty under subsection 280(1) of the ETA and will not result in the cancellation of interest payable under this subsection.

The onus is on a person who claims to have been duly diligent to demonstrate to the CCRA that due diligence has been exercised. The CCRA cannot suggest criteria to make this determination as each one is based upon the particular facts of that case. However, an examination of the reasons for the late or insufficient remittance or payment will often assist the CCRA in determining whether a person has been duly diligent.

Making a Determination of Due Diligence

The CCRA's acceptance of a due diligence defence requires that a person make a sincere and demonstrable attempt that a reasonably prudent person in similar circumstances would be expected to make in order to comply with the requirement to pay or remit the amount when required. A person will be considered by the CCRA to have exercised due diligence where it can be clearly demonstrated that they have to the best of their ability taken reasonable care in ensuring that the correct amount was remitted or paid when required.

The CCRA may accept a due diligence defence in a situation where a person remits or pays an amount that is less than the amount actually owed where that amount was arrived at after having made an incorrect assumption based on genuine uncertainty regarding the application of the ETA. In addition, in a situation where a person is a recipient who fails to report and remit the tax on a self-assessment situation and this failure can be attributed to an incorrect assumption based on genuine uncertainty over the application of the ETA, a due diligence defence may be accepted by the CCRA. In either case, for a person to be duly diligent it must be clearly evident that despite making an incorrect assumption, all reasonable care has been taken to the best of their ability in ensuring that the correct amount was remitted or paid when required.

Limitations on the Application of Due Diligence

Mathematical Errors/Inadequate Records: A due diligence defence may not be accepted by the CCRA where a person has made mathematical errors in the calculation of an amount, or where the CCRA has determined that the person has failed to keep adequate records.
Inaccurate Third Party Advice: Where a person has relied solely on the advice of a third party which turns out to be technically inaccurate, the CCRA would generally not accept a due diligence defence. However, in a case where actions taken by a person's authorized representative lend support to a person's due diligence defence, these actions will be taken into consideration in determining whether a person has been duly diligent. Where appropriate, a person's level of sophistication in tax matters may be viewed as one contributing factor in the CCRA's determination as to whether due diligence has been exercised.
Late Payment or Remittance: The CCRA would not generally accept a due diligence defence where the correct amount was paid or remitted after the due date. In particular, where the CCRA determines that a person has complied with the obligation to collect the correct amount as required but has failed to remit this amount when required, the person's due diligence defence would not be accepted. It is the CCRA's position that a person who has failed to take reasonable care to ensure that the correct amount was paid or remitted by its due date, has not exercised due diligence.

Eligibility For Relief Under the Fairness Guidelines

In cases where it has been determined that the penalty under subsection 280(1) is exigible, there may be extraordinary circumstances beyond a person's control which may have prevented them from complying with their obligations under the ETA. In these cases, the person may request that the CCRA waive or cancel the penalty and interest. For more information, please refer to GST/HST Memorandum 500-3-2-1 Cancellation or Waiver of Penalty and Interest.

Application of Due Diligence in "Wash Transaction" Situations:

In the case of a "wash transaction" where the penalty and interest is reduced to a penalty of 4% of the tax not collected and the CCRA has determined that the person has exercised due diligence, the remaining penalty will be cancelled. For more information on "wash transactions", please refer to Technical Information Bulletin B-074 Guidelines for the Reduction of Penalty and Interest in Wash Transaction Situations.

EXAMPLES

The examples that follow are not meant to set an absolute standard by which the CCRA will or will not accept a person's due diligence defence. This determination is to be made on a case by case basis according to the particular facts of each situation.

Example 1

Facts

A registrant files a GST/HST return when required and remits the net tax based upon the registrant's calculation.
The registrant makes a mathematical error on the return resulting in an insufficient remittance of net tax.
In addition to the unremitted amount of net tax, a penalty of 6% per year and interest at the prescribed rate is payable.
The registrant contends that the failure to remit was not deliberate and merely an error in the net tax calculation.

CCRA's Position

In this case, the CCRA will not accept a due diligence defence to cancel the penalty. Although the registrant made errors that are attributable neither to gross negligence nor to wilful intent, the making of unintentional errors is not in itself sufficient to warrant the acceptance of a due diligence defence. The defence of due diligence requires affirmative proof that reasonable care was exercised to ensure that errors were not made. The payment or remittance of an insufficient amount was caused not as a result of any difficulty or lack of clarity with the legislation, but merely through an inaccurate calculation of the amount owing.

Example 2

Facts

A registrant concerned primarily with the day to day operations of the business hires an outside bookkeeping firm to account for the GST/HST and prepare the returns.
The registrant signs each completed return prepared by the bookkeeper, encloses the remittance as indicated on the return, and mails in the return by its due date.
Upon audit, the CCRA determines that errors have been made on several returns resulting in an additional assessment of net tax plus penalties and interest.
The bookkeeping firm does not provide any credible evidence to demonstrate that any particular action that they have taken on behalf of the registrant lends support to the registrant's due diligence defence.

CCRA's Position

Based on these facts, the registrant is not considered to have exercised due diligence in ensuring that the correct amount of net tax was remitted when required.

It is incumbent upon persons to familiarize themselves with their obligations under the ETA, and to ensure that those obligations are met. The registrant relied solely upon a bookkeeping firm which was unable to satisfy these obligations or to provide evidence that would support the registrant's due diligence defence.

In this case, the registrant's actions do not meet with the degree of "reasonable care" that must be taken in order for a due diligence defence to be accepted. The registrant remains obligated to remit the correct amount of net tax in spite of the fact that it was the bookkeepers who failed to determine the correct amount on behalf of the registrant.

Example 3

Facts

A registrant is the sole proprietor of a weight training equipment store located in Ontario. The store owner carries goods that are taxable at the rate of 7% and products that are zero rated (subject to tax at the rate of 0%).
The registrant begins to stock a chocolate flavoured "energy bar". The bar's ingredients consist of glucose, corn syrup, fructose, brown rice, whole oats, rice crisps, hydrogenated soybean oil and carrageenan with a chocolate coating making up 5% of the total content.
The product literature describes the bar as "a delicious source of energy for breakfast, lunch, or anytime."
The registrant checks the other products in the store categorized as "meal replacements" and determines that tax is not charged in respect of these types of items.
The registrant asks the representative for the distributor of the bar whether or not it is subject to tax at the rate of 7%. The representative advises that the bar is not taxable since it is considered to be a "meal replacement" rather than "candy".
The registrant contacts a local CCRA office and asks a representative whether or not tax should be charged on "meal replacements". The representative, who bases the decision on the limited information provided, confirms that "meal replacements" are zero-rated.
The registrant reviews some CCRA publications but does not draw any conclusions from them as to the tax status of the bar.
The Excise Tax Act (ETA) is reviewed by the registrant. Under section 1 of Part III of Schedule VI to the ETA entitled "Basic Groceries", the registrant notices that supplies of food for human consumption are zero-rated with one of the exceptions being "confectionary that may be classed as candy".
For greater certainty, the registrant checks with an accountant who provides an opinion in writing that if the bar is a "meal replacement" then it is zero-rated and the registrant should not charge tax.
Based on all of the information obtained, the registrant believes that the bars are zero-rated and proceeds to sell them without charging tax.
During the course of an audit conducted by the CCRA the following year, the auditor determines that these "energy bars" are not "meal replacements" and are subject to tax at the rate of 7%.
The amounts that should have been collected on the sales of these bars plus a 6% penalty and interest at the prescribed rate are assessed by the CCRA.
The registrant makes a request to the CCRA to give consideration to cancelling the penalty based on a due diligence defence.

