28 February 2019 CBA Roundtable

This provides summaries of questions posed to CRA at the February 28, 2019 CBA Commodity Tax Roundtable together with the full text of the CRA responses. (The full text of the questions is available with a membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources.) We have provided our own titles to our summaries of the questions.

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

Q.1 Late-filed s. 211 election

HQR0001067 (February 9, 1999) and Q.24 at the February 26, 2009 meeting both indicated that if a public service body has been charging GST/HST on supplies of real property that would otherwise be exempt, and has been accounting for that tax and claiming input tax credits (ITCs) in its net tax calculations and remittances as if the s. 211 election had been filed on time, then the CRA will normally accept a late-filed section 211 election. Is this still the policy?

CRA Comments

As indicated in GST/HST Ruling letter 37442 (July 30, 2002) a decision on whether to accept a backdated effective date for a section 211 election falls within the purview of the Domestic Compliance Programs Branch. The Domestic Compliance Programs Branch will only consider the backdating of a section 211 election in exceptional circumstances. Exceptional circumstances include, but are not limited to, situations where a PSB has obtained inaccurate written information from the CRA. The acceptance of a late-filed section 211 election will be determined on a case-by-case basis.

Summary under ETA s. 211(1).

Q.2 Electing out of NPO memberships exemption

An organization’s membership is exempt under both ss. 17 and 18 of Sched. V, Pt. VI (non-profit organization whose membership is required to maintain a professional status) and all conditions for the exemptions are met.

1. If both Forms GST23 and GST24, are not completed but the organization acts as though it had made the elections and charges GST/HST on its memberships, will the CRA accept the elections as having been made?
2. If the organization completes only one of the GST23 and GST24 forms, so that technically it has not elected out of the other exempting section, will CRA accept both elections as having been made, so that the organization should charge GST/HST and can claim ITCs?
3. Both the GST23 and the GST24 purport to allow the election to be revoked, without apparent legislative basis. Can a revocation be legally valid?

CRA Comments

We assume you are referring to sections 17 and 18 of Part VI of Schedule V to the ETA, and not sections 17 and 18 of Part V of Schedule VI to the ETA.

(a) There is no formal administrative policy in place that would address the issue you have raised. Any decision to allow a backdated election would be at the auditor’s discretion at the time of audit and based on the facts of the case at hand. In general, the CRA would accept that an election was made under section 17 or 18 even though the organization did not complete the required form, if the organization has always acted as though it had made the election in question.

(b) The term “exempt supply” is defined in subsection 123(1) of the ETA as a supply included in Schedule V. The CRA interprets Schedule V as a list of exempt supplies that must be considered and applied independently. As it is possible that a supply may meet the requirements of more than one section in Schedule V, all sections in Schedule V must be examined when determining if a particular supply is exempt.

The wording for the election found in sections 17 and 18 is clear in that the supply is exempt “except where the supplier has made an election under this section” (emphasis added). The election under either section 17 or 18 is just that, an election under a specific section. It is not to the exclusion of all other possible exempting provisions in Schedule V.

If a particular supply meets the requirements of both sections 17 and 18, the supplier must make an election under both sections to ensure that the supply will not be exempt under either of these sections.

We would like to note that, notwithstanding the discussion above, sections 17 and 18 are generally mutually exclusive and would not apply to the same supply of a membership. The benefits typically conferred by a professional membership that is exempt under section 18, such as the right to use a certain title or the right to practice certain otherwise restricted acts, would not be allowable benefits under section 17.

(c) Sections 17 and 18 exempt certain supplies of memberships, except where the supplier has made an election under the relevant section in prescribed form containing prescribed information.

As defined in subsection 123(1), “prescribed”, in the case of a form or the manner of filing a form, means authorized by the Minister of National Revenue. Form GST23, Election and Revocation of the Election by a Public Sector Body (Other than a Charity) to have its Exempt Memberships Treated as Taxable Supplies, is the prescribed form authorized by the Minister for the purpose of section 17. Form GST24, Election and Revocation of the Election to Tax Professional Memberships, is the prescribed form authorized by the Minister for the purpose of section 18.

The GST/HST is a transaction-based tax and for each transaction, the supplier must determine whether the tax is applicable. As such, the exempting provisions in Schedule V apply on a supply-by-supply basis. Whether the conditions of section 17 or section 18 are met, including whether the supplier has made an election, must be determined for each supply of a membership.

It would be unwieldy to require a supplier to complete a separate form in respect of every supply. Therefore, the Minister has approved a form that will allow a supplier to make an election indefinitely, until the supplier chooses that it no longer wants the election to apply. In effect, the supplier continues to make an election under either section 17 or section 18 in respect of each supply of a membership (that is, on a supply-by-supply basis) until it completes Section D of the relevant form. Section D of Form GST23 allows a PSB to revoke an election under section 17. The PSB must specify the effective date of the revocation and sign the appropriate line. Likewise, Section D of Form GST24 allows a supplier to revoke an election under section 18. On completion of Section D, the supplier is no longer considered to have made an election in respect of any supplies of memberships as of the effective date of the revocation.

As such, the CRA considers a revocation to be legally valid if Section D on Form GST23 or Form GST24 is duly completed, signed by a person authorized to sign on behalf of the organization, and kept in the organization’s files for six years from the end of the year to which the election relates.

Q.3 Exceptions to s. 155(1)

S. 155(1) deems certain non-arm’s length supplies to take place at fair market value. CRA reportedly indicated in 1991 that, as an administrative concession, it would not apply s. 155(1) to transactions between corporations without share capital that form part of a national religious organization. See Taitz & Millar, ‘‘The GST and National Religious Organizations – Selected Issues”, GST & Commodity Tax (Carswell), Vol. V, No. 3, pp. 21-23 (April 1991), at p. 22., which states in respect of “Intercorporate Transactions” (in part):

… [A]s an administrative concession, Revenue Canada stated that it would not apply the anti-avoidance rule in section 155 to any of the transactions between the various corporations, in order that the transactions could be completed for nil or nominal consideration. This rule would normally apply as the corporations would not be considered to be dealing at arm’s length and the recipient may not be a registrant using the goods exclusively in commercial activity. Alternatively, the Department indicated that if the transactions were carried out at no greater than the “direct cost” to the vendor (as defined in Schedule V, Part VI), GST would not be applicable.

Is this administrative concession still in place?

CRA Comments

The CRA has no administrative concession in place that limits the application of subsection 155(1) of the ETA.

In the original text of the ETA, section 155 stated:

For the purposes of this Part, where a supply of property or a service is made between persons not dealing with each other at arm's length for no consideration or for consideration less than the fair market value of the property or service at the time the supply is made, and the recipient of the supply is not a registrant who is acquiring the property or service for consumption, use or supply exclusively in the course of commercial activities of the recipient,

a) if no consideration is paid for the supply, the supply shall be deemed to be made for consideration, paid at that time, of a value equal to the fair market value of the property or service at that time; and

b) if consideration is paid for the supply, the value of the consideration shall be deemed to be equal to the fair market value of the property or service at that time.

On September 14, 1992, a Notice of Ways and Means Motion to Amend the Excise Tax Act was tabled in the House of Commons. The schedule to that Notice of Ways and Means Motion to Amend the Excise Tax Act contained the following text with respect to section 155:

“Section 155 — Non-Arm's Length Supplies by Public Sector Bodies:

Section 155 provides an anti-avoidance rule that deems certain non-arm's length supplies made for less than fair market value to be made for fair market value. As a result, tax is payable on the fair market value of the property or service supplied.

It is proposed that a new subsection 155(2) be added to clarify that this rule does not apply to non-arm's length supplies between public sector bodies where those supplies are otherwise exempt under any of sections 6 through 10 of Part VI of Schedule V, which are the nominal consideration exemptions.

For example, if a university research centre were to provide goods for a nominal fee (for instance, $1.00) to the university hospital, the fair market value would not override and be the value for tax. Rather, the $1.00 fee would apply, making the transaction exempt by virtue of the nominal consideration rule. In other words, subsection 155(1) would not override that exemption.

This amendment, consistent with current administrative practice, would be effective January 1, 1991.”

This amendment to the ETA effectively eliminated any administrative practice or concession with respect to the application of section 155 (renumbered subsection 155(1) by this amendment).

Subsequent amendments to section 155 have resulted in subsection 155(2) having the following form:

2) Subsection (1) does not apply to a supply of property or a service by a person where

(a) an amount is deemed under section 173 to be the total consideration for the supply; or

(b) in the absence of subsection (1),

(i) the person, because of subsection 170(1), would not be entitled to claim an input tax credit in respect of the acquisition or importation of the property or service by the person,

(ii) subsection 172(2) would apply to the supply, or

(iii) the supply would be an exempt supply included in Part V.1 or VI of Schedule V.

The relevant provision for the purposes of this discussion is subparagraph 155(2)(b)(iii) which has the effect of relieving exempt supplies made by charities and other public sector bodies from the application of subsection 155(1).

