GST/HST Questions for Revenue Canada 2010

  • March 04, 2010

DISCLAIMER

These comments do not replace the law found in the Excise Tax Act (the Act) and its Regulations. The comments are provided for your reference. As they may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact any CRA GST/HST Rulings Centre for additional information. These Centres are listed in GST/HST Memorandum 1.2, CRA GST/HST Rulings Centres. If you wish to make a technical enquiry on the GST/HST by telephone, please call the toll-free number 1-800-959-8287. A ruling should be requested for certainty in respect of any particular GST/HST matter.

If you are located in the province of Quebec and wish to make a technical enquiry or request a ruling related to the GST/HST, please contact Revenue Qu√©bec by calling the toll-free number 1-800-567-4692.

COPYRIGHT is reserved jointly to the CRA and the CBA Commodity Tax, Customs & Trade Section. Requests for permission to reproduce such text, in whole or in part, should be sent to the CBA National Office in writing at 500-865 Carling Ave., Ottawa, Ontario, K1S-5S8. Where the material is to be reproduced in and used solely for instruction in an educational institution, attribution must be given to the CRA and the CBA Commodity Tax, Customs & Trade Section.

For GST/HST Questions for Revenue Canada from 1999 - 2010 – please contact cbacommoditytax@cba.org.


ANNUAL MEETING – MARCH 4, 2010 (Ottawa, Ontario)

CANADA REVENUE AGENCY ("CRA")
CANADIAN BAR ASSOCIATION (COMMODITY TAX, CUSTOMS AND TRADE SECTION)

GST/HST QUESTIONS & COMMENTS FOR CANADA REVENUE AGENCY

All statutory references are to the Excise Tax Act (the "ETA") Unless otherwise stated

  1. SPONSORSHIP REVENUE AND INPUT TAX CREDITS
  2. CHILD CARE SERVICE
  3. RETROACTIVE REGISTRATION AND CLAIM FOR ITCs
  4. CLEARANCE CERTIFICATES
  5. TAXPAYER RELIEF GUIDELINES FOR WAIVER OF INTEREST AND PENALTY
  6. REISSUING NOTICES OF ASSESSMENT
  7. DEPOSITS AND/OR SECTION 182
  8. SUBSECTION 177(1) AND NON-RESIDENT PRINCIPAL
  9. GST DEEMED TRUST
  10. GST DEEMED TRUST
  11. SALES OF CTCs TO NON-REGISTRANTS – SATISFACTORY EVIDENCE OF SUBSEQUENT EXCHANGE
  12. SALES OF NATURAL GAS TO NON-RESIDENTS – SATISFACTORY EVIDENCE OF EXPORTATION
  13. LEGAL SERVICES – ZERO RATING
  14. ZERO-RATING AND INTANGIBLE PERSONAL PROPERTY
  15. INBOUND FREIGHT TRANSPORTATION SERVICE – WHETHER ZERO-RATED
  16. DE MINIMIS FIs AND DETERMINATION OF FINANCIAL REVENUE
  17. REMITTANCE THROUGH FINANCIAL INSTITUTIONS
  18. SECTION 150 ELECTION & DE-REGISTRATION OF PARTIES
  19. LATE FILED SECTION 150 ELECTIONS
  20. APPLICATION OF THE “FREE-SUPPLY” RULE TO CLAIM ITCs ON INVESTOR’S COSTS
  21. FAILURE TO FILE FORM GST60 AND FAILURE TO REPORT GST ON REGULAR RETURN ON PURCHASE OF REAL PROPERTY (ETA 228(4)(b))
  22. SALE OF REAL PROPERTY BY INDIVIDUAL
  23. AVAILABILITY OF SECTION 167 ELECTION – BUSINESS ASSETS BOTH INSIDE AND OUTSIDE CANADA
  24. UPDATE ON AUDIT ISSUES AND DISCUSSION
  25. UPDATE ON VOLUNTARY DISCLOSURES ISSUES AND DISCUSSION
  26. UPDATE ON COURT CASES/OBJECTION AND DISCUSSION
  27. UPDATE ON HST ISSUES AND DISCUSSION
  28. UPDATE ON STANDARDIZED ACCOUNTING AND PROCESSING ISSUES AND DISCUSSION
  29. PLEASE PROVIDE AN UPDATE REGARDING ANY NEW OR DEVELOPING ISSUES ON FINANCIAL SERVICES SUCH AS:

1. SPONSORSHIP REVENUE AND INPUT TAX CREDITS

Facts / Background

An Non-profit organization (NPO) that is resident in Canada has taxable revenue from the rental of commercial property, as well as sponsorship revenue that is deemed not to be a supply for GST purposes pursuant to section 135 of the Excise Tax Act. The NPO does not make any exempt supplies for GST purposes

Question

Would the NPO be able to claim full ITCs for any GST incurred on input costs that relate to its two revenue sources, or would the NPO be restricted in claiming ITC’s in respect of its sponsorship revenue and, therefore, be required to do an allocation between its taxable revenue and its sponsorship revenue for ITC purposes?

CRA Comments

The fact that a registrant non-profit organization (NPO) makes supplies that are deemed not to be supplies under section 135, does not effect the NPO’s eligibility for input tax credits (ITCs) by virtue of subsection 141.01(7).

To determine eligibility for ITCs it is necessary to determine whether the supplies deemed not to be supplies under section 135 would otherwise be taxable supplies made for consideration. If so, ITCs are available provided there are no other provisions in the ETA that would restrict or limit the claiming of ITCs on inputs. Where the deemed supplies would otherwise be exempt supplies, no ITCs would be available. In other words you look through the deeming provision when determining eligibility for ITCs.

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2. CHILD CARE SERVICE

Facts / Background

Section 1 of Part IV of Schedule V ETA exempts child care services, the primary purpose of which is to provide care and supervision to children 14 years of age or under for periods normally less than 24 hours per day.

There are currently many camps available to children 14 years of age or under and the activities that are being offered to children of this age group are increasingly varied. Clearly, in the majority of cases, parents register their children in child care programs during times when they must be at work. In general, parents choose the camps (schedules, periods during the year) based on their work schedule. Camps organize activities to entertain children during the times that these children are under their care. The nature of the activities offered thus influences the parents’ decision when it comes time to choosing one camp over another.

The Tax Court of Canada recently rendered its decision in the general procedure in the case of Domaine de la Voli√®re (2006-2168(GST)G). In this case, the Court had to determine whether the services rendered by Domaine de la Voli√®re consisted of child care services that were exempted or taxable recreation services. This case gives effect to many decisions rendered in this subject matter.

Domaine de la Voli√®re considered that the primary purpose of its services was to provide care and supervision to children 14 years of age or under and did not collect any GST on these services. The contribution was established based on the fact that the services would be taxable.

In its decision, the Court particularly specifies that it is not necessary to determine the main reason the acquirer retained the services of Domaine de La Voli√®re, however, establishing the main reason for using the services, may in some cases, be influential in the determination of the services primarily provided by the supplier. The question that must be asked, then, is the following: "was the appellant’s supervision service merely incidental to its entertainment and/or educational services from which the pupils benefited? Or was it the other way around?"

Therefore, in the case of Domaine de la Voli√®re the Court further takes an approach based on objective criteria by analyzing the nature of the activities offered to children and the periods during which an individual is responsible for the children’s care. In its opinion, it would be unreasonable to expect that section 1 of Part IV of Schedule V ETA would not apply to situations where no activity is planned. "This could not have been the legislator’s intention." The fact that Domaine de la Voli√®re offered recreational and/or educational activities was entirely expected and reasonable because it was caring for children for a long period of time.

Question (English version)

  1. Please confirm that the CRA has accepted the decision rendered in the Domaine de la Voli√®re case?
  2. Please specify what criteria will be considered by the CRA to qualify a service as a child care service: the number of hours, the acquirer’s intention to have his/her child cared for, the type of activities offered, the type of care provided, etc.?
  3. Can an analysis based on the ratio of activities that are specialized or that have themes with respect to periods during which the children have no other activities except for group games, swimming, etc. be a reasonable criterion for considering that the criterion of "primarily" under section 1 of Part IV of Schedule V ETA is met?

CRA Comments

The CRA is awaiting another court decision on a similar issue. The case  (Arnold) was heard by the Tax Court of Canada on January 20, 2010 and the issue is whether a particular supplier is making supplies of child care services that would be exempt under section 1 of Part IV of Schedule V to the Excise Tax Act, or supplies of instruction in recreational activities which would be taxable. We can confirm that we agree with the Domaine de Voliere decision to the extent that it clarifies that it is not necessary to determine why the recipient acquired the supply but rather, in light of the facts, it must be determined whether the service supplied was primarily a supply of care and supervision or education and/or sporting activities. After the decision in the Arnold case has been issued the CRA will re-assess  its position.

The factors the CRA takes into consideration in determining whether a supply is the supply of a child care service the primary purpose of which is to provide care and supervision to children, include:

  • the purpose of the organization/program as set out in its governing documents;
  • how the organization/program is promoted or advertised;
  • the nature of its license to operate;
  • the nature of the activities provided;
  • the qualifications of instructors/staff;
  • the nature/design and use of facilities;
  • the extent that progress is measured/monitored and goal-orientation is involved;
  • the duration of the program; and
  • the age of the children.

The above criteria will be analyzed on a case by case basis.

To determine the primary purpose of the supply being made the CRA will take into consideration the previously mentioned criterion. An analysis based on the ratio of “downtime” (i.e., where children are not involved in the specific activity) to “active time” does not appear reasonable.  Such an analysis seems to artificially create multiple supplies where they do not exist.  The fact that children are not actively participating in the specialized activity should not be used to change the nature of the supply.

For example, assume that an organization is offering a recreational soccer program during the month of July.  The program is offered Monday to Friday from 9am to 4pm. However, advertising material indicates that parents may drop their children off at 7:30am and pick them up at 5:00pm, if necessary. There are no additional charges for dropping children off early (i.e., at 7:30) or picking them up late (i.e., at 5:00). During the time before and after the actual program begins the children may play games or read but they do not play soccer. In addition, each morning and afternoon the children are given an hour of “quiet time” during which they do not play soccer and an hour has been scheduled each day for lunch.

In comparing the active time to the downtime in this example it is clear that more than 50% of the time is downtime. However, this downtime is part of the overall program and should not be interpreted as changing the nature of the supply from that of a recreational program into something else.

When looking at section 1 of Part IV of Schedule V to the Excise Tax Act the first step is to determine whether the supply being made is “child care service” and then whether the “primary purpose is to provide care and supervision to children…” The bigger question is whether recreational programs can be considered “child care services” and if so what is their primary purpose. Hopefully, the Arnold decision will shed more light on this issue.

SERVICE DE GARDE

L’article 1 de la partie IV de l’annexe V LTA exon√®re les services de garde d'enfants qui consistent principalement √† assurer la garde et la surveillance d'enfants de quatorze ans ou moins pendant des p√©riodes d'une dur√©e normale de moins de vingt-quatre heures par jour.