CCRA's Position

Based on the facts provided, the CCRA would accept the registrant's due diligence defence and cancel the penalty.

In making the determination whether or not tax should be charged on an item, the registrant exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. The registrant researched product information, compared the product with what the registrant thought were similarly classified items, consulted CCRA publications and the ETA, and questioned the distributor of the product. Furthermore, the registrant sought formal advice from an accountant, and unknowingly provided incomplete information to obtain advice from CCRA officials.

Example 4

Facts

A registrant who is a sole proprietor completes a GST/HST return on which the amount of GST/HST collected is reported. It is the registrant's intention to mail the return with the correct remittance prior to the due date.
Prior to the due date of the return, there is a death in the registrant's immediate family whereby the registrant must assume the responsibilities as Executor to the Estate.
The registrant temporarily delegates the bookkeeping duties to a part-time sales employee.
The part-time sales employee mails in the return late and remits the correct amount.
The CCRA charges a penalty of 6% per year and interest at the prescribed rate since the registrant has failed to remit the amount when required.
The registrant contends that extraordinary circumstances beyond the registrant's control prevented the registrant from filing and remitting the correct amount on time.

CCRA's Position

Based on these facts, the CCRA would not accept the registrant's due diligence defence as the penalty was exigible in this case. However, the registrant may be eligible for cancellation or waiver of the penalty and interest under the fairness guidelines as published in GST/HST Memorandum 500-3-2-1 Cancellation or Waiver of Penalty and Interest.

Q.31 -Due Diligence Defence

When should a registrant provide its evidence of due diligence respecting the 6% penalty under subsection 280(1) of the Act - during audit, assessment or appeal? Can the taxpayer provide submissions at the audit level? The Department’s Response to Question 32 last year stated that policy and operating procedures were being developed. What is the status in this regard?

Answer

There is a technical distinction between the due diligence defence and the waiving of penalty and interest under section 281.1 However, it seems to make operational sense to use the same procedures for processing requests for due diligence and fairness. It would be awkward to have separate procedures and require that the all our registrants be aware of the technical distinctions.

Q.32 -Due Diligence - Subsection 221(2)

Subsection 221(2) states that a supplier who makes a taxable supply of real property by way of sale is not required to collect tax payable by the recipient where the recipient is registered for GST (and the supply is not of a residential complex made to an individual). Notwithstanding that a vendor seeks representations from the purchaser, cases arise where in fact the purchaser was not registered, and auditors have raised assessments against the vendor.

(a) Does the CCRA intend to develop a policy as to the inquiries that the vendor must make in order to be confident that the purchaser is registered that it can provide to a CCRA auditor? For example, can the vendor rely on a representation by the purchaser and/or the purchaser’s solicitor that the purchaser is registered for GST? Is the vendor required in all cases to make inquiries to the CCRA?

(b) If the vendor relies on the representations of the purchaser or purchaser’s solicitor, and an auditor subsequently determines that the purchaser was not in fact registered for GST, would the vendor have a “due diligence” defence against penalty following Consolidated Canadian Contractors v. Canada, [1998] GSTC 91 (F.C.A.)?

(c) Would the CCRA consider waiving penalty and/or interest under section 281.1 based on the inquiries that the vendor made?

RESPONSE

(a) The CCRA’s position is that the supplier is at risk if tax is not charged and collected as required. However, the supplier can easily avoid this risk by demanding that the purchaser provide evidence of registration from the CCRA. Alternatively, the supplier may provide the business number and name of the purchaser to the CCRA and Agency staff will verify if the person is registered. If the confirmation is obtained by telephone the supplier should ensure that the appropriate details are recorded so that evidence of the call exists (i.e. name of Agency staff, and date of call).

(b) If the vendor relies solely on the representations of the purchaser or purchaser’s solicitor, the circumstances surrounding the transaction will be examined by CCRA staff. To be determined is whether the supplier made a sincere and demonstrable attempt that a reasonably prudent person in similar circumstances would be expected to make in order to comply with the Act.

For example, since for most registrants making taxable supplies, the collection of tax is the norm, what advice did the registrant seek from its legal counsel? Is there a statement in the sale and purchase agreement that the recipient is registered? Is this the first business dealing with the recipient or its solicitor? Is the person in the business of supplying real property? All these factors could have an impact on whether the CCRA decides that the supplier has a valid due diligence defence available.

Just relying on a verbal statement made by the purchaser or the purchaser’s solicitor would generally not be accepted as a valid due diligence defence.

(c) If there was misinformation provided by CCRA staff regarding the registration status of a particular person, any penalty and interest would be waived or cancelled under the CCRA’s fairness policy.

K. AUDITS, ASSESSMENTS, APPEALS, VOLUNTARY DISCLOSURE

Q.33 -Audit Procedures

(a) Please advise whether the Audit Group’s one-plus-one policy is applicable to GST audits performed by MRQ auditors in Québec.

(b) Is the one-plus-one policy applied to larger taxpayers?

(d) If a recurring clerical mistake leads to underpayment, is the policy applied for a total of 24 months?

Answer

(a) The MRQ has the responsibility to administer the GST in Québec. The MRQ is aware of the one-plus-one policy applicable to GST audits in other provinces. Accordingly, MRQ and CCRA are discussing its application in Québec.

(b) In general, the one-plus-one policy applies to all taxpayers except for those taxpayers that are part of the large file program. In general, a taxpayer is included in the large file program if its gross revenues exceed $250 million.

(c) Yes, as a general rule, audits of taxpayers not included in the large file program will not go beyond the current and the immediately preceding twelve-month periods. For GST, combined or joint GST, Excise and Income Tax Audits, these audits will also include any returns filed for subsequent period(s). The current twelve-month period is defined as the most recent fiscal year for which an income tax return has been filed and assessed.

Notwithstanding the above, there may be circumstances that will warrant the extension of the audit to previous periods.

(d) For GST, combined or joint GST, Excise and Income Tax audits, the one-plus-one policy may permit audit periods to be extended beyond 24 months depending on the the length of the fiscal year and GST filing frequency of the taxpayer. In addition, the nature and significance of the underpayment may be some of the factors in determining the length of the audit period. For example, if the understatement relates to collected and unremitted GST, the audit period will comprise all periods that can be assessed.