For example, if a charity were to make a non-arm’s length supply of real property for no consideration that was exempt by way of section 5 of Part V.I of Schedule V to the ETA, subsection 155(1) would not apply to deem the supply to be made for consideration equal to the fair market value of the property.

Q.4 VDP update

Please provide an update on the post-April 1, 2018 GST/HST Voluntary Disclosures Program (VDP). As of December 31, 2018 for GST/HST VDPs, how many were made and accepted, and into which category they were accepted. How many pre-disclosure discussions were there?

In GST/HST wash transactions where the recipient is entitled to full ITCs, how much estimated tax would be required where the non-compliance related to a period longer than 4 years? We note that estimated tax for only 4 years is required where the disclosure is processed under the wash transaction (Category 1) or general program (Category 2).

CRA Comments

(a) From March 1, 2018 to December 31, 2018, the CRA received 639 GST/HST VDP applications. Files under the new policy are still very much at the reviewing stage since the program is completing the processing of disclosures received before March 1, 2018 first. As such, it is too early for the program to calculate the percentage of applications treated under each category.

CRA received a total of 347 requests for pre-disclosure discussions related to both Income Tax Act and Excise Tax Act matters between March and December 2018.

(b) As indicated in paragraph 33 of GST/HST Memorandum 16-5, Voluntary Disclosures Program, VDP applicants are required to submit information for the four calendar years before the date the application is filed for applications under Category 1 or Category 2. As a result, in these cases, the applicants would only be expected to include payment of the estimated tax owing for the same four-year period as their VDP applications.

Q.5 VDP voluntariness where 3^rd-party supplier assessed

Assume that a GST/HST registered recipient (Aco) is charged tax, five years after the transaction in question, by another GST/HST registrant (Sco) who has now been assessed by CRA for failure to charge GST/HST respecting of a supply of goods to Aco. Sco provides Aco with a copy of the Notice of Assessment so that Aco can claim an ITC for the GST/HST now charged to it by Sco.

This causes Aco to realize that it too has been failing to charge GST/HST on reselling the same goods to its customers - who are also GST/HST registrants, and all were acquiring the goods for consumption, use or supply in the course of their own commercial activities.

The reason that no one has been charging GST/HST is because they had all been relying on s. 144, which they had assumed, contrary to a subsequent published CRA position, deemed their purchases and supplies to be made outside of Canada. – or so they had thought. While they had all been made in Canada, between the time of import and Customs release, CRA’s new policy that long term supply agreements cannot qualify for section 144 relief was news to them.

(a) Can Aco now make a voluntary disclosure in light of para. 30 of GST/HST Memorandum 16-5, which indicates that a VDP application will not be considered voluntary if, “enforcement action … relating to the subject matter of the VDP application has been initiated … against a third party, where the purpose and impact of the enforcement action against the third party are sufficiently related to the present application”?

(b) What is CRA’s interpretation of the “sufficiently related” test?

(c) Assume that that voluntary disclosure is accepted, and that Aco is a large corporation with over $250 million in gross revenues in the last two years. Will Aco be precluded from filing a Notice of Objection to challenge the legal validity of the CRA’s policy on s. 144?

CRA Comments

(a) All VDP applications are reviewed and decided on their own merits. An application will not be eligible for VDP relief if any of the five conditions (which includes the voluntary criterion) detailed in paragraph 29 of GST/HST Memorandum 16-5 are not met. In the example provided, if Aco and Sco are not related, the application from Aco would likely be considered under VDP. Conversely, if Aco and Sco are related companies, Aco’s application would not be considered as voluntary due to the prior enforcement action (audit) that was conducted against Sco that identified the subject matter of Aco’s VDP application.

(b) The determination of whether or not a VDP application does not meet the voluntary criterion due to an enforcement action against a third party will be made on a case-by-case basis taking into consideration all the particular facts of each situation. The following is not meant to set an absolute standard or meaning to the phrase “where the purpose and impact of the enforcement action against the third party are sufficiently related to the present application” but should provide some guidance. In general, the CRA will consider situations where the enforcement action provided sufficient information to identify the VDP applicant and to uncover signs of collusion between the third party and the VDP applicant or wilful blindness on the part of the VDP applicant to fall within the meaning of the aforementioned phrase. An example of such situations would be enforcement actions against a third party that deal with accommodation (also known as “invoices of convenience”) or false invoices where the VDP applicant is identified as a participant in the invoicing scheme.

(c) As per paragraph 73 of GST/HST Memorandum 16-5, the applicant will be required to waive their rights to object to the assessment results in regards to the specific information submitted in the VDP application. However, the applicant is allowed to file a Notice of Objection in case of disagreement with respect to characterization issues, such as whether a supply is a taxable or exempt supply, or whether a particular supply is deemed to be made inside or outside Canada as a result of the application of the place of supply rule in section 144 of the ETA.

Q.6 "No names" discussions before VDP application

GST/HST Memorandum 16-5, paras. 44 and 45 provide that a registrant may participate in preliminary discussions on an anonymous basis with a CRA official. What is the contract number for a potential applicant to be able to contact the CRA to have such a pre-disclosure discussion? Also, in practice, we understand that there is a single person designated to conduct all such pre-disclosure discussions.

(a) Please confirm whether there is only a single individual assigned to GST/HST pre-disclosure discussions or whether there is a team assigned to this role.

(b) Please also advise whether we can schedule a telephone conference as return calls often happen days if not weeks after our voicemail and invariably come at a time we are not available to answer the phone. Hence, the “pre-disclosure discussion” may take weeks if not months before a live discussion can happen – which is especially concerning consideromg that one of the factors the CRA will weigh in deciding whether to treat an applicant under Category 3 is “how quickly the registrant took corrective measures to address their non-compliance upon its discovery”.

CRA Comments

(a) The Shawinigan National Verification and Collections Centre (NVCC) has multiple VDP officers who have been trained and are able to conduct pre-disclosure discussions. The NVCC is able to assign additional VDP officers as necessary to assist with pre-disclosure discussions in response to call volumes. Depending on the complexity of the situations, as well as the availability of the applicant and of the VDP officer, it is recognized that it may take several contacts in some situations to fully conclude a pre-disclosure discussion.

(b) To initiate a pre-disclosure discussion with a VDP officer, an applicant (or their representative) must first contact Business Enquiries at 1-800-959-5525. Business Enquiries will refer the contact information provided by the applicant or their representative to a VDP officer who will initiate a call back to the applicant.

While there were some minor delays in the early weeks after implementation of the new policy, the NVCC is currently responding to requests for call-backs promptly. While we are not aware of any call-backs or discussions that have taken weeks or months to conclude, we will monitor the situation and consider making improvements if needed.

Q.7 VDP where partial wash transaction or payment made only for 4 years

Conditions for the making of a voluntary disclosure include that it is “complete;” and that there is “payment of the estimated tax owing”.

(a) To the extent the taxpayer uncovers errors that are wash transactions (i.e., the wrong entity in a corporate group claimed ITCs) worth over 90% of the claim, and also minor calculation or other errors, will the CRA treat the disclosure as Category 1 for the entire disclosure, only for the portion that is a wash transaction, or will the disclosure instead be treated as Category 2 or 3 because it is not exclusively a “wash transaction” type error.

(b) Where the taxpayer is applying under Category 1 or 2, and for these categories the application is “complete” for the 4 calendar years before the date of the application, does this mean that an applicant satisfies the conditions for completeness and payment where documentation and payment is made for the past 4 years (even if the error was made for more than 4 years prior to filing)?

CRA Comments

(a) The treatment of a VDP disclosure will always depend upon the particular facts at hand. Applications that fall wholly under Category 1, GST/HST wash transactions, should be eligible for a 100% reduction of penalty and interest as per the guidelines set out in GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations. When there is additional information disclosed that does not represent a true wash transaction, provided there is no indication of tax avoidance, deliberate or wilful default, or carelessness amounting to gross negligence, the application may be split between Category 1 and the other two categories. If there is evidence of deliberate or wilful default, gross negligence or tax avoidance then the VDP application as a whole will fall under Category 3. In the scenario presented in this question, for clarity, we will assume that the other errors disclosed were for failure to charge GST/HST on supplies made to clients that were involved in exempt activities. In this case, the CRA would treat 90% of the claim under Category 1 and the other 10% would likely fall under Category 2.

(b) Yes. As indicated in paragraph 33 of GST/HST Memorandum 16-5, Voluntary Disclosures Program, VDP applicants are required to submit information for the 4 calendar years before the date the application is filed for applications processed under Category 1 or Category 2. Accordingly, in these cases, the applicants would only be expected to include information and payment of the estimated tax owing for 4 calendar years before the date the application is filed even if the error was made for more than the 4 calendar years prior to the date of filing.

Please note that when there is tax owing, the accuracy of the payment, or the amount to be paid where there is a payment arrangement, will be verified during the review process. If an application that was believed to fall under Category 1 (GST/HST wash transaction) or Category 2 (General program) is reclassified, in part or in whole to Category 3 (Limited program) by the CRA, the applicant will be required to provide further information and to pay the additional taxes associated with the additional years, beyond the information and estimated tax that initially accompanied their application.