√Ä l’heure actuelle, les camps offerts aux enfants de 14 ans ou moins sont nombreux et les activit√©s qui y sont offertes sont de plus en plus vari√©es. Il est clair que dans la majorit√© des cas, les parents y inscrivent leurs enfants afin d’en confier la garde pendant les p√©riodes o√Ļ ils doivent aller travailler. Le choix des camps (horaires, p√©riodes de l’ann√©e) est g√©n√©ralement fait par les parents en fonction de leur horaire de travail. Les camps organisent des activit√© afin de divertir les enfants pendant les p√©riodes o√Ļ ils en ont la responsabilit√©. La nature des activit√©s offertes influence d’ailleurs les parents quand vient le temps de choisir un camp plut√īt qu’un autre.

R√©cemment, la Cour canadienne de l’imp√īt a rendu son jugement en proc√©dure g√©n√©rale dans l’affaire Domaine de la Voli√®re (2006-2168(GST)G). Dans cette affaire, la Cour devait d√©terminer si les services rendus par Domaine de la Voli√®re constituaient des services de garde d'enfants exon√©r√©s ou des services r√©cr√©atifs taxables. Cette affaire fait suite √† plusieurs jugements rendus en la mati√®re.

Domaine de la Voli√®re consid√©rait que les services consistaient principalement √† garder et √† surveiller des enfants de moins de 14 ans pour des p√©riodes de moins 24 heures et ne percevait pas la TPS √† cet √©gard. La cotisation a √©t√© √©tablie sur la base que les services constituaient plut√īt des services taxables.

Dans sa d√©cision, la Cour pr√©cise notamment qu’il ne faut pas d√©terminer la raison principale pour laquelle l’acqu√©reur a retenu les services de Domaine de La Voli√®re, bien que cette raison puisse dans certains cas servir d’√©clairage dans la d√©termination des services principalement rendus par le fournisseur. Elle pr√©cise que la question qu'il faut alors se poser est la suivante: «est-ce que le service de surveillance fourni par l'appelante n'√©tait qu'un accessoire au service de divertissement et/ou d'√©ducation offert par l'appelante et dont b√©n√©ficiaient ces m√™mes √©l√®ves? O√Ļ √©tait-ce plut√īt l'inverse?»

Ainsi, la Cour, dans l’affaire Domaine de la Voli√®re retient davantage une approche bas√©e sur des crit√®res objectifs en analysant la nature des activit√©s offertes aux enfants et les p√©riodes pendant lesquelles une personne en √† la responsabilit√©. De son avis, il serait d√©raisonnable de s’attendre √† ce que l’article 1 de la partie IV de l’Annexe V LTA ne s’applique qu’aux situations o√Ļ aucune activit√© n’est pr√©vue. «Cela ne pouvait pas √™tre l’intention du l√©gislateur». Le fait que Domaine de la Voli√®re offrait des activit√©s r√©cr√©atives et/ou √©ducatives √©tait enti√®rement pr√©visible et raisonnable puisqu’elle devait s’occuper des enfants pendant une longue p√©riode.

Questions (version française)

  1. Pouvez-vous confirmer que l’ARC accepte la d√©cision rendue dans la cause Domaine de la Voli√®re ?
  2. Pouvez-vous pr√©ciser quels sont les crit√®res retenus par l’ARC pour qualifier un service comme √©tant un service de garde ; le nombre d’heures, l’intention de l’acqu√©reur de faire garder son enfant, le type d’activit√©s offertes, le type d’encadrement offert, etc. ?
  3. Est-ce qu’une analyse bas√© sur le ratio des activit√©s th√©matiques/sp√©cialis√©es par rapport aux p√©riodes o√Ļ les enfants n’ont pas d’autres activit√©s que des jeux de groupe, de la baignade etc. serait un crit√®re raisonnable pour consid√©rer que le crit√®re de «principalement» pr√©vu √† l’article 1 de la partie IV de l’annexe V LTA est rencontr√©?

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3. RETROACTIVE REGISTRATION AND CLAIM FOR ITCs

Background

Section 133 of the ETA provides that where an agreement is entered into to provide a property or service, the entering into the agreement shall be deemed to be a supply of the property or service at the time the agreement is entered into. The Notes to Section 133 in Practitioner’s Goods and Services Annotated state as follows:

Since a supply is deemed made when the agreement to make the supply is entered into, this section can be used to effectively backdate the requirement to register, and thus to constitute the supplier as a “registrant” and entitled to input tax credits under 169(1) from the time the supplier has agreed to make a supply.

Facts

Company A, a non-resident, non registrant, enters into an agreement on June 30, 2009 to supply widgets to Canadian Company B in February 2010 for $10 million. In preparation for the contract and before it is registered, Company A acquires taxable goods and services in Canada. Company A registers in December 2009 and wants to claim input tax credits for GST payable between July 1, 2009 and the time it become registered.

Questions

Will the CRA agree to backdate the registration to June 30, 2009?
If not, does the CRA agree that Company A qualifies as a “registrant” as of June 30, 2009 and will, therefore, be entitled to claim ITCs under subsection 169(1) for the period prior to its registration?

CRA Comments

Based on the information provided, Company A has made a supply of the widgets on June 30, 2009, based on the application of section 133 of the ETA. However, this would not on its own allow for the registration of Company A to be backdated to June 30, 2009. Whether Company A’s effective date of registration would be that date would depend on whether Company A, who is a non-resident, was a registrant who was required to be registered on that date under subsection 240(1) of the ETA. Generally, subsection 240(1) of the ETA provides that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered, except where the person is a small supplier; or the person is a non-resident person who does not carry on any business in Canada. Therefore, unless Company A was carrying on business in Canada on June 30, 2009, and the supply of the widgets was made in Canada, Company A would not have been required to be registered on June 30, 2009, and would not be provided an effective date of registration of June 30, 2009. The question does not provide sufficient information to conclude that Company A was carrying on business in Canada on June 30, 2009. The question also states as a fact that Company A is a non-resident “non-registrant”. There is also not enough information provided to conclude that the supply of the widgets would be made in Canada under section 142 of the ETA.

If Company A was not required to register but applied to register voluntarily, the effective date of the registration would generally be the date on which the application for registration was received by the CRA in December 2009. In this case, subsection 171(1) of the ETA would not apply to allow Company A to claim ITCs for property held by Company A immediately before that time if Company A was not a small supplier immediately before that time.  Of course, if Company A was not registered and was not carrying on business in Canada when the supply was made on June 30, 2009, the supply of the widgets to be delivered to Canadian Company B in February 2010 would also be deemed to be made outside Canada under subsection 143(1) of the ETA and Company A would consequently not be required to collect tax in respect of that supply.

As indicated in the Fall 2007 edition of the Excise and GST/HST News, an exception to the effective date of voluntary registration being the date on which the application is received may be made where a person has collected tax in respect of a supply prior to that date, in which case documentary proof must be presented if the request to backdate the registration is beyond 30 days.

If the facts are the same except that Company A is a resident supplier, the carrying on business in Canada exception in subsection 240(1) would not apply to Company A. In this case, assuming the supply of the widgets is made in Canada, Company A would be considered to have made a taxable supply in Canada in the course of a commercial activity engaged in by Company A in Canada on June 30, 2009. Assuming Company A is not a small supplier when the supply is made on June 30, 2009, (for instance, based on the consideration paid or payable for taxable supplies made by associates of Company A), Company A would be required to be registered under subsection 240(1) and would be considered to be a registrant at that time. This is regardless of whether Company A has issued an invoice for the supply. Since Company would be required to have been registered on June 30, 2009, its registration would be backdated to that date.

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4. CLEARANCE CERTIFICATES

Question

Can the CRA please confirm in what circumstances a “representative” in non-estate matters, is required to obtain a clearance certificate pursuant to subsection 270(3) of the ETA? For example, is a clearance certificate required on the wind-up of a corporation?

CRA Comments

In general, subsection 270(3) provides that a representative of a registrant that is winding up a commercial activity or business of the registrant is not entitled to distribute any property or money under the representative's control (i.e., in the representative's capacity as the representative) before obtaining a certificate from the Minister of National Revenue.

This document certifies that all amounts that are, or are reasonably expected to become, payable or remittable under Part IX of the ETA for a particular reporting period have been paid, or that security has been accepted by the Minister. Representatives that fail to obtain a clearance certificate before distributing the property in question are liable for any unpaid taxes. However, such liability is limited to an amount not greater than the value of the property distributed.

A clearance certificate may only be issued after all required GST/HST returns have been filed and GST/HST liability of the registrant (if any) paid or secured .

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5. TAXPAYER RELIEF GUIDELINES FOR WAIVER OF INTEREST AND PENALTY

Facts/Background

For income tax purposes, Information Circular (IC) 07-1, paragraph 6,states:

6. These are only guidelines. They are not intended to be exhaustive, and are not meant to restrict the spirit or intent of the legislation.

This is consistent with case law saying that the guidelines should not be restrictive. For example, in Guimont v. MNR, [1994] 1 CTC 353 (FCTD), the Court stated: "such general guidelines are not to be elevated to the status of legislation, thereby limiting the decision-making authority in the exercise of the discretion". Similarly, in Alex Parallel Computers Research Inc. v. R, [1999] 2 CTC 180 (FCTD), para. 12, the Court stated:

by strictly applying this application policy as he did (and as Revenue Canada Headquarters advised him to do), the Director elevated guidelines to the level of law, and accordingly limited his decision-making authority in the exercise of the discretion conferred on him.

For GST/HST purposes, Memorandum 16.3 does not make the same statement as IC 07-1 paragraph 6.

Questions

  1. Is this omission deliberate?
  2. If the omission is deliberate, does this mean that the CRA has different Taxpayer Relief policies for income tax and GST/HST?
  3. If the omission is deliberate, does the CRA disagree with the position of the Federal Court as expressed in Guimont and Alex Parallel, above?
  4. (d) If the omission is not deliberate, will the CRA amend Memorandum
  5. 16.3 to add a paragraph similar to IC 07-1 paragraph 6?

We offer the following comments as our response to the questions concerning the omission in the GST/HST Memoranda Series 16.3, Cancellation or Waiver of Penaties and/or Interest, of the statement made in paragraph 6 of IC 07-1, Taxpayer Relief Provisions. The questions have been repeated.

CRA Comments

Question (a):   Is this omission deliberate?

The CRA did not deliberately make the omission in GST/HST Memoranda Series 16.3.

Question (b):   If the omission is deliberate, does this mean that the CRA has different Taxpayer Relief policies for income tax and GST/HST?

As stated above, the omission was not deliberate.

Question (c):   If the omission is deliberate, does the CRA disagree with the position of the Federal Court as expressed in Guimont and Alex Parallel, above?

As stated above, the omission was not deliberate.

Question (d):   If the omission is not deliberate, will the CRA amend Memorandum 16.3 to add a paragraph similar to IC 07-1 paragraph 6?

Paragraph 6 of GST/HST Memoranda Series 16.3 will be amended to reflect the wording used in Information Circular 07-01 as it was always CRA's intention that these guidelines were not intended to be exhaustive and were not meant to restrict the spirit or intent of the legislation.

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6. REISSUING NOTICES OF ASSESSMENT

Question

Under the pre-2007 CRA processing system, the following was true: "The CRA does not retain actual copies of many GST notices of assessment, and thus can only produce 'reconstructed' versions from its computer system."
Is this still true since the new system was put in place in April 2007, or can the CRA now generate an exact copy of the GST/HST Notice of Assessment if it was never received by the registrant?

