25 February 2016 CBA Commodity Taxes Roundtable

This provides summaries of questions posed to CRA at the February 25, 2016 CBA Commodity Tax Roundtable together with the full text of the CRA responses. We have provided our own titles to the questions. The full text of the questions is available with a membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources.

CRA disclaimer: The following comments provided during our meeting represent our general views with respect to the subject matter and do not replace the law found in the Excise Tax Act (the ETA) and regulations. These general comments are provided for your reference and do not bind the CRA with respect to a particular situation. Since our comments may not completely address a particular situation, you may wish to refer to the ETA and regulations, or contact any CRA GST/HST rulings centre for additional information. All references to legislative provsions in our comments are reference to the ETA unless otherwise noted.

Q. 1 Officers as authorized persons (RC59/RC321)

CRA (unlike RQ) only accepts authorizations signed by one or more corporate directors. This can be problematic for mutual fund trusts whose trustee is a large trust company, or for a large multinational with a Canadian branch. Will the CRA accept officers or other individuals as a person with proper authority for the business for purposes of the Form RC59, Business Consent (and other filings)?

CRA Comments

The CRA is considering the extension of signing privileges for some of its documents including Form RC59, Business Consent and Form RC321, Delegation of Authority to certain types of corporate officers, which is still to be defined for these purposes, provided that the names of the corporate officers can be verified from trusted sources, such as the federal and provincial corporate registries, or from different other types of corporate documents such as minutes of official meetings (to be provided upon request).

The CRA will work towards implementing this new policy and updating its procedures (including the current forms) at the earliest possible time. Upon implementation the change will be communicated to internal and external stakeholders.

Q. 2 Web Registry review

Does CRA have any plans to update the GST/HST Web Registry to address that it only recognizes the first 10 characters? Will CRA consider implementing a search system like that of Revenu Quebec, which only requires inputting the business number and it provides the corporate name?

CRA Comments

We are aware of the issues surrounding the current GST/HST Registry and we are studying different options to improve the current process. However, this analysis is in the preliminary stages and we do not as of yet have an anticipated completion date.

Q. 3 VDP lookback period

Would CRA consider establishing a prima facie look back period of 4 years for voluntary disclosures, to mirror the audit limitation period? If the Issue appears particularly egregious so as to permit assessing beyond the statute-barred period on audit, CRA could notify the taxpayer during the no-names period that additional years will be required. Also, will the revisions to IC00-1R4, Voluntary Disclosures Program include any GST/HST-related changes?

CRA Comments

The Voluntary Disclosures Program (VDP) provides a service where taxpayers can voluntarily come forward to make disclosures to correct inaccurate or incomplete information, or to disclose information not previously reported to the CRA. Taxpayers who make a valid disclosure still must pay any taxes owing, plus interest, but they may avoid costly penalties or prosecution. A valid voluntary disclosure must i) be voluntary; ii) be complete; iii) involve the application, or potential application of a penalty; and iv) include information that is at least one year past due.

There is no limit on how far back the VDP will request or review information. The taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to all tax accounts with which the taxpayer is associated. A disclosure must be complete and provide all the relevant information to allow the VDP officer to appropriately review and decide whether statute-barred years should be opened for reassessment. This decision is based on a number of factors, including the total materiality of tax in prior years, compliance history, and the duration of the non-compliance.

The terms of the VDP provide incentives for those engaged in non-compliance to come forward, while not rewarding or encouraging such conduct in the first instance. More and more Canadians are taking advantage of the service provided through the VDP. In fiscal 2014-2015 the program received 19,134 voluntary disclosures, a record and approximately 21% more than the previous year. That same fiscal the VDP identified more than $1.3 billion in unreported income, including $780 million in unreported income from disclosures related to offshore income and assets.

At this time, we are not anticipating any GST/HST-related changes to Information Circular IC00-1R4, Voluntary Disclosures Program.

Q.4 Garnishment issues

(a) At the March 6, 2014 Roundtable meeting, CRA deferred its response to Q.4, which asked, respecting the situation where an account debtor receives a Direction to Pay under s. 317 respecting the GST/HST indebtedness of a registrant that had made the related taxable supply to the account debtor, (i) how should the account debtor treat the GST/HST portion of the amount owing by it for the supply, (ii) should it pay the tax and consideration to CRA, and (iii) how how does the account debtor (qua supplier) account for the GST/HST on the payment in remitting its net tax for the applicable reporting period if that amount has been paid by the recipient pursuant to the garnishment?

(b) The statement in the 2012 version of the National Collections Manual that, in exercising its garnishment power (e.g., under s. 317), CRA will normally abide by the provincial exemptions, does not appear in the 2015 version of the Manual. What does this signify?

CRA Comments

4(a)(i) Application to pre-existing tax debtor GST/HST debt

Section 317 of the Excise Tax Act (ETA) provides that the Minister may, by notice in writing, require a person to pay without delay to the Receiver General the moneys otherwise payable to a tax debtor. Upon service on a third party of a Requirement to Pay (this is the term used by the CRA to refer to the statutory process that is similar to garnishment) under section 317, the Requirement applies to all moneys that are immediately payable by that person to the tax debtor. Such amounts can include the unpaid amount of the consideration payable for the purchase of a taxable supply, the resulting GST/HST, and any additional amounts that may be payable to the tax debtor. Accordingly, a third party who receives a Requirement to Pay in respect of a tax debtor’s pre-existing GST/HST liabilities is required to immediately pay to the Receiver General all moneys that are payable to the tax debtor at the time the Requirement is received. Furthermore, if the amount paid by the third party to the Receiver General did not fully satisfy the amount identified on the Requirement to Pay, and other moneys become payable to the tax debtor during the one-year period while the Requirement to Pay continues to be in effect, those amounts must be immediately paid to the Receiver General upon such amounts becoming payable to the tax debtor.

Amounts resulting from GST/HST that comprise a portion of the total amount that is payable to the tax debtor must be included in the amount that is paid to the Receiver General. When a third party who has received a Requirement to Pay pays the required amount to the Receiver General, subsection 317(11) of the ETA provides that the third party is deemed to have paid the amount to or on behalf of the tax debtor. Accordingly, upon receiving the required payment, the CRA will apply the payment to the debtor’s pre-existing GST/HST liabilities. A portion of the payment cannot be allocated to the amount that the tax debtor is required to pay on the next remittance due date as the funds were recovered by way of a Requirement to Pay in respect of the tax debtor’s pre-existing GST/HST liabilities.

4(a)(ii) Payment of garnished amount satisfies 3^rd party’s liability

When a third party receives a Requirement to Pay, he or she must remit to the Receiver General the lesser of the amount identified on the Requirement and the amount the third party is liable to pay to the tax debtor. Accordingly, if the amount owed to the CRA by the tax debtor exceeds the amount of the consideration for the supply, the related GST/HST and any other amounts that may be payable by the third party, then the total amount payable by the third party to the tax debtor must be paid to the Receiver General. However, if the amount owed to the CRA by the tax debtor is less than the total amount of the consideration for the supply, the related GST/HST and any other amounts that may be payable to the tax debtor, then the full amount identified on the Requirement to Pay must be paid to the Receiver General and the residual amount of the account receivable should be paid to the tax debtor.

When a third party who receives a Requirement to Pay pays the required amount to the Receiver General, subsection 317(5) of the ETA provides that a receipt issued by the Receiver General is a good and sufficient discharge of the original liability to the extent of the amount of the payment sent to the Receiver General. Further, the third party is deemed for all purposes by subsection 317(11) of the ETA to have paid the amount to or on behalf of the tax debtor. Consequently, the tax debtor would not be able to successfully pursue the third party for the amount payable that was redirected to the Receiver General.

4(a)(iii) Interest charges if tax debtor fails to remit its net tax

When a registrant advances credit to make a sale, he or she is required to include the amount of uncollected GST/HST when calculating the net tax payable for the current reporting period and to remit that net tax amount by the next remittance due date. This would apply even if the payment terms stipulated payment from the customer was due before the next reporting period and the payment due date arrived and the customer did not pay the amount payable to the tax debtor (that is, the supplier).

If a third party purchaser who is liable to pay an amount to a tax debtor (supplier) receives a Requirement to Pay, and as a result redirects the amount payable to the CRA, the tax debtor is still required to account for the GST/HST that was included on the invoice when calculating the net tax payable for the current reporting period and to remit that net tax amount by the remittance due date for that period. This would be the case regardless of whether or not the third party redirected the funds to the CRA before, or after, the end of the reporting period and the remittance due date. If circumstances were such that a creditor, other than the CRA, obtained a garnishee order and attached the amount payable by a third party purchaser to a tax debtor, the tax debtor would still have to calculate and pay the upcoming net tax remittance in the same manner. The component amount of GST/HST included in the account receivable is an amount the third party is liable to pay to the tax debtor. The CRA does not have the authority to include unassessed amounts for upcoming reporting periods on a Requirement to Pay. If the third party is liable to pay the invoiced amount to the tax debtor, upon being served with a Requirement to Pay, the third party must pay the required amount to the Receiver General. Upon receiving the payment, the CRA must allocate the payment against the tax debtor’s GST/HST pre-existing liabilities.

If the tax debtor does not include the appropriate amounts to calculate the net tax payable or remit the correct net tax amount within the specified timeframe, the tax debtor will be charged arrears interest on the amount that is deficient. However, in circumstances where an amount is intercepted by a Requirement to Pay and the CRA applies the funds against the tax debtor’s pre-existing GST/HST liabilities, the pre-existing GSTHST liabilities owed by the tax debtor is reduced by the corresponding amount. Accordingly, while interest may be charged on the next remittance to the extent that the tax debtor’s payment is deficient, the amount of interest charged on the pre-existing GST/HST liabilities identified on the Requirement to Pay is reduced and arrears interest is charged on the reduced amount. If the amount of the deficient future remittance is equal to the amount of the reduction in the pre-existing liabilities, the interest charges should be increased and reduced by similar amounts and the amount of interest charged should be somewhat neutral to the tax debtor. If the payment on the Requirement to Pay is received before the current reporting period ends and the payment due date arrives, the interest charged after the corresponding reduction of the pre-existing GST/HST liabilities would be less than the interest charged in respect of the deficiency of the net tax amount due for the next reporting period due to the fact that the payment would be applied to the arrears as of an earlier date.

4(b) Provincial exemptions

With the exception of Quebec, the CRA does not necessarily abide by the provincial exemptions when determining the rate to issue administrative garnishment action.

