This provides summaries of questions posed to CRA at the March 25, 2021 CBA Commodity Tax Roundtable together with the full text of the CRA responses. (The full text of the questions will become 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. Q.18 and Q.19 were in French. In addition to summarizing the questions, we have provided our translation of the CRA responses.

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 (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 Effect of s. 191(3) assessment on NRRP assessment

When CRA assesses additional tax under s. 191(3) on the basis of increasing the reported FMV of the property, there is often a corresponding increase to the new residential rental property (“NRRP”) rebate. However, CRA assesses the NRRP rebate separately from s. 191(3) assessments.

(a) If following an objection, the s. 191(3) assessment is reduced or vacated, can CRA reassess pursuant to s. 298(6) to consequentially reduce the NRRP?

(b) If the NRRP rebate was also reassessed (based on the increased FMV) at the same time as the assessment under s. 191(3), is the builder expected to object to both assessments rather than only objecting to the s. 191(3) assessment?

CRA response

Question (a)

Subsection 297(2) provides that the Minister of National Revenue (“the Minister”) may reassess or make an additional assessment of the amount of a GST/HST rebate, notwithstandin g any previous assessment of the amount of the rebate. According to subsection 298(2), a reassessment under section 297 shall not be made more than four years after the day the application for the rebate was filed.

However, the time limit under subsection 298(2) is subject to certain exceptions provided in subsections 298(3) to (6.1). According to paragraph 298(3)(a), the time limit under subsection (2) does not apply in respect of a reassessment of a person made to give effect to a decision on an objection or appeal. Under subsection 298(6), where the result of a reassessment on an objection to, or a decision on an appeal from, an assessment is to reduce the amount of tax payable by a person and, by reason of the reduction, any rebate claimed by the person should be reduced, the Minister may assess or reassess that rebate only for the purpose of taking the reduction of tax into account in respect of the rebate.

Therefore, where the tax payable on a self-supply of a residential complex under subsection 191(3) is reduced due to a reassessment by the Minister, as described in the question, the exception to the four year time limit under subsection 298(2) for reassessing the related NRRP rebate would apply, effectively permitting the Minister to reassess the rebate at any time. However, subsection 298(6) would limit the scope of such a reassessment to only taking the reduction of tax into account in respect of the rebate.

Question (b)

In this case, the amount of a related NRRP rebate would be similarly reassessed without the need to file a separate objection specifically with respect to the rebate.

Q.2 2^nd CRA appraisal on appeal of s. 191(3) assessment

At a prior Roundtable, CRA indicated that on receipt of a builder's objection to a reassessment under s. 191(3), where the issue is the FMV of the property, the Appeals Branch will automatically refer to, or otherwise involve, a different appraiser than the particular appraiser that completed the original CRA valuation in support of the (re)assessment. The rationale for this policy is that Appeals Officers are generally not certified appraisers, and hence they would need to involve the CRA Appraisal Group to understand the merits of the objection. Moreover, to truly constitute an independent review, it would be inappropriate to rely on, or refer back to, the same CRA Appraiser that worked on the audit. While some Appeals Officers have followed this approach, certain Appeals Officers in recent files were not aware of this policy.

(a) Can CRA Appeals confirm that its Appeals Officers have been made aware CRA’s policy that, on an appeal, the valuation issue should be referred to a second appraiser rather than the CRA appraiser used on the CRA audit?

(b) Will the Appeals Officer be required to obtain a full second appraisal of the property from a different appraiser in the CRA Appraisal Group?

(c) Can CRA agree that neither (a) the original CRA Real Estate Appraiser nor (b) any appraiser within the same group/office of the initial CRA appraiser will be involved or provide input respecting the objection or appeal and that if CRA’s Appeal Division requires input in respect of the GST-registrant’s Objection or Appeal, such advice will be provided by a wholly independent CRA appraiser from a different CRA Real Estate Appraisal Group/Office, without contact with or input from the initial CRA appraiser?

CRA response

(a) The following are measures undertaken by the Appeals Branch to ensure that the Appeals officers are aware of the procedures:

Delivery of tutorial webinars outlining the portal’s content;
Reminders that the GST/HST AOhelp must be the first point of reference for procedures; and
Issuance of “What’s New” notifications when procedures are added and content is updated.

Managers and Team Leaders of the appeals officers are responsible, when reviewing their files, to ensure that procedures are followed. The Appeals Branch conducts periodic Quality Assurance (QA) reviews. If in the course of the QA review, it comes to the attention of the Quality Assurance Officer that a procedure was not followed, the QA officer would, in their report, bring it to the attention of management in the local office.

(b) Where the Objector provides a new valuation or appraisal report at the Objection Stage, the Appeals Officer in discussion with their Team Leader will request assistance from the Regional Real Estate Appraisal section. They may assign a valuator or appraiser, other than the individual who prepared the value conclusion at the audit stage, who will perform the review and prepare the appropriate report to ensure impartiality and objectivity. If the new report includes additional information that was not previously available to the CRA valuator or appraiser, the existing CRA report will be updated.