CRA Comments

In April 2007, the CRA began issuing GST/HST communication items through a new business communication system; this change provided the CRA with the capability to reproduce and reissue previously issued communication items at the request of a registrant.

GST/HST registrants can request a reproduction of most communication items through My Business Account.  If the item is not available for reproduction through My Business Account, the registrant should call the Business Enquiries line or send a written request to their Tax Centre for the specific item.

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7. DEPOSITS AND/OR SECTION 182

Questions

A supplier agrees to sell tangible personal property to a non-resident purchaser and under the agreement, the property is to be delivered by the seller to the purchaser outside Canada. The purchaser gives a deposit towards the purchase which is forfeited as liquidated damages in the event the purchaser does not close the transaction. The purchaser walks away from the deal and forfeits the deposit. What would the GST consequences be? If section 182 were to apply, would the amount of the deposit be deemed to be consideration for a zero-rated supply (section 12 of Part V of Schedule VI) or a supply made outside Canada (because delivery was to be outside Canada)? This should be so as the only supply agreed to was either a zero-rated supply or a supply made outside Canada.

CRA Comments

We are assuming for purposes of responding to the question that the supplier is a GST/HST registrant and is resident in Canada.

Subsection 182(1) applies where, as a consequence of the breach, modification or termination 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, an amount is paid or forfeited to that registrant otherwise than as consideration for that supply.

It is questionable whether an agreement to export tangible personal property that would otherwise be subject to GST/HST would be considered to be an agreement for the making of a zero-rated supply or a supply made outside Canada where that status depends upon how the terms of that agreement are fulfilled. Agreeing to ship goods outside Canada would not be sufficient to zero-rate the supply or deem the supply to be made outside Canada, since the goods would actually have to be delivered or shipped outside Canada, as the case may be, for subsection 142(2) or section 12 of Part V of Schedule VI to the ETA to apply.

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8. SUBSECTION 177(1) AND NON-RESIDENT PRINCIPAL

Question

A Co is resident in Canada and is registered for GST purposes. A Co collects membership fees from customers in Canada on behalf of B Co, which is resident in the U.S., is not registered for GST purposes and is not carrying on business in Canada. The membership fees entitle customers in Canada to various travel related benefits on a world-wide basis.

Would A Co be required to charge and remit GST on the membership fees?

Subsection 177(1) of the Excise Tax Act is relevant given that A Co is acting as an agent in making a supply on behalf of a principal that is not required to collect GST on the supply. However, subsection 177(1) only applies to supplies of tangible personal property, not supplies of services/intangible personal property, which are at issue in this case.

CRA Comments

Based on the information provided, A Co would not be required to collect tax in respect of the membership fees for supplies of memberships made by B Co. The question states that B Co is a non-resident who is not registered and is not carrying on business in Canada. The supply of the memberships by B Co would therefore be deemed to be made outside Canada under subsection 143(1) of the Excise Tax Act. We also agree that subsection 177(1) of the ETA does not apply to supplies of intangible personal property.

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9. GST DEEMED TRUST

Facts / Background

Subsection 222(4) of the Excise Tax Act states that “For the purposes of subsections (1) and (3), a security interest does not include a prescribed security interest.” At the time this provision was enacted, the Department of Finance indicated in its technical notes that a “prescribed security interest” should include a mortgage interest in real property. Currently, no security interests are prescribed for the purposes of this subsection under the Excise Tax Act.  However, we understand that administratively the CRA applies Regulation 2201 of the Income Tax Act Regulations as if this provision applied for purpose of the deemed trust provisions of the Excise Tax Act.

Question

Please confirm that the CRA will administer subsection 222(4) of the Excise Tax Act as if Regulation 2201 of the Income Tax Act Regulations dealing with prescribed security interests applies for the purpose of the Excise Tax Act.

CRA Comments

The Excise Tax Act (ETA) refers to a Prescribed Security Interest for the purposes of the deemed trust provisions described in Section 222.  However, no provision has been enacted to define what it is. Since there is no provision, the CRA applies it administratively as if it the Prescribed Security Interest paralleled Regulation 2201 of the Income Tax Act recognizing that this is the spirit of the law.

It is expected that a Prescribed Security Interest for the ETA will be enacted at some point, but there is no expectation as to when that may occur.  In the meantime, the CRA intends to continue to apply the Prescribed Security Interest in this manner in the future.

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10. GST DEEMED TRUST

Facts/Background

A Co. is a GST registered company which owns real property in Canada which is currently worth $1,000,000. A Co. collected $1,000,000 of GST which it did not remit to the CRA such that a deemed trust arose under subsection 222(1) of the Excise Tax Act with respect to the GST collected. After the date on which the deemed trust arose, B Co. loaned A Co. $1,000,000, which is secured against the real property by way of a registered mortgage. A Co. defaults on the loan to B Co., and B Co. and A Co. enter into an agreement whereby A Co. transfers the property to B.Co in exchange for B Co. setting off the $1,000,000 of debt which A Co. owes to it.

Question

  1. Would the deemed trust under subsection 222(1) extend to the property now held by B. Co under subsection 222(3) of the Excise Tax Act?
  2. Would the answer to question 1 change if the property was taken by way of foreclosure or other statutory or court sanctioned process other than bankruptcy rather than by a private transfer?
  3. Would the answer to question 1 change if A Co. becomes a bankrupt within the meaning of the Bankruptcy and Insolvency Act where the bankruptcy proceedings commenced after B Co. acquired the property?

CRA Comment

Reasons in Support of the Deemed Trust not Extending to the Real Property

Under subsection 222(3) of the Excise Tax Act, if amounts deemed by subsection 222(1) to be held in trust for Her Majesty are not remitted to the Receiver General, then the deemed trust will extend to property of the tax debtor, and “property held by any secured creditor of the person that, but for a security interest, would be property of the person, equal in value to the amount so deemed to be held in trust”. However, once B Co. has acquired the property, either by way of the private transfer, or by way of foreclosure, the property is held by B Co. absolutely, and the security interest no longer exists. As such, the real property is not property held by B Co. which “but for a security interest” would be property of A Co., and subsection 222(3) should not apply to extend the deemed trust to the property which is now owned by B Co.

Under subsection 222(1.1) of the Excise Tax Act it is clear that the deemed trust in subsection 222(1) does not apply to any amounts that were collected or became collectible before the time the person becomes a bankrupt within the meaning of the Bankruptcy and Insolvency Act. Thus, the CRA’s deemed trust for GST under subsection 222(1) would disappear as soon as A Co. becomes a bankrupt, and the deemed trust would not extend to the real property now owned by B Co. regardless of whether B Co. acquired the property before or after A Co. became a bankrupt.

Question 1:  Would the deemed trust under subsection 222(1) extend to the property now held by B. Co under subsection 222(3) of the Excise Tax Act?

Yes - the deemed trust extends to the property that was transferred to Company B.

Question 2:  Would the answer to question 1 change if the property was taken by way of foreclosure or other statutory or court sanctioned process other than bankruptcy rather than by a private transfer?

No, there would be no change as a result of a secured creditor realizing on its security interest through involuntary enforcement action. The deemed trust provisions would continue to apply.

Comment:

The deemed trust arises when a GST registrant collects GST and it is discharged when the collected GST is remitted to the CRA. The deemed trust impresses against all of the registrant's property, save and except that portion of the property which is subject to the Prescribed Security Interest. When the deemed trust arises and impresses against the Registrant's property, the relevant portion of the registrant's property becomes:

beneficially owned by Her Majesty in right of Canada despite any security interest in the property or in the proceeds thereof and the proceeds of the property shall be paid to the Receiver General in priority to all security interests.

Should the registrant pay the deemed trust amount, then this beneficial ownership interest in favour of Her Majesty is released/discharged.

Although a secured creditor may take possession of the registrant's property and either convert the property to proceeds to, or apply/set-off the value of the property directly against an outstanding indebtedness due to the secured creditor, Her Majesty is and remains the beneficial owner of the property. In the event that the property is converted to proceeds, then the deemed trust releases from the property and attaches to the resulting proceeds generated from the sale or disposition of the property. To suggest that the secured creditor becomes the absolute owner of the property that was previously the registrant's, ignores the fact that Her Majesty is the beneficial owner of the property.

In the normal course of business, a GST registrant will sell property and accept either currency or a receivable (promise to pay) as consideration. The deemed trust provision is designed such that the deemed trust is released or discharged from the property at the time of the sale and in turn attaches to the funds or account receivable that arises from the transaction. In this way, the deemed trust is neither diminished nor enhanced.

It should be noted that a Prescribed Security Interest provision for the Excise Tax Act has never been enacted. However, since the legislation refers to the Prescribed Security Interest, the CRA applies it administratively as if the Prescribed Security Interest paralleled Regulation 2201 of the Income Tax Act as this provides a benefit to secured creditors and captures the spirit of the law.

Question 3:  Would the answer to question 1 change if A Co. becomes a bankrupt within the meaning of the Bankruptcy and Insolvency Act where the bankruptcy proceedings commenced after B Co. acquired the property?

The CRA's deemed trust claim is relegated down to the status of an unsecured claim as a result of a tax debtor becoming bankrupt. However, this relegation of the CRA's claim only pertains to claims made against the bankrupt estate.  It is the CRA’s view that the deemed trust claim would continue to apply and impress against a tax debtor's property that the secured creditor has come into possession of before the bankruptcy occurs.

Comment:

Case law concerning the deemed trust provisions is still evolving. While the CRA holds the view the deemed trust continues to apply in the circumstance outlined above, it is acknowledged that this matter has not been before the courts and has not been subjected to counter arguments such that a definitive determination has been made. The CRA has asserted its deemed trust claims in some instances against secured creditors in respect of chattel property the secured creditors realized from before the registrants’ bankruptcies occurred. These cases have been resolved by way of consent judgments in favour of the CRA and therefore have not assisted in establishing precedent.

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11. SALES OF CTCs TO NON-REGISTRANTS – SATISFACTORY EVIDENCE OF SUBSEQUENT EXCHANGE

Background

Section 15.1 of Part V of Schedule VI to the ETA provides for the zero-rating of a supply of a continuous transmission commodity (“CTC”) by a “first seller” to a person who is not registered (the “first buyer”), subject to a number of conditions, including the following:

  1. the first buyer makes a supply of the CTC to a registrant and delivers it in Canada;
  2. all or part of the consideration for the first buyer’s supply of the commodity to a registrant is property of the same class a kind delivered to the first buyer outside Canada; and
  3. the first seller maintains evidence satisfactory to the Minister of the first buyer’s supply of the commodity to the registrant.

Question

What evidence will be satisfactory to the Minister of the first buyer’s supply of a CTC to registrant who will make an exchange of a CTC of the same class a kind outside Canada?

CRA Comments

In order for the “first seller” to zero-rate the supply of the continuous transmission commodity to the “first buyer” referenced in Section 15.1 of Part V of Schedule VI, the “first buyer”, in addition to the other requirements as set out in this provision, must supply evidence satisfactory to the Minister to the “first seller” that the continuous transmission commodity (CTC) has been supplied to a registrant and all or part of the consideration is property of the same class or kind delivered to the first buyer outside Canada.

