GST/HST Questions for Revenue Canada 2011

  • February 24, 2011

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 QuĂ©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 – FEBRUARY 24, 2011 (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. ZERO-RATING AND INTANGIBLE PERSONAL PROPERTY
  2. PLACE OF SUPPLY RULES – LEGAL SERVICES IN RELATION TO REAL PROPERTY
  3. PLACE OF SUPPLY RULES – SERVICES IN RELATION TO REAL PROPERTY
  4. PLACE OF SUPPLY RULES - PROFESSIONAL SERVICES
  5. PLACE OF SUPPLY RULES – GST/HST TREATMENT OF GOODWILL
  6. PLACE OF SUPPLY RULES – SECTION 182 DAMAGE PAYMENTS
  7. PLACE OF SUPPLY RULES – CONFERENCES
  8. PLACE OF SUPPLY RULES - SELF-ASSESSMENT
  9. CHANGING GST/HST FILING FREQUENCY FOR A FINANCIAL INSTITUTION
  10. RETROACTIVE REGISTRATION OF PENSION PLANS AND LATE-FILED ELECTIONS
  11. PENSION RE-SUPPLIES/DEEMED SUPPLIES
  12. PENSION PLAN ANNUAL INFORMATION SCHEDULE
  13. PENSIONS AND SUBSECTION 14(1) OF THE SLFI ATTRIBUTION METHOD (GST/HST REGULATIONS)
  14. CHARACTERIZATION OF TELECOMMUNICATION SERVICES
  15. AMALGAMATION & SUCCESSOR CORP’S ITC ENTITLEMENT
  16. USED BUSINESS VEHICLES TRANSFERS
  17. ELECTRONIC RETURNS
  18. HOLDBACKS ON ASSET DEALS THAT ARE NOT PAID OUT
  19. PENALTIES
  20. COUPONS
  21. RESIDENCY OF INVESTMENT VEHICLES (LPs AND TRUSTS) & ZERO-RATING OF INVESTMENT MANAGEMENT SERVICES
  22. PLEASE PROVIDE AN UPDATE REGARDING ANY NEW OR DEVELOPING ISSUES ON FINANCIAL SERVICES SUCH AS:
  23. ARRANGING LOANS FOR CUSTOMERS TO PURCHASE PRODUCTS AND SERVICES
  24. FINANCIAL SERVICES: UNDERWRITING AND “BEST EFFORTS” DEALS
  25. FINANCIAL SERVICES: TRAILING COMMISSIONS
  26. REGISTRATION AND FILING REQUIREMENTS FOR FUNDS
  27. EXCHANGE-TRADED FUNDS AND THE SLFI REGULATIONS
  28. POLICY STATEMENT P-209 LAWYERS’ DISBURSEMENTS
  29. DELAYED INTERPRETATION REQUESTS AND RELATED ASSESSMENTS
  30. NON-RESIDENTS AND PERMANENT ESTABLISHMENTS
  31. UPDATE ON AUDIT ISSUES AND DISCUSSION
  32. UPDATE ON COURT CASES/OBJECTION AND DISCUSSION

SUPPLEMENTARY QUESTIONS

  1. TREATMENT OF GENERAL PARTNER DISTRIBUTIONS
  2. SECTION 259 OF THE EXCISE TAX ACT
  3. HST – CONFERENCES
  4. RRSP’S/RRIF’S/RESP’S AND THE SLFI REGULATIONS
  5. INCORRECT ACCOUNTING FOR HST VERSUS QST
  6. MASTER TRUSTS AND THE NEW PENSION RULES
  7. PENSION PLAN RULES – DEEMED SUPPLIES – PROVINCIAL FACTOR - CONTRIBUTION – REGULAR AND SPECIAL PAYMENT
  8. CALCULATION OF THE SAM – HYBRID PENSION PLANS
  9. PUBLIC SECTOR BODY PENSION PLANS AND THE HST DEEMED SUPPLY RULES

1. ZERO-RATING AND INTANGIBLE PERSONAL PROPERTY

Facts / Background

A non-resident person who does not carry on business in Canada and is not registered for GST acquires from a Canadian GST registrant the right to intangible personal property (i.e. images). The intangible personal property is purchased outright by the non-resident (i.e. it is not licensed). The non-resident leaves a copy (electronic images) with the vendor, and the vendor provides the non-resident with the service of arranging for printed material which will also be exported.

Question

Would the CRA agree that the non-resident’s purchase of the right to the intangible personal property is zero-rated?

CRA Comments

Based on the information provided, the supply made to the non-resident in the question appears to be a supply of intellectual property that would be zero-rated under section 10 of Part V of Schedule VI to the Excise Tax Act.

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2. PLACE OF SUPPLY RULES – LEGAL SERVICES IN RELATION TO REAL PROPERTY

Facts / Background

A law firm that is resident in Canada provides legal services in September, 2010 in relation to the acquisition of real property (three commercial buildings) for an Ontario resident client. One of the buildings at issue is located in Quebec and has a value of approximately $10 million. The other two buildings are located in New Brunswick and have a combined value of approximately $8.5 million (one has a value of approximately $4 million, the other has a value of approximately $4.5 million).

The new place of supply rules for services provide specific rules with respect to supplies of services in relation to real property. A supply of a service in relation to real property that is situated in Canada that is situated primarily (more than 50%) in the participating provinces is considered to be made in the participating province in which the greatest proportion of the real property that is situated in the participating provinces is situated. Conversely, a supply of a service in relation to real property that is situated in Canada and otherwise than primarily (50% or less) in participating provinces is considered to be made in a non-participating province.

Assume that the law firm is registered for GST/HST and QST purposes.

Question

Should the law firm charge the Ontario resident client GST of 5% and QST of 7.5% on its legal services, on the basis that the real property at issue is primarily situated in Quebec (a non-participating province)? Or, should the law firm charge the Ontario resident client HST of 13% on its legal services, on the basis that the real property at issue is primarily situated in New Brunswick (a participating province). How does one determine where the real property is primarily situated where multiple real properties are involved (e.g., does one look to the number of properties in each jurisdiction, the relative value of the properties in each jurisdiction or some other factor?).

CRA Comments

A place of supply rule for services in relation to real property that requires a determination of the proportion of real property that is situated in a province is not a new concept in the Excise Tax Act. Such a place of supply rule has existed since 1997 for HST purposes in sections 2 and 3 of Part IV of Schedule IX to the Excise Tax Act. Our interpretation of the manner in which the determination of the relevant proportion of the real property is to be made for purposes of these provisions continues to apply for purposes of the new place of supply rule in section 14 of Part I of the New Harmonized Value-added Tax System Regulations. Specifically, for purposes of the new rule, the determination of the relevant proportion of the real property that is situated in a province is based on the physical size of the entire real property (for example, based on square footage) pursuant to its legal description. Factors such as the value of the real property or the number of properties (unless they are of equal size) would therefore not be relevant to the determination. Therefore, the information provided in the question is insufficient to conclusively determine the province in which the real property is primarily situated for purposes of determining the province in which the supply of the service in relation to real property is made. The information provided in the question is also insufficient to conclusively determine whether single or multiple supplies of services are being made.

If it were to be established based on a complete set of facts that a single supply of a service is being made and that the real property to which the service relates is situated primarily in Quebec, then the supply of the service would be deemed to be made in Quebec and subject to GST at a rate of 5%. If it were to be established based on a complete set of facts that a single supply of a service is being made and that the real property to which the service relates is situated primarily in New Brunswick, then the supply of the service would be deemed to be made in New Brunswick and subject to HST at a rate of 13%.

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3. PLACE OF SUPPLY RULES – SERVICES IN RELATION TO REAL PROPERTY

Facts/Background

A registrant contractor agrees to inspect 100 gas wells, 40 of which are located in Alberta and 60 of which are located in BC. Under the governing written agreement, the contractor is to invoice on a monthly basis based on the number of wells inspected in that month.

Questions

In applying section 14 of Division 5 of the New Harmonized Value-Added Tax System Regulations, Part I, will HST apply to:

  1. A all consideration payable under the contract because 60% of the total wells are in BC;
  2. B consideration payable on a monthly basis based on percentage of wells inspected in BC that month; or
  3. C only those wells in BC that are inspected (on the basis that each inspection is a separate supply)?

CRA Comments

The application of the place of supply rule in section 14 of Part I of the New Harmonized Value-added Tax System Regulations in the scenario provided would depend on whether single or multiple supplies of services in relation to real property are being made. As reflected in the three options provided in the question, there is insufficient information provided in the question to determine whether single or multiple supplies of services are being made. There is also insufficient information provided in the question to determine the province in which the real property is primarily situated for purposes of determining the province in which the supply of the service in relation to the real property is made.

If it were to be established based a complete set of facts that a single supply of a service in relation to real property is being made and that the real property to which the service relates is situated primarily in BC, then the supply of the service would be deemed to be made in BC and the entire consideration payable under the agreement for the supply would consequently be subject to HST at a rate of 12%. If it were to be established based a complete set of facts that each inspection is a separate supply of a service in relation to real property, then only those inspection services that are in relation to real property that is situated primarily in BC would be subject to HST at a rate of 12%.

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4. PLACE OF SUPPLY RULES - PROFESSIONAL SERVICES

Facts / Background

An accounting firm provides tax advice with respect to an asset purchase agreement. The assets include both real property primarily outside of Ontario (e.g. Alberta) and tangible personal property (e.g. equipment) primarily inside of Ontario. The accounting firm provides the services through multiple offices across Canada.

Questions

1. How should the accounting firm apply HST to its services in these situations? Specifically, how does one allocate one’s services to arrive at the appropriate place of supply rule? If it involves multiple supplies, presumably the services would relate to each supply separately; however, in the facts provided, it would normally be a composite or single supply of services as the advice relates to completing a single professional mandate (a single asset purchase agreement) and not to each individual supply of each property (there could be 100’s or 1,000’s of supplies if this was the case). The Services Rules in s.14, 15 and 16 of the Regulations, therefore, conflict and there is no tie breaker. Would one apply the real property rule if its total value is higher than the tangible property or vice versa?  Are there any other relevant criteria (other than value)?

2. If the recipient and the accounting firm enter into separate contracts on a province by province basis, for example, with respect to services provided in respect of real property primarily situated in a particular participating province, does the Canada Revenue Agency agree that multiple tax rates will apply on a province by province basis?

CRA Comments

1. Based on the information provided, as confirmed in our response to Question #13 from our meeting of last year with respect to the zero-rating of legal services, a supply of a service of providing tax advice with respect to an asset purchase would not be considered to be a service in relation to property. Specifically, based on the principles set out in GST/HST Policy Statement P-169R that are relevant to determining whether a service is in relation to real property for purposes of the place of supply rule, there would not be a direct connection between the service and the property as the direct object of the service in this case would be to provide tax advice. As a result, the relevant place of supply rules in this case would be the general place of supply rules for services in section 13 of Part I of the New Harmonized Value-added Tax System Regulations. The information provided in the question is insufficient to determine the province in which a single supply of the service would be made under these rules.

2. As previously indicated, the relevant place of supply rules in this case would be the general place of supply rules for services. Where it is established that multiple supplies of services are made, these rules can result in different supplies being made in different provinces and subject to different tax rates.

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5.  PLACE OF SUPPLY RULES – GST/HST TREATMENT OF GOODWILL

Facts / Background

A Co is selling to B Co assets of a portion of its service/repair business which it carries on in Quebec and Ontario. The physical assets of the business are located in Quebec and Ontario. A Co is also transferring the goodwill of the business to B Co (which consists essentially of A Co’s customer list). All of A Co’s existing customers are located in Quebec and Ontario. There is no restriction on where B Co can use the goodwill of the business. B Co’s business address is in Ontario. The value of the goodwill is more than $300.

Assume that A Co is registered for GST/HST and QST purposes, that the sale does not qualify for the section 167 election and that section 167.1 does not apply.

The new place of supply rules for intangibles provide that where the Canadian rights in respect of the property are not limited to be used only primarily (more than 50%) in the participating provinces or to being used only primarily (more than 50%) outside the participating provinces, the supply of the intangible personal property is considered to be made in a province if in the ordinary course of business the supplier obtains an address that is a home or business address of the recipient that is in the province.

Question

Given that B Co’s business address is in Ontario, please confirm that A Co should charge HST of 13% on the transfer of the goodwill.

CRA Comments

Based on the assumptions made in the question, if it were to be established that A Co is making a taxable supply in Canada of goodwill to B Co and if the only business address in Canada of B Co that is obtained by A Co in the ordinary course of its business is in Ontario, then the supply of the goodwill by A Co would be deemed to be made in Ontario under section 8 of Part I of the New Harmonized Value-Added Tax System Regulations, and would be subject to HST at a rate of 13%.

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6.  PLACE OF SUPPLY RULES – SECTION 182 DAMAGE PAYMENTS

Facts / Background

A Co, resident in Canada, leases railcars to B Co, also resident in Canada. The lease of the rail cars was entered into in January, 2008 for a term of 5 years. Initial delivery of the railcars was made in Ontario to B Co. In October, 2010, one of the railcars is destroyed. The railcar was located in Alberta at the time it was destroyed. B Co makes a damage payment to A Co in respected of the destroyed railcar shortly thereafter. The payment is made otherwise than as consideration for the lease of the railcar.

Section 182 of the Excise Tax Act deems the damage payment to include GST/HST.

Both A Co and B Co are registered for GST/HST purposes.

Question

Would the damage payment be deemed to be GST or HST included? In determining whether GST or HST applies when applying section 182 in this context, does one look to where delivery of the railcar was initially made to B Co under the lease, where the railcar was located when it was destroyed, or some other factor?

CRA Comments

Under subsection 26(1) of Division 5 of the New Harmonized Value-added Tax System Regulations, a supply of rolling stock supplied otherwise than by way of sale is deemed to be made in a province if the supplier delivers the rolling stock or makes it available to the recipient in that province. Subsection 26(2) provides that where a supply of railway rolling stock is made in a province by way of lease for the first lease interval in the period during which possession or use of the rolling stock is provided under the lease, then the supply of the rolling stock for each of the other lease intervals in that period is, despite subsection 26(1), made in that province. However, subsection 26(5) further provides that if a supply of railway rolling stock otherwise than by way of sale is made under an agreement that is in effect on July 1, 2010 and, under the agreement, the rolling stock was delivered or made available to the recipient in Ontario or British Columbia before that day, then the rolling stock is deemed to have been delivered or made available to the recipient under the agreement outside the participating provinces.