The CRA is not legally bound by provincial legislation when exercising its administrative garnishment powers, such as those set out in section 317 of the ETA, or under similar provisions of other statutes the CRA administers. In the past, the Agency generally did follow the various provincial exemptions when attaching certain types of remuneration such as salary or wages. However, exceptions would be considered in some circumstances to proceed with administrative garnishment action at a rate that would exceed the provincial limitations. Some examples when this might occur include situations where there were other sources of income and only one income source was to be subjected to garnishment action, assets that could be readily available to the debtor to generate funds to satisfy the tax debt in full or a substantial portion and the debtor was not cooperating, or situations where the provincial exemption amount would be insufficient to address the amount of arrears. There is no overall encompassing list and the examples cited are exactly that, examples.

Consideration was given to the fact that the provincial exemptions varied from jurisdiction to jurisdiction to determine if the CRA should continue to abide by the provincial exemptions in regards to limiting the administrative garnishment action. Given this, the CRA felt it was better to treat all debtors, in a similar circumstance, the same to the extent possible. Hence, the CRA no longer abides by the provincial exemptions, except for the province of Quebec.

In the case of Quebec, circumstances are unique in that there are 2 levels of government bodies involved in administering a similar tax, the province and the federal government. Although the CRA is not bound by the provincial exemptions, the province of Quebec is. It is not unusual that the province and the CRA will issue administrative garnishment action at about the same time. Accordingly, in order to minimize confusion on the part of the debtors as well third parties who have to act on the administrative garnishment, the CRA decided to abide by the provincial exemptions for the province of Quebec.

Q. 5 S. 228(6) netting of rebates

S. 228(6) permits a registrant to net its rebate claim against its net tax remittance obligation.

(a) Does CRA agree that with such netting, there is no deficiency in the registrant's remittance of net tax?

(b) If yes, what can a registrant do when facing a demand for collection of the deficiciency?

CRA Comments

(a) The amount(s) reported on line 111 of the GST/HST return are protected in the CRA accounting system for a period of time to allow for rebate processing and offset, and avoid collection calls or actions. If a rebate application is not received or processed in that time period, then the protection is removed, a debit balance may result, and the account may end up in collections. In most cases, this would be the result of the rebate being reviewed further in Audit. There should be very few instances where the initial review and assessment is not completed based on current processing standards.

(b) The CRA will undertake to develop a policy to advise collections officers to suspend collection of these assessments until the CRA confirms or denies the rebate. When contacted by a collections officer, the registrant should make the collections officer aware of the situation as these accounts are not flagged by the CRA’s systems.

Q. 6 Oral update on cases

Please provide an update on any new or developing issues in the audit area.

CRA Comments

A verbal presentation on current cases was provided at the meeting.

Q. 7 Employing staff as agent for others

Where a group of professionals (e.g., dentists), each operating as sole proprietors, hire common staff members (e.g., receptionists, file clerks, etc.), can the professional who is acting as agent in employing the staff make all payroll remittances under the professional's own Payroll account, without jeopardizing the status of the other professionals as employing the staff as employer, i.e., does CRA require each of the principal employers to remit payroll amounts under their own Payroll accounts in order that no GST/HST be exigible on the services provided by the staff members?

CRA Comments

The Supreme Court of Canada has expressed its view on the essential elements present in a relationship that is a partnership: (1) a business, (2) carried on in common, (3) with a view to profit. In the Civil Code of Québec, a contract of partnership is defined in section 2186 as “a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share among themselves any resulting pecuniary profits.” Both common law and civil law’s approach to partnership require an element that relates to profit sharing.

In the question submitted, the professionals each operate as a sole proprietor; they agree to share certain expenses but do not operate as a partnership as they do not carry on a business in common with a view to sharing profits; rather, they only share expenses. They jointly hire a group of employees who will work for each of the professionals. Each professional is an employer at law; however, there is an agreement that one of them will act as an agent of the others in regards to the employment expenses. It is understood that the support staff is hired under a contract of service and not under a contract for services (that is, it is an employment contract).

The first issue is in regards to payroll remittances. You would like to know if the professional that is acting as agent in employing the staff is entitled to make all payroll remittances under its own Payroll account, without jeopardizing the employment relationship of each principal employer (that is, the other professionals). Based on the details contained in the question outlined above, it is the CRA’s position that the actual employer in the example is the group of dentists who all came together and hired the support staff. That group of dentists, that association or as what is referred to as a non-trading or non-commercial partnership, or a partnership of employment or occupation, is the actual employer. The dentists are jointly responsible for any source deductions required from the remuneration paid to the employees. The group of dentists could open a Business Number (BN) payroll account for payroll purposes and remit and report under that BN.

It is also possible for one of the members to act on behalf of the group of dentists and to pay, deduct, remit and report the wages of the support staff under its own BN. Once again, the dentists would be jointly responsible for any source deductions required from the remuneration paid to the employees.

When a person pays the salary or wages of an employee employed in pensionable and/or insurable employment, that person who paid is deemed to be the employer in addition to the actual employer. The deemed employer is then required under both the Canada Pension Plan (R.S.C., 1985, c. C-8) and the Employment Insurance Act (S.C. 1996, c. 23) to pay, deduct, remit and report as if he were the actual employer. These deeming provisions do not negate the fact that the dentists are the actual employers.

You can refer to subsections 8.1(1), 8.1(1.1) and 8.1(2) of the Canada Pension Plan Regulations (C.R.C., c. 385) and subsection 10(1), paragraphs 10(1)(a) and 10(1)(b) and subsections 10(2) and 10(3) of the Insurable Earnings and Collection of Premiums Regulations (SOR/97-33).

The second issue refers to the application of the GST/HST.

As each dentist is an employer at law of each staff member, no staff member employed by the dentists would be supplying a service for GST/HST purposes; the definition of service in subsection 123(1) of the Excise Tax Act excludes anything that is supplied to an employer by a person who is an employee of the employer in the course of or in relation to the office or employment of that person.

We consider the person who is acting on behalf of the group to be the agent of the other dentists. As the agent can recover the respective portions of the remittance from the other dentists, we consider that the agent is being reimbursed for amounts it pays on behalf of these other dentists, who would be considered to be principals. A reimbursement of this nature is not payment for supplies made by the agent. The reimbursement to the agent would not constitute consideration for a supply and would not be subject to GST/HST. If the agent charges a fee for the services rendered to the other dentists, the fee could constitute consideration for a supply of services and be subject to GST/HST if the agent is a registrant.

Q. 8 Adjustment for missed s. 232(3) credit

When a credit note is issued under s. 232, a deduction against net tax can be taken only for the reporting period in which the credit note was issued (s. 232(3)(b)). If the registrant neglects to claim the deduction, will CRA reassess on a request to allow a late claim? At the 2005 Commodity Tax Symposium, John Sitka stated that no administrative relief would be granted in this situation.

CRA Comments

Our position as stated in the GST/HST policy statement P-149R, Administrative policy regarding adjustment to the goods and services tax/harmonized sales tax return has not changed.

The policy discusses the restrictions which apply to requests for adjustments to previously filed GST/HST returns. Amounts included on previously filed GST/HST returns may be adjusted, except where a person is attempting to increase the amount of input tax credits (ITCs) or other credit adjustments without a corresponding increase in tax liability for the same reporting period.

In certain circumstances, administrative flexibility may be exercised to make adjustments for missed ITCs or deductions without a corresponding increase in tax liability for the same reporting period. This flexibility may include where the adjustment relates to an amount that may not be reported or accounted for in a subsequent period. The circumstances surrounding a registrant's request will be taken into account when deciding whether to adjust a previously filed return. For example, an audit of the registrant's records may be required.

Q. 9 Gross negligence penalty where failure to file/VDP re no real estate return

(a) Please confirm that the CRA agrees (consistently with Last, 2012 TCC 352, at para. 127 and Khan, 2011 TCC 481, paras. 15-16) that gross negligence penalties cannot be imposed under s. 285 where a person neglects to file a GST/HST return.

(b) A person may wish to correct the failure to file a GST60 return in order to have offsetting rebates applied under subsection 296(2.1) (for example, landlord rebate) where the rebate is otherwise out of time. Based on the above response, can the failure to file a GST60 return be the subject of a voluntary disclosure?

CRA Comments

(a) The CRA is of the view that when a person knowingly, or under circumstances amounting to gross negligence, makes or participates in, or assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (each of which is in section 285 of the Excise Tax Act (ETA) referred to as a “return”), then the gross negligence penalty is potentially applicable even where no GST/HST return has been filed. This is supported by the general procedure decision in Kion v. Her Majesty the Queen, 2009 TCC 447.

In other words, the fact that a registrant has not filed a return for a particular reporting period does not automatically preclude the potential application of the gross negligence penalty. The key factor to establish is whether the contravention of the ETA is the making of a false statement or omission in a return or whether it is the simple failure to file the return within the required time.

In general, a gross negligence penalty under section 285 of the ETA will not apply if a person has simply failed to file a Form GST60, GST/HST Return for Acquisition of Real Property, to report and remit the tax payable by the due date of the return. However, if a person has knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in a GST60 return, the gross negligence penalty may apply under section 285 of the ETA.

(b) Whether a particular disclosure by a taxpayer will qualify for relief from penalties and possible prosecution under the CRA’s Voluntary Disclosures Program (VDP) will be determined on a case-by-case basis. Information Circular IC00-1R4, Voluntary Disclosures Program, sets out the conditions that must be met for a valid disclosure under the VDP and one of those conditions is that the disclosure must involve the application, or potential application, of a penalty. The penalty may be a late filing penalty, a failure to remit penalty, an instalment penalty, or a discretionary penalty such as a gross negligence penalty.

Penalties that may be cancelled or waived under the VDP for ETA purposes include, among others:

• the 6% penalty under section 280 of the ETA for failure to remit or pay an amount due before April 1, 2007, to the Receiver General when required under Part IX of the ETA;
• the penalty under section 280.1 of the ETA for filing a return for a reporting period late with an unpaid or unremitted amount;
• the penalty under section 280.11 of the ETA for failing to file a return under Division V of the ETA by electronic transmission as required under subsection 278.1(2.1) of the ETA; and
• where applicable, the gross negligence penalty under section 285 of the ETA.

Where a person has failed to file a GST60 return and remit the tax payable when required, the penalty under section 280.1 of the ETA will not apply as the GST60 is not a return for a reporting period pursuant to paragraph 228(4)(b) of the ETA. Where no other penalty applies with respect to the GST60 return, the person cannot seek relief through the VDP. However, the disclosed information should still be submitted and it will be handled through the CRA’s normal processing procedures.

It should be noted that the VDP does not consider rebates. If a disclosure is submitted with rebate applications, these applications will be forwarded to rebates processing and will be subject to the normal review procedures for eligibility.

Q. 10 Interpretation after assessment

Interpretation 15555 indicates that the request therefor was made after an assessment had been issued. When will Rulings issue interpretations after an assessment? Are interpretations which arise in assessment situations published on the same basis as other Rulings and Interpretations?