The CRA would accept invoices and/or written agreements of the CTC exchanged between the first buyer and the registrant.  The documentation should contain such information as would be required to determine the following:

  • The CTC exchanged is of the same class or kind purchased.
  • The place of delivery of the CTC to the registrant inside Canada.
  • The place of delivery of the exchanged CTC to the first buyer outside Canada.
  • Identity of the registrant including their BN.

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12. SALES OF NATURAL GAS TO NON-RESIDENTS – SATISFACTORY EVIDENCE OF EXPORTATION

Background

Section 15 of Part V of Schedule VI provides for zero-rating of a supply of natural gas made to a person who is not registered if the non-registrant exports the gas or receives a supply, included in section 15.3, of a service of storing the gas prior to export. As a condition of zero-rating, paragraph 15(d) provides that the supplier must maintain evidence satisfactory to the Minister of the exportation of the gas by the recipient.

Facts

Assume that a non-registrant purchases natural gas in Canada and enters into an agreement with another registrant for the storage of the surplus gas prior to export. When the natural gas is released from storage, the non-registrant directs the registrant providing the storage to deliver the gas to a third party having excess pipeline capacity who has agreed to act as the shipper and exporter on behalf of the non resident.

Question

Will the CRA accept evidence of exportation by the third party shipper on the non-resident’s behalf? If so, what documentation would be acceptable to confirm the exportation of the gas was made on behalf of the non-resident?

CRA Comments

This question involves the zero-rating of a supply of gas by a vendor to a non-resident person who is not registered for GST/HST purposes and is the recipient of a supply that is zero rated under section 15.3 of Part V of Schedule VI of a service of storing the gas before export by the non-resident.

In this situation, evidence of exportation by the third party who has contracted with the non-resident to ship the gas would be sufficient to satisfy the documentary requirement under paragraph (d) of section 15 of Part V of Schedule VI in respect of the initial supply to the non-resident provided that such documentation establishes that the gas shipped by the third party is or includes the gas supplied by the vendor.

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13. LEGAL SERVICES – ZERO RATING

A GST/HST-registered Canadian law firm provides legal services regarding an asset purchase transaction to a non-resident client under the following scenarios. Please advise whether the supply of legal services qualifies for zero-rating pursuant to section 23 of Part V of Schedule VI to the Excise Tax Act because the supply of services does not fall under any of the exclusions thereunder.

Question

  1. The law firm provides advice to a non-resident person regarding the application of Canadian income and sales taxes including the availability of elections, such as the section 167 election, in connection with the purchase of a business in Canada by the non-resident person.
  2. The law firm provides advice to a non-resident person regarding the application of income and sales taxes including the availability of elections, such as the section 167 election, in connection with the purchase of a business in Canada by a Canadian subsidiary of the non-resident person. The law firm is engaged by and bills the non-resident person.
  3. The law firm provides advice to a non-resident person regarding the proposed purchase of a business in Canada by the non-resident person. The legal services supplied by the law firm include drafting and revising the asset purchase agreement and related agreements and advising on the application of Canadian taxes to the proposed asset purchase. The services may include assisting the non-resident person in obtaining Canadian tax registrations and completing applicable election forms. The legal services do not include services in respect of the execution of security documents or documents of title for real property.
  4. The law firm provides advice to a non-resident person regarding the proposed purchase of a business in Canada by a Canadian subsidiary of the non-resident person. The legal services supplied by the law firm include drafting and revising the asset purchase agreement and related agreements and advising on the application of Canadian taxes to the proposed asset purchase. The services may include assisting the Canadian subsidiary in obtaining Canadian tax registrations and completing applicable election forms. The legal services do not include services in respect of the execution of security documents or documents of title for real property.
  5. Same as C but the legal services are limited to commenting on and revising an existing asset purchase agreement, advising on the application of Canadian taxes to the proposed agreement and assisting the non-resident with obtaining Canadian tax registrations and completing applicable election forms.
  6. Same as D but the legal services are limited to commenting on and revising an existing asset purchase agreement, advising on the application of Canadian taxes to the proposed agreement and assisting the non-resident with obtaining Canadian tax registrations and completing applicable election forms.
  7. What types of legal services in respect of advising a non-resident client in connection with the purchase of assets of a business in Canada would be considered to be in respect of real property situated in Canada or tangible personal property situated in Canada such that the supply of legal services would not qualify for zero-rating? For example, if a supply of legal services consists of drafting and revising an Asset Purchase Agreement, Intellectual Property Transfer Agreement, Transitional Services Agreement, Non-Competition Agreement and other related agreements, would the supply of services qualify for zero-rating? Would a supply of legal services that involves advising on the application of taxes, registering the non-resident or its Canadian subsidiary for Canadian taxes (or corporate registrations – e.g., extra-provincial licenses) and assisting the non-resident or its Canadian subsidiary in completing elections and exemption documents qualify for zero-rating?

CRA Comments

Based on the information provided, there is not a direct relationship between the service described in scenarios A and B and the property (i.e. the assets which are assumed to include tangible personal property or real property in Canada). The direct object of the service is to provide tax advice. The services would therefore not be considered to be in respect of the property for purposes of section 23 of Part V of Schedule VI to the Excise Tax Act.

As indicated 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 is 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, if a service is aimed at effecting or dealing with the transfer of ownership of, claims on or rights to the property, or determining title to the property, the service will generally be regarded as "in respect of" the property. Based on the information provided, there would be a direct relationship between the service of drafting and revising the asset purchase agreement described in scenarios C and D and the property. The direct object of the service is the transfer of ownership of the property. The service would therefore be considered to be in respect of the property for purposes of section 23 of Part V of Schedule VI to the ETA. The other services described in scenarios C and D would not be considered to be in respect of property for purposes of section 23 of Part V of Schedule VI to the ETA.

Based on the information provided, there would be a direct relationship between the service of commenting on and revising an existing asset purchase agreement described in scenarios E and F and the property.  The direct object of the service is the transfer of ownership of the property. The service would therefore be considered to be in respect of the property for purposes of section 23 of Part V of Schedule VI to the ETA. The other services described in scenarios E and F would not be considered to be in respect of property for purposes of section 23 of Part V of Schedule VI to the ETA.

With respect to scenario G, as previously indicated, a supply of a service consisting of drafting and revising an Asset Purchase Agreement would be considered to be in respect of property for purposes of section 23 of Part V of Schedule VI to the ETA. Based on the information provided, the drafting and revising of an Intellectual Property Transfer Agreement, a Transitional Services Agreement, or a Non-Competition Agreement would not be considered to be in respect of property for purposes of section 23 of Part V of Schedule VI to the ETA. Based on the information provided, a supply of a service that involves advising on the application of taxes, registering the non-resident or its Canadian subsidiary for Canadian taxes (or corporate registrations – e.g., extra-provincial licenses) and assisting the non-resident or its Canadian subsidiary in completing elections and exemption documents would not be considered to be in respect of property for purposes of section 23 of Part V of Schedule VI to the ETA.

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14. ZERO-RATING AND INTANGIBLE PERSONAL PROPERTY

Question

Section 10.1 of Schedule VI, Part V zero-rates supplies of intangible personal property, and specifically, intangible personal property that does not otherwise qualify for zero-rating under section 10.

Could the CRA please provide some guidance as to the scope of the excluding provision in paragraph (d). Paragraph (d) excludes from zero-rating: “a supply of intangible personal property that may only be used in Canada”.

In particular, assuming section 10 is not applicable:

  1. please provide some examples as to when a supply of goodwill would be excluded under paragraph (d);
  2. please confirm that a supply of customer contracts that are for customers 100% outside of Canada would not be excluded under paragraph (d);
  3. please confirm that a supply of product distribution rights for a geographic area wholly outside of Canada would not be excluded under paragraph (d);
  4. please confirm that a supply of product distribution rights for geographic territories both inside and outside of Canada would not be excluded under paragraph (d);
  5. please confirm that a supply of customer contracts or distribution rights for customers/regions wholly inside Canada would be excluded under paragraph (d);
  6. please confirm that the CRA does not impose a de minimis test in applying paragraph (d), i.e. a de minimis test as to how much use must occur either inside or outside of Canada;
  7. please provide some guidance by way of examples as to the meaning of “use” in Canada as it applies to intangible personal property that is not intellectual property.

Additionally, is the CRA currently working on any interpretations or rulings as to the application of section 10.1? Is the CRA aware of any appeals whether by way of objection or to the Tax Court of Canada? Furthermore, has any consideration been given to issuing a publication similar to the carrying on business or drop shipment publications to set out examples and the CRA’s views as to the application of section 10.1?

CRA Comments

  1. Whether a supply of goodwill would be excluded under paragraph 10.1(d) of Part V of Schedule VI to the Excise Tax Act would depend on the facts of each particular case.  An example of where the exclusion would apply would be where a local Canadian business supplies the goodwill and the rights in respect of the goodwill could only be exercised in Canada based on any restrictions governing the use of those rights or the particular business that is involved.
  2. A supply of customer contracts that are for customers 100% outside of Canada would not be excluded under paragraph 10.1(d) of the ETA.
  3. A supply of product distribution rights for a geographic area wholly outside of Canada would not be excluded under paragraph 10.1(d).
  4. A supply of product distribution rights for geographic territories both inside and outside of Canada would not be excluded under paragraph 10.1(d)
  5. A supply of customer contracts or distribution rights for customers/regions wholly inside Canada would be excluded under paragraph 10.1(d).
  6. As reflected in the responses to the previous questions, the CRA does not impose a de minimis test with respect to how much use must occur either inside or outside of Canada. If the rights can be used to any extent outside Canada, the exclusion will not apply.
  7. Generally, intangible personal property would be considered to be “used” in Canada if the rights in respect of that intangible personal property are exercised in Canada, which in turn depends on the nature of the rights that are being supplied. For example, intangible personal property in the form of a subscription to a web site that provides the right to access the web site would be considered to be used in Canada if the web site is accessed from Canada.
  8. We currently have a few requests for rulings and interpretations with respect to section 10.1 of Part V of Schedule VI. We are not aware of any appeals regarding the provision. There is currently a publication that explains the CRA’s views regarding the application of section 10.1 of Part V of Schedule VI (GST/HST Info Sheet GI-034 Exports of intangible personal property). The issue does not lend itself to a comprehensive publication such as the comprehensive publications that have been developed with respect to the issues of carrying on business and drop-shipments that are referred to in the question. However, once we have dealt with a sufficient number of ruling and interpretation cases regarding the issue, consideration will be given to updating existing relevant publications with examples that reflect those cases.

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15. INBOUND FREIGHT TRANSPORTATION SERVICE – WHETHER ZERO-RATED

Question

Whether transportation arranged by the Canadian supplier to a Canadian recipient are zero-rated where the point of delivery occurs outside Canada and where the charges are billed by the third party transportation company to the Canadian supplier and then re-supplied by the Canadian supplier to the Canadian customer.