Based on the information provided, the supplies of the railcars in the scenario provided were made under an agreement in effect on July 1, 2010, and were initially delivered to B Co in Ontario before that date. The railcars are therefore deemed under subsection 26(5) to have been delivered to B Co under the lease agreement outside the participating provinces.  As a result, tax under subsection 165(2) of the Excise Tax Act would not have been payable in respect of the supplies of the railcars under the lease agreement. Therefore, if it were to be established based on a complete set of facts that section 182 of the ETA applies to the damage payment made by B Co to A Co as stated in the question, then the payment would only be deemed under that provision to be GST included at the rate of 5% set out in subsection 165(1) since the damage payment takes on the status of the original supply for purposes of GST or HST being deemed collected and deemed paid in accordance with paragraph 182(1)(b).

If the facts provided in the question were to remain the same except that the lease agreement for the railcars was entered into in September 2010 rather than in January 2008, then the transitional rule in subsection 26(5) would not apply. Based on the application of subsections 26(1) and (2), the supplies of the railcars made for each lease interval would be deemed to be made in Ontario based on the province in which the railcar was initially delivered under the lease agreement and would be subject to HST at a rate of 13%. The application of section 182 would be based on the tax status of the supply when the breach of the agreement occurred, which in this case based on the information provided was in October 2010. Since tax under subsection 165(2) was payable in respect of the supply of the railcar made for this lease interval, the damage payment would be deemed under paragraph 182(1)(b) to be HST included at the rate of 13%. If the facts of the question were to be further modified such that a lease of tangible personal property other than railcars was involved, then pursuant to paragraph 2(a) of Part II of Schedule IX, the supply of the property for each lease interval would be deemed to be made in a province if the ordinary location of the property is in that province when the supply is made. Therefore, if the ordinary location of the property for the lease interval during which a breach of the agreement occurred in October 2010 was in Ontario, then the supply of the property for that lease interval would be made in Ontario. Since tax under subsection 165(2) would be payable in respect of the supply of the property made for this lease interval, the damage payment would be deemed under paragraph 182(1)(b) to be HST included at the rate of 13%.

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7. PLACE OF SUPPLY RULES - CONFERENCES

Facts / Background

A corporation resident in a non-participating province sponsors a conference, to be held in a participating province, by paying an amount to the registrant organizing the conference. In exchange for the payment, the corporation receives recognition of the sponsorship in written conference materials and on materials delivered at the conference. Assume section 135 is not applicable.

Question

Will section 28 of Division 5 of the New Harmonized Value-Added Tax System Regulations, Part I apply to the sponsorship payment to deem the place of supply to be the participating province?

CRA Comments

In order for a service to be considered to be a service in relation to a location-specific event for purposes of the place of supply rule under section 28 of Part I of the New Harmonized Value-Added Tax System Regulations, there must be a direct connection between the service and the event. Specifically, the object of the service must be the event.Generally, this would include services supplied to an organizer of an event such as event planning and the performance of the event. Based on the information provided, the objective of the service that is supplied by the organizer to the sponsor for which the payment is made is not the event. Rather, the objective of the service that is supplied to the sponsor is to publish an acknowledgment of the sponsorship provided by the sponsor The relevant place of supply rules in this case would be the general place of supply rules for services in section 13 of Part I of the New Harmonized Value-added Tax System Regulations.

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8. PLACE OF SUPPLY RULES - SELF-ASSESSMENT

Facts / Background

Scenario 1

Assume Company A is resident in Ontario and is generally not entitled to full input tax credits (ITC). Company B, which is also located in Ontario, provides taxable order processing services exclusively in Ontario in respect of transactions originating with Ontario residents. In this scenario, Company B has to charge Company A 13% HST in respect of its services, and Company A will not recover all the HST by way of ITC.

Scenario 2

If Company A was instead resident in Alberta and did not have a permanent establishment in and was not otherwise resident in Ontario, Company B would only be required to charge 5% GST on its supplies to Company A in respect of those Ontario transactions (assume the only business address of Company A obtained by Company B in the ordinary course is the Alberta address).

Question

In the case where Company A is resident in Alberta (Scenario 2), would Company A have to self assess in respect of an 8% provincial component of Company B’s services?

Please comment for situations where Company A is and is not a financial institution.

CRA Comments

Based on the information provided, the taxable supplies of the services made to Company A would be subject to the general place of supply rules for services in section 13 of Part I of the New Harmonized Value-Added Tax System Regulations. Therefore, if in Scenario 1 the only business address in Canada of Company A that is obtained by Company B in the ordinary course of its business is in Ontario, then the supplies of the services would be deemed under subsection 13(1) of the regulations to be made in Ontario and subject to HST at a rate of 13%. If in Scenario 2 the only business address in Canada of Company A that is obtained by Company B in the ordinary course of its business is in Alberta, then the supplies of the services would be deemed under subsection 13(1) of the regulations to be made in Alberta and subject to GST at a rate of 5%.

In the situation where Company A is not a financial institution, whether a person is required to self-assess the provincial component of the HST under subsection 220.08(1) of the Excise Tax Act in respect of a supply of a service that is acquired by the person for consumption, use or supply in a participating province, depends in part on whether the person is a resident of a participating province. Based on the information provided, if Company A is not a resident of a participating province in Scenario 2, Company A would therefore not be required to self-assess the provincial component of the HST in respect of the services that it acquired from Company B.

Financial Institutions
Subsection 220.08(1) would not apply to Company A if it is a financial institution that is not resident in a participating province. If Company A is a selected listed financial institution (e.g., Company A has a permanent establishment in a participating province under section 4 of theSelected Listed Financial Institution Attribution Method (GST/HST) Regulations only for purposes of those regulations) but is not resident in a participating province for purposes of subsection 220.08(1) it would generally determine an adjustment to its net tax using the calculation described in subsection 225.2(2) to calculate its tax liability for the provincial part of the HST for each participating province.

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9. CHANGING GST/HST FILING FREQUENCY FOR A FINANCIAL INSTITUTION

Question

Could the CRA please advise on the process for changing a GST registrant's filing frequency and, in particular, the procedure for a listed financial institution, who is currently registered as a monthly filer, to become a yearly filer.

CRA Comments

Currently a listed financial institution (LFI) that is a GST/HST registrant with a monthly or quarterly reporting period would be able to elect, using Form GST20, Election for GST/HST Reporting Period, to have an annual reporting period if its threshold amount for a fiscal year does not exceed $1,500,000. The election would be effective the first day of the fiscal year. The election to change from quarterly to annual filing would be required to be filed no later than three months after the beginning of the fiscal year in which the election is to take effect. The election to change from monthly to annual filing would be required to be filed no later than two months after the beginning of the fiscal year in which the election is to take effect.

As indicated in the document entitled Proposed Amendments to the GST/HST Legislation and the Backgrounder, Modifications to the Proposed Financial Institution (FI) Rules for the Harmonized Sales Tax (HST) released by the Department of Finance on January 28, 2011, it is proposed that sections 246 and 247 of the ETA be amended to allow LFIs to revoke a previously made election to be a monthly or quarterly filer, effective on the first day of the fiscal year of the LFI by filing a notice of revocation in prescribed form not later than the day on which the revocation is to become effective or any later day that the Minister may allow.

These proposed amendments to sections 246 and 247 of the ETA would apply to fiscal years of a financial institution that end on or after July 1, 2010.

A new form to file a notice of revocation of a previously made election to be a monthly or quarterly filer is currently being developed to reflect this proposed change. In the interim, a notice of revocation may be filed by sending a letter  to the Summerside Tax Centre, 275 Pope Road, Summerside, PE  C1N 6A2. The letter should be on the registrant’s letterhead, have a clear subject line such as “Notice of Revocation of monthly (or quarterly) reporting election for a listed financial institution” and be signed by an authorized person of the registrant. It should include: the name and business number of the registrant, a statement that the registrant is a listed financial institution, and the effective date of the revocation (i.e., the first day of the fiscal year). If the notice of revocation is being filed after the first day of the fiscal year in which the registrant would like the revocation effective, the letter should also provide an explanation as to why the notice of revocation is being filed late.

At this time, given that these proposed changes were only announced January 28, 2011 and many registrants wanting to file this notice of revocation may have a fiscal year end of December 31, a notice of revocation for a fiscal year ending on or after July 1, 2010 and before July 1, 2011, would generally be accepted provided it is filed before the due date of the first return in the fiscal year for which the notice of revocation will be in effect and no GST/HST returns for the fiscal year have been filed. For example, if the registrant has a fiscal year end of December 31, 2010 and currently has a quarterly reporting period election, a notice of revocation effect January 1, 2011 would generally be accepted if it is filed before April 30, 2011 provided no return for the first quarter has been filed.

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10. RETROACTIVE REGISTRATION OF PENSION PLANS AND LATE-FILED ELECTIONS

Question

Pursuant to paragraph 57(1)(c) of the Draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, the Reporting Entity election, the Consolidated Filing election and the Tax Adjustment Transfer election are required to “be filed with the Minister in prescribed manner before the first day of that first fiscal year or such later day as the Minister may allow.” We understand that the CRA's general practice is to allow a retroactive GST/HST registration of 6 months as a matter of course.  Many pension plans who are SLFI's and subject to the new SAM calculation rules under the draft regulations are still in the process of registering.

  1. Can the CRA confirm that it will accept Reporting Entity Elections filed within the next few weeks/months to be with effect from July 1, 2010?
  2. Will a universal policy be applied with respect to the acceptance of late filed elections (i.e., will a fixed date be set for which all elections must be filed) or, will the acceptance of late filed elections be considered on a case-by-case basis?
  3. In light of the fact that Bill C-9 did not receive Royal Assent until July 12, 2010, will the CRA exercise leniency with respect to requiring participating employers to remit the tax deemed collected under section 172.1 and exercise its discretion to waive interest pursuant to section 281.1?

CRA Comments

1. Based on the information in the Backgrounder released by the Department of Finance on June 30, 2010, Harmonized Sales Tax Rules for Financial Institutions Interment Rights and Streamlined Accounting Methods and the proposed draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations released on June 30, 2010 investment plans would be required to register if they make the reporting entity election, the consolidated filing election or the tax adjustment transfer election.

This is consistent with the information released by the Department of Finance on January 28, 2011, in the document Proposed Amendments to the GST/HST Legislation, as well as the draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (draft SLFI Regulations) that were included in the Draft Regulations Amending Various GST/HST Regulations.

There have been changes to the proposed filing requirements for the reporting entity, consolidated filing and tax adjustment transfer elections. The following is proposed under the draft SLFI Regulations:

under subsection 56(3), a reporting entity election must set out the day on which the election is to come into effect and be filed before that day or any later day that the Minister may allow.

Note: If an election is in effect on a day on or before a Division V return (i.e. Form GST34 or GST494 return) is required to be filed for the investment plan, the return for the reporting period must be filed by the investment plan manager in prescribed form under subsection 56(2).

under subsection 57(10) a consolidated filing election is to set out the day on which the election is to come into effect and be filed before that day or any later day that the Minister may allow.

Note: If an election made by two or more investment plans and the investment plan manager is in effect on a day on or before the Division V returns are required to be filed for those investment plans, the investment plan manager must file in prescribed form on behalf of those plans and those investment plans are each not required to file those returns under subsection 57(7).

under subsection 58(1), a tax adjustment transfer election is effective from the first day of a reporting period of the investment plan manager, and under subsection 58(4), the election must set out the first fiscal year of the investment plan manager during which the election is to be in effect, and be filed before the first day of that first fiscal year or any later day that the Minister may allow.

An SLFI investment plan’s request to file a reporting entity, consolidated filing and/or tax adjustment transfer election late will be considered on a case-by-case basis.

An SLFI that has made a reporting entity and/or tax adjustment transfer election and not a consolidated filing election must apply for registration within 30 days after the day the election comes into effect.

With respect to a consolidated filing election, the investment manager must apply for registration within 30 days after the day the election comes into effect.

We wish to clarify that it is not CRA’s general practice to allow a retroactive GST/HST registration of 6 months as a matter of course.

2. The draft SLFI Regulations provide ministerial discretion to accept reporting entity, consolidated filing and tax adjustment transfer elections that are filed late. Each application to file these elections late will be considered on a case-by-case basis. Where a late-filed election is accepted, CRA will allow a retroactive registration to the effective date of the election.

3. Although Bill C-9 did not receive Royal Assent until July 12, 2010, the Department of Finance announced that the “Government of Canada Proposed Improvements to the Application of the GST to the Financial Services” on September 23, 2009 (Announcement Date). A backgrounder and draft legislation was released with this announcement.

It was stated in the announcement that the proposed deeming rules (section 172.1) would apply for fiscal years of employers beginning on or after the Announcement Date. With respect to pension entities, the proposed rules would apply to a pension entity’s claim periods (i.e., a reporting period of the pension entity is a registrant or the first two or last two fiscal quarters of a fiscal year if the pension entity is not a registrant) beginning on or after the Announcement Date.

GST/HST Memoranda 16.3, Cancellation or Waiver of Penalties and/or Interest, sets out the administrative guidelines that the Canada Revenue Agency (CRA) will follow in applying the provisions of section 281.1 of the Excise Tax Act (the Act) where the Minister may cancel or waive penalties and/or interest payable under section 280 and the penalty payable under section 280.1 for filing a return late.

The CRA recognizes that, despite a person's best efforts, there may be occasions where, as a result of extraordinary circumstances beyond the person's control, the person may be prevented from complying with the requirements of the Act, and therefore may incur penalties and/or interest imposed under section 280 or section 280.1. In such situations, the CRA may consider it appropriate to exercise discretion in the application of penalties and/or interest and include the following criteria for discretion:

  1. Extraordinary circumstances
  2. Cancellation or waiver due to actions by the CRA
  3. Inability to pay or financial hardship

Where an extraordinary circumstance beyond the person's control has prevented the person from complying with the Act, the factors listed below will be considered by the CRA in order to determine whether or not penalties and/or interest will be cancelled or waived.

  1. Does the person have a satisfactory history of voluntary compliance (i.e. have previous GST/HST returns been filed and payments made on time)?
  2. Has the person knowingly allowed an outstanding balance to exist upon which the penalties and/or interest have accrued?
  3. Has the person acted quickly to remedy the omission or the delay in compliance, which originally resulted in penalties and/or interest being charged?
  4. Is there evidence that the person exercised reasonable care and diligence (e.g., planned for anticipated disruptions) and was not negligent or careless in the conduct of its affairs? The onus is on the registrant to keep abreast of any new developments in the administration of the GST/HST so as to ensure continuing compliance.