Q.8 NR provision of services through Cdn subcontractor

A non-resident registered supplier (NR) of marketing and solicitation services (in the credit card processing line of business) contracts with a resident supplier (CanSupplier) that for every merchant signed up with the service, NR will receive a commission. NR then contracts with a resident contractor (RC) to perform the services in exchange for a portion of NR’s commission from CanSupplier. Although NR has no physical presence in Canada and performs no services there, RC performs services in Canada under its contract with NR. There is no formal agency agreement in place between them

Is NR is providing its services exclusively outside Canada for purposes of s. 142(2); and is RC providing zero-rated services to a non-resident per Sched. VI, Pt. V, s. 7? Or is NR providing services in part in Canada by virtue of its contractual obligation to CanSupplier and the entering into of its contract with RC?

CRA Comments

Paragraph 142(1)(g) of the ETA deems a supply of a service to be made in Canada if the service is, or is to be, performed in whole or in part in Canada. Conversely, paragraph 142(2)(g) deems a supply of a service to be made outside Canada if the service is, or is to be, performed wholly outside Canada.

Whether a service is performed in whole or in part in Canada is a question of fact to be determined on a case-by-case basis. Generally, a service will be considered performed at least in part in Canada if the service requires a person to perform a task and the person performing or physically carrying out the task is situated in Canada at the time the activity is done.

Based on the limited information provided, the subcontracted services performed by RC in Canada would result in the supplies of the services by NR being made in Canada pursuant to paragraph 142(1)(g).

Section 7 of Part V of Schedule VI to the ETA zero-rates the supply of a service made in Canada to a non-resident person unless the service is specifically excluded by paragraphs 7(a) through 7(h) of that section. Based on the limited information provided, it appears that the supplies of services made by RC to NR would be zero-rated pursuant to section 7.

Q.9 Assessment based on invoice sampling

A CRA auditor chooses to use a proportionate sampling of invoices to determine whether sufficient evidence of export was obtained and maintained by the Canadian supplier, who had claimed zero-rating treatment. The auditor selects 100 export sales as a sample (from a total of 5,000 export sales) and initially takes the position that for 100% of the sampled sales, insufficient evidence of export was provided and accordingly proposes assessing on the basis that the taxpayer failed to collect GST/HST on 100% of its total export sales. Subsequently, and prior to issuing a final assessment, the auditor agrees that the documentation for 25% of the sampled sales (by value) was actually sufficient to demonstrate zero rating.

In these circumstances, should the auditor amend the proposed assessment by reducing the total proposed assessment by 25%, so that only 75% of the total export sales are assessed?

CRA Comments

The goal of sampling is to obtain information with respect to a particular population to obtain sufficient and appropriate evidence to support conclusions. It is difficult to comment on the above hypothetical situation as there are many factors to consider when developing a sample and analysing the results. Once a sample has been selected and supporting documentation has been obtained and evaluated, the auditor has to link the sample back to the particular population. For this reason we will not comment on this hypothetical situation other than to say that the documentation to support any transaction must be appropriate in order for it to be accepted.

Q.10 Acceptable security under s. 314(2)

1. Is the amount of effort or documentation that a CRA collections officer is required to undertake in obtaining security a relevant factor in determining whether the amount or form of security is satisfactory for purposes of s. 314(2)?
2. What factors will the Minister consider in determining whether security to be taken pursuant to subsection 314(2) is satisfactory regarding:
   
   1. the amount of security; and
   2. the form of the security? Are there any forms of security, or types of assets to be pledged, that are categorically unsatisfactory to the Minister?

CRA Comments

(a) We can confirm that the amount of effort or documentation required to undertake in obtaining security from a tax debtor, pursuant to subsection 314(2) of the ETA, is not usually a relevant factor in determining if the security is satisfactory to the CRA or not.

(b)

(i) The amount of security should be equivalent to the tax assessment amount (tax, interest, and penalties).

Note that any amounts that are not covered by the security are subject to collection action.

(ii) The satisfactory form of security should consist of negotiable security that has the following hallmarks:

(A) liquid;

(B) equivalent, or near equivalent, to cash; and

(C) exercisable upon demand without defense or counterclaim.

Such acceptable negotiable security with the above hallmarks is the Bank Letter of Guarantee or Irrevocable Standby Letter of Credit.

However, if a form of security is being proposed, the Minister will review the proposed security during the course of administering the ETA, and determine whether it is advisable to accept the proposed security.

Please refer to the Collection Policies circular for any further details.

Q.11 Eligibility of JV operator to claim NRRP rebates

Given that s. 273(1)(a) deems supplies made by the operator on behalf of the co-venturer to have been made by the operator, provided the “operator” is considered a “builder,” and given that the operator is a builder as defined in s. 123(1) as it has a beneficial ownership interest, the operator is deemed to have made the supply and to have paid and collected GST/HST on the deemed supply. Similarly, regarding the claiming of a rebate pursuant to s. 256.2, the operator should be the person that claims the rebates as the operator is the person that is deemed to have received a taxable supply of the residential complex and to have paid GST/HST on that deemed supply.

Where there is a joint venture to construct a multiple unit residential complex (MURC), is the “operator” of the joint venture who has been appointed pursuant to s. 273 entitled to: (i) report and remit the GST/HST that is deemed under s. 191(3) of the ETA to have been collected by the builder; and (ii) claim any eligible new residential rental property rebates that are available under s. 256.2?

CRA Comments

It is a question of fact whether an operator who makes a joint venture election under section 273 of the ETA in respect of a joint venture that was created to construct a MURC is within the deeming rules under subsection 191(3) of the ETA, and if so, is eligible to claim a new residential rental property rebate under section 256.2 of the ETA. Each of the relevant provisions of the ETA has different conditions that have to be met, and whether these conditions have been met in a given situation has to be determined on a case-by-case basis.

Where a joint venture election is made, subsection 273(1) provides, among other things, that all property that is supplied or acquired by the operator on behalf of a co-venturer is deemed to be supplied or acquired by the operator rather than the co-venturer. In order for the deeming rule to apply, subsection 273(1) requires that the property be supplied or acquired during the period the election is in effect, that the property be supplied or acquired under the agreement by the operator on behalf of the co-venturer, and that the property be supplied or acquired in the course of the activities for which the agreement was entered into. In other words, where the operator makes a supply of real property and all of these conditions are met, the supply of real property is deemed to be made by the operator and not by the co-venturer.

Subsection 191(3), in part, deems the builder of a MURC to have made and received a taxable supply by way of sale of the MURC (self-supply) and to have paid and collected tax in respect of the self-supply. Generally, the builder is required to report and remit the GST/HST collected on the self-supply once the construction of the MURC is substantially completed and a residential unit in the MURC is provided to the first individual who will occupy a unit in the MURC as a place of residence.

Before determining whether the deeming rules in subsection 191(3) apply to an operator who has made a joint venture election under section 273, the operator must first meet the definition of “builder” in subsection 123(1). Where the operator has a beneficial ownership interest in the real property on which the MURC is constructed, it will likely meet the definition of “builder” if the operator carries on, or engages another person to carry on for the operator, the construction of the MURC. It is important to note that more than one person can meet the definition of “builder” for GST/HST purposes. For example, a co-venturer may have an interest in the real property and also meet the definition of “builder”.

If the operator makes a supply of real property on behalf of a co-venturer and on its own behalf (specifically, if the operator provides on behalf of a co-venturer and on its own behalf, a residential unit in the MURC to the first individual who will occupy a unit in the MURC as a place of residence) and if the supply is made

• during the period that the joint venture election is in effect,
• by the operator under the joint venture agreement,
• in the course of the activities for which the joint venture agreement was entered into,

then the operator will be deemed to have made the supply of the unit. Furthermore, if the operator meets the definition of “builder,” then the operator is within the deeming rules under subsection 191(3) and will be required to report and remit the GST/HST that is deemed under subsection 191(3) to have been collected by the builder. As a result of the deeming rules in subsection 273(1), the co-venturer is not regarded as having made a supply of the unit, and consequently, the co-venturer does not fall within the deeming rules under subsection 191(3).

While there is more than one new residential rental property rebate available under section 256.2, we will confine our answer to the rebate set out in subsection 256.2(3) available to a builder of a residential complex who is deemed to have made a self-supply under section 191. Generally, for a builder of a residential complex to be eligible for this rebate, the tax under section 191 must be deemed to have been paid by the builder, the complex must include one or more qualifying residential units of the builder, and the builder must not be entitled to claim the deemed paid tax as an ITC.