Q.34 -Standardization of Disclosure of Information to Counsel

(a) Re: objections/appeals – will the CCRA provide complete file disclosure, including the audit report?

(b) Re: disclosure to third parties to confirm GST registration. What is the standard for disclosure so we know what to expect in a perfect world?

Answer

(a) Pursuant to the terms of the Protocol between the Compliance Program Branch and the Appeals Branch of the Canada Customs and Revenue Agency, the appeals officer will explain to taxpayers the basis of the assessments and make available all relevant documentation supporting the issues under dispute. The appeals officer will also advise the taxpayers of any discussions with the auditor and provide copies of the minutes of these discussions.

(b) The CCRA will give a written GST registration confirmation where there is a valid need to know that a person is a registrant. This confirmation report available through our business window officers. The letter of confirmation can be picked up in person by the requestor, mailed or faxed to a secure fax. The confirmation will take the following form.

Example

On June 22, 1999, you provided information to Canada Customs and Revenue Agency and requested confirmation of the GST/HST registration status of XYZ Company.

In response to your enquiry, this is to confirm that XYZ Company has been assigned Business Number 123456789, and on June 22, 1999, was registered for GST/HST.

If you have any questions concerning this letter, please contact our Business Number Services Unit at (555) 555-1234.

Q.35 -Assessment Issues

In what circumstances will the CCRA re-open previously assessed periods (a) on its own initiative; (b) at the request of the taxpayer.

Answer

The number of years that the Canada Customs and Revenue Agency can assess or reassess is governed by the time limits provided by the Excise Tax Act. As a rule, an assessment will not go beyond the most recent fiscal period and the immediately preceding twelve month period. However, where GST has been collected but not remitted, the assessment will cover all periods not statute-barred, because these taxes have been collected and are held in trust. There may be other circumstances that will warrant the assessment of older years. For example, a series of transactions covering several years may require a reassessment of several years to correct the overall misstatement. In addition, a year may be re-opened if there is an indication that there is misrepresentation attributable to neglect, carelessness or fraud. Under certain circumstances, a second audit of a period will be warranted, for example where new information comes to light that was not disclosed previously or was unavailable at the time of the previous audit. A review of a rebate claim, a compliance review, a voluntary disclosure and a pre-payment review are other examples of situations that could warrant audits of previously audited periods.

Q.36 -Vacated Assessments – Refund of Interest and Penalties

Facts

The CCRA asserts that tax, penalties and interest are due to the Crown by a taxpayer. The CCRA subsequently issues a Notice of (Re)Assessment in respect of, inter alia, the above-noted tax, penalties and interest. In the interim, the taxpayer has remitted to the Crown the tax, penalties and interest.

A Notice of Objection is filed by the taxpayer. The CCRA then vacates the assessment. However, the CCRA refuses to refund the penalties and interest on the vacated assessment, apparently arguing that it is a collection issue not an appeals issue.

Question

Would the CCRA please explain how it can retain the penalties and interest, especially in view of subsection 296(6)?

Answer

When an assessment is vacated, any net tax, penalty and interest paid by the person that is in excess of the amounts payable by the person shall be refunded to the person with interest in accordance with the provisions of subsection 296(6) of the Excise Tax Act.

When the decision is made to vacate an assessment, generally, the case is transferred by the Appeals area to the Assessment and Collections area within the Tax Services Office. An officer will review the registrant’s account to determine the amount (net tax, penalty and interest) that should be refunded to the registrant as well as any interest payable pursuant to subsection 296(6) of the ETA. It is the CCRA’s position that the amounts payable to the registrant that remain outstanding should be refunded promptly. Any concerns with respect to the amount paid should be directed to the TSO.

Q.37 -Assessment of Interest Against Recipient

Does the CCRA have any authority to assess interest against the recipient of a taxable supply where the vendor has failed to collect the tax? It appears the answer is no. Pursuant to subsection 221(1), the supplier is supposed to collect the tax, and pursuant to subsection 278(2), where section 221 applies, the person is not required to remit directly to the Receiver General (unless assessed therefor). Finally, interest under section 280 is imposed on a failure to pay an amount "to the Receiver General". The effect of the foregoing is that section 280 cannot apply to assess interest against a recipient because there is no requirement to make a payment directly to the Receiver General in the context of section 280. The payment must be made to the supplier.

Answer

We concur that, where subsection 221(1) of the Excise Tax Act applies, the supplier is required to collect the tax payable by the recipient. The recipient is not required to pay the amount to the Receiver General at the time that the supply is made. However, the Minister may assess a recipient for the tax payable for the supply pursuant to paragraph 296(1)(b) of the ETA. Pursuant to subsection 315(2) of the ETA, where the Minister mails a notice of assessment, any amount assessed remaining unpaid is payable forthwith to the Receiver General. Therefore, once a notice of assessment in respect of tax payable is mailed and the amount has become payable to the Receiver General, penalty and interest under subsection 280(1) of the ETA will apply from that time until the amounts are paid.

38. Appeals

A number of appeals filed by taxpayers under the Informal Procedure have been bumped by the CCRA to the General Procedure. In a number of instances the issues were neither complex nor precedential. For example, in one appeal, the only issue was whether the taxpayer had documentation to support its claim for ITCs?

(a) Who decides whether to instruct the Department of Justice to bump an appeal from the Informal Procedure to the General Procedure?

(b) What factors are considered in deciding whether or not to bump an appeal?

Answer

(a) The decision to bump an appeal from the informal procedure to the general procedure is made by the Manager, GST/Excise Appeals in consultation with T.S.O. Appeals Division staff and Justice counsel.

(b) In deciding whether or not to bump an appeal, relevant factors include:

Important questions of policy or interpretation of law are in issue
A Charter of Rights issue is involved
The issue is identical to previous unchallenged decisions under the informal procedure with which the Department did not agree
An examination for discovery is critical to the proper conduct of an appeal.

39. Collections During Appeal

Many practitioners have had experience with CCRA collections upon the issuance of a GST assessment in which the CCRA’s collection officers have indicated that the GST assessed must be paid immediately since there is no express statutory basis to delay payment of GST during an objection or appeal.

The CCRA issued its administrative position with respect to collections procedures pending an objection or appeal in Excise/GST News No. 22 (Fall, 1996) in which it indicated that a request to postpone collection action without security would be considered if one of six criteria were satisfied, e.g., satisfactory compliance history; reasonable differences in interpretation of the legislation; no GST collected relating to the assessment; business is financially secure; or there are extraordinary circumstances.

Notwithstanding the position enunciated in the Excise/GST News collections officers often do not appear willing to postpone collection action during appeals or objections.

Can the CCRA clarify what instructions have been issued to collection officers in order to comply with the collection procedures outlined in the Excise/GST News?