Given these general criteria, and the length of time the changes were announced by the Department of Finance before the date of royal assent, it would not be appropriate for the CRA to use its discretion to waive interest under section 281.1 of the ETA for participating employers required to remit the tax deemed collected under section 172.1

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11. PENSION RE-SUPPLIES/DEEMED SUPPLIES

Facts / Background

An employer is responsible for managing the investments of assets owned by the Plan and the employer retains an investment manager to provide investment management services. Notwithstanding that it is the employer who is responsible for the management of the investments, the employer is entitled to be reimbursed for all costs incurred in administering the pension plan (which would include the investment management fees). The third party investment management services will clearly be included as a deemed supply to the Plan at year end.

Question

Does the CRA consider the mere fact that the employer is reimbursed for the cost to be a re-supply to the pension plan? Under the new rules, the GST/HST cost is the same. If the reimbursement is a re-supply, the employer will collect HST on the reimbursement and at year -end will issue a tax adjustment note to offset the HST on the deemed supply of the third party investment management fees. It is clear that the investment management services are used by the employer (who is the recipient and who is responsible for administering the investments). There does not however, appear to be an actual re-supply to the pension plan and that is why the deeming rules were introduced. Can CRA confirm that mere reimbursement of an employer of administration costs does not constitute a re-supply to the pension plan for HST purposes?

To the extent the CRA does consider the reimbursement to be a re-supply to the pension plan, could the CRA explain how the “tax adjustment note” provisions in subsection 232.01(3) would apply to relieve the incidence of double tax.

CRA Comments

Generally, CRA will consider an actual supply of a specified resource to have been made when the employer is paid an amount in respect of the resource from the assets of the pension plan or when an amount is paid on behalf of the employer from the assets of the plan.  However, all of the facts and circumstances would have to be considered in determining whether the employer was making a supply to the pension entity in a particular situation.

Where an employer is deemed to have made taxable supplies to the pension entity under subsection 172.1(5) or 172.1(6), but has also charged tax on an actual supply of the same property or service to the pension entity, sections 232.01 or 232.02 allow the employer to reduce its net tax by issuing a tax adjustment note (TAN) to the pension entity. However, sections 232.01 and 232.02 also requires the pension entity receiving the tax adjustment note to pay back any input tax credits or rebates claimable in respect of the tax.

The employer is required to issue the TAN in prescribed form containing prescribed information and in a manner satisfactory to the Minister. Every employer that issues a TAN under subsections 232.01(3) or 232.02(2) must maintain satisfactory evidence to establish that the employer was entitled to issue the TAN for a particular amount. This requirement remains for a period of six years after the day the TAN is issued. The information requirements for issuing a TAN can be found in NOTICE 261 - Information Required for Tax Adjustment Notes Issued by an Employer to a Pension Entity and the Consequential Notices Issued by the Pension Entity.

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12. PENSION PLAN ANNUAL INFORMATION SCHEDULE

Question

We understand that consideration is being given for relief from the requirement for pension plans that are SLFI's as a result of the new rules (i.e., having members in different provinces) to file the Annual Information Schedule (Form GST111) for Financial Institutions - either by way of legislative amendment or CRA administrative policy. Can the CRA comment on whether pension plans that are SLFI's merely as a result of the new rules will be required to file Form GST111?

CRA Comments

Under section 273.2 of the ETA, a financial institution that is a GST/HST registrant (other than a prescribed person, or a person of a prescribed class) and that has a total of all amounts included in computing, for purposes of the Income Tax Act, the person’s income (or in the case of an individual, business income) for the last taxation year of the person that ends in the fiscal year in excess of $1 million, is required to file an information return for the financial institution (Form GST111).

As indicated in the proposed Draft Regulations Amending Various GST/HST Regulations issued by the Department of Finance on January 28, 2011, under section 6 of Part 5 of the Financial Services (GST/HST) Regulations, SLFIs that are investment plans, as defined in subsection 1(1) of the Selected Listed Financial Institution Attribution Method (GST/HST) Regulations (draft SLFI Regulations), are prescribed for the purposes of subsection 273.2(2) of the ETA.

Investment plan, as defined in subsection 1(1) of the draft SLFI Regulations means a person referred to in subparagraph 149(1)(a)(vi), a segregated fund of an insurer, or (ix), an investment plan, of the ETA other than a trust governed by a registered retirement savings plan, a registered retirement income find or a registered education savings plan.

The proposed amendment would apply in respect of fiscal years of a person that end on or after July 1, 2010.

Therefore, based on the draft Regulations, a pension plan that is a selected listed financial institution and an investment plan as defined in subsection 1(1) of the draft SLFI Regulations would be a prescribed person and would not be required to file Form GST111 for fiscal years that end on or after July 1, 2010.

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13. PENSIONS AND SUBSECTION 14(1) OF THE SLFI ATTRIBUTION METHOD (GST/HST REGULATIONS)

Facts/Background

Proposed subsection 14(1) of the Selected Listed Financial Institutions Attribution Method (GST/HST Regulations) as found in section 2 of the Draft Regulations Amending Various GST/HST Regulations, No.2, defines “attribution point” as:

(a)(iii) if the investment plan is a pension entity of a defined benefits pension plan, the last day on which calculations of the actuarial liabilities of the plan have been completed in the particular fiscal year and the three immediately preceding fiscal years of the investment plan or, if no such day exists, September 30 of the particular fiscal year…

Question

Please clarify the exact intention of this part of the definition.

(a) Does this provision permit the pension entity to use the last actuarial calculations completed, so long as those calculations are not more than 3 fiscal years old? Or

(b) Does this provision permit the pension entity to use the actuarial calculations from the current fiscal year, only where the calendar date of these calculations is the same as the calendar date such calculations were prepared in the previous three fiscal years?

(c) Does it intend some other effect?

CRA Comments

New proposed paragraph 17(1)(a) of the Selected Listed Financial Institutions Method (GST/HST) Regulations released January 28, 2011, defines “attribution point” where there is no election under section 19 in effect as:

Subparagraph 17(1)(a)(ii)(C):

if the investment plan is a pension entity of a defined benefits pension plan, the last day in the particular fiscal year and the three preceding fiscal years of the investment plan for which calculations of the actuarial liabilities of the plan have been completed or, if no such day exists, September 30 of the particular fiscal year,….

As noted in paragraph (a) of the question, we agree that as clarified by the revised wording in new proposed clause 17(1)(a)(ii)(C), a pension entity of a defined benefit pension plan is required to use the day that the most recent calculations of the actuarial liabilities were completed within the three preceding fiscal years of the investment plan as its attribution point. However, if these calculations are not available the defined benefits pension plan is required to use September 30 of the particular fiscal year as its attribution point. If no election under section 52 (real-time calculation method) or section 53 (reconciliation method) was in effect throughout the fiscal year, the particular fiscal year is the preceding fiscal year.

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14. CHARACTERIZATION OF TELECOMMUNICATION SERVICES

Facts/ Background

There has not been much information regarding the characterization of telecommunication services provided by non-traditional means and whether such telecommunication services are a supply of (a) a “service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system or whether they are a supply of (b) making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a). In addition, with some of these non-traditional telecommunications services, it is difficult to apply the existing place of supply rules.

Question

Has the CRA issued or is in the process of issuing any rulings or interpretations regarding these non-traditional telecommunication services, such as telecommunications provided via Voice over Internet Protocol (“VoIP”)? Please indicate the direction that the CRA is going with respect to these services.

CRA Comments

Historically, the CRA has not received many ruling or interpretation requests concerning the characterization or place of supply of telecommunication services provided by non-traditional means. However, we have noticed an increase in enquiries related to telecommunication services as a result of the implementation of the HST in Ontario and BC.

The CRA has not issued any rulings or interpretations regarding the characterization or place of supply of VoIP services. Generally, VoIP services allow users to make calls using broadband Internet connections. We are currently working on four cases that deal with VoIP services:

  • supplies of VoIP services provided by a non-resident supplier where the communications are initiated outside Canada, but received in Canada;
  • supplies of VoIP services calling plans for a flat fee;
  • supplies of VoIP services provided by a non-resident supplier where the communications are initiated in Canada, but received outside Canada; and
  • supplies of VoIP services provided by a non-resident supplier where the communications are initiated and received outside Canada, but routed through a server located in Canada.

Given that we are only in the early stages of dealing with these cases, we cannot state for certain what our final position will be in each case. However, please note that VoIP services are generally regarded as telecommunications services for GST/HST purposes, as set out in Technical Information Bulletin B-090, GST/HST and Electronic Commerce.

TIB B-090 makes reference to “voice telephony services” provided through the Internet. These services are characterized as telecommunication services for GST/HST purposes, given that the main purpose is to provide the transmission of voice communications over the Internet. Generally, the supplier of VoIP services is regarded as providing a voice telecommunication service analogous to a traditional voice telephone service, except that the VoIP service is provided over the Internet as opposed to over the telephone network.

We anticipate that the redacted responses to these ruling and interpretation requests will be made available to tax practitioners. Also, we will endeavor to put an article concerning the application of GST/HST to VoIP services in the Excise and GST/HST News, once these cases are completed.

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15. AMALGAMATION & SUCCESSOR CORP’S ITC ENTITLEMENT

Facts / Background

In a corporate reorganization involving a GST registrant that is engaged exclusively in commercial activities, assets are first transferred to a NewCo who immediately thereafter is amalgamated with another corporation (“SuccessorCorp”) who will use the assets exclusively in a commercial activity.

The CRA has indicated in previous meetings that the NewCo may not be eligible to register for GST or claim ITCs in relation to the asset transfer (see. Question 19 from March 3, 2005 meeting).

Question

Can the CRA confirm that SuccessorCorp will be entitled to claim ITCs for the GST that was payable by NewCo pursuant to the following provisions:

  1. For purposes of applying all provisions of Part IX of the ETA to property that was acquired by NewCo, paragraph 271(b) deems the SuccessorCorp to be the same corporation as and a continuation of NewCo and, as such, SuccessorCorp can claim the ITC?
  2. To the extent paragraph 271(b) does not provide the basis for SuccessorCorp to claim ITCs for the GST that was payable by NewCo, then the “change of use” rules in subsection 199(3) for capital personal property and 206(2) for real property should allow SuccessorCorp to claim ITCs?

CRA Comments

It appears that NewCo will not be engaged in commercial activity as defined in subsection 123(1) of the ETA and therefore it will not be eligible for input tax credits (ITCs). As a result, SuccessorCorp would not be eligible to claim ITCs with respect to the property that NewCo acquired unless a change-in-use provision applies. For example, if all conditions of the provisions are met, SuccessorCorp may be eligible to claim ITCs on the change of use of capital personal property under subsection 199(3) and of capital real property under subsection 206(2) based on the basic tax content of the property.

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16. USED BUSINESS VEHICLES TRANSFERS

Facts/ Background

In a situation where there is a s. 156 election (which deems that there to be nil consideration) or a s. 167 election (no tax is payable), there is clearly no tax on the transfer of used motor vehicles because of the specific provisions of the GST legislation.

Question

  1. Does the CRA agree with this statement?
  2. If the CRA agrees, we note that there is a 13% Ontario used vehicle tax which appears to apply. As there should be no tax, how is this taken into account when registering the vehicles, or is this an Ontario only issue?

CRA Comments

Where a valid election exists under section 156 of the Excise Tax Act (the Act), every taxable supply, with certain exceptions, made between electing parties is deemed to be made for no consideration for the purposes of Part IX of the Act. This means that if there is a taxable supply of a used motor vehicle to which an election under section 156 applies, the GST/HST calculated on the consideration for the supply would be zero.

Where the requirements for an election under subsection 167(1) of the Act are satisfied and the supplier and the recipient jointly elect, no GST/HST is payable in respect of a supply of any property or service made under the agreement for the supply of a business or part of a business, with certain exceptions. Where the assets of the business or part of a business that are being supplied under the election include the sale of a used motor vehicle, no GST/HST is payable in respect of the supply of the vehicle for the purposes of Part IX of the Act.

The application of the provisions of the Ontario Retail Sales Tax Act (ORSTA) to supplies of used business vehicles is determined under the provisions of that Act by officials of the Province of Ontario. Questions concerning the application of ORSTA to such a supply should be addressed to them.

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17. ELECTRONIC RETURNS

Question

In situations where an electronic return is required, electronic payment is also required, how can this be done where the non-resident does not have a Canadian bank account?

CRA Comments

Under subsection 278(3) remittances/payments of $50,000 or greater must be made at a Financial Institution. There is no legislative requirement to make electronic payments where the registrant has filed the return electronically. Registrants who are not subject to subsection 278(3) may choose to make electronic payments.

If a non-resident does not have a Canadian bank account the CRA will accept a wire transfer as a method of payment. Please see the attached document (Appendix A) for more detailed information on the process.

The CRA website http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/bspsbch/pymnts/menu-eng.html is currently being updated to reflect this information.

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18. HOLDBACKS ON ASSET DEALS THAT ARE NOT PAID OUT

Facts / Background

An asset deal has a holdback which is not paid out until earned. For example, (i) an indemnity for any claims that are made within 2 years of completing the purchase (closing); or (ii) payouts earned if executives stay on for 2 years. Please assume neither section 167 nor subsection 168(7) is applicable to the asset deal.

Additional Information:

The asset deal consists of a supply of tangible personal property and real property. We are assuming that the value of the tangible personal property and that of the real property are separately identified in the asset deal.

We also understand that there are two holdbacks relating to this supply of tangible personal property and real property. The first holdback could be used by the recipient to make payments for damage claims made on the business or reimbursements to customers during the two year period as specified in the asset deal. If at the end of the two year period, no claims or reimbursements have been made, the amount of the holdback is released to the supplier. The second holdback relates to key executive employees of the supplier who became employees of the recipient at the time of the asset deal. We are also assuming that under the terms of the asset deal, if these employees stay on with the recipient at the end of the two year period, the holdback is released to the supplier. In the event any of the employees leave during the two year period, the holdback is not released to the supplier.

Question

  1. How is the holdback treated for GST/HST purposes?  Specifically, is tax not payable under section 165 until the amount is actually paid, or does subsection 168(2) apply?
  2. What happens if the holdback is never paid out but subsection 168(3) has been applied? Is the only remedy a rebate application (which may be out of time)?