Subsection 256.2(1) defines a “qualifying residential unit” for purposes of the new residential rental property rebate; among other conditions, this definition requires that the unit meet the definitions of a “residential unit” in subsection 123(1) and “self-contained residence” in subsection 256.2(1). As well, to be a “qualifying residential unit,” the builder must be, at or immediately before the time the tax under section 191 is deemed to have been paid, the owner, a co-owner, a lessee or a sub-lessee of the residential unit, or have possession of the unit as purchaser under an agreement of purchase and sale, or the unit must be situated in a residential complex of which the builder is, at or immediately before that time, a lessee or a sub-lessee. In many cases, to be a “qualifying residential unit,” the builder must also hold the unit for the purpose of making specific exempt supplies of the unit, the first use of the unit must be as an individual’s place of residence, and it must be intended that the individual will occupy the unit continuously for a period of at least one year. It will be a question of fact whether one or more of the residential units in the MURC meet the definition of a “qualifying residential unit”.

Even if the operator is a “builder” that is required under subsection 191(3) to report and remit the tax on the self-supply of the MURC, it may not necessarily be entitled to a rebate under subsection 256.2(3) if the residential unit does not meet the definition of a “qualifying residential unit” or if any of the other conditions under section 256.2 for claiming the rebate are not met.

Q.12 Single supply on sale of rental real estate

Where a vendor transfers a business and the primary asset that is used to carry on the business is real property, does s. 221(2) relieve the vendor from collecting GST/HST on the value of the consideration that is attributable to the real property where the purchaser is registered and no s. 167 election is made. Consider, for example, the sale of an office building, a hotel or a shopping centre.

(a) Regarding the office building, the vendor may have prepaid property taxes for the entire year and is reimbursed by the purchaser for the portion thereof relating to the post-closing period. Should the payment be treated as: (i) a non-taxable reimbursement of taxes paid as agent for the purchaser; or (ii) an adjustment of the purchase price.

(b) Regarding the sale of an office building and the assignment of tenant leases, is the assignment of the leases part of the single supply of the building where none of the purchase price is allocated to the leases?

CRA Comments

The question contained in the preamble

Generally, section 167 of the ETA permits a supplier to make a supply of a business or part of a business to a recipient with no GST/HST payable on the property or services supplied under the agreement for the supply (with some exceptions), if both parties to the transaction elect to do so. One of those exceptions is where a supply of property made under the agreement is a taxable supply by way of sale of real property made to a non-registrant recipient.

In any event, if no election is made under section 167, then the application of GST/HST to a supply of property that was an asset in the supplier’s business is determined in accordance with the general rules. Generally, if a supplier makes a taxable supply by way of sale of real property that was an asset in the supplier’s business, and if the recipient of the supply is registered for GST/HST purposes, then in accordance with paragraph 221(2)(b) of the ETA, the supplier is not required to collect the tax payable by the recipient and the recipient is required to account for the tax payable on the supply.

Question (a) – Reimbursement of property taxes paid by the vendor

As we understand it, it is common for a lawyer representing a vendor who is a party to a purchase and sale agreement in respect of real property to prepare a statement of adjustments prior to finalizing the transaction. Generally, the purpose of the statement of adjustments is to allocate between the vendor and the purchaser the responsibility for certain financial obligations relating to the real property being sold. In situations where a vendor has paid property taxes relating to a period during which time the purchaser will be the owner of the real property, the vendor’s lawyer will, in the statement of adjustments, request that the purchaser pay, to the vendor, an amount equivalent to the portion of the property taxes that relates to the period during which the purchaser will be the owner of the real property. Generally, this results in an increase to the final amount owing to the vendor by the purchaser.

Generally, some refer to the adjustment to compensate the vendor for the property taxes the vendor paid as a non-taxable reimbursement, which implies that the vendor paid the property tax to the municipality as agent acting on behalf of the purchaser. In accordance with GST/HST Policy Statement P-182R, Agency, there are three essential qualities that help in determining whether a person is acting as agent in making a transaction on behalf of another person. The three essential qualities are: consent of both the principal and the agent; authority of the agent to affect the principal’s legal position; and the principal’s control of the agent’s actions.

Based on the scenario, there is no evidence that the essential qualities that determine whether a person is acting as agent in making a transaction on behalf of another person are met. Consequently, it is our view that no agency relationship exists between the vendor and the purchaser, and therefore, the prepayment of property taxes by the vendor cannot be treated as a non-taxable reimbursement of taxes paid as agent for the purchaser.

Consequently, it is our view that the adjustment for the amount equivalent to the portion of the property taxes that relates to the period during which the purchaser will be the owner of the real property is additional consideration for the supply of the real property.

Question (b) – Assignment of tenant leases

For GST/HST purposes, the determination of whether a transaction consisting of several elements is to be regarded as a single supply or multiple supplies is based on a determination of fact. A set of questions to help determine if a transaction consists of a single supply or multiple supplies can be found in GST/HST Policy Statement P-077R2, Single and Multiple Supplies. In no particular order, the questions are:

• Is the property/service provided by two or more suppliers?
• Is there more than one recipient?
• What did the supplier provide for the consideration received?
• Is the recipient made aware of the elements (in detail) that are part of the package?
• In the context of the particular transaction, does the recipient have the option to acquire the elements separately or to substitute elements?

In applying Policy Statement P-077R2 to the scenario: there is one supplier and one recipient; the sale of the office building is one element of the supply; the assignment of tenant leases is another element of the supply; none of the purchase price is allocated to the leases (but a single price does not in itself determine whether there are one or more supplies); and the recipient does not have the option to acquire the building without the assignment of tenant leases.

Consequently, it is our view that the sale of the office building and the assignment of tenant leases likely form a single supply. However, we would have to review the applicable agreements before we could make a definitive pronouncement on the matter.

Q.13 Draft gross negligence penalty report

At the 2017 CBA Commodity Tax Roundtable, CRA was asked (in Q.14) whether it would instruct auditors to enclose a draft Penalty Recommendation Report along with the proposal letter, to inform the taxpayer of the particular reasons for the potential assessment of the penalty.

CRA’s response was essentially that this would be taken “under consideration” regarding certain cases. Has CRA reached a conclusion on this issue?

CRA Comments

At this time, there are no procedures allowing a draft Penalty Recommendation Report to accompany a proposal letter.

However, the CRA continues to be committed to providing access to the Penalty Recommendation Report once it is finalized.

Q.14 Separate processing of NRRP rebates and interest assessments/collections demands

Where there is a self-supply by a developer under s. 191, if the developer is entitled to the new residential rental property rebates under ss. 256.2 and 256.21, the rebate claim will generally be filed with the developer’s regular GST/HST return for the reporting period that includes the self-supply. In this regard, s. 228(6) deems the developer’s net tax remittance for the reporting period of the self-supply to have been paid to the extent of the rebate amount claimed; and s. 296(2.1) requires CRA, in subsequently assessing net tax, to apply unclaimed rebate amounts against any net tax underpaid.

However, separate CRA offices assess the net tax amount (under s. 296) and the rebate amount (under s. 297). This often leads to problematic outcomes, viz,, if the rebate assessment is delayed, the CRA’s account for the developer will show an underpayment of net tax, resulting in potential demands for payment by CRA collection officers. Moreover, s. 296(2.1) is often misapplied so as to result in incorrect interest amount, i.e., 6% interest is imposed on alleged deficient net tax payments whereas rebates attract only 2% interest.

Both of these outcomes are legally wrong, and generally require the intervention of an appeals officer at a later date. Does CRA intend to modify these practices?

CRA Comments

In cases where a registrant that is required to self-assess under section 191 of the ETA files their new residential rental property rebate (NRRPR) claim with their regular GST/HST return, as noted above, subsection 228(6) of the ETA will apply and offset, on the day the return is filed, any tax remittable by the NRRPR claimed by the registrant.

If the registrant files their GST/HST return late, there will be interest charges pursuant to subsection 280(1) of the ETA as with any other late payment. Upon receipt of the NRRPR, the Minister must consider and assess the NRRPR under section 297 of the ETA.

Subsection 296(2.1) of the ETA cannot apply in this situation as the NRRPR was claimed by the registrant in an application filed with their GST/HST return.

In cases where it is discovered during a registrant’s audit that the registrant failed to self-assess the GST/HST as required under section 191 and may be eligible for a NRRPR, subsection 296(2.1) may apply, provided all the eligibility requirements were met, to offset the amount of the net tax assessment with the NRRPR amount.

Current audit procedures require the auditor to verify the validity of the NRRPR and, if the NRRPR is valid, to send the rebate claim to be keyed into our system and processed with an effective date that is the same as the due date of the registrant’s return. As a result, interest should only apply to the difference between the amount of tax on the self-assessment and the valid NRRPR amount. Furthermore, the NRRPR should not be delayed as it would have been verified by the initial auditor and would not require a second review by our refund integrity or rebate processing programs. However, we are aware of some unintended results that may arise with our existing audit procedures and we will be reviewing these procedures to determine where improvements can be made.

Q.15 “Management or administrative service” and FMV thereof for s. 272.1(8) purposes

1. Does CRA have a definition of “management or administrative service” that it applies for purposes of s. 272.1(8) (other than the inclusion of an “asset management service” as defined in s. 123(1))?
2. If the consideration paid for such a service is based on an industry standard of say X%, would that constitute the fair market value (FMV), even if between related parties?