CRA Comments

As part of the Excise and GST/HST rulings and interpretations service, the Excise and GST/HST Rulings Directorate provides rulings and interpretations to various parties such as taxpayers, registrants, rebate applicants, tax professionals, and industry associations. This service is intended to help these parties comply with the requirements of the Excise Tax Act (ETA) and other legislation falling within the scope of our mandate. Detailed information about this service is provided in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service.

As explained in this Memorandum, the Excise and GST/HST Rulings Directorate will not issue a ruling in various circumstances, including when it considers that it would be inappropriate to do so. For example, we may not issue a ruling when the ruling request concerns a matter in respect of which the requestor may be subject to an assessment. Similarly, we may not issue a ruling when the ruling request concerns a matter in respect of which the requestor has filed a notice of objection. Nevertheless, we may issue technical guidance on a matter under audit or appeal after discussing the matter with the CRA functional area involved in the audit or appeal. Requests for technical guidance in such circumstances are normally submitted by, and our responses are normally provided to, the CRA functional area seeking this guidance.

The Directorate’s mandate extends beyond providing rulings and interpretations to the parties listed above. For example, as the final authority within the CRA for the interpretation of the ETA and other legislation, our Headquarters function is frequently consulted by officials from other CRA functional areas (for example, Appeals, Audit, Rebates Processing) regarding interpretive issues for which they require guidance. These consultations are usually informal, but they are occasionally formal and in writing. The opinion provided in case no. 155555 was the result of a formal internal consultation. Whenever possible, Headquarters’ opinions such as the one provided in case no. 155555 are published on the same basis as rulings and interpretations provided to taxpayers.

Q. 11 Failure to report under s. 228(4)

A GST-registered person purchases real property in circumstances where a fully offsetting ITC is available and, when it files its return, neglects to report the tax payable under s. 228(4) and claim the offsetting ITC. CRA indicated that administrative tolerance woujld be provided so as to not assess interest, for example, at the May 1994 Institute of Chartered Accountants of Alberta Roundtable, the response to Question 2 in the Revenue Canada Roundtable 1995 Commodity Tax Symposium (CICA), final tab; Technical Interpretation 11695-7-2 (November 22, 1995) and 11620-1 (September 13, 1995). Is this administrative tolerance still practised?

CRA Comments

Pursuant to subsection 221(2) of the Excise Tax Act (ETA), a supplier is relieved from its obligation to collect GST/HST in respect of a taxable sale of real property where certain conditions are met. Where the supplier is not required to collect tax, the purchaser is required to pay the tax payable in respect of the supply directly to the CRA.

Where the purchaser is a GST/HST registrant and is entitled to claim a full input tax credit (ITC) in respect the tax payable on the supply, pursuant to subsection 228(4) of the ETA, the registrant must report the tax payable on line 205 (GST/HST due on the acquisition of taxable real property) of its GST/HST return for the reporting period in which the tax became payable. The tax payable is not part of the registrant’s net tax calculation. The offsetting ITC would normally be claimed on line 106 of the same return (or included on line 108 if the registrant is filing its return electronically).

The CRA maintains its position that it will generally exercise administrative tolerance if this issue is discovered later and reported by the registrant or discovered by the CRA on audit. In assessing the tax payable in respect of the supply, the CRA will generally also assess the registrant’s net tax. Pursuant to subsection 296(2) of the ETA, the Minister must take into account an ITC for a particular reporting period when assessing the net tax for that reporting period even though the time limit for claiming the ITC may have expired.

In the case of a full ITC being offset against the GST/HST payable, there would not be any interest assessed on the assessment.

Administrative tolerance will not be granted where the purchaser is not entitled to claim a full ITC or where the purchaser has already claimed the ITC in a GST/HST return. Administrative tolerance will also not be granted where the purchaser was previously assessed under similar circumstances. It should be noted that paragraph 169(4)(b) of the ETA provides that the ITC cannot be claimed until the tax payable has been reported in a return.

Q. 12 Revising Statement of Interest Calculated form on Notices of Assessment

Does CRA have any plan to revise the Statement of Interest Calculated to allow a better understanding of how arrears interest has been calculated?

CRA Comments

The CRA is currently targeting 2018 to implement improvements to the Statement of Interest document; our goal is to make the arrears interest calculation easier for our clients to follow and understand.

To achieve this goal, we welcome feedback identifying areas of the existing statement where they are currently experiencing difficulty, and any suggestions that would increase the usefulness of this statement.

When changes have been drafted for the Statement of Interest based on feedback we would be happy to share this product for review and comments. We want to ensure the finished product is meeting the needs of our clients.

Additionally, future changes are also being considered to provide clients with the ability to view the interest calculation through our online MyBA service, providing clients with instant access to this information. All comments received regarding the existing statement will also be taken into consideration for the development of the online tool.

Q. 13 Filing obligations where registration in dispute

A U.S. based company providing a subscription service to corporations operating around the world took the position that it was not required to be registered for GST purposes, but after a CRA review, CRA unilaterally registered the company and issued a notice of assessment. The company filed a notice of objection. Will CRA accept the filing of nil returns during the period between the assessment and the final decision (with adjusted returns filed should the assessment be maintained) or must the involuntary registrant remit deemed GST on its supplies?

CRA Comments

There is no administrative tolerance to allow a person to disregard the requirements for filing and remitting tax in circumstances where it has been determined that a person is required to do so. The Excise Tax Act (ETA) is very clear as to the requirements of a registrant with respect to the filing of a return. Under subsection 221(1) of the ETA, every person who makes a taxable supply is generally required to collect any tax that is payable by the recipient of the supply and file a GST/HST return under subsection 238(1) of the ETA with the Minister for each reporting period of the registrant and remit that tax in accordance with section 228 of the ETA.

Where a person fails to file a return or remit amounts as required by legislation, interest and penalties will be assessed in respect of such failures. In addition, if a person knowingly makes false statements or omissions in a return, penalties described in section 285 of the ETA may be applicable.

In essence, a registrant is required to comply with the requirements of the legislation at all times. If a person chooses to file nil returns in situations where tax is required to be collected and remitted, the CRA can apply the mechanisms in the ETA to address non-compliance.

Q. 14 Oral update on audit Issues

Please provide an update regarding any new or developing issues in the audit area.

CRA Comments

A verbal update was provided at the meeting.

Q. 15 3S. 170(1)(b) ITC restriction where corp provides flight services to shareholder

An aircraft owned by a corporation provides flight transportation services to its sole shareholder (an individual travelling for pleasure only) for fair market value consideration. As the corporation (which employs or retains the pilot) is using the aircraft to provide a service, should s. 170(1)(b) not apply as the corporation is the person using the aircraft in providing the flight transportation services (see, e.g., D. Porter & Son Ltd. v. Minister of Finance (Nova Scotia) [1979] 5802 ETC (NSSC): owner of a crane provided by it with operator was the person using the crane; and Cairns Construction [1960] S.C.R. 619: builder was the person using building materials in the course of completing real property contracts)? To the extent the shareholder is also an officer of the corporation (and none of the other officers of the corporation receive flight transportation services from the corporation), should the benefits be considered to be included in the shareholder's income pursuant to ITA s. 15 and not s. 6, thus resulting in ETA s. 170(1)(b) not applying by virtue of s. 170(1)(b)(ii)? (See Spicy Sports, 2004 TCC 463 and O'Flynn, 2005 TCC 230 re "qua shareholder.") To the extent s. 170(1)(b) applies to a corporation's acquisition of property and the property ceases being used exclusively by an employee, would the change of use rules in s. 199(3) apply?

CRA Comments

While it is not explicitly stated in the information provided, we assume that the corporation is a registrant who acquired the aircraft exclusively for the personal consumption, use or enjoyment of an individual who is a shareholder of the corporation. We also assume that the corporation has title and ownership of the aircraft (that is, the aircraft was not acquired by way of lease) and that an election under section 173 of the Excise Tax Act (ETA) has not been made in respect of the aircraft.

An individual can be both a shareholder and an employee or officer of a corporation. Where this is the case, it is necessary to determine whether the individual received the benefit in his or her capacity as a shareholder or as an employee or officer of the corporation. Generally, such a determination would be made for income tax purposes on a case-by-case basis.

Paragraph 170(1)(b) of the ETA will restrict the claiming of an ITC under section 169 of the ETA where the aircraft is acquired by the corporation for the exclusive personal benefit of an individual who was, is or agrees to become an officer or employee of the corporation or for a relative of such an individual, unless the corporation makes a taxable supply of the aircraft to the individual for consideration equal to its fair market value or, if no amount was payable by the individual for the benefit, it is not a taxable benefit under section 6 of the Income Tax Act (ITA).

Where the individual receives the benefit in his or her capacity as a shareholder of the corporation then paragraph 170(1)(b) of the ETA will not apply to restrict the corporation from claiming an ITC in respect of the aircraft providing the other conditions for claiming an ITC under the ETA are met.

Where the individual is a shareholder who receives the benefit in his or her capacity as an employee or officer of the corporation, then paragraph 170(1)(b) of the ETA will not apply where, as in the above example, the corporation makes a taxable supply of the aircraft to the individual for consideration equal to its fair market value.

Ordinarily, for income tax purposes, the taxable benefit for the use of an aircraft would be included in income under paragraph 6(1)(a) of the ITA where it is received or enjoyed by the taxpayer in the course of, or by virtue of, an office or employment. If the benefit is conferred on a shareholder, the value of the benefit is generally included in income under subsection 15(1) of the ITA.

Where the corporation makes a supply (other than an exempt or zero-rated supply) of an aircraft to an individual or a person related to the individual and a taxable benefit amount in respect of the supply is required under paragraph 6(1)(a) or subsection 15(1) of the ITA to be included in computing the individual’s income for a taxation year of the individual then the rules under section 173 of the ETA may apply.

Under paragraph 173(1)(c) of the ETA, where the aircraft is supplied otherwise than by sale, the use made by the corporation in so providing the aircraft to the individual (or related individual) is deemed, for GST/HST purposes, to be use in commercial activities of the corporation. Further, to the extent that the corporation acquired or imported the aircraft or brought it into a participating province for the purpose of making that supply, the corporation is deemed to have so acquired or imported the aircraft or imported the aircraft or brought it into the province, as the case may be, for use in its commercial activities.

The corporation will generally be required to include GST/HST deemed collectible and collected on the value of the taxable benefit in its net tax as calculated under subparagraphs 173(1)(d)(v) and (vi) of the ETA unless one of the exclusions in subparagraphs 173(1)(d)(i) to (iv) of the ETA is applicable. In particular, under subparagraph 173(1)(d)(i) of the ETA, the corporation will not be required to account for the GST/HST on the value of the taxable benefit where section 170 of the ETA denies the corporation an ITC with respect to the tax paid or payable on the acquisition, importation or bringing into a province of the aircraft.