CRA Comments

The provisions of section 168 of the Excise Tax Act (ETA) would apply to the holdback.

  1. Where a supply of personal property and real property is made and the consideration for each element is separately identified, subsection 168(3) would apply to the supply of tangible property and subsection 168(5) would apply to the supply of real property to determine when the tax is payable for the portion of the consideration held back.

    Under subsection 168(6) where tax is payable on a day for the supply of tangible personal property or real property and the value of the consideration or a part of the consideration for the supply of tangible personal property or real property is not ascertainable on that day, the tax becomes payable on the day the value of that consideration becomes ascertainable.

    In this scenario, the holdbacks are to be released at the end of two years following the sale of the business assets. The GST/HST is exigible on the amount of the holdbacks released at the end of the two year period. In the event that a claim for damages or customer reimbursements reduces the amount of the first holdback during the two year period following the sale of the business assets, the amount of the holdback released at the end of the two year period would be subject to the GST/HST, the day the terms of the first holdback would have been met and the amount of the consideration would have become ascertainable. Similarly, with respect to the second holdback relating to the key executive employees, if the key executive employees stay on with the recipient at the end of the two year period under the terms of the asset deal, the second holdback is to be released. The amount of the second holdback released at the end of the two year period would be subject to the GST/HST, the day the terms of the second holdback would have been met and the amount of the consideration would have become ascertainable.

  2. In the event that GST/HST has been charged on the amount of the holdback prior to the value becoming ascertainable at the end of the two year period, GST/HST would have been paid in error during the two year period. An application for a rebate for tax paid in error, where no ITC has been taken, could be made by the recipient before the tax becomes exigible and within two years of having paid the GST/HST.

Regardless of the approach taken to recover the GST/HST paid in error, the tax on the amount of the remaining holdback value will only become payable at the end of the two year period, the time when the amounts become ascertainable.

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19. PENALTIES

Facts/Background

Assume that two closely-related corporations (ACo and BCo) have entered into a valid election under section 156 of the ETA and that a significant amount of tangible property is transferred from ACo to BCo for use exclusively in commercial activity of BCo. It is not always clear whether tangible property constitutes real property (e.g., when it is attached, in some manner, to a building). In addition, the section 156 election does not apply to transfers of real property.

Question

Where no GST is collected by ACo or self-assessed by BCo and it is ultimately determined that all or a portion of the transferred property constitutes real property, what is the CRA’s assessing policy concerning application of tax, penalties and interest?

Comments

Our understanding is that the CRA generally assesses the tax in the relevant reporting period, allows the offsetting ITC for the same period and does not assess penalties or interest in these circumstances.  Please confirm.

CRA Comments

Where it is determined that a registrant has failed to self-assess and through an audit is assessed for the GST/HST payable, subsection 296(2) would allow for the offsetting of the ITC in the relevant reporting period against the GST/HST payable provided that the registrant was entitled to an ITC. In the case of a full ITC being offset against the GST/HST payable, there would not be any interest assessed on the assessment.

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20. COUPONS

Question

In President's Choice Bank v. Her Majesty the Queen, the Tax Court found that it is at the time of redemption of the coupon (points) that it is determined whether a coupon has a fixed dollar amount. Please confirm that the Canada Revenue Agency now accepts that subsection 181(3) of the ETA also applies to the redemption of non-reimbursable coupons that offer a different percentage off an item (e.g., 10% off the purchase of 5 or less boxes and 20% off the purchase of 6 or more) or contain more than one monetary discount (e.g., 25¢ off a 750ml soft drink or 50¢ off a 1.5 litre soft drink).

CRA Comments

It is the CRA’s position that a particular coupon falling within section 181 of the ETA may have a fixed value where that value can be determined without reference to the cost of the property or service for which the coupon is redeemed. Where, as here, the value of the coupon may vary depending on the final charge, the value of the coupon is variable and not fixed. In such cases, subsection 181(3) will not apply.

We confirm that non-reimbursable coupons that offer a variable percentage discount (e.g., 10% off the purchase of 5 or less boxes and 20% off the purchase of 6 or more) or that offer more than one fixed monetary discount (e.g., 25¢ off a 750ml soft drink or 50¢ off a 1.5 litre soft drink) do not meet the conditions of subsection 181(3) since the actual price reduction accorded by the coupon may vary with each purchase.

Subsection 181(4) of the ETA will apply to these coupons. Under this provision, when a registrant accepts, in full or partial consideration for a supply of a property or service, a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and subsection 181(2) does not apply in respect of the coupon, the value of the consideration for the supply is deemed to be the amount, if any, by which the value of the consideration for the supply exceeds the discount or exchange value of the coupon. No input tax credits are available in respect of redemptions of coupons that fall under subsection 181(4).

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21.  RESIDENCY OF INVESTMENT VEHICLES (LPs AND TRUSTS) & ZERO-RATING OF INVESTMENT MANAGEMENT SERVICES

Facts / Background

Services that are supplied to a non-resident are generally zero-rated. Subsection 123(1) of the ETA defines a "non-resident" to mean not resident in Canada. Pursuant to paragraph 132(1)(b) of the Act, a partnership will be deemed to be a resident of Canada if a majority of members of the partnership, having management and control of the partnership, are residents of Canada. With respect to trusts, the CRA has historically taken the view that the residency of a trust is determined by the residency of the trustee (see, for example, Ruling No. 1159—5 dated May 6, 1998 where the CRA stated “the trust is considered to be resident in the location where the trustee resides”). The FCA’s recent decision in St. Michael Trust (2010 DTC 5189); however, suggests that the residence of a trust will not always be determined based on the residence of the trustee and that a central management and control test may be applied.

(Please note that the view of the CRA as expressed in the question is the CBA impression of the CRA position and not actually that of the CRA.)

Question

Can the CRA provide its views on the residency of limited partnerships and trusts and confirm whether it will be looking to the residency of the general partner and the trustee or whether it will also apply a “central management and control” test. In the context of trusts and limited partnerships whose principal activity is the investing of funds, to the extent the CRA applies a central management and control test, will the appointment of a Canadian investment manager result in the limited partnership/trust being a resident of Canada in situations where the investment manager has discretionary authority to purchase and sell investments on behalf of the investment entity (i.e., by virtue of appointing a Canadian investment manager, will central management and control be considered to reside in Canada such that the investment entity will no longer be a non-resident)?

CRA Comments

The ETA is silent on the determination of the residence of a trust; however, the CRA would generally apply the same test for ETA purposes as applied for Income Tax Act purposes. It has been the longstanding position of the CRA that, as is noted in Interpretation Bulletin IT-447 - Residence of a Trust or Estate, the residence of a trust or estate in Canada, or in a particular province or territory within Canada, is a question of fact to be determined according to the circumstances in each case. This continues to reflect the current position of the Agency.

The Federal Court of Appeal decision in St. Michael Trust Corp. vs The Queen, confirmed that residence is a question of fact and that determining a person’s residence requires consideration of several factors that point to or away from a sufficient nexus between the person and the particular country, and as such, the central management and control test for determining residence can also apply to trusts.

For this reason, we are unable to make a determination as to whether the appointment of a Canadian investment manager will result in the trust being a resident of Canada in situations where the investment manager has discretionary authority to purchase and sell investments on behalf of the investment entity. This determination would require a detailed review of all the specifics facts of the particular situation.

Unlike the situation with trusts under the ETA, as you point out, pursuant to paragraph 132(1)(b) of the ETA, a partnership will be deemed to be a resident of Canada if the member or a majority of members of the partnership, having management and control of the partnership, are residents of Canada.

Typically, in a limited partnership the limited partners do not manage nor do they exert control over the partnership. Management and control of the limited partnership is provided by the general partner.  If the investment manager is the general partner exerting all the management and control over the partnership the location of the general partner will dictate the residency of the partnership.

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

Question 1

Please provide an update on the CRA’s review of 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.

CRA Comments

GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Services issued February 2011 (TIB B-105) reflects the clarified policy based on the amendments to the definition of financial service set out in Bill C-9, the Jobs and Economic Growth Actwhich received Royal Assent on July 12, 2010. TIB B-105 replaces GST/HST Notice 250, Proposed Changes to the Definition of Financial Service and GST/HST Policy Statements P-239, Meaning of the term “arranging for” as provided in the definition of “financial service” and P-119, Trailer Commission Servicing Fees thereby making the Notice and the Policy Statements obsolete.

GST/HST Memorandum 17.2, Products and Services of a Deposit-Taking Financial Institution will be reviewed in light of the amendments to the definition of financial service. However, given other various high priority work to be completed related to the financial services sector, for example the work related to the implementation of the rules for selected listed financial institutions, the completion of this review has been delayed.

Question 2

Has there been an increase in the number of requests for GST rulings and technical interpretations in the financial services sector since the December 14, 2009 release? How many rulings and technical interpretation requests relating to the financial services sector have been received by the CRA since the December 14, 2009 release? How many rulings and technical interpretations have been issued by the CRA in response to these requests? What is the average length of time to process a financial services GST/HST Ruling request?

CRA Comments

There was an increase in written GST/HST ruling and interpretation requests relating to the definition of financial service as a result of the issuance of the GST/HST Notice 250 in February 2010 and the subsequent request by CRA for industry and stakeholder input. We have recently issued responses to several of these requests and this workload continues to be a priority.

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23. ARRANGING LOANS FOR CUSTOMERS TO PURCHASE PRODUCTS AND SERVICES

Facts/background

In Notice 250, the CRA provides two examples involving a car dealership earning a fee in relation to a loan that is provided to its customer. Example No. 13 involves a dealership that has a “captive financing and leasing segment of a business” and whom earns an exempt commission from a financing company for every successful loan that is arranged. The activities that are undertaken in arranging for the loan include: obtaining credit information from the customer; explaining to the customer the loan terms and interest rates available; helping the customer in selecting the type of loan best suited for the customer; completing loan application forms; verifying that all information is completed and making recommendations for accepting or denying loans; forwarding loan application to the lender for approval and negotiating terms of the loan.

Example No. 14 involves an independent automobile dealership that earns a taxable “referral fee” from the financing company for every successful loan. The activities undertaken by the dealership include: explaining to the customer the financing options that are available; explaining to the customer the different loan terms and interest rates that are available, assisting the customer in completing the loan application; verifying the information entered on the loan application and forwarding loan applications to the lender.

Question 1

The activities that are undertaken by the respective intermediaries in Examples 13 and 14 are fairly similar, with the important differences being that the dealership in Example 14 does not make any recommendations nor does it participate in the negotiation process. Can the CRA confirm that being involved in the negotiation process is the essential difference (and that the fact that the dealership in example 13 has a “captive financing and leasing segment” is of no relevance)?

CRA Comments

Note that although GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Services issued February 2011 (TIB B-105) replaces GST/HST Notice 250, Proposed Changes to the Definition of Financial Service, both the number of and the content in examples 13 and 14 of the Notice are the same in the TIB.

Making recommendations and being involved in the negotiation process would be factors to consider together with:

  • the degree of direct involvement and effort of the person in the provision of a financial service;
  • the time expended by the intermediary in the provision of a financial service;
  • the degree of reliance of either or both the supplier and the recipient on the intermediary in the course of providing a financial service;
  • the intention of the intermediary to effect a supply of a financial; and
  • the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in a business of providing financial services).

Question 2

To the extent being involved in the negotiations is an important factor, can the CRA provide some guidance with respect to what constitutes negotiations. For example, would it include such things as (i) issuing one or more quotes on behalf of a financing company; or (ii) requesting, on behalf of the borrower, special terms such as a lower interest rate or more flexible payment dates?

CRA Comments

The term “negotiation” is not defined in the Excise Tax Act. Various common dictionary meanings would indicate that negotiation may include such activities as (i) issuing one or more quotes on behalf of a financing company; and (ii) requesting, on behalf of the borrower, special terms such as a lower interest rate or more flexible payment dates, but one of these activities on its own would not generally be considered negotiating.

Question 3

To the extent having a “captive financing” department is relevant, can the CRA please explain how this impacts the characterization of the supply?

CRA Comments

In Example 13 of TIB B-105, the financing company relies fully on the dealership’s captive financing segment to secure the loan with the customer. The customer and the financing company have no direct contact with each other; their contact is through the dealership. This high degree of reliance on the dealership by both the customer and the financing company to effect the loan is one of many factors that are considered when determining if the dealership is providing a supply of “arranging for” a financial service under paragraph (l) of the definition of financial service in subsection 123(1) of the ETA.

Question 4

Can the CRA confirm that the same analysis with respect to the GST status of commissions received for a successful loan would apply equally in other industries where a supplier’s customer requests financing and the supplier is involved in facilitating the issuance of a loan by a third party (e.g. loans to buy electronics, furniture, stocks, or an insurance policy).

CRA Comments

The GST/HST status of a supply for which the supplier receives commissions for its services rendered as an intermediary will be determined by applying the same general analysis as set out in TIB B-105 in the section entitled, “Determining whether a supply is a financial service”. It is important to note that one of the factors to be considered is the normal activities of an intermediary in a given industry (including whether the intermediary is engaged in a business of providing a financial service).

Question 5

With respect to the importance of being involved in negotiations, we note that Example 9 involves a licensed mortgage broker who participates in the preparation and submission of residential mortgage loan applications and assists the applicant in obtaining a mortgage loan by: (i) providing the lender with correct and complete applications for mortgage loans; (ii) disclosing any or all information that may affect the lender’s approval decision; and (iii) providing all documentation that is required to complete funding. In this example, the mortgage broker is not involved in the negotiations and it does not have authority to bind the lender in any manner. Can the CRA confirm that the same level of involvement in arranging a loan would result in a commission being exempt in situations where the intermediary is arranging a loan on behalf of a customer who is purchasing a particular product or service from the intermediary?

CRA Comments

As previously indicated, whether a person is providing a supply of a financial service under paragraph (1), of “arranging for” a service referred to in any of paragraphs (a) to (i) and not otherwise referred to in any of paragraphs (n) to (t) in the definition of financial service, can only be determined by reviewing all the facts surrounding the transaction including a review of the written agreement detailing the actions, responsibilities and obligations of the person in connection with the issuance of the loan by the lender, by establishing the predominant element of the single supply, and by taking into consideration all the factors listed in TIB B-105 to establish whether an “arranging for” service is provided under paragraph (l) of the definition of financial service.