CRA Comments

(a) The CRA does not have a specific definition of “management or administrative service” for purposes of subsection 272.1(8) of the ETA. For GST/HST purposes, in addition to its ordinary meaning, the phrase “management or administrative service” is defined in subsection 123(1) of the ETA to include an “asset management service” which is also defined in subsection 123(1) of the ETA. In the context of management or administrative services provided by a general partner to an investment limited partnership of which it is a member, a management or administrative service would typically include managing or administering the day-to-day business and affairs of the partnership.

This could include, for example, organizing, monitoring, planning and coordinating the activities of the partnership, making decisions and directing resources to assist the partnership in achieving its defined objectives, as well as maintaining records, and preparing reports.

(b) The ETA does not define FMV other than to state that the FMV of a property or a service is to be determined without reference to any tax excluded by section 154 of the ETA from the consideration for the supply. Further, the ETA does not prescribe a specific methodology for determining FMV. The CRA recognizes that there are various methods that may be used and the appropriateness of any valuation methodology used in a particular case is a matter of valuation principles and practice.

GST/HST Policy Statement P-165R, Fair Market Value for Purposes of Part IX of the Excise Tax Act (Revised) provides that generally, it is the CRA’s position that FMV represents the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact. Accordingly, the FMV of a supply of a management or administrative service may not necessarily always correspond to the consideration paid for such a service.

The CRA appreciates that it may be difficult to determine the FMV of a management or administrative service provided by a general partner to an investment limited partnership of which the general partner is a member. However, in accordance with GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Services, the CRA does not issue rulings relating to the determination of the FMV. Further, the CRA cannot commit to a specific methodology, such as an industry standard percentage, to determine FMV as each situation is unique and an industry standard may not apply to the facts of any given situation.

General partners can use whichever method they would like to determine FMV. However, they must be able to support it. The CRA is under no obligation to accept the value used by the general partner if it is determined to be over or under valued but it will consider the general partner’s FMV determination, as well as other approaches in determining the appropriateness of the FMV used.

Q.16 ONEnergy and s. 141.1(3)

ONEnergy (2018 FCA 54) held that s. 141.1(3), which provides for an input tax credit where the property or service is acquired in connection with the acquisition, establishment, disposition or termination of a commercial activity, is more specific than s. 141.01(2), so that a person will not lose the entitlement to claim an ITC solely because that person is not making any taxable supplies at the time that such property or service is acquired. Does CRA agree?

CRA Comments

It is a question of fact whether the conditions of subsection 141.1(3) of the ETA are met in any particular situation. The Domestic Compliance Programs Branch may find that the conditions of subsection 141.1(3) are not met in particular situations where the specific facts are different than those in ONEnergy. We would need to review all of the relevant facts in a particular fact situation to determine whether the conditions of either or both paragraph 141.01(2)(b) and subsection 141.1(3) are met.

Q.17 Getting referral for a DOJ legal opinion at the audit stage

Can taxpayers request that the Technical Guidance Section seek a legal opinion or guidance from the Department of Justice (DOJ) at the audit stage? When and how can taxpayers get DOJ internal Legal Services involved at the audit or appeals stage?

CRA Comments

The mandate of the Technical Guidance Section (TGS) is to provide support to auditors and examiners on issues related to the application of the Excise Tax Act (ETA) and related legislation, as well as CRA policies by providing technical advice and assistance when requested.

To fulfill its mandate, TGS consults with Excise and GST/HST Rulings on interpretative issues related to the ETA or may seek advice from Legal Services on non-interpretative issues.

However, the decision to seek a legal opinion is made solely by TGS or by TGS in consultation with the relevant HQ Program.

Q.18 Removal of P-249 on Novations

GST/HST Policy Statement P-249, Agreements and Novation, was removed from the CRA website in 2011. The website stated that the removal is temporary and P-249 is under review. No redacted rulings on the novation of contracts have been issued since then.

What aspects of the original policy statement were considered problematic so as to require removal of P-249? When will the Policy Statement be republished?

CRA Comments

An agreement can be amended or changed without novation occurring. Further, a determination of whether novation occurs in a particular case requires consideration of all relevant facts.

GST/HST Policy Statement P-249, Agreements and Novation, is being reviewed to further confirm and clarify this, and to further address other circumstances where this can be the case.

Q.19 Extension of wash trades where recipient entitled to full rebate

GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations, para. 3, states that “a wash transaction does not include a supply made to a recipient that would have been entitled to claim a rebate, as opposed to a full ITC, if the tax had been charged correctly.” Para. 4 lists municipalities, which are eligible for 100% GST rebates, as an entities that cannot be considered to have received a wash transaction.

What is the rationale for excluding supplies made to a recipient who would have been eligible for a 100% rebate, as contrasted to a 100% input tax credit, from the definition of a “wash transaction”?

CRA Comments

A review of the wash transaction policy was undertaken before Memorandum 16-3-1 was updated in 2010. In the course of that review, consideration was given with respect to whether the wash transaction policy should be revised to include situations where the recipient of the supply is a municipality that would have been entitled to a public service body (PSB) rebate of 100% of the GST rather than a full ITC.

The outcome of the review was to maintain the original tax policy intent of the wash transaction policy whereby it would continue to only possibly apply for recipients involved in commercial activities and entitled to claim full ITCs. The wash transaction policy was not intended to apply to all circumstances where there is no net loss of revenues for the government.

As a result of the review, updated Memorandum 16-3-1 includes example No. 5 that illustrates that even if the recipient of the taxable supply is a municipality that would have been entitled to a rebate of 100% of the GST, the wash transaction policy would not apply to the supplier as a full ITC was not available to the municipality.

It should also be noted that not all municipalities would be entitled to a PSB rebate of 100% of non-creditable tax charged where they are not entitled to an ITC. Municipalities in participating provinces may be entitled to a PSB rebate of 100% of the federal part of the HST but only entitled to a lesser percentage of the provincial part of the HST. Thus, the amount of the HST collectible on a taxable supply would not be completely offset by the amount available to a municipality in a participating province as a PSB rebate.

Q.20 Update of Memoranda 3-3-3 and 8-6

Will CRA be updating GST/HST Memorandum 3-3-1, Drop Shipments, and GST/HST Memorandum 8-6, Input Tax Credits for Holding Corporations and Corporate Takeovers?

CRA Comments

Yes, we are currently updating both publications to reflect legislative changes that have been made with respect to these issues.

Q.21 Late assessment by CRA of supplier so as to engage s. 225(4)(c)

More than four years after a GST/HST registered supplier made a taxable supply and unintentionally failed to collect tax from a GST/HST registered recipient who would have been entitled to a full input tax credit, the supplier makes a voluntary disclosure respecting that failure. That disclosure is accepted as a wash transaction under Category I, and the supplier now plans to collect the unpaid tax from the recipient by issuing an invoice to the recipient.

Will CRA will issue a Notice of Assessment to the supplier once such a voluntary disclosure has been accepted and finalized, so that the recipient will be entitled under s. 225(4)(c) to claim ITCs beyond the four-year limitation period for the tax it subsequently pays to the supplier? Note that s. 225(4)(c), the supplier must disclose to the recipient in writing that the Minister has assessed the supplier for that tax.

CRA Comments

The Assessment, Benefit, and Service Branch (ABSB) has indicated that a NOA will be issued once the voluntary disclosure has been accepted and finalized. Additional questions on the NOA can be addressed to the Business Returns Directorate, ABSB.

Q.22 Polygon and double tax where taxable sale of homes on leased land

DeveloperCo which holds land under a 99-year headlease, hires Contractor to develop the land and housing lots, and will enter into subleases of the lots with Builder who intends to construct, market and sell homes in the subdivision to third party buyers. The houses and other improvements will become part of the land under general legal principles. On completion of the homes, Builder will sell the homes to purchasers, who will be assigned the Builder’s sublease.

Polygon Southampton (2003 FCA 193) indicates that such assignment is a sale for GST/HST purposes, on which GST/HST is payable, and that the self-supply rule in s. 191 did not apply to either DeveloperCo or Builder. Accordingly, the consequences appear to be the following:

• The land headleased to DeveloperCo is exempt under Sched. V, Pt. I, s. 6.1.
• The sublease to Builder is exempt under Sched. V, Pt. I, s. 7, so that DeveloperCo cannot claim ITCs to recover GST/HST paid on development costs.
• No rebate provision appears to permit DeveloperCo to recover the GST/HST paid on its development costs. While s. 256.1 may have been intended to address this situation (of land leased for residential purposes to a builder), the rebate right is not triggered unless Builder is subject at some point to any of ss. 190(3) to (5) or 191 – and none of these apply here.

Is there a solution to the potential double taxation problem outlined above? Can DeveloperCo recover the GST/HST paid on the costs of developing and servicing the lots?