Facts

A Canadian supplier of certain goods enters into an agreement to supply goods to a customer in Canada. The goods are produced by the supplier’s US parent and are shipped directly from the US to the customer in Canada. Here is a chronology of events:

  1. Canadian customer orders goods from Canadian supplier. Terms are delivery ex-factory at US facility, freight prepaid and extra.
  2. Canadian supplier orders the goods from its US parent/supplier. Terms are delivery ex-factory at US facility. Freight is arranged by US parent/supplier on behalf of Canadian supplier; freight company bills Canadian supplier and the service is treated as zero-rated supply by the freight company.
  3. Canadian supplier arranges for insurance to be placed on the goods while in transit. The insurance is included in the price of the goods (i.e., there is no separate charge to the customer). The Canadian supplier acts as importer of record. Title to the goods transfers to the Canadian customer following customs clearance of the goods.
  4. Canadian supplier invoices Canadian customer for the goods at the negotiated price, freight is a separate line item on the invoice. The freight charged to the Canadian customer is less than the actual freight charged to the Canadian supplier. The reason for this is that the goods were formerly manufactured in a Canadian facility which was temporarily shut down and the cap in freight charges is intended to maintain the same price/cost to the customer, notwithstanding the greater distance over which the goods are transported from the US facility to the Canadian customer.

Comments

Paragraph 8 of Part VII of Schedule VI zero-rates the “supply of a freight transportation service in respect of the transportation of tangible personal property from a place outside Canada to a place in Canada”. In this case it is clear that the third party transportation company is supplying a zero-rated freight transportation service to the Canadian supplier. It should follow that the re-supply of the freight transportation service by the Canadian supplier to the Canadian customer should equally be characterized as a zero-rated supply. This is supported by the fact that the goods are considered to be supplied outside Canada by virtue of the point of delivery occurring outside Canada. This is notwithstanding that the transfer in title to the goods occurs only following customs clearance in Canada.

CRA Comments

Based on the information provided, the supply of the goods to the Canadian supplier and to the Canadian customer would be deemed to be made outside Canada under subsection 142(2) of the Excise Tax Act based on legal delivery of the goods occurring outside Canada. Furthermore, the separate supply of the freight transportation service made by the Canadian supplier to the Canadian customer for the transportation of the goods from a place outside Canada to a place in Canada would be zero-rated under section 8 of Part VII of Schedule VI to the ETA.

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16. DE MINIMIS FIs AND DETERMINATION OF FINANCIAL REVENUE

Facts/ Background

Paragraph 149(1)(b) essentially provides that a person is a financial institution if it has financial revenue (i.e., interest and dividends (but not dividends in kind and patronage dividends) from non-related corporations and separate fees or charges for financial services) in a preceding taxation year that exceed both (i) $10,000,000; and (ii) 10% of most supplies (but excluding supplies of capital property).

There is very little administrative guidance from the CRA with respect to the calculation of “financial revenue” and, in particular, what constitutes a “separate fee or charge for a financial service. GST Memorandum 700-4 indicates that those partnership distributions are not included and that the proceeds received from the sale of accounts receivable is not considered a separate fee or charge for a financial service. Miscellaneous administrative interpretations have also indicated that foreign exchange gains resulting from the repayment of a debt is not a separate fee or charge for a financial service and that the proceeds derived from selling credit card vouchers is not a separate fee or charge for a financial service.

Question

Could the CRA provide some additional guidance on what would be included in calculating “financial revenue” particularly in the context of derivative transactions which may only be settled in cash and which constitute an exempt financial service? For example, assume that the operator of an oil and gas refinery (“Opco”) entered into various derivative transactions which may only be settled in cash (and which do not allow or provide for the physical delivery of any particular commodity). On a monthly basis, Opco will either make a payment or receive a payment from the respective counter-party to the derivative transaction, with the amount of the payment based on price movements for the underlying commodity. Opco may also assign its position in a particular derivative transaction before settlement thus resulting in Opco either receiving a payment or making a payment by virtue of the assignment.

Could the CRA advise whether any of the following are considered a “separate fee or charge” for a financial service that is included in the “financial revenue” calculation provided for in paragraph 149(1)(b):

  1. gross payments received under a derivative contract;
  2. gross payments made under a derivative contract;
  3. payments received from a third party as consideration for assigning a derivative contract;
  4. payments made to a third party as consideration for the party agreeing to receive an assignment of a derivative contract; and
  5. any payment that is made or received by a party in relation to entering into (or issuing) a derivative contract.

CRA Comments

Pursuant to subsection 149(1) of the ETA a person is a financial institution throughout a particular taxation year of the person if it meets the criteria in any of paragraphs 149(1)(a), (b), or (c). For purposes of paragraph 149(1)(b) “financial revenue” is the total of all amounts of interest, dividends (other than a dividend in kind or a patronage dividend) or a separate fee or charge for a financial service and that is included in computing, for purposes of the Income Tax Act (ITA), the person’s income or, if the person is an individual, the person’s income from a business, for the taxation year of the person preceding the particular year.

To determine whether an amount is a separate fee or charge for a financial service it is first necessary that the transaction be a financial service, as defined in subsection 123(1). A financial service includes, in paragraph (d) of the definition, the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership, or repayment of a financial instrument and, in paragraph (f), the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument.

A financial instrument, also defined in subsection 123(1), includes, in paragraph (a) of the definition, a debt security and, in paragraph (i) of the definition, an option or a contract for the future supply of money or anything described in any of paragraphs (a) to (h) of the definition.

In the example provided, the derivative contract that Opco enters into with a counter-party, which provides for the payment of money to either Opco or the counter-party based on price movements of the underlying commodity, would be considered a financial instrument. The issue, granting, acceptance, transfer of ownership or repayment of the derivative contract would then be a financial service under paragraph (d) of the definition. The receipt of money as interest, principal, benefits or similar receipt of money in respect of the derivative contract would also be a financial service under paragraph (f) of the definition.

For the following discussion, it is assumed that Opco is not a person described in subsection 149(4.1) (e.g., a charity, municipality, school authority).

Based on the limited information provided, it is our view that:

  • Gross payments received by Opco under the derivative contract from the respective counter-party would be included in Opco’s calculation of financial revenue in paragraph 149(1)(b) if the gross payments are included in computing, for the purposes of theIncome Tax Act, Opco’s income for its taxation year preceding the particular year.
  • Payments received by Opco from a third party as consideration for assigning the derivative contract to the third party would be included in Opco’s calculation of financial revenue in paragraph 149(1)(b) if the payments are included in computing, for the purposes of the Income Tax Act, Opco’s income for its taxation year preceding the particular year.
  • A payment that Opco receives for entering into (or issuing)  the derivative contract would be included in its calculation of financial revenue in paragraph 149(1)(b) if the payment is included in computing, for the purposes of the Income Tax Act, Opco’s income for its taxation year preceding the particular year.
  • Gross payments made by Opco under the derivative contract to the respective counter-party or payments made to a third party as consideration for assigning the derivative contract would generally not be included in Opco’s financial revenue calculation in paragraph 149(1)(b). In addition, a payment made by Opco for entering into the derivative contract would generally not be included in Opco’s financial revenue calculation in paragraph 149(1)(b).

As we were unable to complete a detailed analysis of this issue given the limited information provided, if you have concerns related to our conclusions, we would invite you to make a submission (e.g. complete statement of facts, supporting analysis and relevant documents related to the transaction) so that we may examine the question in greater detail.

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17. REMITTANCE THROUGH FINANCIAL INSTITUTIONS

Question

ETA subsection 278(3) requires certain large registrants to make remittances through a financial institution. This rule parallels the closing words of Income Tax Act subsection 153(1) for income tax source withholdings.

For income tax source withholdings, ITA subsection 153(1.4) was added in 2008 to provide that, as long as the remittance is made at least one day early, it need not be made through a financial institution and thus no penalty will apply.

Is the CRA recommending to Finance that a similar amendment be made to the ETA, or is the CRA willing to administer ETA subsection 278(3) as though a provision similar to ITA subsection 153(1.4) were in force?

CRA Comments

Unlike the Income Tax Act there is no penalty imposed under the Excise Tax Act (ETA) on persons who make a remittance, for example, at a Tax Services Office when the remittance should have been made at a financial institution pursuant to subsection 278(3) of the ETA. An amendment to the ETA is not necessary.

Late filed returns will be subject to a penalty under section (s 280.1) and late payments will be subject to interest under subsection 280(1) of the ETA.

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18. SECTION 150 ELECTION & DE-REGISTRATION OF PARTIES

Facts / Background

One of the conditions that must be satisfied to make a section 150 election is for the person to be a member of a closely related group that includes a listed financial institution. To be member of a closely related group, a Canadian resident corporation must be a GST registrant. Given that a GST registrant is defined as a person who is registered for GST or required to be registered for GST, this requirement is fairly easy to satisfy (i.e., making a single taxable supply would generally require a person to be registered for GST). Persons who have made an election are also deemed to be a financial institution such that they are entitled to voluntarily register for GST.

Question

Could the CRA comment on whether it would invoke its authority to cancel a person’s GST registration pursuant to section 242 of the ETA in situations where the person has no commercial activities but they are a party to a section 150 election. To the extent a person’s registration was cancelled, they would no longer be eligible to make a section 150 election such that GST would be payable on taxable services that they receive from closely related parties who are party to a section 150 election. As an example, consider a Canadian corporation who has made a section 150 election but who no longer makes any taxable supplies and, apart from the fact that it is deemed to be a listed financial institution, is no longer entitled to voluntarily register under paragraph 240(3)(d) of the ETA. Would the CRA consider cancelling the GST registration such that (i) section 150 would no longer apply to deem services acquired from closely related parties to be financial services; and (ii) the person would no longer be considered a “financial institution” such that the zero-rated financial service provisions in Part IX of Schedule VI would not apply with respect to financial service revenue that the person received from non-residents.

CRA Comments

As discussed in paragraph 3(g) of GST/HST Memorandum 2.7, Cancellation of Registration, the CRA may cancel a person’s GST/HST registration if the person ceases to be engaged in commercial activity or no longer qualifies for voluntary registration. Cancellation of a corporation’s registration under subsection 242(1) would result in the corporation ceasing to be a member of a closely related group, so if the corporation had previously made an election under subsection 150(1), that election would end under subsection 150(4) on the day the person ceased to be a registrant. Since the deeming provision in subsection 151 remains in effect only during the period that the election under subsection 150(1) is in effect, the person would cease to be deemed to be a financial institution on the day the election ceased to be in effect. If cancellation of a person’s election under subsection 150(1) results in the person ceasing to be a financial institution, and that person was making supplies that would be zero-rated only where the person is a financial institution, such supplies would not be zero-rated when made after the election ceases to be in effect.

19. LATE FILED SECTION 150 ELECTIONS

Facts/Background

An election under section 150 of the Excise Tax Act (Canada) (“ETA”) is required to be made and filed in a manner and within the time prescribed by subsection 150(3). There is no specific authority in the ETA for the CRA’s acceptance of late-filed section 150 elections. However, subsection 281(1) provides that the Minister may at any time extend in writing the time for filing a return, or providing information, under the ETA.

Question

Under what circumstances will the CRA accept a late-filed section 150 election?

To whom, and in what form, should the request be made?

CRA Comments

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

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

Although subsection 281(1) states that the Minister may at any time extend in writing the time for filing a return, or providing information under Part IX of the ETA, subsection 281(1) does not authorize the Minister to extend the date by which an election must be filed in order for the election to take effect as of a specific date.