As noted above, under subsection 173(1) of the ETA, if a taxable benefit amount must be included in the shareholder’s or employee’s income for income tax purposes, that portion of the personal use of the aircraft by that individual is deemed to be use in commercial activity by the corporation. In determining the ITCs to which the corporation may be entitled, the personal use of the property by that individual would be combined with any other use of the aircraft in commercial activity by the corporation to arrive at the total use of the aircraft in commercial activity.

For example, if a corporation uses the aircraft 40% in a commercial activity, 20% for making exempt supplies and 40% for the personal use of a shareholder or employee, then the total use of the aircraft in commercial activity will be deemed to be 80% where the supply of the aircraft to the shareholder or employee is a taxable benefit for income tax purposes. In this situation, the aircraft, as capital property, would be used more than primarily in the corporation’s commercial activities. Subsection 199(3) of the ETA would not apply in this situation as the use of the aircraft has not gone from less than primarily in commercial activities to primarily in commercial activities.

Q. 16 Effect on GST/HST instalments of lump sum sale

A GST/HST registered entity (Corporation A), as a non-operator in a real estate joint venture, assigned an annual reporting period and has been filing nil returns for several years. In 2015, it sold its interest in the joint venture to the operator for consideration that was more than $600,000 but less than $1,000,000 resulting in GST collected of at least $78,000. Assume that it is not associated with any other companies and is not a "specified supplier". Does the disposition have any effect on its annual reporting period and/or instalment base?

CRA Comments

We cannot confirm that there would be no change in Corporation A's reporting period and/or instalment base as all the facts are not known. For example, we do not know if Corporation A continues in a commercial activity after selling its interest in the joint venture or if it dissolves and ceases to be a registrant or if it amalgamates with one or more corporations. As a result, we provide the following general comments based on the assumption that the registrant is not a charity, listed financial institution or selected listed financial institution and has not filed any election to change its reporting period.

Whether the disposition of an interest in a joint venture by a participant will have any effect on the participant's annual reporting period and/or instalment base will be a question of fact. It will depend on whether all or part of the consideration for the supply of the interest in the joint venture is included in determining the threshold amount of the participant for a fiscal year or a fiscal quarter in a fiscal year as the threshold amount is used to determine the frequency of reporting periods.

In general, the threshold amount for a fiscal year is the amount of total revenue from taxable supplies made in Canada by the registrant and its associates in the immediate preceding fiscal year. The threshold amount for a fiscal quarter at any time in a fiscal year is generally the amount of total revenue from taxable supplies made in Canada by the registrant and its associates in the preceding fiscal quarters ending in that fiscal year. The threshold amount does not include supplies made outside Canada, zero-rated exports of goods and services, zero-rated financial services, taxable sales of capital real property or goodwill.

If a registrant's threshold amount for a fiscal year was $1.5 million or less it will have an annual reporting period during its current fiscal year if it does not exceed the threshold amount for a fiscal quarter in the current fiscal year.

If the registrant's threshold amount for a fiscal quarter is more than $1.5 million but not more than $6 million in the first quarter of a fiscal year, then it will have to report quarterly beginning on the first day of its second fiscal quarter of that fiscal year. If the registrant goes over $1.5 million but not $6 million in its first two fiscal quarters of a fiscal year, it will have to report quarterly beginning on the first day of its third fiscal quarter of that fiscal year.

If the registrant's threshold amount for a fiscal quarter is more than $1.5 million but not more than $6 million in its first three fiscal quarters of a fiscal year, or in its last fiscal quarter of its fiscal year, it will have to report quarterly beginning on the first day of its next fiscal year.

If the registrant's threshold amount for a fiscal quarter is more than $6 million, it has to report monthly beginning on the first day of the fiscal quarter that follows the fiscal quarters ending in that fiscal year during which the registrant went over the $6 million.

In general, a registrant who has an annual reporting period must make instalment payments equal to 1/4 of its instalment base in respect of its net tax for that reporting period as determined under subsection 237(2) of the Excise Tax Act within one month after the end of each fiscal quarter ending in the reporting period. The instalment base is generally based on the lesser of the net tax for the particular reporting period and the net tax for all reporting periods of the registrant ending in the 12-month period immediately preceding the particular reporting period. However, where the registrant ceases to qualify for annual reporting at the beginning of a second or third fiscal quarter and, as a result, is required to have a quarterly or monthly reporting period, the net tax for the short reporting period is to be grossed-up to an amount for a 12-month period in order to determine the instalment base for the short period.

If, in the above example, Corporation A continues as an ongoing entity engaged in a commercial activity and it has not exceeded $1.5 million in its threshold amount for a fiscal year or for a fiscal quarter in its 2015 fiscal year, then it will retain an annual reporting period for 2015. There would also be no change to its instalment base.

Q. 17 Retroactive registration where sales of Cdn-purchased goods from Cdn warehouse

CRA in Example 9 of P-051R2 and Ruling 81915 indicated that where a non-resident of Canada sells and delivers goods to customers in Canada from a stock of goods owned and stored by the non–resident at a warehouse located in Canada, that non–resident is required to be registered and to collect GST/HST on such sales (assuming the non–resident is not a small supplier). We recently had a contrary experience. Is it the CRA position that a non–resident that purchases tangible personal property from suppliers in Canada, stores that same property in Canada at leased warehouse space, and then sells to Canadian customers this same property, to be delivered to the customer in Canada, is required to be registered (assuming the non-resident is not a small supplier) and that the CRA will backdate the registration to the first moment that the non–resident satisfies the above conditions?

CRA Comments

Whether a particular non-resident person is carrying on business in Canada for GST/HST purposes is a question of fact requiring consideration of all relevant facts. The factors that the CRA will consider in determining whether a non-resident is carrying on business in Canada for GST/HST purposes are set out in Policy Statement P-051R2, Carrying on Business in Canada.

The CRA concluded in Example 9 of P-051R2 and ruled in Headquarters GST/HST Ruling case no. 81915 that a non-resident person who is not a small supplier would be considered to be carrying on business in Canada and required to be registered for GST/HST purposes where:

• the non-resident person maintains an inventory of goods in Canada for sale in Canada,
• the non-resident person solicits orders in Canada, and
• the goods are delivered in Canada.

With respect to the scenario provided, where the non-resident person is not a small supplier and meets the above factors with respect to its activities in Canada, the non-resident person would be considered to be carrying on business in Canada and would be required to be registered retroactively for GST/HST purposes with retroactive effect. In this case, the registration would be made effective the date the non-resident person first makes a taxable supply of goods in Canada in the course of carrying on business in Canada.

Q. 18 Availability of rebate for tax remitted in error

(a) CRA has stated that if a registrant fails to claim a rebate for tax remitted in error prior to an assessment for that period being issued, the registrant may either file a timely notice of objection or, if the objection period has expired, it can request a reassessment. Per s. 296(2.1), a rebate will only be considered an "allowable rebate" for the period if it would meet the s. 261 requirements (other than as to timing). However, a rebate is not allowed under s. 261(2)(a) if the amount has been taken into account as tax or net tax for a period assessed by the Minister under s. 296. Therefore, s. 296(2.1) appears to create a loop where a reassessment under s. 296 will never allow a rebate of tax paid in error for a period already assessed. Could CRA comment?

(b) Registrants are still receiving automatically issued documents that are titled Notice of (Re)Assessment. Does the CRA consider these documents to be assessments?

(c) CRA indicated one way to deal with a failure to claim a rebate is to ask the CRA to reassess a period. In such case, if the CRA opens a particular period to reassess, does that mean there was no assessment in the first place (that is, the restriction is not applicable so that the rebate is available) or would the CRA be making an additional assessment (that is, the restriction is applicable and no rebate is available)?

(d) If a person receives these standard Notices of Re(Assessments), is it disentitled from filing a rebate claim for tax paid in error under s. 261?

CRA comments

(a) We confirm that paragraph 261(2)(a) of the Excise Tax Act (ETA) prevents a rebate from being paid to the extent that the amount was taken into account as tax or net tax for a reporting period of the person and the Minister has assessed the person for the period under section 296 of the ETA. The purpose of subsection 261(2) of the ETA is to prevent a person from filing a rebate application after an assessment.

In this situation, the recourse available to a person who has reported and remitted tax in error is to file a notice of objection within 90 days after the day the notice of assessment is sent to the person pursuant to subsection 301(1.1) of the ETA. If that time period has past, then under subsection 303(7) of the ETA, where the person has a valid reason for failing to file the objection on time, the person may apply for an extension of time to file a notice of objection where the application is made within one year after the expiration of the time limit for objecting to the assessment.

If that time period has also past, the person may request a reassessment of its tax payable or net tax for the particular reporting period. In this case, audit has the discretion whether to reassess under subsection 296(1) of the ETA within the time limits set out in section 298 of the ETA and make any adjustments for an overpayment of net tax.

(b) To clarify, with the introduction of standardized accounting in April 2007, every GST/HST return remitting tax or claiming a refund was assessed and a Notice of (Re)Assessment (NOA) was issued upon initial filing. Nil returns (returns with no business activity reported on any lines) were not, and are not, assessed upon initial filing. In general, since April 2011, a GST/HST return for a reporting period in which the net tax owing is equal to the payment made with the return is no longer automatically assessed upon initial filing (referred to as a net nil return); however, an exception may occur where it is the first net nil return filed by a registrant. Returns filed with net tax or tax payable owing for the reporting period are still automatically assessed and NOAs are issued upon initial filing. NOAs are also issued for all returns claiming a net tax refund.

After making an assessment, including a system-generated assessment which can occur upon the initial filing of a return for a reporting period, the Minister must send a NOA to the person assessed, pursuant to subsection 300(1) of the ETA. A NOA can also be issued as a result of an assessment (or reassessment) to a return for a reporting period because of a client requested adjustment, or as a result of an adjustment originating from Audit or Appeals or other internal adjustment. These are all valid NOAs that inform the person of the details of their assessment (or reassessment).

(c) Under subsection 299(3) of the ETA, an assessment, subject to being vacated on an objection or appeal under Part IX of the ETA and subject to a reassessment, shall be deemed to be valid and binding. Further, under subsection 299(4) of the ETA, an assessment shall, subject to being reassessed or vacated as a result of an objection or appeal under Part IX of the ETA, be deemed to be valid and binding, notwithstanding any error, defect or omission therein or in any proceeding under this Part relating thereto. A system-generated assessment is a valid and binding assessment but is subject to a reassessment or being vacated on an objection or appeal.