CRA Comments

In this scenario, Builder is regarded as acquiring possession of the lots for the purpose of constructing a residential complex thereon in the course of commercial activities. Also, Builder is regarded as making supplies of its leasehold interest in the residential complexes by way of assignment. Pursuant to the Polygon decision, Builder’s supplies are characterized as taxable supplies that are outside the scope of section 191 of the ETA.

Pursuant to the operation of the ETA, Builder’s use of the lots and the characterization of Builder’s supplies have a direct impact on the GST/HST obligations and entitlements of both the landowner and DeveloperCo in this scenario. Specifically, with respect to DeveloperCo, because Builder does not make (or hold the lots for the purposes of making) exempt supplies included in section 6 or 7 of Part I of Schedule V to the ETA, DeveloperCo’s subleases of the lots to Builder are exempt under subparagraph 7(a)(ii) of Part I of Schedule V as opposed to being exempt under section 6.1 of Part I of Schedule V. In either case:

• DeveloperCo’s subleases of the lots to Builder are (or would be) exempt supplies for GST/HST purposes; and
• DeveloperCo is not (or would not be) entitled to claim ITCs in respect of the GST/HST payable on Contractor’s supply of developing and servicing the lots.

However, the matter of which provision exempts DeveloperCo’s subleases of the lots to Builder has a direct impact on whether DeveloperCo is eligible to claim a rebate under section 256.1 of the ETA in respect of the GST/HST payable on Contractor’s supply of developing and servicing the lots. Specifically, in order for DeveloperCo to be eligible to claim a rebate under section 256.1, DeveloperCo’s subleases of the lots to Builder must be exempt supplies under section 6.1 or 6.11 of Part I of Schedule V. Since DeveloperCo’s subleases of the lots to Builder are exempt supplies under subparagraph 7(a)(ii) of Part I of Schedule V, DeveloperCo is not eligible for a rebate under section 256.1.

The CRA recognizes this result, but we are not aware of any solutions.

Q.23 Medallion and JV election

Medallion (2018 TCC 157) appears to have widened the concept of a “participant” to a person contributing property management services alone. The appellant had no ownership interest in the joint venture properties and the facts do not indicate that it was responsible for managerial or operational control of the joint venture.

In light of Medallion, for s. 273 purposes can a participant in a joint venture include a person that contributes solely property management services to the joint venture pursuant to a written joint venture agreement?

CRA Comments

We are currently reviewing the extent to which the Medallion decision would affect our position with respect to the issue of who can be considered to be a participant in a joint venture for purposes of section 273 of the ETA, and this includes taking into consideration the issue described in the question.

Q.24 S. 167 election where immediate sale by Amalco

Corporations A and B (both registered and carrying on a business) amalgamate to form AmalCo. Immediately thereafter, Corporation C, a GST/HST registered corporation, acquires all the AmalCo assets. Are Corporation C and AmalCo entitled to elect under s. 167(1) respecting that acquisition?

It is unclear why the CRA took the position in 2003 that there was no “acquisition” of a business by AmalCo considering that s. 271(c) only provides that the transfer of assets from the predecessors to the amalgamated company is not a supply. Furthermore, 2017-0719531I7 indicates respecting a similar issue under ITA s. 22 that to the extent that there was no disruption in the continued operation of the business, the election under s.22 should be available even if AmalCo did not actually carry on the business.

CRA Comments

In the situation that you have described, we are assuming that the amalgamation of Corporations A and B meets the conditions of section 271 of the ETA and that AmalCo did not carry on the business itself but has made a supply of the assets to Corporation C immediately following the amalgamation. It is our view that the election under subsection 167(1) of the ETA would not be available in this situation.

For purposes of section 271, an amalgamation must occur otherwise than as the result of the acquisition of property of one corporation by another corporation pursuant to the purchase of the property by the other corporation or as a result of the distribution of the property to the other corporation on the winding-up of the corporation.

The conditions for making an election under section 167 provide that the supplier must be supplying a business or part of a business that was established or carried on by the supplier, or that was established or carried on by another person and acquired by the supplier, and under the agreement for the supply, the recipient is acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business.

As indicated at the 2003 and 2013 CRA CBA Commodity Taxes Roundtables, for the purposes of Part IX of the ETA, paragraph 271(a) deems the newly amalgamated corporation (referred as the “new corporation”) to be a separate person from each of its predecessor corporations, except as otherwise provided in Part IX. Since, in your example, Corporations A and B were the persons that established or carried on the business, AmalCo cannot be considered to have done so, since it is deemed to be a separate person for GST/HST purposes. Whether any person, including a corporation formed by an amalgamation, makes a supply of a business that was carried on by the person is a question of fact.

Paragraph 271(b) provides that the new corporation will be considered to be the same corporation as, and a continuation of, each of the predecessor corporations with respect to the property of those predecessors, as well as with respect to any services that the predecessor corporations had acquired, imported or brought into a participating province.

Therefore, where an amalgamation occurs for GST/HST purposes, the transfer of property or services to AmalCo by Corporations A and B under the amalgamation agreement does not constitute an acquisition made by AmalCo from those corporations, since AmalCo is deemed to be the same person and a continuation of those corporations in respect of that property or those services.

In addition, paragraph 271(c) deems the transfer of property from the predecessor corporations to the new corporation not to be a supply for GST/HST purposes.

Thus if the amalgamation of Corporation A and Corporation B meets the conditions of section 271 where the rules in paragraphs 271(b) and (c) apply to the property that is transferred to AmalCo by those corporations, AmalCo cannot be considered to have “acquired” a business established or carried on by another person in accordance with section 167 nor be considered the recipient of a supply of a business.

The question suggests that the CRA consider adopting for GST/HST purposes the administrative position set out in the 2017 income tax ruling, case 2017-0719531I7, developed for purposes of the election in section 22 of the ITA to allow AmalCo and Corporation C to file the election in section 167 of the ETA.

Given that the GST/HST and income tax are based on different legislative schemes and policy frameworks, the administrative position developed for purposes of section 22 of the ITA does not apply for purposes of section 167 of the ETA. It should be noted that, unlike section 22 of the ITA, subsection 167(1) of the ETA specifically addresses certain circumstances where a business or part of a business was established or carried on by another person.

Q.25 ILP status where real estate invested in indirectly

Each scenario provides a variant of Example 1 in Notice 308 respecting a limited partnership (LP) that is established to offer investment opportunities to investors on a pooled basis under a prospectus, with the partnership agreement stating that the primary purpose of LP is to invest directly or indirectly in real property.

Scenario 1. LP uses all the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property. The only difference with Example 1 is the statement of purpose in the partnership agreement.

Scenario 2. On day one, LP uses all of the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property. On day 180, LP sells all those interests and invests the proceeds directly in real property.

Scenario 3. The reverse of Scenario 2.

Scenario 4. On day one, LP uses 40% of the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property; and on day two, it uses the remaining 60% to invest directly in real property. On day 180, due to market shifts, the interests LP owns in the limited partnerships are now worth $1,200,000, while the direct investments in real property (acquired with 60% of the original capital) are now worth $800,000.

Scenario 5. On day one, LP uses 40% of the capital raised to invest directly in real property. On day two, LP uses the remaining 60% to acquire interests in other limited partnerships which invest in commercial and residential real property. On day 180, due to market shifts, the interests in the limited partnerships are now worth $800,000, while the direct investments in real property are worth $1,200,000.

Is LP an ILP on day 1 and, where applicable, does its status change on day 2 or 181?

CRA Comments

For GST/HST purposes, an “investment limited partnership” means a limited partnership, the primary purpose of which is to invest funds in property consisting primarily of financial instruments if (a) the limited partnership is, or forms part of an arrangement or structure that is, represented or promoted as a hedge fund, investment limited partnership, mutual fund, private equity fund, venture capital fund or similar collective investment vehicle, or (b) the CRA/CBA Roundtable – February 28, 2019 total value of all interests in the limited partnership held by listed financial institutions is 50% or more of the total value of all interests in the limited partnership.

Whether a limited partnership (LP) is an investment limited partnership (ILP) is not determined on any particular day based on the combination of assets that it holds on that day. Rather, the definition of “investment limited partnership” applies a primary purpose test. A determination of the LP’s primary purpose would generally reflect its main or fundamental purpose at the time it was established – and may be reassessed later on. The necessity to determine the primary purpose implies that the LP could have more than one business purpose. With respect to the scenarios you presented, the primary purpose test is not necessarily a numeric test such that it would require that more than 50% of the LP’s capital be invested in financial instruments at all times nor would the primary purpose be affected solely by short-term changes in the value of investments due to market shifts. In addition, the inclusion of a statement in the partnership agreement that the primary purpose of the LP is to invest directly or indirectly in real property is not in itself sufficient to exclude the LP from being an ILP.

Upon reviewing the LP’s agreement and other documents, the CRA may consider the following to determine whether it is reasonable to conclude that the primary purpose of an LP is to invest funds in property consisting primarily of financial instruments:

• the business of the LP as set out in its LP agreement and other relevant documents;
• the investments that generate the major revenue and the ones in which most funds are allocated;
• the time, attention and efforts directed towards an activity as opposed to the other(s).