Answer

Although the Excise Tax Act and our policies permit the CCRA to not collect or secure appealed GST/HST assessments, this is not automatic. Our policy provides that each situation must be reviewed on a case by case basis. We do not consider that it is appropriate to delay collection action regarding appealed cases where GST has been collected and not remitted. Many factors, such as the possibility that a delay will jeopardize recovery of the outstanding amount will be considered along with the clients reason for the request. The discretion to postpone collection action is delegated to the Assistant Director, Revenue Collections. If at any time the client wishes to question the finding of the collection officer, they may invoke the necessary measures.

40. Voluntary Disclosure

(a) What is the status of the CCRA’s voluntary disclosure review? Please explain the policy.

(b) How does voluntary disclosure tie in with the Appeals function?

(d) If interest is assessed, how far back will the CCRA assess the interest on a voluntary disclosure?

(e) Why is the GST policy inconsistent with Customs policy (i.e., where voluntary disclosure is not under the Appeals function).

(f) When is a disclosure voluntary? What if the CCRA is calling or sends letters on unrelated matters or if a routine audit is scheduled?

Answer

(a) The Appeals Branch, following broad consultations both internally and with tax, customs and trade communities, is nearing completion of a proposed VDP policy covering all business lines, as well as separate guidelines specific to income tax and GST/HST on the one hand and customs and trade programs on the other. We are presently seeking comments from a group of external advisors and from internal sources on the draft policy and guidelines. Early in the next fiscal year, we intend to publicly announce the new CCRA voluntary disclosures policy.

The overall approach to voluntary disclosures will not change. Briefly, the policy will require clients who come forward in good faith and make a valid voluntary disclosure to pay only the taxes, duties and/or tariffs owing, plus interest. No prosecution will be undertaken, nor will any civil penalties, including late filing penalties, be imposed. Clients can make disclosures to correct inaccurate or incomplete information from prior years, or disclose amounts never previously reported.

(b) The VDP was transferred to Appeals in response to public suggestions that the program be made more accessible. One of the messages was a concern about voluntarily approaching the Investigations area to make a disclosure. This concern was related not to the quality of work done in Investigations, but to a wariness of approaching an area of an investigative nature. Given its emphasis on impartiality, the Appeals Branch was chosen as the proper fit for the program

(c) It is our policy that a client must make a complete disclosure of all omissions. This will be elaborated in the new policy and guidelines, which will be announced early in the next fiscal year.

(d) Interest will be charged on the years or periods that are assessed under the voluntary disclosure. Interest is a charge for the use of money. Under the CCRA’s VDP policy, only penalties can be waived or cancelled. It is the punitive element that we are relieving under the VDP because clients are coming forward in good faith to correct past omissions.

(e) The overall philosophy, purpose, and requirements of the new VDP will be consistent across all program lines. It is important that the VDP be seen as seamless throughout the CCRA. Our clients have stressed the need for this. To this end, we are working to ensure this high-level consistency exists for our clients.

(f) A client has to initiate the disclosure for it to be considered voluntary. If a disclosure is found to have been made with the knowledge of a CCRA audit, investigation or other enforcement action, the disclosure will not qualify as a voluntary disclosure.

The facts of a particular case will determine the relevance of an enforcement action, and whether it disqualifies a disclosure from being accepted as a voluntary disclosure. The VDP officer will take into account whether there was direct contact with the client or whether the client is likely to have been aware of the enforcement action.

L. MISCELLANEOUS

Q.41 -GST on Non-Compete Payment

Facts

Assume the following. An individual (Mr. X) owns all of the issued and outstanding shares of a corporation (XCo), a GST registrant, engaged exclusively in commercial activities. Mr. X provides employment services to XCo. XCo sells its entire business to YCo, including goodwill of the business. As part of the agreement of purchase and sale, YCo agrees to make a payment (in excess of $30,000) to Mr. X for Mr. X’s covenant not to compete in the business of XCo or YCo for a period of, say, five years. Mr. X is not a GST registrant.

Issue

Is the payment received by Mr. X subject to GST? Under what circumstances could such a payment be subject to GST?

We note the CCRA’s comments from Question 21, posed at the CBA meeting last year. However, it is difficult to determine how such payments “may” be consideration for taxable supplies subject to GST. Any supply by Mr. X (of his personal goodwill) would not be “in the course of a commercial activity” of Mr. X. (In this respect, see Aubrett Holdings Ltd. v. The Queen, [1998] GSTC 17 (T.C.C.)). Nothing in section 141.1, or elsewhere in the Act, appears to deem Mr. X to have made the supply in the course of a commercial activity.

Answer

Based on the information provided, and assuming that Mr. X is not otherwise involved in a commercial activity, it does not appear that the non-competition payment to Mr. X would be taxable. Specifically, it does not appear that the payment is for a supply made by Mr. X in the course of a commercial activity, be it in the course of carrying on a business or an adventure or concern in the nature of trade. Generally, a non-competition payment made in circumstances other than those described in the question, could be subject to tax to the extent that it is for a supply made in the course of a commercial activity (eg. payment made to a corporation or a sole proprietor involved in a commercial activity). The determination of whether this is the case will be made on a case-by-case basis taking into account the relevant facts of each case.

Q.42 -Telecommunications

A company approaches a Canadian telco to rent excess bandwidth or “dark cable” in Canada that the Canadian telco does not use. The excess bandwidth either runs under the ground or by above ground telephone lines connected to telephone poles.

Does the CCRA consider the rental of the bandwidth or dark cable to be:

(1) a rental of real property;

(2) a rental of tangible personal property; or

(3) a supply of a telecommunication service.

Answer

Our understanding of bandwidth is that it refers to the speed of a communications link. In digital systems, bandwidth is data speed, measured in bits per second (bps). In analog systems, it is the difference between the highest-frequency signal component and the lowest frequency component, measured in cycles per second (hertz).

We presume that the reference to “dark cable” is to “dark fibre”, which is optical fibre infrastructure (cabling and repeaters) that is currently in place but is not being used (the reference to “dark” meaning that no light pulses are being sent through the fibre).

The above would likely come within the definition of a “telecommunication service”. Paragraph (a) of the definition states that a telecommunication service is

“the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system”.

Paragraph (b) of the definition states that it is the

“making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a)”.

A “telecommunications facility” is defined as

“any facility, apparatus or other thing (including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof) that is used or is capable of being used for telecommunications”.

Since a cable or telephone line meets the definition of a telecommunications facility, providing access to excess bandwidth on the cables or lines would be considered to be providing access to the cables or lines. Providing access to a telecommunications facility comes within paragraph (b) of the definition of a telecommunication service.

If the telco renting the bandwidth is also responsible for transmitting the signals carried on the rented portion of the bandwidth, and the rental of the bandwidth is charged for on the basis of actual transmission, then this would be a telecommunication service pursuant to paragraph (a) of the definition.