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24. FINANCIAL SERVICES: UNDERWRITING AND “BEST EFFORTS” DEALS

Facts / Background

Underwriting Services

An underwriter agrees to act for a company to sell shares/debt of the company in Canada (an IPO or follow-on offering), either public or private.  The underwriter receives underwriting fees, which are paid chiefly for the selling of securities on behalf of an issuing company. The underwriting service may also involve some of the following activities:

  1. conducting research on the company and the market for its securities;
  2. advising the company on
    1. alternatives for raising capital;
    2. the process and structure for issuance of its shares/debt;
    3. pricing of its shares/debt;
  3. arranging for other underwriters to participate in the offering;
  4. negotiating on behalf of other underwriters;
  5. marketing of the shares/debt;
  6. purchasing shares/debt from the issuing company; and
  7. selling shares/debt to investors.

Fees may be paid to the underwriter in the form of a commission (percentage of proceeds either buying or selling the shares), spread (profit on sale of securities), or both. The underwriter may receive all or a portion of their fees in securities.

“Best Efforts” Services

In many cases an underwriter will act as a best efforts agent to the selling securityholder to sell shares/debt of another company (in Canada or internationally). Agency commissions are only paid to the extent that the agent sells or arranges for the sale of the issuer’s securities. In addition to commissions, an agent may receive a fixed fee in respect of its efforts in preparing the offering. Such best efforts services are virtually identical to the underwriting services described above except that the agent is generally not required to purchase the securities of the issuer if it cannot sell them.

Question 1

Please confirm that the above described underwriting services are exempt from GST/HST as they fall within the meaning of paragraph (h) of the definition of “financial services” (i.e. “the underwriting of a financial instrument”) or paragraph (l) of the definition of “financial services” (i.e. arranging for the issuance and sale of a financial instrument).

CRA Comments

The underwriting of a financial instrument is referred to in paragraph (h) of the definition financial service. While the underwriter may undertake activities such as research and marketing, where the underwriter is a person who agrees to purchase a new issue of securities from an issuer, assumes the risk of buying such securities from the issuer, and as the principal resells those securities to investors, it would be providing a financial service. None of the exclusionary paragraphs would apply to this service.

Question 2

The “Best Efforts” services described above should be exempt from GST/HST as they fall within the meaning of the term “arranging for” in paragraph (l) of the definition of “financial services” (i.e. arranging for the issuance and sale of a financial instrument). To the extent that some of the payment may relate to some administrative functions which would be taxable on their own, these services should be considered incidental to the overall service of arranging for the sale of shares/debt. In these circumstances, either s.138 or s.139 of the ETA should apply to deem the overall payment to be for an exempt financial service. Please confirm the CRA agrees with this analysis.

CRA Comments

We understand that the term “Best Efforts” service or arrangement is where a person such as an underwriter, acting as an agent, agrees to do its best to sell securities of the securityholder. Instead of buying the securities outright, the agent has the authority to sell the securities.

If the predominant element of the supply of the service is arranging for the sale or selling the securities on behalf of the Canadian company in circumstances where the underwriter is not the principal who buys and resells the securities to investors, the service may be considered an exempt supply of “arranging for” a service that is a financial service under paragraph (l) of the definition of financial service. Determining the tax status of the supply would require a review of the facts surrounding the transaction, including a review of the written agreement that details the actions, responsibilities and obligations of the underwriter in connection with the selling of securities, as well as a review of all the factors listed in GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service, issued February 2011.

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25. FINANCIAL SERVICES: TRAILING COMMISSIONS

Facts / Background

In example 4 of revised GST/HST Notice No. 250, issued in June, 2010, the CRA provides a factual situation where:

A commission is paid to the salesperson by the dealer at the time mutual fund units are purchased by the client. The dealer is paid a trailing commission by the mutual fund manager in respect of the value of the units of the funds that are held in the accounts. The dealer pays the salesperson a percentage of the dealer’s trailing commission on a monthly basis on each account that is serviced by the salesperson, based upon the value of all of the units held in the accounts serviced by the salesperson.

The CRA does not make a determination as to whether trailing commissions are taxable as it did in the original version of Notice 250 (where in example 2, it seemed to suggest that all trailer commissions were taxable). Rather, in the revised Notice 250, the CRA states that:

It would be a question of fact as to whether the services provided in any particular case are considered to be a single supply that is made only in consideration of the commission on the purchase of the units or a combination of the commission on the purchase and the trailing commission. The facts and circumstances of each transaction would have to be considered on their own merits.

Questions

  1. Please confirm that the trailing commission paid by the mutual fund manager to the dealer in the above situation is exempt as arranging for the supply of a financial service.
  2. If the CRA has changed its position as set out in P-119R – Trailer Commission Servicing Fees, and it is now a question of fact as to whether a trailing commission will be considered taxable or exempt, could the CRA please list some factors which would lead the CRA to conclude that a particular trailing commission is taxable? Please also provide some factors which would lead the CRA to conclude that a particular trailing commission was exempt.

CRA Comments

GST/HST Technical Information Bulletin B-105, Changes to the Definition of Financial Service (TIB B-105) issued February 2011, replaces GST/HST Notice 250, Proposed Changes to the Definition of Financial Service, and GST/HST Policy Statement P-119, Trailer Commission Servicing Fees thereby making the Notice and the Policy Statement obsolete. Example 4 in TIB B-105 provides guidance on the application of the GST/HST to trailing commissions.

Whether services for which consideration is a trailing commission provided by a dealer to a fund manager or other third party are considered to be a single supply of a financial service that is included in paragraph (a) to (m) and not otherwise excluded by any of paragraphs (n) to (t) is a question of fact.  The facts and circumstances of each transaction would have to be considered.

To date we have not been provided with sufficiently detailed information including relevant documentation such as written agreements that clearly describe the dealer’s actions, responsibilities and obligations. As such, we are not in a position to confirm that the dealer’s services in exchange for trailing commissions are exempt. However, we can say that we have previously expressed concerns with respect to situations where the trailing commission is paid to a dealer in circumstances where the dealer was not directly involved in the sale of the mutual fund units. If further clarification is required concerning the tax status of trailing commissions, please provide us with your submissions and all of the relevant agreements for our review and consideration.

Also refer to TIB B-105 for guidance on the factors to be considered to determine the application of the GST/HST on the dealer’s services.

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26. REGISTRATION AND FILING REQUIREMENTS FOR FUNDS

Facts / Background

Under the proposed changes to the draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the “Proposed SLFI Regulations”) announced in the Backgrounder released by the Department of Finance (“Finance”) on June 30, 2010 (the “June Backgrounder”), investment plans and segregated funds (“Funds”) will not generally be required to register for GST/HST purposes unless they propose to make certain elections under the Proposed SLFI Regulations. This change from the original Backgrounder released by Finance on May 19, 2010 was, we understand, intended to relieve such Funds from the administrative burden of having to register for GST/HST purposes and file GST/HST returns.

However, if a Fund does not register for GST/HST purposes, it is deemed by subsection 245(1) of the ETA to have a calendar month reporting period. As a consequence, it would appear that a non-registered Fund is required to file a interim GST/HST return (Form GST 34) for any particular month (by virtue of subsection 245(1) and paragraph 238(2.1)(a) of the ETA), in addition to its obligation to file a final annual SLFI GST/HST return (Form GST 494) pursuant to paragraph 238(2.1)(b) of the ETA. Similarly, it would appear that such a Fund would be required to remit any net tax remittable for a particular month under paragraph 228(2.1)(b) of the ETA, or may be entitled to claim a net tax refund under subsection 228(2.4) of the ETA.  In contrast, a Fund which does register for GST/HST purposes would likely have a calendar year reporting period (by virtue of subparagraph 245(2)(a)(iv) of the ETA) and would only be required to file a single annual SLFI return by virtue of paragraph 238(2.1)(b). This result would appear to be anomalous, whereby Funds not registered are subject to a greater compliance burden than registered Funds, since it runs contrary to the apparent policy rationale for relieving Funds from the requirement not to register for the GST/HST (i.e., to reduce the administrative burden for Funds).

Question

Does the CRA agree that Funds which are not registered for the GST/HST will be required to file monthly interim GST/HST returns and, where applicable, remit net taxes monthly? If not, what is the technical basis for relieving such Funds from the requirement to file interim GST/HST returns and the corresponding remittance obligations? Would CRA extend any administrative relief from these monthly interim filing obligations for non-registrants, particularly given that as of January 12, 2011, the Proposed SLFI Regulations are not law, and remain to be amended to reflect the June Backgrounder and other possible changes? Alternatively, would the CRA consider extending administrative relief from interim filing requirements for months where there is no net tax (adjustment) to be reported or there is a net tax refund? We note that claiming a net refund is not mandatory but permissive or optional under subsection 228(2.4), as indicated by the word “may” rather than “shall”. Has CRA had any communications with Finance with a view to addressing what appears to be an anomalous result?

CRA Comments

Under subsection 245(1) of the ETA, the reporting period of a non–registrant is monthly (subject to section 251 of the ETA, ceasing to be or becoming a registrant).

Under subsection 238(2) of the ETA, a non-registrant is required to file a return for each reporting period for which net tax is remittable. However, subsection 238(2.1) of the ETA, states that despite subsection 238(2) of the ETA, if an SLFI’s reporting period is monthly or quarterly, it is required to file an interim return within one month after the end of the period, and file a final return for the period within six months after the end of the fiscal year in which the period ends.

Accordingly, a non-registrant that is an SLFI is required to file monthly interim returns (Form GST62, Goods and Services Tax/Harmonized Sales Tax (Non-personalized)) and a final return (Form GST494, Goods and Services Tax/Harmonized Sales Tax Final Return for Selected Listed Financial Institutions).

Under subsection 228(2.4) of the ETA, where an amount for a reporting period of an SLFI is a negative amount, the SLFI may claim that amount, in the interim return for that reporting period filed before the day on or before which the final return for the period is required to be filed, as an interim net tax refund for the period. Subsection 228(3) of the ETA permits an SLFI to claim its net tax refund for a reporting period in its final return for the period to the extent that the amount was not claimed as an interim net tax refund.

Based on discussions with the Department of Finance, it is our understanding this is consistent with the policy intent.

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27. EXCHANGE TRADED FUNDS AND THE SLFI REGULATIONS

Facts Background

Draft sections 33 and 34 of the Proposed SLFI Regulations, as modified by the June Backgrounder, contain special rules for computing the provincial attribution percentage (“PAP”) for “exchange-traded funds” (“ETFs”), as that term is defined in section 1 of the Proposed SLFI Regulations. Where an ETF is unable to determine the province or country of residence of more than 10% of its investors, represented by value, for a particular attribution point, the unitholders for which it cannot determine the province of residence will be deemed to be resident, as of that attribution point, in the province with the highest HST rate as of the first day of the relevant fiscal year (the “Highest Rate HST Province”), subject to the 10% carve-out where the ETF obtains information about the residence of investors representing more than 50% of the value.

In practice, however, ETFs often face significant difficulties indentifying the province (or country) of residence of its investors. For example, most units of an ETF are typically registered in the name of a financial intermediary, such as CDS, who holds such units on behalf of the “real”, beneficial unitholders. An ETF can usually obtain a list of “non-objecting beneficial owners” (“NOBOs”) of its units, who have consented to the disclosure by the relevant financial intermediaries of their information, including their addresses, to the ETF (a “NOBO List”). The ETF can, therefore, use the NOBO List to determine the residence of the NOBOs.

However, an ETF usually cannot determine the residence of “objecting beneficial owners” (“OBOs”) of its units, who have not consented to the disclosure of their information to the ETF by the relevant financial intermediaries.

For purpose of the PAP calculation under the proposed rules, the OBOs would be treated as if being resident in the Highest Rate HST Province (subject to the possibility of the above-noted 10% carve-out). This calculation could generally result in the ETF’s HST liability being significantly higher than it would be if the province of residence of the OBOs could be identified.

Since ETFs face these practical obstacles preventing obtaining the residence of OBOs and, unlike other SLFI investment plans, cannot compel the production of such information from third parties, the above result seems to impose an unfair additional HST burden on ETFs.

Question

To alleviate the harsh results described above has the CRA considered alternative methods to allow ETFs to determine the residency of their unitholders and to compute their PAPs? For example, has the CRA considered allowing ETFs to compute their PAPs based on a “geographical analysis report” (a “GEO Report”) prepared by a third-party service provider? A GEO Report breaks down the number and percentage of units held by all beneficial unitholders, NOBOs and OBOs, in different provinces and countries based on the addresses of such unitholders contained in the records of the relevant financial intermediaries. In response to a residence information request under subsection 53(3) of the Proposed SLFI Regulations from a non-ETF investment plan to determine its PAPs, it would appear that a broker, dealer or distributor could satisfy this request by providing information substantially similar to that contained in a GEO Report. Does the CRA agree that information similar to that contained in a GEO Report would be sufficient to satisfy an information request under subsection 53(3) of the Proposed SLFI Regulations? If so, there does not seem to be any policy reason why an ETF should not also be permitted to rely upon a GEO Report.

In view of the above, will the CRA allow an ETF to rely upon a GEO Report in determining the residence of its beneficial shareholders to compute its PAPs?

CRA Comments

A selected listed financial institution that is an exchange-traded fund is required to use the residency test in section 6 of the proposed Selected Listed Financial Institutions Attribution Method GST/HST) Regulations released January 28, 2011 (draft SLFI Regulations) to calculate its provincial attribution percentage (referred to in sections 35 or 36 of the draft SLFI Regulations). For example, under paragraph 6(a) an individual is resident in the province in which the individual’s principal mailing address in Canada is located.

A GEO report will be accepted (subject to the normal audit process) provided that the information received from the third-party service provider supports the determination of a person’s residency in a province under section 6, for example with respect to an individual it is based on the individual’s principal mailing address in Canada.

Where a selected listed financial institution that is an exchange-traded fund is unable to calculate its provincial attribution percentages using the methods referred to in the January 28 draft SLFI Regulations it would be able to apply to the Minster to use an alternative method to calculate its provincial attribution

percentages as described in the backgrounder released on May 19, 2010, Financial Institution Rules for the Harmonized Sales Tax (HST) and confirmed in proposed section 225.3 of the proposed amendments to the Excise Tax Act released on January 28 2011.

In general, as referred to in proposed subsection 225.3(3) this application must be filed on or before the day that is 180 days before the first day of the fiscal year to which the application applies or any later day that the Minister may allow. The application should explain why the exchange-traded fund is unable to determine the province of residency for 90% of its unit holders (e.g., the existence of a large group of OBOs). Where the information in a GEO report does not meet the specific information requirements in section 6 it could possibly be included as part of the application to use an alternative method under proposed section 225.3. The Compliance Programs Branch would then need to consider all the documentation presented to determine if the GEO report prepared by the third-party service provider is a reasonable representation of the provincial distribution of the units held in the exchange-traded fund or in the exchange-traded series of the fund given the particular circumstances.