Every case must be assessed on its own facts and surrounding circumstances and it is ultimately a question of fact to be decided on a case-by-case basis. If the LP agreement states that the purpose is to invest directly or indirectly in real property and the other documents provided to investors such as the prospectus, offering memorandum or subscription agreement do not provide more details, then the activities of the LP as well as the LP’s conduct during a particular taxation year may be more relevant.

As a result, further information is required to conclude that the LP in the scenarios presented is an ILP. However, we would likely conclude that the LP in scenarios 1 and 2 are ILPs and further information would be required to determine if the LP in scenario 2 is no longer considered to be an ILP.

With respect to scenario 4, we would likely conclude that the LP is not an ILP and further information would be required to determine if the LP in scenario 4 is considered an ILP at a later time. Short-term changes in the value of investments due to market shifts would generally not have an immediate impact on the determination of the LP’s primary purpose, as such, it is unlikely that we would conclude that the LP is an ILP on day 181.

During the meeting, a concern was raised that an LP that is an ILP would also be a listed financial institution for GST/HST purposes, and therefore subject to certain filing requirements. Paragraph 149(1)(a) of the Excise Tax Act (ETA) provides that if an LP is an ILP at any time during a particular taxation year, the LP is a listed financial institution for GST/HST purposes for the entire year. Therefore, regardless of what day during a taxation year an LP becomes an ILP or ceases to be an ILP, it will be a listed financial throughout that year as a consequence of the addition of ILP to the definition of “investment plan” in paragraph 149(5)(f.1).

Furthermore, the definition of “distributed investment plan” in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations) was amended by adding new paragraph (i) to include an ILP in that definition in subsection 1(1) of the SLFI Regulations. As a result, the current rules for distributed investment plans apply to an ILP. Thus, as an investment plan, an ILP is a listed financial institution and thus subject to the rules for listed financial institutions and, as the case may be, to the rules for selected listed financial institutions.

If an LP is not an ILP, as indicated at the 2006 CRA CBA Commodity Taxes Roundtable and in Notice 308, the management or administrative services provided by the general partner (GP) to the LP may be taxable supplies. A fee received by a GP for the provision of services, such as a fee based on the net value of the partnership assets, is an indicator that the GP is providing services in the course of its own business activity rather than for something done as a member of the LP, even if the agreement to provide such services is included in the LP agreement.

We would be pleased to respond to any written requests on this matter, where all relevant documentation is provided for our review.

Q.26 Reliance on GST/HST Registry

The charity gave the supplier a business number ending in RT0001. The supplier checked the number on the CRA’s online GST/HST registry, and the result indicated that the charity was GST/HST registered. The supplier, in reliance on s. 221(2), did not charge GST/HST on the sale. The supplier subsequently learned that the charity’s business number ending in RT0001 was only for use in filing public service body rebates, and that the charity was not registered for GST/HST under Part IX of the ETA.

(a) Is the GST/HST registry inapplicable for checking the GST/HST registration status of recipients that have a business number ending in RT0001, only for the purpose of claiming rebates? If so, how can suppliers meet their obligations to check the recipient’s GST/HST registration status and apply s. 221(2)?

(b) If a supplier relies on the GST/HST registry and the GST/HST registry gives a false positive, is it CRA’s policy that interest and penalties will be waived?

CRA Comments

(a) The Business Number and Authorization Division, Business Returns Directorate, Assessment, Benefit, and Service Branch, recently confirmed that they have resolved the issue of false positives that occurred in some instances when searches were conducted using the GST/HST Registry.

Suppliers can meet their obligation under subsection 221(2) of the ETA by obtaining the information from the recipient. Suppliers can call the CRA's Business enquiries line at 1-800-959-5525 to confirm the registration status of the recipient.

(b) The CRA does not currently have a specific policy to waive penalty and interest in cases where a supplier of real property relied on the GST/HST registry to verify a recipient’s GST/HST registration status and the GST/HST registry gave a false positive. However, the supplier may apply to the CRA to waive the penalty and interest under the general guidelines set out in GST/HST Memorandum 16-3, Cancellation or Waiver of Penalty and Interest.

On the CRA website it provides that the Minister may grant relief from penalty or interest when the following types of situations prevent a taxpayer from meeting their tax obligations:

• extraordinary circumstances;
• actions of the CRA;
• inability to pay or financial hardship;
• other circumstances.

More information on the Minister’s discretion to provide relief from penalty or interest amounts can be found at Cancel or waive penalties or interest.

Q.27 New home rebate where direct transfer of title from developer to builder’s customer

Developer enters into a Sale Agreement with the Builder to to sell (a) developed lots for residential houses to be constructed (Developed Lots) or (b) a developed parcel of land for residential condominium units to be constructed (Developed Land). Prior to completion of the Sale Agreement, the Builder enters on to the Developed Lots or Developed Land to construct the Houses or Units as an invitee of the Developer.

Pursuant to agreements of purchase and sale entered into between the Builder and the Home Buyers (Home Buyer Agreements), the Builder agrees to sell to each Home Buyer a House or condo unit (“Unit”) for a price less than $450,000. Once the Builder completes construction of a House or a Unit, and the Unit is registered as a condominium, the Developer first transfers its beneficial ownership interest in the House or Unit under the Sale Agreement (the Initial Closing), followed one moment later by the transfer by the Builder to the Home Buyer of the beneficial ownership of the House or Unit under the applicable Home Buyer Agreement (the Subsequent Closing). However, at the Builder’s direction, the Developer conveys registered title directly to the Home Buyer on the Subsequent Closing.

Before this conveyance the Home Buyer will provide completed and signed GST/HST New Housing Rebate forms (Rebate Forms) to the Builder.

Respecting the Initial Closing, the Builder will self-assess 13% HST and claim an offsetting ITC on filing its monthly GST/HST return. On the Subsequent Closing, the Builder will charge the 13% HST included in the purchase price, and credit the rebate to the Home Buyer.

Can the Builder credit the Rebate, as described above, pursuant to ETA ss. 254(4), 254(5), 256.21(3) and 256.21(4) and s. 41(6) of the New Harmonized Value-Added Tax System Regulations, No. 2 (Regulations), notwithstanding the direct transfer of title to House/Unit to the Home Buyer from Developer?

CRA Comments

Generally, subsection 254(4) of the ETA provides that the builder of a single unit residential complex or a residential condominium unit may pay or credit the amount of the federal portion of the GST/HST new housing rebate (Rebate) to or in favour of the individual who purchases the complex or unit. The federal portion of the Rebate may be paid or credited by the builder only where the conditions in paragraphs 254(4)(a) to (e), as reproduced below, are met:

1. the builder has made a taxable supply of the complex or unit by way of sale to an individual and has transferred ownership of the complex or unit to the individual under the agreement for the supply,
2. tax has been paid, or is payable by the individual in respect of the supply,
3. the individual submits the rebate application to the builder within two years after the day ownership of the complex or unit is transferred to the individual under the agreement for the supply,
4. the builder agrees to pay or credit to or in favour of the individual any rebate that is payable to the individual in respect of the complex, and
5. the tax payable in respect of the supply has not been paid at the time the individual submits an application to the builder for the rebate and, if the individual had paid the tax and made application for the rebate, the individual would have been entitled to the rebate.

With respect to housing situated in Ontario, subsection 256.21(3) of the ETA and subsection 41(6) of the Regulations provide that the builder of a single unit residential complex or a residential condominium unit may pay or credit the amount of the Ontario portion of the Rebate to or in favour of the individual who purchases the complex or unit. The Ontario portion of the Rebate may be paid or credited by the builder only where the conditions in paragraph 41(6)(c) of the Regulations are met. Generally, that paragraph includes five conditions that correspond to the five conditions set out in subsection 254(4).

Generally, the condition in paragraph 254(4)(a) of the ETA and the corresponding condition in subparagraph 41(6)(c)(i) of the Regulations requires the builder to have made a taxable supply of a single unit residential complex or a residential condominium unit by way of sale to an individual and to have transferred ownership of the complex or unit to the individual under the agreement for the supply. As a reminder, the CRA has clarified at past CRA CBA Commodity Taxes Roundtables that, in accordance with GST/HST Policy Statement P-111R, The Meaning of “Sale” with Respect to Real Property (Revised), the word “ownership” generally refers to the legal ownership (that is, “titled” ownership in the case of the underlying real property), rather than equitable ownership of the property.

In this scenario, the Builder transfers the beneficial ownership of the House or Unit to the Home Buyer on Subsequent Closing, and directs the Developer to transfer legal ownership of the House or Unit to the Home Buyer on Subsequent Closing. To be clear, legal ownership is never transferred directly from the Builder to the Home Buyer because legal ownership is never transferred from the Developer to the Builder.