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20. APPLICATION OF THE “FREE-SUPPLY” RULE TO CLAIM ITCs ON INVESTOR’S COSTS

Facts/Background

Assume that the activities of a venture capital corporation are: (1) the investment in securities of emerging corporations (“investee companies”) that are engaged exclusively in commercial activities; and (2) the provision of management or advisory services to those investee companies for no consideration. The purpose of the management or advisory services is to facilitate or further the businesses (commercial activities) of the investee companies. Assume that the venture capital corporation is not a financial institution under section 149. Also assume that section 186 is not applicable.

Question

Can the venture capital corporation rely on the “free-supply” rule in subsection 141.01(4) to claim ITCs in respect of expenses incurred for the purpose of providing the management or advisory services to the investee companies?

CRA Comments

In the above example, the venture capital corporation is making supplies of management or advisory services for no consideration to the companies whose securities it acquires. It therefore appears that the venture capital corporation’s purpose in making those supplies of management or advisory services for no consideration is to facilitate or further the making of supplies of financial services, such as increasing its income from interest, dividends, or capital gains earned on the subsequent sales of the shares of the companies in which it has invested.

Since the supply of a financial service is generally exempt of GST/HST, the venture capital corporation appears to be making supplies of management or advisory services for no consideration in the course of activities that are other than commercial activities. In this case, subsection 141.01(4) would not permit the venture capital corporation to claim ITCs under subsection 169(1) with respect to the GST/HST it paid on property or services it acquired for consumption or use in the course of making those supplies of management or advisory services.

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21. FAILURE TO FILE FORM GST60 AND FAILURE TO REPORT  GST ON REGULAR RETURN ON PURCHASE OF REAL PROPERTY (ETA 228(4)(b))

Question

Some CRA officials have indicated that the "failure to file" penalty under section 280.1 does not apply to the failure to file a Form GST60 to report GST self-assessable on a purchase of real property (where the property is not primarily for use in commercial activities). The reason is that section 280.1 refers to a "reporting period", and the obligation to file under paragraph 228(4)(b) does not refer to a "reporting period".

  1. Does the CRA agree that section 280.1 does not apply to a Form GST60?
  2. If so, is the CRA seeking an amendment from Finance to change this, or is the CRA content with the penalty not applying?
  3. Are there other filing obligations where the same analysis applies?

If a registrant purchases real property and is entitled to a fully offsetting input tax credit, the registrant should report the two amounts on its regular GST return (ETA 228(4)(a) and 169(1)) and they will offset each other, netting to zero.

What is the CRA's policy as to the waiver of interest and penalty if this is not done and is discovered later on audit? There seem to be two possible approaches:

  1. The CRA has waived all interest (and pre-April penalty) under Taxpayer Relief (ETA section 281.1).
  2. No interest (and pre-April 2007 penalty) applies in the first place under subsection 280(1), because no "amount" was payable or remittable, due to the ITC that was always available to offset the self-assessed tax.

Which approach will the CRA apply, or will the CRA maintain in some cases that interest and penalty do apply and will not be waived? If the latter, how do you respond to the technical argument in (b) above?

CRA Comments

(a) Section 280.1 does not apply to a GST60 return. Section 280.1 provides for a penalty where a person fails to file a return for a reporting period. The GST60, GST/HST Return for Acquisition of Real Property, although a return, is not in respect of a specific reporting period.

(b) The question of whether the section 280.1 penalty would apply to returns such as the GST60 was raised with the Department of Finance during the drafting of the Standardized Accounting amendments in 2006-2007. Whether section 280.1 will be amended at a subsequent date to include returns such as the GST 60 is a matter for the Department of Finance.

(c) Other forms not subject to the section 280.1 penalty include the GST59 and the GST489.

(d) & (e)

The administrative tolerance of waiving penalty and/or interest as exercised in the past when a registrant late filed a GST60 return has been extended to those situations where a registrant is now required to required to report the GST/HST payable on the acquisition of the real property on line 205 of the regular (GST34) return and is eligible to claim an ITC for the full amount of the GST/HST payable on that return. In the past, administrative tolerance was exercised to permit, in certain circumstances, the full waiver of penalty and interest on the late submission of the GST60 return. This tolerance was only available if the GST60 liability was completely offset by a corresponding input tax credit and the person did not achieve a monetary gain. A monetary gain would be achieved where a person files a GST34 return claiming an ITC for the tax required to be reported on line 205 of the return but does not report the tax payable.

The administrative tolerance also provides that penalty and/or interest will not be assessed where a person has failed to report the tax on line 205 and has not claimed an input tax credit, provided there are no revenue implications (i.e. the purchaser is entitled to a full input tax credit).

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22. SALE OF REAL PROPERTY BY INDIVIDUAL

Questions

Is the sale of an abandoned building a tax exempt supply?

Facts: The individual owner leased the commercial building to a tenant. But when the tenant left the building, he simply ignored the building and made no effort to lease it. A few years later, he receives an unsolicited offer to sell.

Comments: the sale of real property by an individual is exempt under Section 9 of Part V of Schedule V to the ETA. , except in some cases mentioned at Subsection 9 (2). None of these exceptions seem to apply here.

Further question: assuming the above sale is exempt, then when was triggered the obligation to self-assess under ETA 206 (4)? Subsection (4) refers to the fact that “the registrant begins, at a particular time, to use the property exclusively for other purposes”.

Comments: Do we need an effective “use” of the property in some non-commercial or personal activities for ETA 206 (4) to apply? Or is the fact of abandoning a building sufficient to create an obligation to self-assess?

CRA Comments

Subsection 9(2) of Part I of Schedule V to the ETA exempts the sale of real property by an individual or a personal trust, with certain exceptions. In part, the sale of real property is excluded from the general exemption if immediately before the time ownership or possession of the property is transferred, the property is capital property used primarily (more than 50%) in a business carried on by the individual (or personal trust) with a reasonable expectation of profit; or in the case of an individual (or personal trust) who is a registrant, the real property was used as capital property primarily in making taxable supplies of the property by way of lease, licence or similar arrangement.

For purposes of subsection 9(2), in order to determine the use of the real property immediately before the time ownership or possession of the property is transferred, the CRA looks at the last use of the capital real property. As set out in Appendix A of GST/HST Memorandum 19.5, Land and Associated Real Property, capital real property must be used, or held for use, for one or more purposes at all times. Capital real property cannot be regarded as having “no use”. As such, the sale by an individual of a commercial building that is capital real property last used primarily in a business with a reasonable expectation of profit; or in the case of an individual (or personal trust) who is a registrant, supplied by way of lease, licence or similar arrangement, is excluded from the general exemption for the sale of real property under subsection 9(2) and is subject to GST/HST.

Change-in-use Rules – ceasing use in commercial activities
Sections 206, 207 and 208 of the ETA set out the rules governing the change in use of capital real property. Section 206 pertains to persons other than individuals, such as corporations, whereas sections 207 and 208 pertain to individuals.

Subsection 207(1) sets out the rules for GST/HST registrant individuals who cease using capital real property in commercial activities. This subsection applies where an individual who is a registrant last acquired real property for use as capital property in commercial activities, and not primarily for the personal use and enjoyment of the individual or a related individual, and the individual begins at a particular time to use the property exclusively for other purposes, or primarily for the personal use and enjoyment of the individual or a related individual.

A change-in-use under subsection 207(1) occurs when the registrant ceases using the capital real property in commercial activities and begins to use the real property as described above. It is not sufficient that the registrant simply cease use of the capital real property in commercial activities. The determination of when a change in use actually occurs is a question of fact that is determined on a case by case basis.

Where an individual who is a registrant ceases use of capital real property in commercial activities but does not actually begin to use the property exclusively for other purposes, or primarily for the personal use and enjoyment of the individual or a related individual, the requirements for the change-in-use rules under subsection 207(1) will not be met and will not give rise to a requirement for the registrant to account for tax in respect of a change-in-use in relation to the capital real property.

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23. AVAILABILITY OF SECTION 167 ELECTION  – BUSINESS ASSETS BOTH INSIDE AND OUTSIDE CANADA

Facts/background

There is a sale of business assets. Some of the assets are located inside Canada but substantially all are located outside Canada. The vendor provides a non-competition covenant.

Questions

Whether the section 167 election is available in a sale of business assets where the assets are located both inside and outside Canada and in particular where substantially all of the assets are located outside Canada?

Assuming section 167 applies, doers the election cover the consideration paid for a non competition covenant by the vendor, or is that outside the election as it service subject to 167 (1.1)a)(i)?

CRA Comments

While section 167 imposes several of requirements, it makes no reference to residency of the supplier or recipient or to the location of the business assets being supplied. It is always a question of fact as to whether the requirements for making the election under subsection 167(1) are satisfied or not. Where the requirements for making the election under subsection 167(1) are met, the supplier and recipient would be eligible to make the election even if the assets are located inside and outside Canada. However, we do not have sufficient information to determine if the election could be made in this situation.

Moreover, we do not have enough information to determine how the GST/HST applies to the consideration paid for the non-competition covenant by the vendor. Given the definition of “service” in subsection 123(1), where a person makes a supply pursuant to a non-competition covenant that is not a supply of property (e.g., where the Manrell decision2 applies) and the exclusions in paragraph (b) and (c) of the definition of “service” do not apply, the supply would be a supply of a service. As noted above, it is a question of fact whether section 167 applies in a particular situation. If it does and if under the agreement for the supply of the business assets, the vendor makes a taxable supply of a service, that supply is excluded from the election under subparagraph 167(1.1)(a)(i).

2 Manrell v The Queen [2003 FCA 128; 2003 DTC 5225]

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24. UPDATE ON AUDIT ISSUES AND DISCUSSION

Question

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

CRA Comments

The following update is provided by Large Business GST/HST Program in Compliance Programs Branch:

Pre-approvals of input tax credit methods for qualifying institutions - Form GST116 renewal process:

Proposed section 141.02 of the Excise Tax Act (ETA) provides that financial institutions that are "qualifying institutions" (i.e., banks, insurers & securities dealers exceeding certain thresholds) must have their input tax credit ("ITC") allocation method(s) pre-approved by the Canada Revenue Agency (CRA).

Under the proposed legislation, a "qualifying institution" may request authorization to use particular methods to determine the "operative extent" and "procurative extent" of each input for a particular fiscal year.

Last year, some qualifying institutions filed Form GST116 to request a renewal of an authorization to use particular methods granted for a previous fiscal year. It is important to note that a Form GST116 requesting the renewal of an authorization to use particular methods granted for a previous fiscal year can only be filed where the particular methods previously authorized do not contain modifications that have note been authorized. Also, after Form GST116 has been filed, a qualifying institution may still be required to provide additional information in order to complete the review of the renewal request. In the absence of a pre approval, a qualifying institution would be subject to recovery of ITC's at a prescribed rate. Non-qualifying institutions are required to determine their input tax credit allocation methods on the basis set out in proposed section 141.02 of the ETA. They should refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions for information regarding the application of the proposed section 141.02 of the ETA.