We are currently developing a prescribed form for the application by an exchange-traded fund to use particular methods to calculate its provincial attribution percentages. In the interim, a letter of application with details of the proposed method(s) may be sent to the Assistant Director of Audit of your tax services office.

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28. POLICY STATEMENT P-209 LAWYERS’ DISBURSEMENTS

Question

Will the CRA be changing GST/HST Policy Statement P-209 Lawyers’ Disbursements, in light of the Federal Court of Appeal’s decision in the Merchant Law Group case, and if so, how is it expected to change?

CRA Comments

No. The CRA will not be changing GST/HST Policy Statement P-209, Lawyers’ Disbursements, (P-209) as a result of the Federal Court of Appeal’s (FCA) decision in the Merchant Law Group case. The FCA’s decision confirms the CRA’s policy that a lawyer must establish that it incurred a particular disbursement in its capacity as the client’s agent before the subsequent reimbursement by the client can be relieved of GST/HST.

P-209 explains how common lawyers’ disbursements are characterized for GST/HST purposes. The phrase “lawyers’ disbursements” refers to any number of expenses that a lawyer may incur in the course of providing legal services, and for which a particular client will subsequently reimburse the lawyer.

The disbursements described in P-209 are characterized as either “incurred as agent” or “not incurred as agent.” The phrase “incurred as agent” indicates that the disbursement described is generally incurred in a lawyer’s capacity as agent for a particular client. As such, no GST/HST is payable on the subsequent reimbursement by the client. The phrase “not incurred as agent” indicates that the disbursement described is generally incurred otherwise than in a lawyer’s capacity as agent for a particular client. As such, GST/HST is payable on the subsequent reimbursement by the client (to the extent that GST/HST is payable on the consideration for the service provided by the lawyer to the client).

The characterization of the disbursements set out in P-209 is based on the application of the principles of agency to a typical transaction involving that disbursement. GST/HST Policy Statement P-182R, Agency, (P-182R) was used as the basis for this analysis. P 182R lists three essential qualities of an agency relationship, including the essential quality that the putative agent must possess the authority to affect the alleged principal’s legal position.

With respect to the disbursements at issue in the Merchant Law Group case, the FCA stated that for a lawyer who acquires goods or services not to be the recipient of the goods or services for GST/HST purposes, the lawyer must establish that he or she was acting as agent on behalf of their client when acquiring the goods or services. Furthermore, the FCA stated that the onus is on the lawyer to establish the existence of the agency relationship.

Consistent with P-182R, the FCA stated that an essential quality of agency is whether the putative agent has the capacity to affect the legal position of the alleged principal. The FCA stated that the absence of the ability to affect the legal position of the alleged principal with respect to a particular disbursement is conclusive that there is no agency relationship with respect to that disbursement.

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29. DELAYED INTERPRETATION REQUESTS AND RELATED ASSESSMENTS

Question

Does the CRA have any audit enforcement policies in situations where GST/HST Interpretation requests have taken an inordinately long period of time (e.g., in excess of 5 years). The concern is that the taxpayer has sought CRA’s interpretation on the application of the Act, but has not been provided with any guidance allowing it to properly comply. Does the CRA have any policy limiting the ability of Audit to assess the taxpayer during the period of time that the Interpretation was outstanding? Will the CRA consider developing same?

CRA Comments:

The CRA does not have any policies limiting the ability of Audit to assess a registrant during the period of time that an interpretation or ruling request is outstanding. Discussions between Audit and Rulings are a normal course of action in order to establish whether the audit will be affected by the decision rendered by Rulings and to the reasoning for the delay in issuing a response to the requestor. Where the auditor determines that the assessment can be raised without the decision from Rulings, the registrant would be informed, and also as in the normal course of an audit, informed of their rights to recourse in respect of the assessment. Generally, lengthy delays are mainly the result of an interpretation request requiring a significant amount of consultation with internal stakeholders as well as with the Department of Finance to determine if the interpretation and/or decision is in line with the tax policy.

Further, as the question suggests a delay of more than 5 years, the request of a waiver as well as the application of the waive policy may be considered appropriate, based on the specific facts of the case.

There are no plans at this time to develop a policy as the cases are distinct and would be reviewed on a case by case basis.

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30. NON-RESIDENTS AND PERMANENT ESTABLISHMENTS

Facts / Background

A non-resident corporation not registered for GST purposes, contracts with independent distributors resident in Canada (mainly individuals), who agree to buy and resell goods from the non-resident (i.e., not acting as sales “agents” or “sales reps”), and refer other Canadian residents to the non-resident as potential independent distributors. The non-resident has no other physical or other presence in Canada, but may from time to time, send employees or other contractors to Canada to meet with the distributors for training and motivation purposes.

Questions

  1. Does the CRA accept that in a “buy and resale” situation, where the independent distributor purchases and warehouses inventory in Canada for resale to Canadian customers on its own account, the independent distributor cannot constitute a “permanent establishment” of the non-resident?  If not, please comment on the CRA’s position on the CRA’s interpretation of paragraph (b) of the definition of “permanent establishment” in subsection 123(1) of the ETA.
  2. Does the answer change if, instead of purchasing and warehousing a quantity of inventory in Canada, the independent distributors takes only “flash title” at the time the goods are shipped from the non-resident to the Canadian customer?

CRA Comments:

  1. Based on the information provided, the independent distributor would not be considered a permanent establishment of the non-resident under subsection 123(1) of the Excise Tax Act.
  2. Based on the information provided, the answer would not change if instead of purchasing and warehousing a quantity of inventory in Canada, the independent distributors were to take “flash title” at the time the goods are shipped from the non-resident to the Canadian customer.

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31. UPDATE ON AUDIT ISSUES AND DISCUSSION

Question

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

CRA Comments:

GST/HST audits and examinations enhancements

On July 1, 2010, the Government of Canada and the provinces of Ontario and British Columbia implemented the HST in these provinces. Ontario harmonized its retail sales tax with the GST for a total HST rate of 13% and British Columbia harmonized its provincial sales tax with the GST to implement the HST at the rate of 12%.

In administering the HST for Ontario and British Columbia, the CRA is taking on a significant new workload. To ensure success, the CRA is taking steps to strengthen its administration of GST/HST and provide a dedicated and centralized focus on GST/HST compliance.

These new enhancements will help to reduce the compliance burden of audit activities on businesses. For example, our auditors and managers will be able to gain technical expertise and be more equipped to explain the application of the law. The enhancements will also provide the CRA with the information it needs to identify and effectively address instances of non-compliance.

The major change to audit operations includes the discontinuation of combined audits:

In the past, most audits of smaller businesses (generally businesses with annual sales less than $4 million) have been done as combined audits - one audit covering both income tax and GST/HST. Combined audits have now been discontinued; therefore, businesses will either be subject to an income tax or GST/HST audit.

Most audits are selected based on an assessment of risk of non-compliance. Non-compliance in one tax does not necessarily correlate with non-compliance in the other tax. In these cases, businesses will be subject to only a brief compliance review of the other tax rather than a full audit of both taxes.

Pre-assessment reviews:

GST/HST returns are subjected to an impartial electronic review to identify potential errors or indications of non-compliance prior to assessment. Those returns identified through this pre-assessment process are referred for further review and in some cases audits prior to assessment.

Following the completion of the pre-assessment process a notice of assessment is sent to the registrant confirming that the return is assessed as filed or identifying any adjustments necessary.

This pre-assessment approach is being expanded with new system validations and additional resources. Initially, this expansion will focus on new province-specific measures such as the recapture of input tax credits. These new measures will allow the CRA to better identify errors in GST/HST returns, as well as detect cases of non-compliance.

Recaptured Input Tax Credits:

In regards to recently introduced recaptured input tax credits (RITCs) the requirement applies to large businesses (generally businesses and their associates whose combined taxable supplies are more than $10 million annually as well as certain financial institutions). From July 1, 2010 to June 30, 2018, these registrants are required to recapture and report RITCs and to file their returns online using GST/HST NETFILE, a free Internet-based service provided by the CRA.

RITCs must be separately identified in the GST/HST NETFILE return and cannot be netted out against other amounts on the return. Registrants who do not correctly report RITCs may be subject to penalties even if they report the correct net tax amount.

Further details and instructions regarding RITCs have been mailed to all registrants who meet the large business criteria in a letter from the CRA dated November 12, 2010.

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32. UPDATE ON COURT CASES/OBJECTION AND DISCUSSION

The following is an update to a question answered in 2007.

Facts/Background

cra.gc.ca/myaccount (individuals) and cra.gc.ca/mybusinessaccount (corporations) allow a taxpayer to "register a formal dispute".

Question

Is this "dispute" accepted as a valid Notice of Objection by the CRA? If so, on what authority, and what assurance do the taxpayer and their representative have that an objection has validly been filed?

CRA Comments:

GST/HST objections are not presently accepted via submissions through “my account” or “my business account”. This is due to the fact that the ETA requires the objection to be filed in the prescribed form and manner. Subsection 301(2) allows the Minister to accept an objection notwithstanding that it was not filed in the prescribed manner. There is ongoing discussion concerning legislative and systemic changes to enable a person to file a GST/HST objection electronically.

The system accepts objections under the Excise Act 2001 [195(1); 195(7)] and the Air Travellers Security Charges Act [43(1); 43(7)]. It is anticipated that objections under the Softwood Lumbers Products Export Charge Act [54(1); 54(7)] will be accepted in the future. Objections under these acts are also required to be filed in the prescribed form and manner. However, these acts allow the Minister to accept objections even though they were not filed in the prescribed form and manner.

Objections under the Income Tax Act do not require a prescribed form.

For the above programs which allow electronic filing of an objection, the taxpayer no longer registers for a Government of Canada epass. As of October 4, 2010 these ID’s and passwords expired. A new ID and password must be created via the CRAs website. Once logged in to the account the taxpayer can register a formal dispute. The taxpayer has 2,500 characters to provide facts and reasons. Once he submits the information, the submission is time stamped and the taxpayer receives an immediate “thank you” page that indicates that CRA has received the submission. The taxpayer can print this page together with his submission.

The submissions are sent to the screeners who review them. If the submission is regular correspondence, it is forwarded to the appropriate division. If it is an objection, it follows the same process as an objection received by mail. The validity of the objection is determined at this stage and an acknowledgment letter is sent.

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Supplementary Questions

1. TREATMENT OF GENERAL PARTNER DISTRIBUTIONS

Facts / Background

“Investment LP” (“LP”) is a limited partnership formed under the laws of Ontario for the purpose of investing, in the form of equity and debt instruments, in emerging Canadian companies and earning a positive return on such investments. LP’s general partner (“GP”) is a corporation that was formed for the purpose of engaging in the activities of LP as its general partner and does not carry on any other business or perform services for any person other than the LP. GP is responsible for carrying out all of the day-to-day management and operation of the LP’s activities. In particular, the Partnership Agreement sets out the authority and duties of GP, which include directing the formulation of investment policies and strategies for the LP, investigating, selecting, negotiating, structuring and purchasing, holding and selling or otherwise disposing of, investments, assessing the performance of investments, exercising all rights and incidents of ownership associated with the LP’s investments, and generally taking any and all other actions that are determined by the GP to be necessary or advisable for the attainment of the LP’s purpose. The Partnership Agreement provides that the limited partner of the LP shall not take part in the management of the business and affairs of, or transact any business for, the LP.

Each of GP and the limited partner contributed an equal initial amount of capital to the LP. The limited partner will from time to time contribute additional capital to the LP. The Partnership Agreement provides that GP is entitled to be reimbursed by the LP for all expenses that GP incurs on behalf of the LP in connection with the LP’s activities. Also, the Partnership Agreement provides for distributions to the partners as follows: GP is entitled to receive, on a quarterly basis, an amount equal to 1.5% per annum of the value of the LP’s investments; and, provided GP has received the foregoing distribution, the investment proceeds are to be distributed to all partners, including GP, in proportion to their respective ownership interest in the LP.

Question

In this illustrative case, would the CRA regard the managing GP as making (or deemed to be making) a supply of services to the partnership that is subject to GST? If so, how would the value of the consideration for the supply be determined for purposes of applying the GST?

CRA Comments

As outlined in GST/HST Policy Statement P-244, Partnerships – Application of subsection 272.1(1) of the Excise Tax Act, the determination of whether a general partner does something as a member of a partnership for the purposes of subsection 272.1(1) of the ETA or is making a supply to the partnership depends on the particular provincial partnership law and the facts of a particular situation. Factors to consider include, but are not limited to, the following:

  • the terms of the partnership agreement;
  • the nature of the action undertaken by the partner; and
  • the partner's ordinary course of conduct.

It is the CRA’s position that where a corporate general partner of a limited partnership receives a fixed fee (for example, a percentage of the net value of partnership assets) for services it provides to the partnership, generally the amount would be considered to be remuneration for services provided by the partner on its own account and not for something done as a member of the partnership even if the agreement to provide the services is included in the partnership agreement.

Where the services are acquired by the partnership for such use, consumption or supply, the partner would be required to collect GST/HST on the amount the partnership agrees to pay (1.5% per annum of the value of the LP’s investments) as this is consideration for the supply pursuant to paragraph 272.1(3)(a).

Where the service is not for consumption, use or supply exclusively in the course of commercial activities of the partnership, paragraph 272.1(3)(b) provides that the consideration is deemed to be equal to the fair market value of the property or service that is so acquired by the partnership at the time the supply is made. The fair market value is determined as though the partner was not a member of the partnership and the partner and partnership were dealing at arm's length.

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2. SECTION 259 OF THE EXCISE TAX ACT

Facts / Background

Section 259 of the Excise Tax Act (ETA) provides for a mechanism under which an organization that carries out activities of a municipal nature can be designated as a municipality. Such designation entitles the organization to claim the municipal GST rebate of 100% of expenses incurred in connection with such activities. Municipal transportation is an activity that qualifies for this designation and we would like to know the Canada Revenue Agency’s (CRA) position on the following:

Questions

  1. How does the CRA define municipal transportation?
  2. Does this definition include only transportation between two points situated in the same municipality or does it also include transportation from a point in one municipality to a point in another municipality?
  3. Does the CRA consider that a ferry qualifies as municipal transportation that would therefore be eligible for the designation as a municipality for such activity?