In the situation where a person has failed to claim an eligible rebate and the time period for claiming that rebate has expired, if the rebate is in respect of tax payable or net tax for a reporting period that was assessed under section 296 of the ETA, the person can object to the (re)assessment within the time limits to do so under the ETA to request that the allowable unclaimed rebate be taken into account. If the time limits for making an objection have expired, the person may request a reassessment in respect of that period. The Minister has discretion in this regard.

(d) Under paragraph 261(2)(a) of the ETA, a rebate in respect of an amount shall not be paid under subsection 261(1) to a person to the extent that the amount was taken into account as tax or net tax for a reporting period of the person and the Minister has assessed the person for the period under section 296 of the ETA. A system-generated assessment is a valid assessment. The person has the option of objecting to that assessment to have an allowable unclaimed rebate taken into account.

Q. 19 Relief for temporarily imported leased goods

S. 3 of the Value of Imported Goods (GST/HST) Regulations (Valuation Regulations) relieves GST/HST on imports of certain identified items (the Items) in the Schedule to the Temporary Importation (Excise Levies and Additional Duties) Regulations (Temporary Import Regulations) "in circumstances in which the terms and conditions of those Regulations are met or, if those Regulations do not apply, in which those terms and conditions (other than any respecting security) would be met if those Regulations applied". Such imported goods would be subject to GST/HST calculated on 1/60th of the value for duty of the imported equipment for each month that the equipment is in Canada (plus "the remaining duties payable", if any).

Assume that the goods temporarily imported into Canada fit within an Item (for example, 25) identified in section 3 of the Valuation Regulations that does not require the goods to be imported by a non-resident person for section 3 to apply. Further assume that without the Temporary Import Regulations applying, the imported goods would not attract any customs duties, excise duties and excise taxes (other than GST/HST). In our view, the GST/HST relief on the reduced value under section 3 of the Valuation Regulations should be available if the conditions in section 5 of the Temporary Import Regulations are met.

Paragraph 5(1)(a) of the Temporary Import Regulations would be met if the temporarily imported goods "are used in Canada solely for the purpose and on the conditions set out in the schedule" for the relevant Item. Assume that the temporarily imported goods are not referred to in any of paragraphs 5(1)(c) to (g). Accordingly, pursuant to paragraph 5(1)(b) of the Temporary Import Regulations, the only other condition that would have to be satisfied is that the goods "are exported by their importer within a year after the date the goods were released" (that is, imported).

In the hypothetical scenario, the temporarily imported goods would, therefore, satisfy all the relevant conditions in section 5, specifically under paragraphs 5(1)(a) and (b), of the Temporary Import Regulations. Therefore, the GST/HST imposed under Division III of Part IX of the ETA should be calculated on the reduced value pursuant to subsection 215(2) of the ETA and section 3 of the Valuation Regulations thereunder.

However, the CBSA has indicated that such GST/HST relief would be restricted if the terms and conditions of tariff item 9993.00.00 for temporarily imported goods are not met. CBSA's administrative policy in Memorandum D8-1-1, contains a list of the Items that would qualify for various GST/HST relief. Due to CBSA citing the GST/HST relief for temporarily imported goods in the CBSA's administrative policy addressing tariff item 9993.00.00, CBSA has advised that the GST/HST relief would be unavailable if the temporarily imported goods do not qualify under tariff item 9993.00.00.

To illustrate, we sought an interpretation from CBSA that temporarily imported, leased goods:

1. that fit within one of the Items,

2. that satisfy all the relevant conditions in section 3 of the Valuation Regulations and section 5 (specifically paragraphs 5(1)(a) and (b)) of the Temporary Import Regulations, and

3. to which the Temporary Import Regulations do not apply,

would qualify for the GST/HST relief under section 3 of the Valuation Regulations.

CBSA advised that GST/HST relief would be unavailable because leased goods do not meet the conditions of tariff item 9993.00.00. In our view, consideration as to the application of tariff item 9993.00.00 is irrelevant. Would you please confirm that GST/HST relief under section 3 of the Valuation Regulations would be available (that is, calculated on a 1/60th basis) in these circumstances.

CRA Comments

Whether an imported good can be classified under a particular tariff item of the Customs Tariff depends on the facts in each case. The conditions for classification under a tariff item must first be met before a good can be classified under the item. As a result, an importer may choose to classify temporarily imported goods under tariff item No. 9993.00.00 if the conditions of that tariff item are met, one of which is that the goods will not be sold, leased or further manufactured or processed while the goods are in Canada. However, not all temporarily imported goods must be classified under that tariff item. Depending on the circumstances, an importer may decide not to classify temporarily imported goods under tariff item No. 9993.00.00.

Imported goods described under the Temporary Importation (Excise Levies and Additional Duties) Regulations may therefore be classified under tariff item No. 9993.00.00 or any other applicable tariff item. Because the Value of Imported Goods (GST/HST) Regulations provides partial GST/HST relief in respect of certain goods, including temporarily imported leased goods in certain circumstances, described by the Temporary Importation (Excise Levies and Additional Duties) Regulations under the Customs Tariff, the conditions described in both regulations must be met in respect of the goods before they can be partially relieved of GST/HST.

The determination as to whether a good falls within a particular item description is made by CBSA. Importers should consult with CBSA to determine what conditions must be met in respect of any Customs Tariff provision that is referenced under the Excise Tax Act.

Q. 20 Software licence adding intelligence to TPP

A Co manufactures high-tech versions of widgets (for example, luggage, locks) that have optional features that may be accessed online with software, but otherwise function the same as ordinary versions of the widgets. Optional features might include GPS localization, generating usage reports and modifying user authorizations. To have access to the software and features, the consumer must purchase a licence from a third party, B Co. Without the license and the optional features, the consumer can still use the widget as if it were an ordinary version of the widget. Does CRA consider the sale of a licence for any of the optional features to be a supply of intangible personal property in respect of tangible personal property and, if so, what will it consider as acceptable supporting documentation for the purpose of applying the place of supply rules?

CRA Comments

Generally, to be considered a supply of intangible personal property (IPP) that relates to tangible personal property (TPP), there must be a direct connection between the IPP and the TPP. Generally, this type of IPP would be a right or interest that may be exercised in relation to the TPP.

There is insufficient information in the question for the CRA to conclusively determine the nature of the supply between B Co and the consumer in the scenario. To make a definite determination it would be necessary for the CRA to review the terms of the arrangement between B Co and the consumer. However, where it is determined, after careful review of all the relevant facts, that the supply is of IPP that relates to TPP the place of supply of the IPP would generally be determined based on the ordinary location of the TPP. Under section 4 of Part I of Schedule IX to the Excise Tax Act, the ordinary location of property is deemed to be the location where the supplier and the recipient mutually agree that the ordinary location of the property is to be at a particular time. The mutual agreement of the supplier and recipient is determinative even where the property is actually located at a different place at the relevant time than what had been agreed upon. The mutual agreement of the parties may change from time to time. Therefore, even if the original written agreement for a supply of property specified that the property would be located in a particular province, the parties may mutually agree subsequent to the signing of the contract that the property is to be moved at a particular time to a location in another province. In this case, the latter location would be the ordinary location of the property at that particular time.

In this instance, B Co would need to maintain evidence of this agreement as supporting documentation for purposes of determining the place of supply of IPP that relates to TPP.

Q. 21 Advertising services in respect of real property

A Co, which is an advertising agency, and C Co enter into an agreement whereby A Co will provide one or more of the following services, which have the indicated relation to a commercial building owned by B Co: Display advertising on the walls inside the Building; Display advertising on a billboard attached to the Building; Display digital advertising on a screen fixed to a wall in the Building; Display the logo of C Co on the Building; Name the Building or a hall in the Building after C Co; and have a work of art commissioned by C Co installed on the side of the Building (for example, street art, mural or other). A Co and B Co then enter into an agreement whereby B Co will perform these services. Does CRA consider any of the services supplied by A Co to C Co, or by B Co to A Co, to be services in respect of real property or tangible personal property?

CRA Comments

Generally, a service that is in the nature of advertising would not be considered to be in respect of real property or tangible personal property as the direct object of the advertising would be the communication of the message rather than the media that is used to communicate the message. There is insufficient information in the question to conclusively characterize the supplies that are being made between parties A Co, B Co and C Co, for GST/HST purposes. To conclusively determine the nature of the supplies being made by each of the parties would require consideration of all relevant facts and the particular terms of the agreements between the parties.

An advertising service is generally considered to be a service of creating a message oriented toward soliciting business, attracting donations, or calling public attention in the form of an information notice, a political announcement or other similar communication by any means including oral, written, or graphic statements and representations disseminated by any means. An advertising service also includes a service directly related to the communication of such a message where the communication service is supplied as part of the supply of a message, or the person providing the communication service can demonstrate that, at the time the supply is made, the service is in relation to the supply of a message.

It is a question of fact whether a service would be considered to be an advertising service that would be zero-rated under sections 7 or 8 of Part V of Schedule VI to the Excise Tax Act (ETA). The supply would need to be a service that is in the nature of an advertising service and could include the negotiation and placement of media and advertising messages including specialty advertising. The object of the supply and what each party has actually agreed to supply as reflected in the agreement would have to be considered.

As explained in GST/HST Policy Statement P-169R, Meaning of "in Respect of Real Property Situated in Canada" and "in Respect of Tangible Personal Property that Situated in Canada at the Time the Service is Performed", for Purposes of Schedule VI, Part V, Sections 7 and 23 to the Excise Tax Act, for purposes of paragraphs 7(d) and (e) of Part V of Schedule VI to the ETA, there must be more than an indirect or incidental connection between a service and the underlying real property or tangible personal property in order for the supply of a service to be in respect of real property or tangible personal property that maybe excluded from zero-rating. Whether the relationship between the service and the property is sufficiently direct will depend on the facts of the situation.

Q. 22 IPP that relates to real property

Bulletin B-103 does not provide a concrete example of what constitutes IPP that relates to real property. In Québec, it has been determined that a call option is considered to be IPP that relates to real property. Federal interpretations (44420 and 52554) include timeshare points in the scope of IPP that relates to real property. Please provide clear examples of what constitutes IPP that relates to real property?

CRA Comments

GST/HST Technical Information Bulletin B-103, Place of supply rules for determining whether a supply is made in a province describes the place of supply rules used to determine whether a supply that is made in Canada is made in a province for purposes of determining whether the supply is made in a participating province and is consequently subject to the provincial part of the HST in addition to the federal part of the HST. B-103 states that the general place of supply rules for supplies of intangible personal property (IPP) do not apply to supplies of IPP that relate to real property and that the place of supply of a supply of IPP that relates to real property situated in Canada would be determined by applying the rules in section 9 of the New Harmonized Value-Added Tax System Regulations (Regulations).