The Large Business GST/HST Audit Program has been actively engaged in the pre approval/renewal process. Generally, the time required to conduct a review (i.e., authorization/denial) of a renewal application was less than the time required to conduct the initial approval.

In the unlikely event that a disagreement arises during the pre approval process, a QI should follow the normal disagreement resolution process as they do for audits. The first level is the Large File Manager. If satisfactory results are not achieved the next level is the Section Manager.

Form GST116 is being revised. These revisions are intended to accommodate changes to the proposed draft legislation released in September 2009 and add clarity. There will be changes to Part B - Eligibility, Part C- Application, and Part D - Notice of renewal.

Development of a prescribed form to be used to apply to the Minister to be designated a qualifying institution is currently in process.

Changes within the Large Business GST/HST Program:

Effective April 1, 2009, the Large Business GST/HST Program within the Compliance Programs Branch became responsible for audit issues with respect to both domestic and non-resident large business entities with annual gross revenues in excess of $100 million (and the entities they control), such as corporations, partnerships, trusts, income trusts, and other business entities. Previously, the income threshold for the Large Business GST/HST Program was $250 million.

Non-compliance issues have been identified within the non-resident GST/HST population. Six designated Tax Services Offices (TSOs) have been identified to conduct these GST/HST audits (although the workload will generally be distributed on a regional basis to ensure the most efficient use of resources). All six designated TSOs are in various stages of conducting audits of Large Business GST/HST non-resident registrants.

Audit Issues from Recent Jurisprudence:

The legislative proposals released December 14, 2009, have some impact on the Large Business GST/HST Program - Pre-approvals of input tax credit methods for QIs. If a QI had treated the above services as exempt they may consider changes to particular methods utilized to determine their input tax credits. If modifications to particular methods are determined to be appropriate the QI will be required to file Form GST116 as a request for the authorization to use particular methods for a fiscal year rather than as a request for the renewal of the authorization to use particular methods.

Specific GST/HST audit issues giving rise to assessments:

  • ITCs denied - The claimant was not the "recipient" of the supply (i.e., incorrect person claiming ITC)
  • GST/HST not charged/collected on supply (i.e., supply incorrectly treated as zero-rated or exempt)
  • ITCs denied - Documentary requirements not satisfied
  • GST/HST collected, but not remitted
  • Tax not assessed on imported taxable supply
  • Clerical/posting errors

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25. UPDATE ON VOLUNTARY DISCLOSURES ISSUES AND DISCUSSION

Please provide an update regarding any new or developing issues in the voluntary disclosures area. See questions below.

Questions

Question A

Please provide an update regarding any new or developing issues in the voluntary disclosure area including:

  1. Most recent statistics regarding all classes of voluntary disclosure (e.g. income tax, GST, etc), and GST disclosures in particular – is there any trend to declining GST voluntary disclosures, as predicted by practitioners, now that there hasn’t been complete elimination of interest in wash transaction disclosures for almost 3 years?
  2. There are continuing rumours that the voluntary disclosure policy regarding the elimination of interest on wash transactions is still under review – is this true?
  3. Has there been any development in clarifying the policy regarding the circumstances under which “second disclosures” will be accepted (see last year’s Q & A #19, referring to paragraph 46 of the Circular).
  4. When Ontario corporations tax was moved to CRA administration, all voluntary disclosures for Ontario corporations tax began to be handled by the CRA immediately, even for prior years. What is planned for the transition to the HST in Ontario and BC? The circumstances are not completely parallel (in the case of the HST, an old tax is being wound down), but will Ontario and BC sales tax disclosures continue to be handled by the Provinces, or will they move to the CRA under some administrative arrangement? Will it make a difference whether the disclosure involves transitional HST, transitional RST or both HST and RST issues (e.g. a disclosure could cover a 4 year period with both RST and HST issues)?

CRA Comments

  1. For the fiscal year 2008 – 2009 the following are the summary results:
    Summary of the 2008 - 2009 fiscal year
    Total Income Tax Disclosures = 9,907
    Total GST/HST Disclosures = 1,486
    Total All = 11,393
    Federal Tax = $392,384,192
    Tax = $182,438,898
    Total Tax = $574,823,090

    There has been a small decline in GST/HST disclosures from previous years.

    For the fiscal year 2009 – 2010 to date the following are the summary results:

    Total Income tax and GST/HST disclosures = 10,000
    Income change = $1.7Billion

  2. As an Agency we have reviewed the GST/HST WASH transactions policy. This review has been concluded. A release on the outcome of this review will be issued shortly.
  3. We are currently working on a number of clarifications to the Voluntary Disclosure Information Circular, IC 00-1R2. A clarification to “second disclosures” will be included in the revised circular. Although each disclosure’s individual circumstances will be reviewed on its own merits, we will not unnecessarily deny access to the voluntary disclosure program to taxpayers/registrants who are attempting, in good faith, to remain compliant. Generally, a second disclosure will be accepted, such as in the case of a large file client, unless for example the disclosure is for the same issue as was previously disclosed.
  4. For the RST disclosures received for transactions which are prior to July 1, 2010 the submission will be the responsibility of the one of the two provincial tax authorities involved (Ontario or British Columba). Disclosures relating to transactions after June 20, 2010 will be the responsibility of the CRA.

Question B

The CRA’s Voluntary Disclosure Program (Information Circular IC00-1R2), dated October 22, 2007 provides that a voluntary disclosure must be complete, among other things, in order to be accepted. Paragraph 35 of the Information Circular defines complete as providing “full and accurate facts and documentation for all taxation years or reporting period where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer is associated.”

When the disclosure is finalized, the CRA issues a notice of assessment confirming the GST liability that is disclosed by the taxpayer. Section 298 of the Excise Tax Act precludes the CRA from assessing the net tax of taxpayer beyond four years, barring fraud or misrepresentation. Given the foregoing, what statutory authority does the CRA have to issue a notice of assessment confirming the GST liability that is disclosed by a taxpayer beyond four years?

Assume the taxpayer did not commit fraud or misrepresentation and filed its GST returns as required under the Excise Tax Act for all relevant periods to which the disclosure.

CRA Comments

The authority to assess beyond the normal assessment period is contained in ss.298(4)(a) of the Excise Tax Act (ETA). This is similar to ss.152(4)(a) of the Income Tax Act (ITA).

ETA 298
“(4) Idem — An assessment in respect of any matter may be made at any time where the person to be assessed has, in respect of that matter, (a) made a misrepresentation that is attributable to the person's neglect, carelessness or wilful default;…”

The misrepresentation must be due, at the minimum, to neglect, or carelessness.

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26. UPDATE ON COURT CASES/OBJECTION AND DISCUSSION

Question

Please provide an update regarding any new or developing issues in the Court Cases/Objection Area.

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27. UPDATE ON HST ISSUES AND DISCUSSION

Please provide an update regarding any new or developing issues in the HST issues area?

See question below.

Question A

Clients in Ontario and BC are starting to focus on the pending HST in these provinces, and many difficult questions are being asked regarding transitional rules, as well as specific HST situations. Ontario readily admits that they are not sufficiently versed in GST to answer more challenging HST questions beyond what is in the various publications, and the existing CRA HQ database of HST rulings is not particularly well developed. How should a senior practitioner with HST issues go about getting input, interpretations and rulings? Should we contact the GST/HST Rulings Directorate in Ottawa or the Region? What infrastructure will be in place to address these questions, which can be expected to increase significantly as we get closer to July 1, 2010? Will, for example, there be a special group organized in Ottawa to deal with transition questions on a timely basis?

CRA Comments

As new legislation is being proposed, the CRA is developing technical information in various formats (Q’s and A’s, Info Sheets, Technical Information Bulletins, etc.) in support of the announcements. This information is generally made available on the CRA Internet site when announcements are made. Our intention is to keep the public informed in as timely a manner as possible. As such, we would advise senior practitioners to subscribe to our web site so that they can remain up to date with the HST information, as it is disseminated.

As far as having an infrastructure in place to address questions that may arise, in general, we believe that our current infrastructure and regular business service protocols will be able to manage the enquiries we receive. As an exception to this, when the transitional rules were announced, we had a temporary line that went directly into the HQ area of expertise, until such time as our regional offices were equipped to respond to these types of enquiries.

Current protocol is that taxpayers and practitioners can find HST information on our CRA website, or contact the Business Enquiries telephone line for general information on the HST at 1-800 959 5525 (for English enquiries) and 1 800 959 7775 (for French enquiries). Should an HST business enquiry be more technical in nature or become too complex, it is seamlessly transferred to any one of our regional GST/HST Rulings centres for response. This tiered approach enables us to manage call volumes in the most cost effective and efficient manner and maximize our telephone service delivery. For more complex, technical HST enquiries, taxpayers or practitioners may choose to call GST/HST Rulings directly at 1 800-959-8287 (for English enquiries) or 1 800 959 8296 (for French enquires).

Written requests for HST rulings or interpretations should be forwarded to our regional GST/HST Rulings offices. Information on this process may be found in GST/HST Memorandum 1.4 Excise and GST/HST Rulings and Interpretations Service available at this web link:http://www.cra-arc.gc.ca/E/pub/gm/1-4/README.html. Precedent or policy setting HST issues are forwarded to our headquarters operations in Ottawa for response.

The GST/HST Rulings and interpretations program also offers specialized, highly technical seminars upon request. These sessions can be made available by contacting your nearest GST/HST Rulings centre http://www.cra-arc.gc.ca/E/pub/gp/rc4405/README.html.

Taxpayers and practitioners are also encouraged to continue to visit the HST section of our website (i.e., http://www.cra-arc.gc.ca/gncy/hrmnztn/menu-eng.html) for current information on the rules pertaining to the implementation of HST in the provinces of Ontario and British Columbia.

Question B

The current HST self-assessment rules for services, as provided for in subsections 218.1(1) and 220.08(1), are based on the location where the service is consumed or used. Could the CRA provide some administrative guidance with respect to its views on where a service is being consumed or used. As an example, consider a Canadian resident corporation who is proposing to acquire all of the issued and outstanding shares of a target corporation whose assets are situated solely in the United States and whose shares are only listed on a US Stock Exchange. To the extent the Canadian corporation acquires corporate advisory services and due diligence services relating to the share purchase, are said services being consumed and used in Canada (i.e., the location where the Canadian resident corporation decides whether to purchase the target corporation) or in the United States (i.e., the location where the Canadian resident corporation actually purchases the target corporation).

Given that rebate is also available under section 261.3 for HST paid on services that are for consumption or use primarily outside a participating province, we assume that the same service cannot be used and consumed primarily in both an HST province and a non HST province.

CRA Comments

Note that we have assumed the target corporation is not engaged exclusively in the course of commercial activities and therefore section 186 is not applicable.

The CRA does not have a policy with respect to where a service is being consumed or used. The words “consumption” and “use” are not defined in the ETA, and as indicated in GST Memoranda 8.1, their common dictionary meanings should be considered.

Pursuant to section 217, a supply of a service is an imported taxable supply where the supply was a taxable supply (other than a zero-rated supply or a prescribed supply) made outside Canada, unless the exclusions in subparagraphs 217(a)(i) to (vi) apply.

Pursuant to section 218, the recipient of an imported taxable supply is required to self-assess GST on the value of consideration for the imported taxable supply.