Q.43 -Settlement Payments (s. 182)

A builder hires a construction contractor to build a building. The builder refuses to pay the last invoice. The construction contractor remits the GST payable in respect of the last invoice notwithstanding the fact that the invoice is not paid by the builder. The contractor sues the builder. Eventually a settlement is reached and the builder agrees to pay the contractor (a) the outstanding amount of the unpaid invoice, including GST, (b) reimbursement of 50% of the contractor’s legal fees, and (c) interest.

Please confirm that amount (a) does not fall within subsection 182(1) of the Act and that amounts (b) and (c) are excluded from subsection 182(1) by reason of paragraph 182(3)(a) of the Act so that no GST is remittable.

If (b) is not within the purview of paragraph 182(3)(a), please confirm that the position taken in Headquarter Letter HQR0000023, file dated November 12, 1997 is correct and that GST is not remittable in respect of judicial costs.

Answer

It appears that amount (a), the outstanding amount of the unpaid invoice, is consideration for the supply provided by the contractor and the GST payable in respect of that supply. Therefore, subsection 182(1) of the Excise Tax Act (the “Act”) would not apply when this amount is paid. However, based on the information provided we can not confirm that amounts (b) and (c) are excluded from subsection 182(1) by reason of paragraph 182(3)(a).

As indicated in Headquarter Letter HQR0000023, where judicial costs are awarded by the court, no tax will be remittable in respect of this payment as no supply is made for the receipt of the amount and subsection 182(1) will not apply. The payment of judicial costs should not be confused with that of the legal fees. A registrant supplier of legal services is required to collect tax from the recipient of a legal service. The awarding of costs by a court does not change the recipient of the supply of the legal services nor does it transfer the liability to pay tax.

Q.44 -Procurement Cards Issue and ITCS What is the current status of the issue. Will the ITC Regulations be amended or is this going to be dealt with on a case-by-case basis?

Answer

Issue

Some businesses have been using procurement cards in the last few years to acquire goods and services. These cards are used by such organizations to acquire goods and services more efficiently and minimize paperwork due to the fact that the information regarding the acquisitions is transmitted electronically. As a result, these organizations do not normally retain a purchase order, an invoice, or a procurement card receipt when using such cards.

However, as the transactions are more commonly processed by merchants through basic retail charge card point-of-sale equipment, the statements/reports provided by the procurement card issuers (i.e. the banks) to the registrants as supporting documentation for the purchases provide only minimal information. For example, these reports do not indicate the actual total amount of tax paid or payable for each of the supplies but rather an estimated amount of tax. They also do not include a description of each supply sufficient to identify it, nor do they include the merchant’s registration number.

Thus, a registrant acquiring goods and services with procurement cards would not normally satisfy the documentary requirements and could not claim input tax credits until the registrant obtains additional supporting documentation or obtains an exemption from the documentary requirements under ss. 169(5).

Update

The Agency recognizes the objectives for the use of the cards and is considering an administrative position that would be applied on a case by case basis to facilitate procurement card users to satisfy the documentary requirements. Any policy would also have to take into account the documentary requirements under the Income Tax Act and the requirement to capitalize some procurement card purchases. For the moment, the ITC Regulations would not be amended.

The Excise Tax Act is quite clear that a registrant must satisfy the documentary requirements prior to claiming an input tax credit and does not allow the use of a blanket tax factor (i.e. 6/106) in these circumstances to calculate ITCs.

To date, we have been discussing certain options with some industry representatives and anticipate consulting other representatives and/or p-card users in the next few months. We will also be doing some preliminary testing in the field in the next few months. The objective of such testing is to obtain additional information as to the use of the cards, and assist us in establishing a methodology that would be the least demanding for procurement card users with respect to record retention while still maintaining the integrity of the tax legislation that we administer.

Q.45 -Transfer Payments

We understand that Technical Information Bulletin B-067, “Goods and Services Tax Treatment of Grants and Subsidies” will be revised in the future. Could you please provide us with a status report on this bulletin?

Answer

It is our intention to incorporate the information in Technical Information Bulletin B-067 into the Memoranda Series. Although the policy has not changed regarding the treatment of grants and subsidies, the information provided in the Memorandum will deal with some of the issues that have arisen and were not contemplated at the time the original policy was drafted.

Q.46 -Exempt Provincial Government Entities

GST is not payable by entities qualifying as part of a provincial government. Please confirm whether a provincial "Crown agent" at common law is automatically exempt, or whether in practice the exemption is available only to an entity listed in the list of exempt provincial entities published by the CCRA? Please confirm whether the list of exempt entities is taken directly from Schedule A to the Reciprocal Taxation Agreement with each province. Does the CCRA have a policy or criteria for when a particular government entity will be added to the exempt listing, or is this in essence a matter of negotiation between the provincial government in question and the CCRA? Does the entity have to be a “Crown agent” for common law purposes? Has the CCRA considered whether it is possible for a government to essentially contract out of section 125 of the Constitution Act, 1867, which provides that no property of the Crown is subject to taxation? Does a trust settled by a provincial Crown and in respect of which the Crown is the sole beneficiary, qualify as an exempt provincial government entity, either automatically, or only if added to the list by agreement between the governments? Is there a published procedure available for adding a provincial government entity to the exempt list?

Answer

Although under the Constitution Act 1867 and the Excise Tax Act (ETA), GST/HST is not payable by any organization that is an agent of the Crown, the government of Canada (represented by the Department of Finance) and the Governments of all provinces and territories with the exception of Alberta and New Brunswick have entered into Reciprocal Taxation Agreements (RTA). Under the RTAs, the provinces agree that all corporations and agencies other than those listed in Schedule A to the Agreement will pay the tax. Any provincial organization that wishes to be added to Schedule A to an RTA should contact the provincial ministry which entered into the RTA on the province’s behalf (usually the Ministry of Finance or Treasury). If that ministry agrees that the entity should be on Schedule A, the province will then enter into negotiations with the federal Department of Finance to add the organization to the Schedule. The criteria used to determine an organization’s addition to the list are decided between Canada and the provinces.

Although no RTA exists between Canada and New Brunswick or Canada and Alberta, these provinces provide lists to the Canada Customs and Revenue Agency (CCRA) of those agents of the province that will exercise their right not to pay GST/HST. Any organization that wishes to be added to one of these lists should contact its provincial Ministry of Finance which will then determine whether the organization will be put forward to CCRA for inclusion. The province’s request to CCRA should provide documentation that the organization is an agent of the Crown.

A province cannot (either through an RTA or other agreement) contract out of its immunity from tax set out in section 125 of the Constitution Act 1867. However, in the interest of ensuring competitive equity, consistency of treatment of similar organizations and in order to increase vendor simplicity, some provincial entities voluntarily pay tax (as a result of an RTA or the list provided to CCRA).