Real property is defined in subsection 123(1) of the Excise Tax Act (ETA) to include:

• in respect of property in the Province of Quebec, immovable property and every lease thereof,
• in respect of property in any other place in Canada, messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, and
• a mobile home, a floating home and any leasehold or proprietary interest therein.

As indicated in B-103, based on this definition, except for property in Quebec, there are very few supplies of intangible personal property relating to real property that would not be deemed to be a supply of real property. As a result, the place of supply rules in section 9 of the Regulations would only apply in very few circumstances.

Subject to the definition of real property in subsection 123(1) of the ETA, to be considered a supply of IPP that relates to real property for purposes of section 9 of the Regulations, there must be a direct connection between the IPP and the real property. Generally, this type of IPP would be a right or interest that may be exercised in relation to real property. As indicated in B-103, an example of a supply of intangible personal property relating to real property to which the place of supply rules for this type of supply could apply would be a supply of a vacation club membership relating to vacation resorts.

Q. 23 Place of supply and consigned goods

[not summarized in light of the response]

CRA Comments

There are insufficient facts in the question for the CRA to conclusively determine the place of supply of the goods in the two scenarios described. Additional information, including the specific terms of the arrangement between the two parties would be necessary for us to make a place of supply determination.

Q. 24 Meaning in s. 232.1 of exclusively for sale

For the promotional allowance rules to apply, s. 232.1 requires the particular registrant must acquire the tangible personal property "exclusively for supply by way of sale for a price in money". In the context of an automobile dealership that holds inventory that is available for sale and supply by way of lease, is this condition satisfied respecting promotional allowances that are paid to the dealer in respect of (i) inventory that is on hand and which the dealership was not holding "exclusively for supply by way of sale" but which is ultimately resold for a price in money; and (ii) inventory that the dealership purchases after it has a purchae order from a customer for a particular automobile?

CRA Comments

Generally, section 232.1 of the Excise Tax Act (ETA) applies where a registrant acquires particular tangible personal property exclusively for supply by way of sale for a price in money in the course of commercial activities of the particular registrant, and another registrant, who has made taxable supplies of the particular property by way of sale, whether to the particular registrant or another person, pays to or credits in favour of the supplied by the other registrant to the particular registrant, an amount in return for the promotion of the particular property by the particular registrant.

The determination of whether all of the conditions of section 232.1 of the ETA have been met in a particular situation requires consideration of all relevant facts.

For GST/HST purposes a distinction is made between supplies of property by way of sale versus by way of lease. Property that is acquired for supply way of lease, licence or similar arrangement is excluded from the application of section 232.1 of the ETA.

Where inventory is not held “exclusively for supply by way of sale for a price in money”, all of the conditions under section 232.1 of the ETA will not be considered to have been met and the provision will not apply. Where a dealership purchases a particular vehicle to complete the customer’s particular order for an automobile for a price in money, then the condition that the automobile must be acquired “exclusively for supply by way of sale for a price in money” would be met. However, all of the other conditions of section 232.1 of the ETA would have to be met in order for the provision to apply.

Q. 25 Application of s. 268 to subsequent contributions by settlor

In s. 268, does "settle" include a gift made after the trust was first settled? For example, X settles a trust in 2013 with property, then in 2015 X contributes more property to the trust. Would s. 268 apply to the second and any subsequent contributions of property to the trust?

CRA Comments

Section 268 of the Excise Tax Act (ETA) states that where a person settles property on an inter vivos trust,

(a) the person is deemed to have made and the trust is deemed to have received a supply by way of sale of the property; and

(b) the supply is deemed to have been made for consideration equal to the amount determined under the Income Tax Act to be the proceeds of disposition of the property.

Thus, when a person settles property on an inter vivos trust, the person (the ‘settlor’) is deemed to have made, and the trust is deemed to have received, a supply of the property by way of sale of the property. Section 268 of the ETA applies at any time a settlor settles property on an inter vivos trust.

The supply is deemed to be made for the same consideration that is established for purposes of the Income Tax Act to be the proceeds of disposition of the property.

Q. 26 Single/multiple supply of transported goods

A registrant makes a zero-rated supply of goods. There is no written agreement for the sale. The seller hires a carrier to deliver the goods to the recipient and the seller pays the carrier's charges. The invoice to the customer segregates the price of the goods and the delivery charge. Does CRA consider the transaction to involve a single supply of delivered goods, or two separate supplies of goods and transportation?

CRA Comments

There are insufficient facts provided in the question to determine whether the supplier in the circumstances described is making a single supply of goods delivered to the customer or if the supplier is making a separate supply of a freight transportation service in addition to the supply of the goods.

Generally, where it is determined that the registered supplier supplies the goods on a delivered at destination basis and that under the terms for the sale of the goods the supplier must deliver the goods to a destination specified by the recipient, the delivery of the goods will generally be considered to be part of a single zero-rated supply of the goods even if a separate delivery charge is itemized on the invoice.

Generally, where it is determined that a registered supplier supplies the goods on a delivered at origin basis and the supplier is not required under the terms for the sale of the goods to deliver the goods to a destination specified by the recipient, the delivery of the goods will generally be considered to be a separate supply of a freight transportation service. In this instance the supply of the goods would be zero-rated and the supply of the delivery/freight transportation service would be subject to GST/HST at the applicable rate based on the application of the place of supply rules and zero-rating rules for freight transportation services.

Q. 27 Payment labelled as non-damages (s. 182)

ACo, which leases equipment to BCo, demanded damages from BCo for alleged breach of the lease. However, they settled the damage claim out of court, BCo made a payment to ACo. and the settlement agreement stated that the parties agreed that the lease was not breached, and that was released from the claims of ACo. The lease continues and is not terminated or modified. Does the payment from BCo to ACo include GST/HST under s. 182?

CRA Comments

Generally, section 182 of the Excise Tax Act (ETA) applies where at any time, as a consequence of the breach, modification or termination after 1990 of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant to a person, an amount is paid or forfeited to the registrant otherwise than as consideration for the supply, or a debt or other obligation of the registrant is reduced or extinguished without payment on account of the debt or obligation.

Based on the limited information provided, it appears that the payment by BCo to ACo is not a payment to which section 182 of the ETA would apply since both parties have agreed out of court that the lease was not breached.

The payment could, however, be consideration for a taxable supply. Aco is being paid to surrender/forfeit their right to make a claim against BCo for the alleged breach of the lease agreement.

Q. 28 Free supply of equipment to sister (s. 141.01(4))

Corporations A and B, which are owned by Mr. X, are registrants engaged exclusively in commercial activities. Transport trucks of Corporation A are used as to 60% to transport Corporation A's products and, as to 40%, to transport the products of Corporation B. Corporation A does not charge Corporation B for the use of the trucks. Does s. 141.01(4) apply so that Corporation A can claim full ITCs related to costs of its trucks pursuant to ss. 169(1) and 199(2)?

CRA Comments

It is a question of fact whether subsection 141.01(4) of the Excise Tax Act (ETA) would apply in any particular circumstance, and without all of the pertinent facts, we cannot make that determination.

In the example presented, it is not clear that Corporation A is making free supplies in the course of its endeavour, nor for what purposes they are made. Therefore, we cannot determine if subsection 141.01(4) applies. For example, if Corporation A is making free supplies to Corporation B for purposes related to the holding of Corporation A’s and Corporation B’s shares by Mr. X, it does not appear that such free supplies would be considered to further the making of taxable supplies for consideration.

Q. 29 Miedzi Copper (s. 186)

Last year, CRA indicated that its interpretation of s. 186 was under review. Please provide an update.

CRA Comments

Our position on the interpretation of section 186 of the Excise Tax Act has not changed. It is a question of fact whether subsection 186(1) would apply in a particular situation. We will apply the Court’s decision in Miedzi Copper Corporation v. The Queen, 2015 TCC 26 where the situation has the same facts as Miedzi. If you have a question about the application of subsection 186(1) to a particular situation, please provide the relevant facts and documents and we will review the request.

Q. 30 Application of s. 141.01(7) to ss. 162(2) and 273(1)(c) deemed non-supplies

If a registrant (the "Resource Rights Vendor") acquires property or a service for consumption or use in its business of supplying certain rights to explore for or exploit natural resources described in s. 162(2) ("Resource Rights") for (not nominal) consideration, as determined based on the facts (not under the deeming provision in s. 162(2) then, for the purpose of applying s. 141.01(2), the deeming provision in s. 162(2) is ignored by virtue of s. 141.01(7) and such facts prevail. Would the Resource Rights Vendor thereby be considered to acquire Resource Rights for taxable (re-)supply for (not nominal) consideration in the course of the Resource Rights Vendor’s business (that is, commercial activity), so that it would be entitled to claim full ITCs for the GST/HST payable on the acquisition?

Another example: where a registrant is an “operator” under a valid joint venture election made with a co-venturer under s. 273 of the ETA, s. 273(1)(c) deems any supplies made by the operator to the co-venturer not to be supplies in certain circumstances. On a smilar basis to the above, when the operator acquires property or a service for taxable (re-)supply for (not nominal) consideration to the co-venturer, would it be entitled to claim full ITCs for any GST/HST paid to acquire that property or service?

CRA Comments

If a supplier (re)supplies Resource Rights, both the supplier’s acquisition and supply of the Resource Rights would generally be deemed not to be supplies under subsection 162(2) of the Excise Tax Act (ETA). Therefore, no GST/HST would be payable by the supplier on the acquisition and, as a result, an ITC would not be available. As a result, it is unclear why the application of subsection 141.01(2) of the ETA would need to be considered.

It is not clear how, in the context of a valid joint venture election under section 273 of the ETA, there would be property or a service that would be acquired by an operator in the course of a joint venture exclusively for the purpose of resupplying it to a co-venturer.

Q. 31 S. 156 election on ITA s. 98(3) dissolution of partnership

Corp A and Corp B, which are wholly-owned by the same corporation and engaged exclusively in commercila activities, form an Alberta LP (Partnership) which is registered for GST/HST and engaged in commercial activities, and all three parties make (and file) an s. 156 election, with an effective date of February 1, 2016. On April 30, the Partnership is wound up under ITA s. 98(3), so that the the Partnership transfers an undivided interest in each of its assets to Corp A and Corp B on April 30, 2016. The Partnership requests cancellation of its GST/HST registration on May 31, 2016.

1. Will s. 156 apply to deem the supply of the undivided interests in the assets from the Partnership to Corp A and Corp B to be made for nil consideration?
2. Does the answer to Q.1 depend on the date the GST registration of the Partnership is cancelled?
3. Will the answer to Q.1 change if the corporate declaration of dissolution of the partnership is filed with the Alberta Registrar on April 30, 2016 (having regard inter alia to s. 272.1(6))?