Based on the assumptions that: (a) the Builder has actual possession of the Developed Lots or the Developed Land pursuant to the Sale Agreement, and (b) the Sale Agreement provides that beneficial ownership of the House or Unit situated on the Developed Lot or Developed Land (as the case may be) is transferred to the Builder at Initial Closing, one could argue that the Developer holds legal ownership for the benefit of the Builder and is required to transfer legal ownership to the Builder on demand, or to any third party at the Builder’s request (for example, to the Home Buyer at the Builder’s direction at Subsequent Closing).

So, with respect to this scenario, provided that legal ownership is transferred from the Developer, at the Builder’s direction at Subsequent Closing, to the Home Buyer who is the particular individual with whom the Builder has entered into the Home Buyer Agreement, the CRA will, for purposes of applying paragraph 254(4)(a) of the ETA and subparagraph 41(6)(c)(i) of the Regulations, regard the Builder as having transferred ownership of the House or Unit (as the case may be) to the Home Buyer, even though legal ownership is not transferred directly from the Builder to the Home Buyer.

Therefore, provided that the Home Buyer meets all of the eligibility conditions for the Rebate, and provided that all of the other conditions set out in subsection 254(4) of the ETA and subsection 41(6) of the Regulations are met, the Builder may pay or credit the Rebate to the Home Buyer.

Q.28 S. 182 application where supplier sues for unnecessary additional expense

A supplier, who incurs additional expense on a construction job due to avoidable delays caused by the purchaser, sues the purchaser for the amounts of such expenses. Did the fact that the purchaser did not respect its general obligations under the agreement with the supplier trigger the application of s. 182 if an amount is paid to the supplier in a settlement agreement - or does this fall under the exception for an amount is paid in consideration for services rendered?

CRA Comments

The determination of whether or not a payment is compensation for damages for purposes of subsection 182(1) of the ETA or consideration for the supply is a question of fact that requires consideration of all relevant facts including the relevant agreements.

We would be pleased to provide a written ruling with respect to such a particular situation where all of the relevant facts and agreements have been provided as explained in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service.

Q.29 S. 182 and Automodular

Automodular (2018 ONSC 1640) held that, in the particular circumstances at hand, it was not an implied term of the settlement agreement that GST/HST was payable as an additional amount, and indicated that “As is often the case, the settlement involved a number of claims at least some of which were certainly non-taxable.”

In a situation where s. 182 applies to an amount paid to a supplier in a context of a settlement agreement, the parties allocated the amount as follows: Capital amount: $1M; Interest: $100,000; Indemnity: $100,000.

Is only the $1M considered taxable as the “amount paid” under s. 182 and GST/HST would be deemed included in this amount – so that the interest and indemnity amounts would be considered non-taxable?

CRA Comments

We are examining the potential effects of the Automodular Corporation v. General Motors of Canada Limited decision for purposes of section 182 of the ETA. This section generally applies if the settlement allocates certain amounts to be paid or forfeited to a supplier that is a registrant otherwise than as consideration for the supply, or a debt or other obligation of the supplier is reduced or extinguished without payment on account of the debt or obligation due to a consequence of the breach, modification or termination of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by the supplier to a person. Whether the whole of the amount, however allocated, may be subject to section 182 would require a review of the settlement agreement and all relevant facts and agreements in order to provide a definitive response.

We would be pleased to provide a written ruling with respect to such a particular situation where all of the relevant facts and agreements have been provided as explained in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service.

Q.30 Short-cut FMV determinations under s. 191

Routinely, registrants that self-assess on the construction of multiple unit residential complexes are subject to one or more audits based on the fair market value (FMV) of the complex. In virtually every review, CRA proposes an increase in the FMV regardless of the extent to which the registrant has obtained independent valuations.

Registrants who have spent considerable resources on appraisals, so as to comply with their GST/HST self-assessment obligations, are increasingly frustrated by this approach.

Would the CRA consider, as an alternative, a quick method valuation that a registrant could elect to use?

CRA Comments

The CRA’s position on FMV is set out in GST/HST Policy Statement P-165R, Fair Market Value for Purposes of Part IX of the Excise Tax Act (Revised). Generally, the CRA considers that FMV represents the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact.

To determine the FMV of real property, the CRA recognizes that the real property valuation profession in Canada generally uses one of three valuation methods: (1) the cost method; (2) the direct comparison method; or (3) the income method.

The CRA also recognizes that the real property valuation profession is governed by uniform standards of professional practice which regulate not only the valuation methodology, but also the business practice and conduct of real property valuators. The real property valuation profession is a profession of highly skilled individuals who exercise their expertise and professional judgment in choosing which valuation method is the most appropriate in any given situation. For these reasons, it would be inappropriate for the CRA to choose a specific valuation method for determining the FMV of real property. Thus, the CRA defers the matter of choosing the appropriate valuation method to the professionals in that field, and has adopted a general position that no particular valuation method should be categorically excluded when determining the FMV of real property.

As a result, the CRA is not considering implementing a quick method alternative for determining the valuation of real property.

Q.31 Effective date of ceasing operator status of nominees

The CRA requires joint ventures reporting through a bare trust/nominee to correct their GST/HST reporting, beginning January 1, 2015. In some cases, the refund integrity officer at the former Centre of Excellence for joint ventures in P.E.I. would suggest or apply a correction date somewhere between January 1, 2015, and the date of the audit/review. The nominees, if their registration was not cancelled by the CRA at that time, simply began filing nil returns.

Now, in late 2018, in one situation, the local CRA office has decided to audit the nominee and is proposing to deny ITCs for the period January 1, 2015 through to September 30, 2015 (the effective date adopted as described above). They are telling the accepted operator to claim those ITCs because “they have no choice but to reassess the nominee to deny the ITCs.”

Coming back two years later to reassess a nominee without any assets with the result that the CRA will have to pay out monies to the accepted operator and wait for the operator to pay such funds back to the nominee to remit to the CRA, seems to be a complete waste of resources for both the CRA and the registrants.

Why is the CRA instructing auditors to go back and audit ITCs claimed by nominees where the CRA itself was previously involved in both the manner to correct the reporting and the effective date of the change? Why would the CRA spend resources to raise assessments that are at best revenue neutral and at worst put the fisc at risk?

CRA Comments

While we cannot comment on a live case, we can confirm that in February 2014 the CRA issued Notice 284, Bare Trusts, Nominee Corporations and Joint Ventures. The notice indicated that auditors were advised not to assess GST/HST owing where an assessment could be raised because a bare trust or nominee corporation was not a participant for purposes of section 273 of the Excise Tax Act. The administrative tolerance was contingent that all returns were filed, all amounts were remitted and the joint venture participants were otherwise fully compliant. This tolerance was available for reporting periods ending before January 1, 2015. Further, on a go forward basis, the joint venture must arrange its affairs to ensure that a participant, who is a GST/HST registrant, is the operator of the joint venture.

Q.32 Liability of executors following distribution

Assume that an estate takes over the deceased’s GST/HST registration number on the day after death, and accounts for GST/HST on the rents, and potentially the sale of the estate building from that date forward (s. 267). The estate trustee is personally liable to satisfy every “obligation” imposed on the estate during or before the creation of the estate, including amounts “payable or remittable” by the estate, subject to certain value limits (s. 267.1). S. 270 provides that the estate trustee must obtain a clearance certificate before distributing any property or money of the estate, failing which there generally is personal liability.

Where the estate trustee fully complies with s. 270 and obtains a clearance certificate certifying that all amounts payable or remittable by the estate and the estate trustee have been paid (or security has been accepted), are there any GST/HST financial liabilities relating to the administration of the estate for which the estate trustee could still be held personally liable, for example, because of the independent personal liability imposed on the estate trustee by s. 267.1?

CRA Comments

Subject to certain exceptions, section 267 of the ETA provides that Part IX of the ETA applies as though the estate of a deceased individual were the individual and the individual had not died. This applies to all of the obligations imposed under Part IX, for example: complying with registration requirements, the charging and collection of tax when making taxable supplies and also the filing of returns. Generally, under section 267.1 of the ETA, anything done by a trustee of a trust in its capacity of trustee of the trust, and by extension of the definition of trustee, the personal representative of a deceased individual in its capacity of personal representative of the estate of the deceased individual, is deemed to have been done by the trust and by extension, the estate respectively.

In general, section 270 of the ETA provides that a representative handling the estate or administering or winding up a commercial activity or business of a person is not entitled to distribute any property or money under the representative's control before obtaining a certificate described in that section from the Minister of National Revenue. This document certifies that all amounts, that are, or can reasonably be expected to become, payable or remittable under Part IX in respect of the reporting period during which the distribution is made, or any previous reporting period, have been paid, or that security for the payment or remittance of the amounts has, in accordance with Part IX, been accepted by the Minister. Failure to obtain the certificate renders the representative personally liable for the payment or remittance of those amounts to the extent of the value of the property or money distributed.

That being said, the fact that a clearance certificate is issued to a representative of an estate, does not free the estate from any outstanding obligations under Part IX and as such, the trustee would still be liable to satisfy these obligations pursuant to subsection 267.1(2).

Q.33 Update on Audit Issues

A verbal update was provided.

Q.34 Update on Court Cases/Objections

A verbal update was provided.