CRA Comments

1. Section 24 of Part VI of Schedule V to the ETA exempts a supply made to a member of the public of a municipal transit service or of a public passenger transportation service designated by the Minister of National Revenue to be a municipal transit service.

Section 1 of Part VI of Schedule V to the ETA defines a “municipal transit service” for purposes of the exemption in section 24 of this Part. Essentially, this is described as a public passenger transportation service (other than a charter service or a service that is part of a tour) supplied by a transit authority all or substantially all of whose supplies are of public passenger transportation service provided within a particular municipality and its environs.

A “transit authority” is also defined in section 1 of Part VI of Schedule V and it means a division, department or agency of a government, municipality or school authority, the primary purpose of which is to supply public passenger transportation services. A transit authority may also include a non-profit organization that either receives funding from a government, municipality or school authority to support the supply of public passenger transportation services or that is established and operated for the purpose of providing public passenger transportation services to individuals with a disability.

Consequently, for purposes of the ETA a key feature of municipal transit services is that they are generally subsidized services.

In addition, for purposes of section 24 of Part VI of Schedule V, the Minister of National Revenue may designate a public passenger transportation service to be a municipal transit service. For purposes of the designation under section 24, a public passenger transportation service is a service provided by a charity or a non-profit organization that would also be a “municipal transit service” but for the fact that the supplier is not a “transit authority”. Accordingly, for purposes of the ETA, municipal transportation is considered to be a subsidized public passenger transportation service provided within a particular municipality and its environs by a government, municipality, school authority, or in certain circumstances, by a charity or non-profit organization.

2. As stated in the definition of “municipal transit service “, the definition provides that all or substantially all of the public passenger transportation service is provided within a particular municipality. Therefore, a municipal transit service would not generally be considered to include a passenger transportation service from a point in one municipality to a point in another municipality. For example, an intercity bus that carries passengers between different cities, towns, or other populated areas is not a municipal transit service.

3. Organizations that may qualify for municipal designation under section 259 of the ETA are generally governments, school authorities, charities and non-profit organizations that make supplies of municipal transit services that are exempt under section 24 of Part VI of Schedule V. A ferry service that is part of a municipal transit system may be included within the broad scope of municipal transit services. A stand-alone ferry service operated by a private, for-profit supplier, whether an exempt ferry service described in section 1 of Part VIII of Schedule V (a ferry service that transports motor vehicles and passengers between parts of a road or highway system that are separated by a stretch of water) or a taxable passenger-only ferry service (ferry service for cyclists and pedestrians) would not be considered a municipal transit service for purposes of the designation in section 24 of Part VI of Schedule V. Further, the activity of operating a private stand-alone ferry service would not be considered an activity involving the supply of a municipal service for purposes of section 259.

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3. HST - CONFERENCES

Facts / Background

An American association (not resident in Canada & no branch in Canada) is hosting a conference in Toronto in the summer of 2011 (because Toronto has many hotels and Canadians are friendly). There are so many that may do this, let's call them the American Comedians Association (ACA). The ACA opens its membership to comedians around the world, including Canadians. It is expected over 5,000 comedians will come to the Toronto Annual Conference, which will last a few days (so the attendees will stay at Toronto hotels). While it cannot be said with certainty how many Canadian comedians will participate, it is expected that the number of Canadian registrants will be 1,000 and of that number 500 will reside in Ontario (so less than 25% are Canadians). The conference registration may cost $100. Tickets may be purchased to attend sessions at approximately $50 per session. Tickets may be purchased for evening parties and vary in cost. It is expected that the ACA will sell more than $1,000,000 relating to the conference. 95% or more of the charges will be processes in the United States and prior to the start of the conference. There will be the opportunity for on-site registrations and purchases of tickets. In addition, the ACA will have an Expo where businesses (many outside Canada) can purchase booth space. In addition, the ACA will allow Comedians and businesses to sponsor events (all arranged prior to arrival in Canada) at $5000 per sponsorship (in return for signage at the events, logo included in materials manufactured in the United States, etc.).

Questions

  1. Is the ACA required to register for GST/HST purposes and charge, collect and remit GST/HST on the supplies made?
  2. Is the ACA required to charge GST/HST on the registrations and tickets?
  3. If so, will the foreign attendees be able to recover the GST/HST paid on the registration and tickets?
  4. If so, what mechanism would the attendees use?
  5. How should the foreign attendees recover GST/HST paid at conference hotels (for accommodation)?

CRA Comments

The responses to the following questions are based on the assumptions that the Toronto Annual Conference and Expo are “foreign conventions,” that the American Comedians Association (the ACA) is the “sponsor” of these events, as these terms are defined in subsection 123(1) of the ETA, and that section 11 of Part VI of Schedule V to the ETA does not apply to any of the events.

Questions 4 and 5

Supplies of Admissions
Generally, the supply of an admission that may be used in Canada is a supply of intangible personal property that is deemed to be made in Canada under paragraph 142(1)(c) of the ETA. An exclusion in paragraph 143(1)(c) of the ETA from the override place of supply rule under subsection 143(1) of the ETA for supplies by non-residents applies where the supply of the admission made in Canada by the non-resident person is in respect of a place of amusement, a seminar, an activity or an event in Canada and the non-resident person did not acquire the admission from another person.

Under subsection 240(2) of the ETA, every person who enters Canada for the purpose of making taxable supplies of admissions in respect of a place of amusement, a seminar, an activity or an event is required to be registered for GST/HST purposes before making such supplies.

Taxable supplies are supplies made in the course of a commercial activity. Examples of taxable supplies of admissions include supplies of admissions by the ACA to attend sessions and evening parties at the conference.

A non-resident person is not required to be registered under subsection 240(2) of the ETA where it enters Canada only for the purposes of making supplies of admissions that are not made in the course of a commercial activity. Paragraph 189.2(a) of the ETA provides that supplies of admissions to a foreign convention by the sponsor of the convention are deemed not to have been made in the course of a commercial activity.

Given that the ACA is a non resident person making taxable supplies of admissions in Canada, the ACA is required to be registered under subsection 240(2) and is required to charge and account for GST/HST on those taxable supplies.

Supplies of Real Property (i.e., Booth Space)
The question did not indicate whether the ACA or the operator of the convention facility is supplying the booth space. Paragraph 189.2(b) of the ETA provides that supplies of booth space by the sponsor of a foreign convention to an exhibitor, by way of lease, licence or similar arrangement, is deemed not to have been made in the course of a commercial activity. Therefore, even where the ACA is required to be registered under subsection 240(2) of the ETA in respect of its taxable supplies of admissions, it is not required to charge and account for tax on supplies of booth space to exhibitors.

Supplies of Other Personal Property and Services (e.g., Related Convention Supplies)
The override place of supply rule under subsection 143(1) of the ETA that deems the supply of personal property or a service by a non-resident person to be made outside Canada does not apply where at the time the supply is made, the person is registered under Subdivision d of Division V of the ETA (e.g., where the person is registered under subsection 240(2)).

As explained above, the ACA is required to be registered under subsection 240(2) of the ETA in respect of its taxable supplies of admissions (i.e., admissions to attend sessions and evening parties at the conference), and it is required to be registered before any of these taxable supplies of admissions are made. As a result, the place of supply of any other supplies of personal property and services by the ACA is determined in accordance with the rules set out in section 142 of the ETA. In other words, even though the ACA is a non-resident, as a registrant, the ACA is required to charge and account for GST/HST on taxable supplies of personal property and services that it makes in Canada.

That being said, paragraph 189.2(c) of the ETA provides that supplies of “related convention supplies,” as defined in subsection 123(1) of the ETA, by the sponsor of a foreign convention to an exhibitor who also rents booth space from the sponsor are deemed not to have been made in the course of a commercial activity. Therefore, the ACA is not required to charge and account for GST/HST on supplies of related convention supplies in these situations.

Sponsorships of Events
The question did not indicate if the ACA is a “non-profit organization,” as defined in subsection 123(1) of the ETA. However, if it is, then section 135 of the ETA may apply to the advertising services or a licence to use the ACA’s logo that the ACA provides to the Comedians and businesses that sponsor events.

Under section 135, where a public sector body (such as a non-profit organization) makes a supply of a service or a supply by way of licence of the use of a copyright, trade-mark, trade-name or other similar property of the body to a person who is the sponsor of an activity of the body for use by the person exclusively in publicizing the person’s business, the supply of the service or the licence to use the ACA’s logo is deemed not to be a supply, unless it is primarily a service of advertising by means of radio or television or in a newspaper, magazine or other publication that is published periodically. If the ACA is a non-profit organization, then section 135 may apply to deem that the supplies of the advertising service or the licence to use the ACA’s logo to the Comedians and businesses that sponsor events are not supplies, and therefore not subject to tax.

Questions 6 and 7

The attendees will not pay GST/HST on the conference registrations as per paragraph 189.2(a) of the ETA.

There is no mechanism in the ETA to allow non-GST/HST-registered attendees to recover the GST/HST paid on the tickets to attend sessions and evening parties.

Question 8

Pursuant to section 252.3 of the ETA, non-resident non-GST/HST-registered exhibitors that rent booth space can apply for a rebate of the GST/HST paid on related convention supplies, including accommodation, by filing a rebate claim with the CRA, using form GST386, Rebate Application for Foreign Conventions (see Booklet RC4160, Rebate for Tour Packages, Foreign Conventions, and Non-Resident Exhibitor Purchases for more information).

There is no other mechanism in the ETA to allow non-GST/HST-registered attendees to recover the GST/HST paid at conference hotels for accommodation. Although, if the sponsor of the foreign convention included the accommodation in the supply of the admission to the convention, no tax would apply to the accommodation made available to the attendees, and the sponsor would be eligible for a rebate of the tax paid to the hotel for this related convention supply.

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4. RRSP’S / RRIF’S / RESP’S AND THE SLFI REGULATIONS

Facts/Background

Finance’s May 19, 2010 Background – Financial Institution Rules For The Harmonized Sales Tax (HST), indicated that the proposed selected listed financial institution (SLFI) rules would not treat trusts for individuals that are governed by a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF) or a registered education savings plan (RESP), as SLFIs. However, under subsection 1(1) of the draft Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, “investment plan” is defined to mean:

“a listed financial institution described in subparagraph 149(1)(a)(vi) or (ix), other than a trust governed by a RRSP, a RRIF or a RESP

The investment plan definition appears to broadly exclude to all trusts governed by a RRSP, a RRIF or a RESP and does not specifically exclude only such investment plans/trusts held by individuals (as had been indicated in May).

Question

Please confirm whether a pooled or master trust that aggregates RRSP, RRIF or RESP contributions/funds from individual investors (whether through individual trusts or accounts) are intended to be excluded from the definition of investment plan.

CRA Comments

Currently the definition of investment plan referred to in subsection 1(1) of the proposed Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations released January 28, 2011 excludes a trust governed by an RRSP, a RRIF or an RESP for the purposes of these regulations and subsection 225.2(2) as adapted by these regulations.

As indicated in part three of the Backgrounder: Modifications to the Proposed Financial Institution (FI) Rules for the Harmonized Sales Tax (HST) released January 28, 2011 (Backgrounder), the Department of Finance is involved in consultations with the industry on whether the SLFI rules should apply to non-SLFIs that are similar to investment entities. These consultations are also considering the specific rules that should apply to these investment entities, if the SLFI rules apply to these investment entities. The Backgrounder refers to trusts governed by a RRSP, a RRIF or a RESP administered on a group rather than an individual basis as an example of such an investment entity. Therefore, at this time we cannot confirm that a pooled or master trust that aggregates RRSP, RRIF or RESP contributions/funds from individuals are intended to be excluded from the SLFI rules.

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5. INCORRECT ACCOUNTING FOR HST VERSUS QST

Facts / Background

ABC Corp carries on a business of providing consultation services. ABC Corp’s only place of business is in the province of Quebec. In the course of its business, ABC Corp has entered into an agreement with XYZ Corp, a customer based in Ontario, regarding the review of XYZ’s strategic business plan. XYZ Corp also has a place of business in Quebec. ABC Corp was aware about the existence of the two addresses. After the performance of the consulting services, the invoice issued by ABC Corp to XYZ Corp and sent to XYZ’s Corp Ontario address contains the following information, among other:

Invoice to XYZ Corp
Consultation services $10,000
GST (5%) $500
QST (8,5%) $893
Total: $11,393

Both ABC Corp and XYZ Corp are registered for GST and QST purposes.

Questions

Please assume that, under the new place of supply rules for HST, ABC Corp should have invoiced the HST at the rate of 13% to XYZ Corp because the contract was negotiated through the Ontario location of XYZ Corp, and the invoice was sent to the Ontario location.

  1. In the case of an audit, will ABC Corp be assessed interest for failure to collect the Ontario component of the HST?
  2. Will ABC Corp be obliged to issue a credit note to its customer and issue a new invoice with the corrected tax?
  3. Will the CRA consider the fact that the right amount of taxes (approximately) was already collected (although not being the right tax) and therefore, not assess interest?
  4. Would the CRA consider proceeding directly with the MRQ to readjust the QST and the Ontario component of the HST?.

CRA Comments

Generally, ABC Corp would be assessed interest on the amount of HST that it failed to collect in respect of the supply.

ABC Corp would be obliged to issue a credit note to the recipient and then issue a new invoice with the corrected amount of HST due in respect of the supply.

As the correct amount of HST was not remitted to the CRA, the assessment would be subject to interest.

Re-adjusting the QST falls outside of the scope of responsibilities of the CRA and nor is it included in the modalities with Revenu Québec.

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6. MASTER TRUSTS AND THE NEW PENSION RULES

Question

  1. Under a pension plan structure where two or more pension trusts contribute to a master trust and the funds are invested in various financial instruments at the level of the master trust, if the employer who is administrator of the pension plan(s), contracted with an investment manager to advise on the investments of the master trust, are the services provided by the investment manager to the employer considered to be services acquired for consumption and use related to pension activities and required to be included as a deemed supply under ETA s. 172.1(5) or s. 172.1(7)? Firstly, it is unclear whether the master trust is a “pension entity” (see also question (b) that follows). Also, it is arguable that the employer’s activities relate to the master trust, and not to the upper-level trusts that are clearly “pension entities”.
  2. For purposes of the rebate under ETA section 261.01, will the master trust be considered to be a “pension entity”? Again, this relies on the determination that the master trust is a trust that is governed by a pension plan for purposes of the Income Tax Act.