It must be noted here that the harmonized provinces of Nova Scotia, New Brunswick and Newfoundland and Labrador pay the tax at point of purchase and those entities on the list then claim a full rebate of the GST/HST paid.

Any trust that is a person for GST purposes will pay the GST/HST unless it is added to the list of entities which claim relief. However, if it is established that the trust is not a person and is simply an account, the status of the person holding that account will determine if payments made out of the trust will be subject to GST/HST (i.e. if the person is on the list, it receives tax relief either at point of purchase or through rebate).

The provincial ministries of Finance are aware of the criteria and procedures for adding an organization to the list.

Q.47 -GST and Retail Sales Tax

The J.A. Porter Holdings (Lucknow) Ltd., [1996] GSTC 25 and Consolidated Canadian Contractors Inc., [1997] GSTC 34 cases stand for the position that retail sales taxes paid by a manufacturing contractor in respect of a supply and install contract are not subject to GST pursuant to section 154 of the Act. The CCRA disagrees, and its Response to Question 33 at last year’s meeting stated that “the department will be presenting its position to the Courts in the near future”. Please provide an update.

Answer

Should an appropriate case present itself in respect of this issue, the Canada Customs and Revenue Agency (CCRA) will present its position to the courts. In the meantime, a Notice of Ways and Means Motion has been introduced to amend section 154 of the Act. The amendment is intended to clarify the CCRA’s position that retail sales tax paid by a manufacturing contractor in respect of a supply and install contract is subject to GST pursuant to section 154 of the Act. The proposed amendment requires the inclusion in the consideration for a supply all provincial taxes payable by the recipient or payable or collectible by the supplier for the supply of a property or service other than a prescribed provincial tax payable by the recipient. Taxes, duties and fees which are not required to be included in the value for the consideration of a supply are prescribed under the Taxes, Duties and Fees(GST)Regulations.

The proposed amendment is applicable to transactions after November 26, 1997.

Q.48 -Non-Resident Registration

We understand that a non-resident (e.g., U.S. resident) without a permanent establishment in Canada no longer has a right to obtain a GST/HST registration and keep their file at a CCRA office of their choosing. Instead, they are required to apply to the designated Tax Services Office for that state (or country). Is this the correct policy and why has the policy changed?

Answer

The question posed concerns the right of a non-resident (U.S. resident), without a permanent establishment in Canada, to choose a Canada Customs and Revenue Agency (CCRA) Tax Services Office (TSO) of its choice for GST/HST registration purposes and the keeping of its file/account. You are of the belief that because non-residents are required to apply to a designated TSO, according to the geographical area of their place of business abroad, the Agency has changed its administrative policy in this respect.

For purposes of registering non-residents, the Agency chose to apportion the registration workload between several TSOs thereby creating centres of responsibility in regards to the registration of non-residents. The purpose was two pronged: to facilitate the administration, and to allow for closer communication with non-residents, geographically.

In 1997, we included a listing of the designated TSOs who have the responsibility of registering non-residents in the GST/HST guide entitled “Doing Business in Canada - Information for Non-Residents”.

Our administrative policy has not really changed over the years. Perhaps, because we are now including the designated TSO for non-resident registration in the above mentioned GST/HST publication, that this appears to be something new.

In spite of the above administrative policy, should a non-resident wish to register with or otherwise deal specifically with a TSO for a particular reason (i.e., the place where its tax consultant is situated or where most of the supplies will be made), CCRA would allow for such a selection. However, when choosing such a TSO, it would have to be one of the designated TSO for non-resident registration and the provision of the security requirements for those non-residents who do not have a permanent establishment in Canada.

Q.49 -Books and Records

Does the CCRA have a policy respecting granting permission to keep books and records outside Canada? We are aware of a standard form of request, however, in our experience we have never seen any correspondence from the CCRA which explicitly grants permission. Are we to assume that permission is granted unless we hear otherwise?

Answer

Certain Tax Services Offices use a form letter and questionnaire which can normally be obtained through the Business Window. When the information requested is returned by the person seeking approval, unless there are errors omissions or other problems with the request, permission is automatically granted. An approval letter is not necessarily sent. However, if permission is not granted a reply will be provided.

Q.50 -Joint Filing of Returns

Pursuant to subsection 228(7) of the Act, a person may reduce or offset tax remittable by the amount of any refund or rebate owing to another person. The Act defines "prescribed" in broad terms to include circumstances "specified" and "authorized" by the Minister in addition to the making of formal regulations. To date, the Offset of Taxes by a Refund or Rebate (GST) Regulations permit this provision to be employed only by corporations. Has the CCRA considered whether this provision can be employed by other entities, such as a partnership which dissolves by distribution of assets to each of its partners?

Answer

Subsection 228(7) of the Act provides that in circumstances and conditions prescribed by regulations, the tax remittable by one person may be offset by the amount of any refund or rebate another person is entitled to claim. Under the Offset of Taxes by a Refund or Rebate (GST) Regulations, SOR/91-49, as amended by SOR/93-242 this offset is only available to members of a closely related group. Subsection 123(1) of the Act, defines “closely related group” only with respect to corporations. As a result, partnerships and limited partnerships, since they are not corporations are not eligible for joint filing. Should you wish to pursue the possibility of a legislative change, you may wish make the Department of Finance aware of any suggestions that you may have.

Q.51 -Offset of Tax Remittable by Refunds

Pursuant to subsection 228(6), a person is entitled to offset tax remittable by tax refunds owing to the person, either in the same return or a separate return. Can this provision be used by an amalgamated corporation to offset its own tax remittable by tax refunds owing to a predecessor corporation, based on paragraph 271(b) (i.e., amalco and predecessor considered the same corporation in respect of property acquired by the predecessor)?

Answer

Yes. Paragraph 271(b) provides that for prescribed purposes, the new corporation is deemed to be the same corporation and continuance of each predecessor. The Amalgamations and Windings-up Continuation (GST) Regulations provide for section 228 thereby allowing the tax refund owing to a predecessor to be offset by the new amalgamated corporation.

Q.52 -Rulings/Technical Memorandum

(a) Application or Advance Ruling – what is the difference?

(b) Changes to Memorandum 1.4 have been proposed. What is the timing of these changes? Which proposals have been or will likely be adopted? Are technical interpretations still available and to what extent will they be followed by the CCRA?

Answer

(a) An advance GST/HST ruling is a written statement the CCRA gives to a registrant or other person, stating how the CCRA will interpret specific provisions of Part IX of the Excise Tax Act (the ETA) with respect to supplies, actions, transactions or series of transactions, which the person is contemplating. An advance GST/HST ruling refers to specific persons, specific transactions and specific time periods within which the transactions must be completed.

A GST/HST application ruling provides the CCRA’s position on specific provisions of the legislation as these relate to a clearly defined fact situation of a particular person. Generally, application rulings relate to ongoing transactions and do not specify time limits. When an application ruling is given in advance of any transaction, it does not become an "advance" ruling. The nature of the transactions determines the type of ruling and if the transactions are ongoing, the ruling is an application ruling.