CRA Comments

To be eligible for an election under subsection 156(2) of the Excise Tax Act (ETA), all of the parties must be specified members of a qualifying group. There is not enough information in the facts to determine whether the parties in question are specified members; however, provided that they qualify as such and that all of the conditions of the election have been met, taxable supplies made between them would be deemed to be made for no consideration during the time that the election is in effect, subject to the exclusions in subsection 156(2.1).

As such, a taxable supply of an undivided interest in the assets of the Partnership to Corp A and Corp B on April 30, 2016 (date of dissolution of the Partnership) may be deemed to have been made for no consideration under subsection 156(2) of the ETA even where such supplies would otherwise be deemed to be made at fair market value pursuant to subsection 272.1(4) of the ETA. However, it is noted that there is no explanation in the facts as to how Corp A (or Corp B) would use an undivided interest in each of the assets for consumption, use or supply exclusively in a commercial activity. The supply of the undivided interest in the assets of the Partnership to Corp A (or Corp B) would not be deemed to be made for no consideration where Corp A (or Corp B) did not acquire the undivided interest for consumption, use or supply exclusively in their commercial activities, or where one of the other exclusions in subsection 156(2.1) applies.

Does the answer depend on the date the GST registration of the Partnership is cancelled?

Yes, in so far as there is a condition that the parties to the section 156 election must be registrants. For a section 156 election to remain in effect, the Partnership would at all times be required to be a specified member. To be a specified member, the member must be a qualifying member, the definition of which requires a resident corporation or Canadian partnership to be a registrant.

If the effective date of the cancellation of the GST/HST registration is before April 30, 2016, the Partnership would not be a registrant on April 30, 2016. As such, a taxable supply of an undivided interest in the assets of the Partnership to Corp A and Corp B on April 30, 2016 (date of dissolution of the Partnership) would not be deemed to have been made for no consideration under subsection 156(2) of the ETA.

Will the answer change if the corporate declaration of dissolution of the partnership is filed with the Alberta Registrar on April 30, 2016?

No, the answer would be the same.

Q. 32 Extension of s. 256.2(7) limitation in Quebec where incorrect advice

In Larocque v. ARQ, 2014 QCCQ 8246, a landlord was able to claim the new residential rental property rebate under the Quebec Act ("ARQST") equivalent of ETA s. 256, despite filing the application late, because s. 2904 of the Civil Code of Quebec provided that "prescription does not run against persons if it is impossible in fact for them to act by themselves." Larocque had received incorrect advice and, as a result, was unable to apply for the rebate on time. Does the impossibility to act under s. 2904 of the Civil Code of Quebec apply to Quebec registrants respecting the limitation periods reflected in the ETA, e.g., s. 256?

CRA Comments

We would like to preface our comments by stating that the CRA is not responsible for administering the Civil Code of Quebec (Civil Code) or the Act Respecting the Quebec Sales Tax (ARQST) and that the matter in the Larocque case is under appeal. With this in mind, we offer the following comments.

The Larocque case, which was heard by the Court of Québec pursuant to the Code of Civil Procedure, deals with the application of section 378.16 of the ARQST and section 2904 of the Civil Code. Briefly, section 378.16 of the ARQST provides a two-year time limit for filing a rebate application in respect of the QST new residential rental property rebate, and it parallels subsection 256.2(7) of the Excise Tax Act (ETA). Section 2904 of the Civil Code provides that prescription (for example, the loss of a right through the passage of time) does not run against a person if it was impossible in fact for the person to act by themselves or to be represented by others.

In the Larocque case, the taxpayer argued that he was unable to apply for a QST new residential rental property rebate within the two-year time limit set out in section 378.16 of the ARQST, and consequently, section 2904 of the Civil Code should apply in his case, meaning that he would not be subject to the two-year time limit.

However, Revenu Québec (RQ) argued that the two-year time limit should apply without exception to any other statute (that is, the Civil Code). In support of its position, RQ cited four court cases in which the decisions strictly adhered to the application of legislated time limits. Three of the court cases cited by RQ were from the Tax Court of Canada and related to time limits set out in subsection 256(3) and 256.2(7) of the ETA. The fourth court case cited by RQ was from the Court of Quebec and related to the time limit set out in section 370.12 of the ARQST.

Ultimately, the judge sided with the taxpayer and ruled that the decisions of the Tax Court of Canada in the cases cited by RQ do not apply in the Larocque case. At paragraphs 70 to 76, the judge stated that the Civil Code should apply to a Quebec statute and that the case law cited by RQ should not apply as they related to restrictions applicable to a federal statute (that is, the ETA). Essentially, the judge ruled that since the issue in the Larocque case does not deal with an ETA issue, but rather with an ARQST issue, and given that the Tax Court of Canada has no jurisdiction with respect to ARQST issues, its decisions cannot set any precedent over an ARQST issue.

Therefore, the response to your question as to how the CRA would apply section 2904 of the Civil Code to subsection 256.2(7) of the ETA is, in our view, straightforward. Given that ETA issues are under the explicit jurisdiction of the Tax Court of Canada, we would continue to apply the two-year time limit set out in subsection 256.2(7) of the ETA independently of the Civil Code, given that the Tax Court of Canada has already set precedent in this matter.

Q. 33 Provision of trust property to beneficiary as licence (s. 191 self-supply)

Assume that a principal residence trust (Trust) owns land. Under the terms of the trust indenture, it is the duty of the trustee to construct a home on the land for the individual beneficiaries of the Trust that will be their primary residence. On completion and occupation of the home, does the self-supply rule in s. 191apply?

Discussion: It does not appear that the self-supply rule is triggered. The use of the home by the beneficiaries does not result from the Trust giving use or possession under a lease, licence or similar arrangement. Specifically, the right of use and possession of the home does not transfer from the Trust to the beneficiaries. Rather, by virtue of the express terms of the Trust Indenture, the beneficiaries have at all times held the right to use or reside in the home. Furthermore, the phrase lease, licence or similar arrangement is unlikely to encompass a trust indenture under which a trustee holds a home solely for the use and benefit of the trust beneficiaries.

CRA Comments

The question is essentially whether, in the circumstances described, the Trust, which we will assume is not a bare trust, can be considered to have given possession or use of the house (we will assume it is a residential complex) to the beneficiary under a lease, licence or similar arrangement.

The CRA has not addressed this particular scenario. For certainty, we recommend that the facts, along with the trust agreement and any other relevant information be provided in a request for ruling so that all of the issues can be fully considered. It is our view that the fact that the Trust may have been established to construct a house for the use of its beneficiary does not preclude that the Trust, as a person in its own right, can give possession or use of the house to the beneficiary under a supply made by way of lease, licence or similar arrangement.

The definition of “person” in subsection 123(1) of the Excise Tax Act (ETA) includes a trust, and therefore, a trust may be a person in its own right. As a person, a trust is capable of making supplies, subject to any provisions that deem otherwise.

“Supply” is defined in subsection 123(1) of the ETA to mean, subject to sections 133 and 134 of the ETA, the provision of property or a service in any manner (emphasis added). In this case, the supply is of some type of right to use the residential complex.

For GST/HST purposes, all supplies of real property are normally made either by way of sale or by way of lease, licence or similar arrangement. As a sale does not exist in this situation, any supply that is made would likely be made by way of lease, licence or similar arrangement.

The term “similar arrangement” is not defined in the ETA, however, it can be interpreted as an arrangement which, for one reason or another, cannot be considered a lease or a licence, but much like the two, offers the possession and/or use of property to a person. A similar arrangement can therefore be said to include an arrangement whereby one of the parties is either granted, imposed or deprived of something for a period of time.

Based on the foregoing, the beneficiary is granted the right to possess or use the residential complex, thereby depriving the Trust of the right to use the residential complex in some other manner (for example, to produce income for the beneficiary). In our view, the Trust makes a supply of the residential complex by way of lease, licence or similar arrangement to the beneficiary. Where the remaining conditions of subsection 191(1) of the ETA are met, the Trust will be considered to have made and received a taxable supply by way of sale of the residential complex.

Q. 34 Reporting of s. 191 tax

Where there is a self-supply of a residential complex, some CRA offices instruct builders to report the s. 191 tax at line 205 on the basis that the self-supply constitutes "GST/HST due on the acquisition of taxable real property" whereas others instruct builders to report the tax at line 405 as "other GST/HST to be self-assessed". Which is correct?

CRA Comments

The CRA’s view regarding the proper reporting of GST/HST that is deemed to have been collected on a self-supply of a residential complex is communicated in Guide RC4052, GST/HST Information for the Home Construction Industry. Specifically, we refer to the section titled “How do you account for the tax on a self-supply?” on page 40 of the current PDF version of the guide (revision date 10/2014). This section instructs a GST/HST registrant to account for the GST/HST on a self-supply by including the amount of the tax considered to have been collected on line 103 of the GST/HST return or, if using GST/HST NEFTILE, in the calculation of line 105 of the GST/HST NETFILE return. The section further instructs a person who is not a GST/HST registrant to account for the GST/HST on a self-supply by including the amount of the tax considered to have been collected on line 103 of Form GST62, Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return (Non-Personalized).

Information regarding the amounts that are to be reported on lines 205 and 405 of the GST/HST return is provided on page 75 of the current PDF version of Guide RC4022, General Information for GST/HST Registrants, (revision date 2013).

Q. 35 Lease of top of building

Ruling 156633, which concerned a lease of real property to a person who constructs an apartment building on the leased land, stated that from the beginning of the lease up to the end of the lease interval in which the self-supply occurs, the ground lease of the land is a taxable supply because "[t]here is no exemption or relieving provision that applies to the Lessor's supply of real property made under the Agreement during" that period. Why was the lease of the land not exempt under Sched. I, Pt. I, s. 7(a)(ii)?

CRA Comments

GST/HST Ruling case no. 156633 discusses the supply by way of lease of real property that is composed of a portion of an existing building, on top of which the lessee will construct an apartment building, and other related areas. The substance of the lease in this case is not a lease in respect of land; rather it is a lease in respect of other real property.

Subparagraph 7(a)(ii) of Part I of Schedule V to the Excise Tax Act (ETA) exempts the supply of land (other than a site in a residential trailer park) made, under a lease, licence or similar arrangement which provides for continuous possession or use of the land for a period of at least one month, to a person who is acquiring possession of the land for the purpose of constructing a residential complex on it in the course of a commercial activity. Subparagraph 7(a)(ii) specifically exempts supplies of land and does not exempt supplies of other real property.

Consequently, as the supply discussed in GST/HST Ruling case no. 156633 is not a supply of land (that is, it is a supply of other real property) the exemption under subparagraph 7(a)(ii) does not apply. As noted in the ruling, there is no exemption or relieving provision that applies to this supply of other real property during the particular time when the apartment building is under construction (that is, prior to the deemed self-supply under subsection 191(3) of the ETA). Therefore, the supply of the real property in this case is a taxable supply during that particular time.