Pursuant to subsection 218.1(1), the recipient of an imported taxable supply that is a service is also required to self-assess the provincial portion of the HST on that imported taxable supply, where the recipient is resident in a participating province and the supply is acquired by the person for consumption, use or supply primarily in the participating provinces. Where the requirements to self-assess the provincial portion of the HST are met, the rate of tax that is applied is the tax rate for the province in which the recipient is resident, and the amount of tax is calculated on the extent to which the recipient acquired the service for consumption, use or supply in that province.

In the example given, the corporation is acquiring advisory services related to purchasing the shares of a target corporation in the U.S. Therefore it is acquiring the services for use in an exempt activity. The corporation is the recipient of a taxable supply of a service that is an imported taxable supply because the services are for use by the Canadian corporation to acquire foreign shares, and the acquisition of shares, whether Canadian shares or foreign shares, by the Canadian corporation is part of its activity in Canada. Accordingly, under section 218 the Canadian corporation is required to self-assess the GST on the value of the consideration for the supply of the services.

If the Canadian corporation is resident in a particular participating province, and the services are for consumption, use or supply primarily in participating provinces, it will be required to self-assess at the rate of tax for that participating province to the extent the supply is for consumption, use or supply in that province pursuant to subsection 218.1(1).

Question C

If a builder operator or a nursing home, long term care home or retirement home must self-assess GST/HST on a newly built home or substantial renovations and the FMV is over $10 Million, will this event put the operator into the restricted ITC rules (assuming operational taxable supplies without the self-assessment would not exceed $1 Million in the same annual period)?

CRA Comments

With respect to the proposed rules for the temporary recapture of input tax credits (RITC) for large businesses, the application of the self-supply rules in section 191 of the Excise Tax Act would not, on their own, cause a person’s RITC threshold amount to exceed $10 million. The proposed RITC threshold amount is determined with reference to “the total of all consideration for taxable supplies…”. While various subsections in section 191 deem a builder to make and receive a taxable supply of a complex, or in the case of subsection 191(4) an addition to a multiple unit residential complex, and deems the builder to have collected and paid tax, there is no deeming provision with respect to consideration. As such, the application of the self-supply rules would not, on their own, affect a person’s RITC threshold. It is also noted that the proposed RITC threshold amount excludes consideration for taxable supplies by way of sale of real property that is capital property of the person.

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28. UPDATE ON STANDARDIZED ACCOUNTING AND PROCESSING ISSUES AND DISCUSSION

Please provide an update regarding any new or developing issues in the standardized and processing issues area?

See questions below.

Question A

Could the CRA please comment on the transition to standardized accounting and whether this has caused any errors or delays in processing returns and rebates. We recently assisted a client in navigating through the CRA to resolve an error that occurred, seemingly because of the transition to standardized accounting.  The CRA officials who assisted us were very courteous and helpful.  However, it took approximately 7 months to resolve, while we waited for debits and credits to be processed through the clients accounts. In the meantime, the client received a series of assessments and a collection action was initiated – which was stopped at our request. Would there have been a mechanism to expedite this correction to the accounts?

CRA Comments

The CRA has implemented a number of system changes since the implementation of the standardized accounting system to improve client service and to address specific concerns raised by taxpayers and/or their representatives. For example, our communication products have been revised to include additional information such as account numbers, period end dates and amounts transferred between accounts. Also, enhancements to My Business Account provide taxpayers or their representative more electronic self-service options.

Many of the initial problems during the transition to the standardized accounting system have been resolved.  The CRA offers on-line services at http://www.cra-arc.gc.ca/ as well as telephone services or direct contact with CRA officials to expedite corrections to accounts. Normally account errors are corrected very quickly through these channels.

Question B

Under the new standardized accounting, will a Non Resident Importer (assume: corporation with GST Number, with import/export sub-account) that is delivering goods in Canada (assume: paying Division III tax, charging and collecting Division II tax from Canadian customers, and taking ITCs for the Division III tax paid), be impacted if it is not filing Canadian income tax returns.

Specifically, (1) does the CRA automatically consider non-resident GST registered persons to be required to file T2 Corporate Returns, and (2) will ITC claims by the Non-Resident Importer be impacted by its failure to file income tax returns under standardized accounting.

CRA Comments

Non-resident corporations who earn taxable income in Canada, as defined in subsection 2(3) of the Income Tax Act, are required to file a corporate tax return. In general, if the income earned on the importation of the goods was earned in Canada (e.g. a Canadian resident paid the corporation to import the products into Canada, the corporation sells the imported goods within Canada), then the corporation would be required to file a return. Section 115 of the Income Tax Act provides further details on computing taxable income of non-residents.

As a result of changes made to the Excise Tax Act as part of the harmonization initiative, subsection 229(2) of the Excise Tax Act specifies that:

A net tax refund for a reporting period of a person shall not be paid to the person under subsection (1) at any time, unless all returns of which the Minister has knowledge and that are required to be filed at or before that time by the person under this Act, the Air Travellers Security Charge Act, the Excise Act, 2001 and the Income Tax Act have been filed with the Minister.

Corporate income tax (T2) returns are required to be filed within six months after the fiscal year end of the corporation as per subsection 150(1) of the Income Tax Act. If the return is not filed by this date, then the corporation would be considered to be non-compliant and any refunds to which the corporation would be eligible under the Excise Tax Act would be held by the Agency until the outstanding returns are filed.

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29. PLEASE PROVIDE AN UPDATE REGARDING ANY NEW OR DEVELOPING ISSUES ON FINANCIAL SERVICES SUCH AS:

  • The notion of “arranging for”.
  • The amendment to the definition of financial service.

See questions below.

Question A

The proposed amendments to the definition of “financial service” announced December 14, 2009, do not apply to amounts that were due or paid before Announcement Date, if the supplier did not, before that day, charge, collect, or remit any amount as or on account of tax in respect of the supply.

Can the CRA confirm that if  a supplier did not collect tax on the supply but was subsequently assessed for failure to collect tax before the Announcement Date, and as a result of such reassessment the supplier paid the reassessment and went back to the recipient to charge the tax before Announcement Date, the proposed amendment would not be applicable to the supply in question?

This would ensure that, if the supplier objected to the reassessment, the supplier’s position would not be prejudiced by the CRA’s assessing action (or delay in dealing with the objection) and, if the supplier did not object, permit a rebate of tax paid in error by the recipient within the otherwise applicable limitation period.

CRA Comments

In part, the proposed amendments to the definition of “financial service” would apply to asset management services, preparatory services, or a service of managing credit, rendered under an agreement for a supply if all the consideration for the supply became due or was paid on or before December 14, 2009, unless the supplier did not, on or before that day, charge, collect or remit any amount as or on account of tax in respect of the supply or in respect of any other supply that includes an asset management service, preparatory service or a service of managing credit and that is made under the agreement.

In the first situation described above, assuming that the amount remitted by the supplier as or on account of tax and subsequently charged to the recipient on or before December 14, 2009, was in respect of an asset management service, a preparatory service or a credit management service rendered under an agreement for the supply or in respect of any other supply that includes one or more of these services, the proposed amendment would apply to the supplier’s service.

In the second situation described above, making the same assumptions as in the first situation, the proposed amendment would not apply to the supplier’s service unless that service is considered an imported taxable supply which the recipient is required to self-assess the GST/HST under Division IV of Part XI to the ETA.  In the latter case, the proposed amendment is deemed to have come into force on December 17, 1990.

Question B

As a result of the Department of Finance release dated December 14, 2009, the definition of “arranging for” in paragraph (l) of the definition of “financial service” will be amended to exclude facilitatory services such as market research, product design, document preparation or processing, customer assistance, advertising, promotional or other similar activities.

  1. Will Policy Statement P-239 be amended to deal with the change in the “arranging for” definition?
  2. If so, what will be the new criteria for “arranging for” a financial service?
  3. Will Example No. 1 in P-239 (i.e., automobile dealership arranges for a customer to obtain a loan) still be applicable?  If not, please provide examples of when paragraph(l) of the definition of “financial service” will apply.
  4. Are the exempt services in GST Memorandum 17.2 (“Products and Services of a Deposit-Taking Financial Institution”) now taxable (e.g., services relating to granting of credit or making loans) as a result of the December 14 release?
  5. Are trailer fees payable by fund managers to investment dealers as described in Policy Statement P-119 now subject to GST?

CRA Comments

In part, the proposed amendments to the definition of “financial service” would apply to asset management services, preparatory services, or a service of managing credit, rendered under an agreement for a supply if all the consideration for the supply became due or was paid on or before December 14, 2009, unless the supplier did not, on or before that day, charge, collect or remit any amount as or on account of tax in respect of the supply or in respect of any other supply that includes an asset management service, preparatory service or a service of managing credit and that is made under the agreement.

In the first situation described above, assuming that the amount remitted by the supplier as or on account of tax and subsequently charged to the recipient on or before December 14, 2009, was in respect of an asset management service, a preparatory service or a credit management service rendered under an agreement for the supply or in respect of any other supply that includes one or more of these services, the proposed amendment would apply to the supplier’s service.

In the second situation described above, making the same assumptions as in the first situation, the proposed amendment would not apply to the supplier’s service unless that service is considered an imported taxable supply which the recipient is required to self-assess the GST/HST under Division IV of Part XI to the ETA. In the latter case, the proposed amendment is deemed to have come into force on December 17, 1990.

Question B

As a result of the Department of Finance release dated December 14, 2009, the definition of “arranging for” in paragraph (l) of the definition of “financial service” will be amended to exclude facilitatory services such as market research, product design, document preparation or processing, customer assistance, advertising, promotional or other similar activities.

  1. Will Policy Statement P-239 be amended to deal with the change in the “arranging for” definition?
  2. If so, what will be the new criteria for “arranging for” a financial service?
  3. Will Example No. 1 in P-239 (i.e., automobile dealership arranges for a customer to obtain a loan) still be applicable?  If not, please provide examples of when paragraph (l) of the definition of “financial service” will apply.
  4. Are the exempt services in GST Memorandum 17.2 (“Products and Services of a Deposit-Taking Financial Institution”) now taxable (e.g., services relating to granting of credit or making loans) as a result of the December 14 release?
  5. Are trailer fees payable by fund managers to investment dealers as described in Policy Statement P-119 now subject to GST?

CRA Comments

(i) to (v)
We are currently reviewing GST/HST Policy Statement P-239, Meaning of the term “arranging for” as provided in the definition of “financial service”, GST/HST Policy Statement P-119, Trailer Commission Servicing Fees, and GST/HST Memorandum 17.2, Products and Services of a Deposit-Taking Financial Institution, in light of the December 14, 2009 release, the March 4, 2010 Notice of Ways and Means Motion with respect to the proposed amendments to the definition of “financial service” and given the recent tabling of Bill C-9, the Jobs and Economic Growth Act.

In early February 2010, we released GST/HST Notice No. 250, Proposed Changes to the Definition of Financial Service, (the “Notice”) which provides information on the proposed legislative amendments.

Given the recent tabling of Bill C-9, the Jobs and Economic Growth Act, outlining the proposed amendments to the GST/HST treatment of financial services, we are currently reviewing and will be updating the Notice to reflect the policy intent and the proposed legislation.

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