CRA Comments

A “pension entity” of a pension plan is an entity of the plan that is a person referred to in paragraph (a) of the definition of “pension plan”, a corporation referred to in paragraph (b) of that definition, or a prescribed person. Essentially, a pension entity is either a trust described in paragraph 149(1)(o) of the Income Tax Act.

A “pension plan” is a registered pension plan (as defined in subsection 248(1) of the Income Tax Act).

It is a question of fact, given these definitions, whether a master trust is a pension entity or if the employer is making a supply to the master trust or to another entity. All of the facts would have to be considered to determine if the employer is resupplying the investment management services to a pension entity or consuming or using the services in the course of pension activities.

The arrangements between the parties as well as the pension plan documents and all of the relevant trust agreements would need to be considered in making a determination on these issues.

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7. PENSION PLAN RULES – DEEMED SUPPLIES – PROVINCIAL FACTOR - CONTRIBUTION – REGULAR AND SPECIAL PAYMENT

Facts/Background

Under the new pension rules, the PVAT on the deemed supplies is calculated based on the provincial factor (s.172.1(1)) which is determined by reference to the employer’s deductible contribution to the pension plan and the number of active members of the pension plan who were employees of the employer.

Question

Please clarify the following:

  1. For a defined benefit plan, apart from regular contributions, an employer may also be required to make special payments to the plan trust due to insufficient assets in the plan to cover future payments both TO current employees, but also to departed employee s and retirees. For purposes of calculating the provincial factor, are special payments made by the employer to the pension trust considered to be “contributions” and required to be included in the calculation? It is submitted that only current contributions should be considered, based on the distinction that appears to be built into the deemed supply rules which focus on employees; and the SAM formula which clearly focuses on actuarial liability and therefore clearly would include both current employees and retirees.
  2. Are personnel that are members of a pension plan but are on temporary layoff (e.g., due to lack of work) or long-term disability/sick leave on the last day of a calendar year, to be considered as employees of the employer for purposes of calculating the provincial factor?

CRA Comments

Subsection 172.1(1) of the ETA defines “provincial factor”.

  1. For purposes of calculating the provincial factor, special payments made by the employer to the pension trust are considered to be pension contributions and are required to be included in the calculation if the contributions could be deducted under paragraph 20(1)(q) of the Income Tax Act in computing the employer’s income.
  2. Employees that are members of a pension plan but are on temporary layoff (e.g., due to lack of work) or long-term disability/sick leave on the last day of a calendar year, are considered as employees of the employer for purposes of calculating the provincial factor if they are “active members”. Active member is defined in subsection 172.1(1) of the ETA as having the meaning assigned by subsection 8500(1) of the Income Tax Regulations.

    Subsection 8500(1) provides that an “active member” of a pension plan in a calendar year means a member of the plan to whom benefits accrue under a defined benefit provision of the plan in respect of all or any portion of the year or who makes contributions, or on whose behalf contributions are made, in relation to the year under a money purchase provision of the plan.

As you may be aware, the Department of Finance announced in a backgrounder dated January 28, 2011 that they were undertaking further consultations on the issue of master trusts.

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8. CALCULATION OF THE SAM – HYBRID PENSION PLANS

Question

For purposes of the Special Attribution Method (SAM) calculation, the provincial attribution percentage determination for a defined benefit plan is based on the actuarial liabilities of the pension plan, and for a defined contribution plan the determination is based on the value of the assets of the pension plan. In the case of a hybrid pension plan which is comprised of both a defined benefit and a defined contribution component under one trust, how should the provincial attribution percentage be determined for the trust for purposes of the SAM calculation? If a weighted average is to be used, should the weighted average determination be based in relation to the size (i.e., the asset value) of each component to the total plan (e.g., if the assets of the DB is $90M with Ontario attribution of 60% and the assets of DC is $5M with Ontario attribution of 20%; under the weight average the Ontario attribution for the entire plan will be [($90M x 60% + $5M x 20%) / $95M = 58%)

CRA Comments

Section 40 of the proposed Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations released January 28, 2011 provides a new formula to be used to calculate the provincial attribution percentage for mixed pension plans.

Specifically, if a selected listed financial institution (SLFI) is a pension entity of a pension plan, part of which is a defined contribution pension plan and the remaining part of which is a defined benefits pension plan, in a particular period in which a fiscal year of the SLFI ends, it would determine its provincial attribution percentage for each participating province for the purposes of the SAM formula using the following formula:

[A x B/C] + [D x (C – B)/C]

Where:

A is the financial institution’s percentage determined for the participating province and for the particular period by applying section 37 (calculation of provincial attribution percentage for a defined contribution plan) to that part of the pension plan that is the defined contribution pension plan;

B is the value of the assets of the defined contribution pension plan held by pension entities of the pension plan on a particular attribution point in respect of the financial institution for the particular period that is the last such attribution point required to be used in the determination of the percentage referred to in description A, or such other amount that the Minister may allow on application by the investment plan;

C is the total value of the assets of the pension plan held by pension entities of the pension plan on the particular attribution point, or such other amount that the Minister may allow on application by the investment plan; and

D is the financial institution’s percentage determined for the participating province and for the particular period by applying section 38 (calculation of provincial attribution percentage for a defined benefits plan) to the part of the pension plan that is the defined benefits pension plan.

In very general terms, the provincial attribution percentage that is calculated using the above formula is a weighted average based on the total value of assets of each component to the total value of assets of the whole plan.

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9. PUBLIC SECTOR BODY PENSION PLANS AND THE HST DEEMED SUPPLY RULES

The following questions relate to the application of ETA section 172.1 to participating employers of a pension plan that are also “public sector bodies”, “charities” or “public institutions” (PI’s) as these terms are defined under the Excise Tax Act.

ETA paragraphs 172.1(5)(a) and 172.1(6)(a) deem a participating employer to have made a taxable supply of the specified resource.

Question A-1:

If the employer is a charity or a PI, do the provisions of either Section 1 of Part V.1 of Schedule V (for charities) or Section 2 of Part V of Schedule V (for PIs) apply to exempt these supplies to a pension plan and override the deemed taxable supply in section 172.1?

Question A- 2:

Similarly, if the participating employer is a public sector body, does Section 6 of Part V of Schedule V (i.e., the “direct cost rule”) override section 172.1 and apply to exempt a supply of property to a pension plan?

CRA Comments A-1:

No, section 1 of Part V.1 of Schedule V (for charities) and section 2 of Part VI (not Part V) of Schedule V (for public institutions) do not override the deemed taxable supply in section 172.1.

More specifically, paragraph 1(b) of Part V.1 of Schedule V excludes from the general exemption for charities supplies that are deemed to have been made by the charity. Therefore, a deemed taxable supply of a specified resource (that is not an excluded resource) under subsection 172.1(5) or a deemed taxable supply of an employer resource under subsection 172.1(6) will not be exempt under section 1 of Part V.1 of Schedule V.

Most supplies of personal property or services made by a public institution are exempt under section 2 of Part VI of Schedule V. However, paragraph 2(b) of Part VI (not part V) of Schedule V excludes from this general exemption supplies that are deemed to have been made by the public institution. Therefore a deemed taxable supply of a specified resource under subsection 172.1(5) or a deemed taxable supply of an employer resource under subsection 172.1(6) will not be exempt under section 2 of Part VI of Schedule V.

CRA Comments A- 2:

Section 6 of Part VI (not Part V) of Schedule V applies to public service bodies (not public sector bodies) other than charities and municipalities.

For a supply to be exempt under section 6 of Part VI of Schedule V the supply must be made by way of sale. Given that the deeming provisions in subsections 172.1(5) and (6) do not deem the supply of a specified resource or employer resource to be made by way of sale, it is our opinion that the direct cost exemption would not apply to override these deemed taxable supplies. The same would be true for the direct cost exemption for charities found in section 5.1 of Part V.1 of Schedule V.

If the answer to questions in (a) is “no”, the following question relates to charities and PI’s who operate a simplified accounting method (such as the Special Quick Method (SQM) or the Simplified Accounting Method (SAM) for charities). Such entities are required to collect HST on taxable supplies in full but are only required to remit a percentage of the tax so collected.

Under the current legislation and regulations, certain tax collected amounts are excluded from the SQM/SAM net tax remittance calculations and must be remitted in full.

There do not appear to be any amendments to the net tax calculation methods for either the SQM or the SAM following the introduction of the new pension legislation under section 172.1. Absent any exclusion, it would appear that any tax deemed collected should be included in the net tax calculation required under the SQM or the SAM.

Question B-1 Charity and public institution:

Please confirm that a GST-registered charity or PI that makes a deemed taxable supply under 172.1 can include the tax remittance amount arising from the deemed supply in the reduced remittance calculation, and is not required to include tax in full.

CRA Comments Question B – 1    Charity:

For simplicity, our response will first deal with the net tax calculation method for charities as described in section 225.1 and then look at the implications under the Special Quick Method available to public institutions.

Generally, a charity using the net tax calculation described in subsection 225.1(2) would include the deemed tax collected on the deemed taxable supplies in section 172.1 at the reduced remittance rate of 60%.

More specifically, subsection 225.1(2) requires a charity to remit 60% of the GST/HST on its “specified supplies”.

The definition of “specified supply” in subsection 225.1(1) is one of exclusion so that taxable supplies made by a charity are a “specified supply” unless specifically excluded from that definition. Therefore, if the deemed taxable supply of a “specified resource” or “employer resource” under section 172.1 is not excluded from the definition of “specified supply” the charity will remit 60% of the tax they are deemed to have collected. Otherwise, the charity would determine the amount of deemed tax to be remitted by referring to paragraphs (b) to (d) of element A of subsection 225.1(2).

Question B – 2 Charity:

Where the charity or PI has made a real supply to the trust, that supply would generally have been exempt under the general scheme of the Excise Tax Act. Consequently, the charity could not claim ITCs and would only be entitled to a rebate of HST paid on the initial acquisition of the resource. Consequently, there would be non-recoverable tax included in the cost base to the charity or PI in the deemed supply to the pension entity.

Can the charity or PI exclude any non-recoverable tax from the “fair market value” for the purposes of element C in paragraph 172.1(5)(c), (6)(c), or 7 (c)? If not, this will result in a cascading of tax.

CRA Comments B- 2 Charity:

Generally, a charity using the net tax calculation method described in subsection 225.1(2) cannot claim input tax credits for the GST/HST paid on its purchases even if they relate to taxable supplies. However, there are some situations set out in paragraph (a) of element B in subsection 225.1(2) where a charity may claim an input tax credit. For example, a charity may claim an input tax credit for the GST/HST paid or payable on its purchases of capital personal or capital real property for use primarily in its commercial activities.

Where a charity cannot claim full input tax credits it can claim a PSB rebate to recover a portion of the GST/HST paid or payable on its purchases and expenses. Given that the PSB rebate does not provide for 100% recovery of non-creditable tax (i.e. the amount for which a charity was not entitled to an input tax credit, other rebate, refund or remission of tax) there will be a certain amount of tax that the charity cannot recover. This amount is not excluded in determining the “fair market value” for the purposes of element C in paragraph 172.1(5)(c), (6)(c) or (7)(c).

Question B – 3 Charity:

Alternatively, please comment on whether the charity/PI would be allowed to claim ITCs under the SQM or SAM on the original acquisition in order to avoid tax cascading.

CRA Comments B – 3 Charity:

It is not possible to determine based on the information provided whether or not a public institution can claim an input tax credit as it is ultimately a question of fact.

A charity will not be entitled to claim an input tax credit on its original acquisition unless it falls within element B of subsection 225.1(2). Where input tax credits are not available the charity may claim a PSB rebate.

Question B – 1 Public Institution:

Please confirm that a GST-registered charity or PI that makes a deemed taxable supply under 172.1 can include the tax remittance amount arising from the deemed supply in the reduced remittance calculation, and is not required to include tax in full.

CRA Comments B-1 Public Institution:

Generally, public institutions using the Special Quick Method for Public Service Bodies described in Part V of the Streamlined Accounting (GST/HST) Regulations would include the deemed tax collected on the deemed taxable supplies under section 172.1 at the applicable reduced remittance rate.

Public institutions using the special quick method calculate their net tax by using the formula A+B-C set out in subsection 21(1) of the Streamlined Accounting Regulations.

Generally speaking, Element A is equal to GST/HST included taxable sales (subject to certain exclusions) multiplied by the reduced remittance rate.  The deemed taxable supplies under section 172.1 are not specifically excluded from Element A. Therefore the deemed tax collected that arises from the deemed supply in section 172.1 of the ETA will form part of the total that is multiplied by the special quick-method rate specific to the registrant.

Question B – 2 Public Institution:

Where the charity or PI has made a real supply to the trust the supply would generally have been exempt under the general scheme of the Excise Tax Act. Consequently, the charity could not claim ITCs and would only be entitled to a rebate of HST paid on the initial acquisition of the resource. Consequently, there would be non-recoverable tax is included in the cost base to the charity or PI in the deemed supply to the pension entity.

Can the charity or PI exclude any non-recoverable tax from the “fair market value” for the purposes of element C in paragraph 172.1(5)(c), (6)(c), or 7 (c)? If not, this will result in a cascading of tax.

CRA Comments B – 2 Public Institution:

Generally, a public institution using the special quick method cannot claim input tax credits (except in limited situations such as purchases of capital property valued at at least $10,000)

Where a public institution cannot claim full input tax credits it can claim a PSB rebate to recover a portion of the GST/HST paid or payable on its purchases and expenses. Where the PSB rebate does not provide for 100% recovery of non-creditable tax (i.e. the amount for which a public institution was not entitled to an input tax credit, other rebate, refund or remission of tax) there will be a certain amount of tax that the public institution cannot recover. This amount is not excluded in determining the “fair market value” for the purposes of element C in paragraph 172.1(5)(c), (6)(c) or (7)(c).

Question B – 3 Public Institution:

Alternatively, please comment on whether the charity/PI would be allowed to claim ITCs under the SQM or SAM on the original acquisition in order to avoid tax cascading.

CRA Comments B – 3 Public Institution:

It is not possible to determine based on the information provided whether or not a public institution can claim an input tax credit as it is ultimately a question of fact.

However, a public institution will not be entitled to claim an input tax credit on its original acquisition unless it falls within element C of the formula set out in subsection 21(1) of Part of the Streamlined Accounting Regulations.

Where input tax credits are not available the charity may claim a PSB rebate.

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