For example, a registrant develops a new product and wishes to know whether the supply of the product is considered to be a zero-rated supply of a medical device as provided for under Part II of Schedule VI to the ETA. The registrant requests the ruling before making any supplies of the new product.

In this case, the CCRA provides an application ruling, rather than an advance ruling, even though the ruling request is made before any transactions have taken place. This is because the registrant does not want a ruling limited to a specific time period or single transaction, but needs a ruling that applies to all future supplies of the device.

Please note that the CCRA is currently investigating the need for both application and advance GST/HST rulings as part of its review of Memorandum 1.4.

(b) The review of Memorandum 1.4 is still in the drafting stages and it would be premature to give specifics on what proposals have been or will likely be adopted into the memorandum.

Generally speaking, we are looking at providing our clients with reliable, understandable and timely GST/HST information. This will be accomplished by redefining our product lines and ensuring that our responses are binding on the CCRA.

An interpretation has been regarded by the CCRA as a general explanation of how the ETA would apply; it does not relate to any specific contemplated or completed transaction by a specific requester.

Currently, the CCRA still provides technical interpretations which it adheres to, provided the ETA, its interpretation, or any related administrative policy to do not change.

(c) As mentioned in the answer to part (b) above, interpretations provided by the CCRA, or by Revenue Canada in the past, are valid based on the assumption that the ETA, its interpretation, or any related administrative policy have not changed. To inform registrants or other interested parties, significant changes are published (e.g., in a Department of Finance Press Release, the GST/HST News, or other GST/HST publications). However, the onus is on the registrant or other interested party to keep current with any legislative, interpretative, or administrative change that may affect that registrant’s or person’s obligations under the law.

Q.53 -Excise Act Review

Kindly provide an update with respect to the Excise Act Review process and the status of the proposed legislation and regulations issued in April 1999.

Answer

Proposed legislation and draft regulations for a new framework for the taxation of spirits, wine and tobacco products were released by the Ministers of Finance and National Revenue in April 1999. These detailed proposals were based on a proposed framework that was outlined in a government discussion paper released in February 1997. The discussion paper formed the basis for extensive consultations with affected industries and the provincial liquor boards. The proposals released in 1999 reflected the key elements of the framework in the discussion paper, but also incorporated changes made to take into account comments received during the consultation process. Following release of the legislative proposals and draft regulations, the Department of Finance and the CCRA invited further comments from affected parties. Consultations with several groups, including the distilling industry and the provincial liquor boards, have not yet been concluded. At the conclusion of these consultations, a bill will be finalized and presented for parliamentary consideration. A preliminary target date for implementation by the CCRA had been set at July 2001 when the proposals were released in April 1999. Because the consultations are not yet complete, and the draft legislation is not finalized, it is unclear whether this target will be met.

Q.54 -E-Commerce

Could the CCRA provide us with an update on e-commerce developments as it relates to the GST/HST. Are any amendments to the current rules expected in the near future?

Answer

The CCRA is dealing with the challenges presented by electronic commerce - both domestically and on the international level, through our participation at such forums as the OECD. We are represented on the Working Group and the Sub-groups looking at electronic commerce at the OECD.

As for the domestic front, you will recall that we had an advisory committee of government and private sector experts who reviewed current developments related to electronic commerce and submitted their recommendations to the Minister of National Revenue in April, 1998.

In September 1998, as part of the response to the recommendations of the advisory committee, the Minister of National Revenue announced the formation of four Electronic Commerce Technical Advisory Groups.

Taxpayer Service — Advice on all existing and future Departmental electronic service delivery initiatives including those of Customs and Trade Administration.
Compliance and Administration — Advice on income tax and Customs compliance and administration matters concerning electronic commerce including collection of all taxes and Customs duties.
Interpretation and International Co-operation — Advice on the interpretation of legislation involving income tax and tax treaties concerning electronic commerce including current and future mutual co-operation agreements.
Consumption Taxes — Advice on the interpretation of legislation, compliance and administration matters involving the Goods and Services Tax (GST) and electronic commerce.

Consumption Tax TAG

One of these technical advisory groups is focussing on measures and initiatives related to consumption taxes. The mandate of the group is to provide advice on the interpretation of legislation, compliance and administration matters involving the Goods and Services Tax and the Harmonized Sales Tax (GST/HST) and electronic commerce.

The group is composed of ten experts, representing industry and the tax practitioner community, and is chaired by the CCRA. Since its formation, the group has had three meetings - April, June and October 1999. A fourth meeting is planned for early next year.

Issues Being Considered

a) Carrying on business in Canada

The issue is whether and under what circumstances, a non-resident vendor, advertising and/or selling their products over the internet, can be considered to be carrying on business in Canada and therefore subject to the registration requirements under the GST/HST.

b) Permanent Establishment

A subsidiary issue for GST/HST is what constitutes a permanent establishment in the situation where a non-resident vendor is making sales in Canada through a server located in Canada.

A non-resident person with a permanent establishment in Canada is considered to be a resident and treated in the same manner as a Canadian business. The issue is whether a server, which may be used to advertise, solicit orders, accept and process orders and payments, sufficient to constitute a permanent establishment for purposes of the Excise Tax Act.

c) Place of Supply Rules

Similarly, the development of digitized products, such as magazines, videos, software, music recordings, etc. requires an examination of the existing place of supply rules to ensure the proper application of tax and maintenance of neutrality with businesses supplying the same products in more traditional tangible forms.

d) Characterization of Supplies

Determining what is being supplied -the nature of the supply- is also complicated by electronic commerce. The traditional treatment - as goods - afforded to such items as, books, magazines, videos, music recordings, off-the-shelf software, etc., is being reviewed when such items are provided electronically. The issues being considered are: what is the nature of such items (are they intangible property, services, etc.) when supplied over the internet and what is the distinction between an intangible and a service.

In Addition, when services are provided on-line, the issue arises as to whether such services are telecommunication services. The advisory group is reviewing the classification of such services as e-mail, web site hosting, voice mail, payment and order processing, e-filing, etc.

e) Collection Mechanisms

The current collection and reporting mechanisms may not be adequate in dealing with electronic transactions, particularly in relation to supplies made by businesses to consumers. Alternatives, such as collection agreements/treaties between jurisdictions, and the feasibility of collection by intermediaries, such as financial institutions and internet service providers, are being considered.

Digitized products cross international borders with ease. New mechanisms may be required to replace the traditional reliance on the Customs administration for the collection of GST on imported products.

Conclusion

Over the course of its mandate, the advisory group will provide assistance in developing interpretative positions related to the GST/HST and electronic commerce as well as providing advice on possible options for enhancing the existing legal and administrative consumption tax framework in Canada.