Q. 36 Lease of land before construction of home

Will a lease of land to a person who intends to use the land for residential purposes be an exempt supply under Sched. I, Pt. I, s. 7(a)(i) from the outset of the lease, notwithstanding that construction of the home has not commenced and the individual does not otherwise possess a residential unit for period after the commencement of the lease?

CRA Comments

It is the position of the CRA that subparagraph 7(a)(i) of Part I of Schedule V to the Excise Tax Act (ETA) exempts, among other things, a supply of land (other than a site in a residential trailer park) made, under a lease, licence or similar arrangement which provides for continuous possession or use of the land for a period of at least one month, to the owner of a residential unit (for example, a detached house) that is to be constructed on and affixed to the land for the purpose of its use and enjoyment as a place of residence for individuals provided that there is clear documentation to which both the supplier and recipient have agreed that a residential unit is to be affixed to the property within a reasonable period of time. The exemption under subparagraph 7(a)(i) of Part I of Schedule V to the ETA applies from the outset of the lease, licence or similar arrangement, notwithstanding that at that particular time, the owner may not yet have commenced construction.

The example cited from GST/HST Memorandum 19.2.3, Residential Real Property — Deemed Supplies, reflects the CRA’s current position on the interpretation of subparagraph 7(a)(i) of Part I of Schedule V to the ETA.

Q. 37 New housing rebate where nominee corp.

The purchase agreement for the acquisition by an individual of a new home is entered into in the name of a corporation which acts strictly as bare trustee and agent of the individual, as documented at that time. The transaction closes and the corporation takes bare legal title to the home only, as confirmed under a Bare Trustee and Nominee Agreement. Is the individual entitled to the s. 254 rebate?

CRA Comments

Generally, section 254 of the Excise Tax Act (ETA) provides a rebate of a portion of the GST payable on the sale of a newly constructed or substantially renovated single unit residential complex or residential condominium unit (referred to hereafter as a “new house”). Subsection 254(2) of the ETA includes seven paragraphs that set out various requirements that must be satisfied before the Minister can pay a rebate. For the purpose of this response, we will focus on three of the seven paragraphs, namely:

• paragraph 254(2)(a) which generally requires that the builder of a new house must sell the house to a particular individual;
• paragraph 254(2)(b) which generally requires that, at the time the particular individual becomes liable under the agreement of purchase and sale for the new house that he entered into with the builder, the particular individual must be acquiring the house for use as his primary place of residence or that of a relation; and
• paragraph 254(2)(e) which generally requires that ownership of the new house must be transferred to the particular individual.

Under the requirements in paragraphs 254(2)(a), (b) and (e) of the ETA, ownership of the new house must be transferred to the same individual to whom the builder sells the house. Absent any other factors, this is the same individual with whom the builder enters into the agreement of purchase and sale for the new house.

Generally, a trust cannot exist without a settlor having first contributed trust property to the trust. In the situation described where the corporation enters into the agreement of purchase and sale with the builder, it is not clear how the corporation could be considered to be a bare trustee. However, where the corporation enters into the agreement of purchase and sale as agent of the individual where the agency relationship between them is clearly documented at the time the corporation enters into the agreement with the builder, the individual would be the principal to the agreement of purchase and sale with the builder, and for purposes of paragraphs 254(2)(a) and (b) of the ETA, the particular individual with whom the builder entered into the agreement of purchase and sale. This is consistent with the principles of agency.

As stated in GST/HST Policy Statement P-111R, The Meaning of Sale with Respect to Real Property, and as discussed in Question 11 of last year’s CRA/CBA Annual Roundtable Meeting, our position is that the word “ownership,” as used in paragraph 254(2)(e) of the ETA, refers to legal ownership (that is, titled ownership). Therefore, if legal ownership is not transferred to the particular individual with whom the builder entered into the agreement of purchase and sale – which seems to be the case in the situation described, as ownership of the new house seems to be transferred to the corporation as bare trustee – then the requirement in paragraph 254(2)(e) of the ETA is not satisfied and the Minister cannot pay a new housing rebate under subsection 254(2).

Q. 38 Claim of unregistered purchaser of land to s. 257(1) rebate

Corporation A, which is not a GST/HST registrant, purchases land from another corporation that has the obligation to collect the GST/HST on the sale to Corporation A (which intends to develop the land or sell it to a third party). Corporation A is associated with other persons who are not small suppliers. If Corporation A registers for GST/HST after the acquisition of the land, Corporation A will not be able to claim an ITC related to the acquisition since s. 171(1) will not apply. If Corporation A does not become a registrant or makes any supplies, and subsequently sells the land it acquired, will it be entitled to claim a s. 257(1) rebate?

CRA Comments

If we understand correctly, Corporation A purchased land from another corporation, and at the particular time when Corporation A purchased the land:

• Corporation A was neither registered nor required to be registered for GST/HST purposes; and
• Corporation A intended to either develop the land or sell it to a third party.

Furthermore, at that particular time, Corporation A was associated with other persons who were not small suppliers for GST/HST purposes. Consequently, pursuant to section 148 of the Excise Tax Act (ETA) Corporation A was not a small supplier for GST/HST purposes in its own right, and therefore, Corporation A would be required to be registered for GST/HST when it makes a taxable supply in Canada in the course of a commercial activity engaged in by Corporation A in Canada, unless one of the exceptions in paragraphs 240(1)(b) or (c) of the ETA applies in respect of the taxable supply.

You assert that the other corporation had the obligation to collect GST/HST on the sale of the land to Corporation A. This implies that the land is situated in Canada (otherwise, there would be no GST/HST collectible on the sale) and that Corporation A was not registered for GST/HST purposes (otherwise, the obligation would have been on Corporation A to account for the tax payable on the sale). Corporation A presumably paid GST/HST on the purchase of the land; however, we assume that Corporation A could not claim an ITC in respect of the GST/HST payable on the purchase of the land because it was not a registrant for GST/HST purposes (that is, a person who is registered or required to be registered for GST/HST purposes) at that particular time.

In addition, you assert that if Corporation A were to voluntarily register for GST/HST purposes (for example, before it makes a taxable supply in Canada in the course of a commercial activity engaged in by Corporation A in Canada) then Corporation A would not be able to claim an ITC in respect of the GST/HST payable on the purchase of the land given subsection 171(1) of the ETA would not apply. Although you have not explained why this particular subsection would not apply, we assume it is because Corporation A would not have been a small supplier immediately before it became a registrant.

So, with this in mind, and assuming that as you state Corporation A neither becomes a registrant nor makes any supplies, if Corporation A subsequently sells the land it had purchased previously from the other corporation, you would like to know whether Corporation A will be able to claim a rebate under subsection 257(1) of the ETA.

In order for a person to be able to claim a rebate under subsection 257(1) of the ETA, the person must be a non-registrant who makes a taxable supply of real property by way of sale. As a reminder:

• the term “taxable supply” is defined in subsection 123(1) of the ETA to mean a supply that is made in the course of a commercial activity; and

• to paraphrase the definition of the term “commercial activity” in subsection 123(1), a commercial activity includes the making of a supply (other than an exempt supply) of real property, and a business or an adventure or concern in the nature of trade except to the extent that it involves the making of exempt supplies.

With respect to Corporation A’s sale of land, the facts suggest that Corporation A is making a taxable supply in Canada in the course of a commercial activity engaged in by Corporation A in Canada. Given that Corporation A is not a small supplier, Corporation A’s sale of land would trigger the requirement for it to be registered for GST/HST purposes, unless one of the exceptions in paragraphs 240(1)(b) or (c) of the ETA applies in respect of that taxable supply. If neither of those exceptions applies, then Corporation A is a registrant for GST/HST purposes (despite that it may not actually be registered) when it sells the land, and consequently, it cannot avail itself to the rebate in subsection 257(1) of the ETA. However, in this particular situation, Corporation A may be eligible to claim an ITC under subsection 193(1) of the ETA in order to prevent cascading of tax on the sale of the land.

Conversely, if one of those exceptions applies (for example, if the exception in paragraph 240(1)(b) of the ETA applies, meaning that Corporation A’s only commercial activity is the making of supplies of real property by way of sale otherwise than in the course of a business) then Corporation A would not be a registrant, and it could avail itself to the rebate in subsection 257(1) of the ETA.

Ultimately, it is a question of fact as to whether Corporation A will be able to claim a rebate under subsection 257(1) of the ETA.

Q. 39 Exchange of credit notes

Corporation A purchased goods from VendorCo which it subsequently returned to VendorCo in exchange for a credit note that could be applied against future purchases. Corporation A has now found a supplier that also purchase goods from VendorCo. Corporation A will assign the VendorCo credit note to Corporation B in exchange for a credit note of equal value from Corporation B. VendorCo has agreed to enter into an agreements with Corporation A and Corporation B to facilitate the assignment. VendorCo will not pay or receive any consideration from Corporation A and Corporation B in connection with these agreements. Is the assignment of the credit note by Corporation A to Corporation B a supply of an exempt financial service?

CRA Comments

In order for the assignment of the credit note to be a supply of an exempt financial service, the assignment must meet the definition of financial service in subsection 123(1) of the Excise Tax Act (ETA). A financial service means anything that is described in paragraphs (a) to (m) and not excluded by any of paragraphs (n) to (t) of that definition.

The ETA does not define the term “credit note”, other than referring to a credit note issued under subsection 232(3) of the ETA, which is not determinative of the issue raised here.

In the example provided, the credit note documents Corporation A’s right to apply the credit note towards the price of future purchases, but does not credit Corporation A with a specific amount of money or the right to receive a specific amount of money.

A financial service includes in paragraph (d) “the…transfer of ownership…of a financial instrument”. A financial instrument is defined in subsection 123(1) of the ETA. The credit note granted by VendorCo to Corporation A would more accurately be described as a right granted to Corporation A to purchase goods at a reduced price or to use the credit note as total or partial payment for goods. The note issued by VendorCo would not appear to fit within the definition of financial instrument.

As the credit note would not be a financial instrument, the assignment of the credit note would not be an exempt supply of a financial service under paragraph (d) of the definition. Also, based on the information provided, the assignment would not appear to fit within other paragraphs of the definition of financial service.

The assignment of the credit note is a taxable supply of intangible personal property as it documents Corporation A’s right to apply the credit note towards the price of future purchases. Although not stated in the question, we presume that Corporation A is a registrant and that the assignment of the credit note, that is, the intangible personal property, to Corporation B, is made in the course of its commercial activity.

Finally, it should be noted that for the purposes of the ETA, we do not consider the provision of the right to receive products and services as described in the example and referred to as a “credit note” to fall within the ordinary or common meaning of the term “gift certificate” or “coupon”.