Q.55 -Current “Hot” Issues

Could the CCRA provide the CBA with the top 5 issues for:

(a) Audit

We can provide you with some of the issues that we have considered in recent months. However, we would not go so far as to rate these as the top five issues in Audit as we really have had insufficient time to consult with other Audit Divisions. Nevertheless, the following issues may be a representative cross-section of the issues examined by Audit lately:

GST/HST New Housing Rebates;
Determining the GST status (i.e. taxable vs. zero-rated) of fruit juice products and testing for fruit juice content;
Division IV Tax
Whether input tax credits may be denied where there is no legal relationship between the supplier of the invoice and the purchaser of a supply;
Procurement Cards;
Whether certain supplies, notably related to agriculture, are zero rated. It is not possible to identify the products without risking the identity of the taxpayers;
Application of section 280 penalties;
Place of supply rule (e-commerce).

(b) Policy and Legislation

General discussion no written response provided

Q.56 -Status of Jurisprudence

Please provide a summary of important GST/HST, FST and excise tax cases pending before the Tax Court and federal and provincial courts.

Answer

PAUL BROTHERS - EXCISE TAX

Paul Brothers, carrying on business as Gestion ADL, were licensed to manufacture tobacco products on the Pointe Bleue reserve in Quebec.
They failed to pay excise tax in respect of the tobacco products they would manufacture.
Paul Brothers have appealed all four assessments to the Federal Court – Trial Division on the basis that they are not required to pay tax by virtue of section 87 of the Indian Act.
The issue is whether section 87 of the Indian Act applies to goods that are manufactured on a reserve and intended to be sold off-reserve in commercial quantities to non-Indians.
The appeals are significant, since many more manufacturing businesses are likely to relocate on-reserve if the courts find that Paul Brothers are not required to pay excise tax.
A pre-trial conference will be held in Quebec on March 30, 2000.

CAR FLIPS

The issue in these cases is whether car dealers are relieved from collecting or remitting GST on their sales of automobiles to natives located on a reserve. A second issue is whether off-reserve dealers are able to claim input tax credits (ITCs) with respect to cars purchased from Indians.
A number of car dealers have appealed their GST assessment to the Tax Court of Canada. These car dealers sold automobiles to natives located on a reserve. They were assessed on these sales on the basis that the automobiles were at no time the personal property of an Indian on a reserve since they were never actually delivered to a reserve.
Normally, the automobiles will be sold to natives and several non-native automobile dealers in the span of a few days. In selling the automobiles to Indians, the automobile dealers rely principally on the argument that natives are exempt from paying and collecting GST and in support cite various treaties, the Constitution Act, and the Indian Act.
Given that all these appeals raise similar or identical issues relating to aboriginal and treaty rights, the Tax Court will have three cases Robert Wood, James McMurter Home Centre and Robert Giles Brant, heard one immediately after the other and consolidate certain parts of the proceedings before the same trial judge.
Criminal charges have been laid against participants in some of the car flip schemes based in Ontario.

INDIAN ISSUES Googoo / Pictou / Toney-Thorpe

The issue in these cases is whether the Appellants are accountable for GST on sales of gas and cigarettes sold to non-natives on Mi’kmaq reserves located in the Maritimes.
The Appellants are alleging that they are exempt from paying and collecting GST based on various treaties including, the treaty that was an issue in the Marshall’s case (the British and the Mi’kmaq in 1760-61) the Indian Act and the Constitution Act.
Case was heard on February 23, 1998 and our Counsel was asked to provide additional submissions as a result of the Supreme Court Decision in Marshall.
Decision has not been rendered yet.

FST REFUND ENTITLEMENT – GAAR Michelin North American (Canada) Inc.

There are two issues in these cases.
1. Whether the transactions in question, effectively making a paper sale and then undoing the transaction were a legally effective sale?
2. Whether the transactions in question, resulted in a misuse or an abuse of the provision of the Excise Tax Act pursuant to the requirement of GAAR?
This matter was appealed by the Plaintiff after a decision in favour of the Crown by the Canadian International Trade Tribunal.
Case was heard by the Federal Court Trial Division on February 28, 2000, in Toronto.
The Crown argued the case based on the transactions at issue being a sham or alternatively that the GAAR rule could be used to prevent the Plaintiff from using the transaction in question strictly for a tax benefit.
Decision has not been rendered yet.

SCHOOL BOARDS

School board contracts with transportation company to transport children to and from school.
Transportation company charges GST in respect of service to school board
School board entitled to claim MUSH sector rebate in respect of GST paid
School board believes it is entitled to full ITCs and claims difference between amount of ITC and amount of rebate paid
On February 22, 2000, the Tax Court ruled in favour of the Agency.

An appeal has been filed by the School board.

You are here

24 February 2000 CBA Roundtable

A. FINANCIAL SERVICES

Q.1 - Financial Services (GST/HST) Regulations

Answer

Q.2 - Draft Policy Statement - “Arranging For”

Answer

Q.3 - “Arranging For” – Financial Service

Facts

Answer

Q.4 - Lease vs. Financing

Question

Answer

Q.5 - Goodwill

Answer

B. REAL PROPERTY

Q.6 - Real Property – Goodwill

Answer

Q.7 - Real Property –Section 261

Answer

Q.8 - Real Property – Section 194

Answer

C. REORGANIZATIONS

Q.9 - Section 167 Election – Reorganizations

Questions

Answer

Q.10 -Section 167 Election – Oil and Gas Facilities

Facts

Answer

Q.11 -Reorganizations Using Section 156 Election

Answer

Q.12 -Input Tax Credit Entitlement for Newco in Reorganization

Answer

D. PARTNERSHIPS

Q.13 -Partnership Issues

Answer

Q.14 -Supplies to Partnership (Subsection 272.1(3))

Answer

Q.15 -Interplay of Subsection 272.1(2) and Section 156

Questions

Answer

Q.16 -Section 186 and Holdings in Partnerships or Trusts

Answer

E. IMPORTS

Q.17 -Temporary Importation of Goods

Answer

Q.18 -Importation of Goods – Place of Supply

Answer

Q.19 -Imports and ITCs

Answer

F. EXPORTS

Q.20 -Zero-Rating of Intangibles

Answer

Q.21 -Zero-Rating: Carrying on Business in Canada

Answer

Q.22 -Zero-Rated Export Services

Answer

G. INPUT TAX CREDITS

Q.23 -Input Tax Credit Claims

Answer

Q.24 -Input Tax Credit Claims – Documentary Requirements

Answer

Q.25 -GST Refunds on Supplies to Provincial Government

Answer

H. ELECTIONS

Q.26 -Joint Venture Election

Answer

Q.27 -GST Elections - Retroactivity

Answer

I. DIRECTORS’ LIABILITY

Q.28 -Directors’ Liability – Collections

Answer

Q.29 -Directors’ Liability Assessments

Answer

J. DUE DILIGENCE

Q.30 -Due Diligence Under Section 280

Answer

Facts

Facts

Facts