(c) CRA appraisers are members of the Appraisal Institute of Canada (AIC) and must comply with the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP). These standards require the appraiser to be impartial and unbiased in conducting a review of an appraisal or in performing a new appraisal.

Q.3 S. 256.2(10) assessment if no rebate claimed

A builder constructs a new residential condominium complex containing 300 units. Although most are sold, it rents 10 units to individuals pursuant to 1-year leases on January 1, 2021, resulting in a s. 191(3) self-supply. However, on January 15, 2021, it sells the units (with the closing on February 15, 2021) so that the third-party purchaser becomes the landlord. The builder does not claim the NRRP Rebate respecting any of the 10 rental units in its January 2021 return (such rebate would be required to be immediately repaid under s. 256.2(10) as the units’ purchaser did not acquire for personal use).

Such builder was “entitled to claim” the NRRP Rebates for each of the 10 rental units. Will CRA nonetheless only invoke s. 256.2(10) if the builder actually claims the NRRP Rebate, rather than assessing the builder in the amounts of the NRRP Rebates even if the builder never makes the NRRP Rebate claim?

CRA response

In regard to the assumption noted in the question that the builder would be required to self-supply pursuant to subsection 191(3), we would like to clarify that in our view the builder would self -assess under subsection 191(1) upon renting the units. Subsection 191(3) applies to multiple unit residential complexes (MURCs), and a MURC is defined in subsection 123(1) to exclude a condominium complex.

Subsection 256.2(3) states, in part, that a builder may be eligible to claim a new residential rental property rebate if all requirements are met. One of these requirements is that the residential unit also be a qualifying residential unit. In the definition of “qualifying residential unit”, subparagraph (iii) provides criteria for the unit’s first use. More specifically, the person that holds the unit must lease the unit for at least one year. It also provides that the lease can be for less than one year if (1) it is then sold to an individual who will be using it as a primary place of residence for themselves or a relation or (2) the person takes it over to use as a primary place of residence for themselves or a relation. At the time a rebate application is submitted, the requester could still be within the one-year timeframe that is required to meet this “first use” criterion. Subsection 256.2(10) is in place for this reason.

Subsection 256.2(10) states the following:

If a person was entitled to claim a rebate under subsection (3) in respect of a qualifying residential unit (other than a unit located in a multiple unit residential complex) and, within one year after the unit is first occupied as a place of residence after the construction or last substantial renovation of the unit was substantially completed, the person makes a supply by way of sale (other than a supply deemed under section 183 or 184 to have been made) of the unit to a purchaser who is not acquiring the unit for use as the primary place of residence of the purchaser or of a relation of the purchaser, the person shall pay to the Receiver General an amount equal to the rebate plus interest at the prescribed rate less 2% per year, calculated on that amount for the period beginning on the day the rebate was paid or applied to a liability of the person and ending on the day the amount of the rebate is paid by the person to the Receiver General.

The intention behind this provision is to provide a requirement for recapture should the unit no longer meet the “first use” test in the definition of “qualifying residential unit”, as this criterion, in many cases, has a future time frame associated with it, given the requirement for the unit to be leased for at least one year. To provide further context, Clause 144, Repayment of rebate, in the Explanatory notes to the Budget Implementation Act of 2006, states, in part, that “Subsection 256.2(10) requires a person who was eligible for the New Residential Rental Property Rebate to repay the amount of the rebate plus interest calculated on the amount for the period from the day the rebate was paid or applied to a liability of a person and ending on the day the person repays the amount.” [emphasis added]

In the explanatory notes, the term “repay”, which the Merriam-Webster dictionary defines as “to pay back” or “make a return payment to”, would lead us to conclude that 256.2(10) would only apply to a situation where a rebate was paid to a claimant. Otherwise, there would not be an amount to pay back. Furthermore, the notes explain that the interest would be calculated based on the time period beginning on “the day the rebate was paid or applied to a liability of a person”. If a rebate was never requested, there would not be a rebate amount paid or applied to a liability of a person.

In conclusion, subsection 256.2(10) would only apply if the person claimed a New Residential Rental Property Rebate and within the first year, no longer qualified for that rebate.

Q.4 Virtual payment instruments

(a) As the draft legislative proposals regarding “virtual payment instruments” (“VPI”), such as Biotcoin, have not yet been enacted, how should suppliers treat their various transactions regarding cryptocurrency for the time being?

(b) In particular, should they treat the supply of VPI to Canadian resident recipients as exempt supplies?

(c) Are supplies of VPI made to Canadian resident recipients by an entity that mined such cryptocurrency to be treated as exempt supplies (contrary to the treatment of the supply of precious metals by the refiner)?

(d) Are supplies of VPI by financial institutions to non-resident persons zero-rated supplies?

CRA response

(a) Consistent with its standard practice, CRA is administering the GST/HST application based on the proposed amendments announced on May 17, 2019 by the Department of Finance. Any cryptocurrency that meets the proposed definition of a “virtual payment instrument” should be treated as a financial instrument after May 17, 2019. These proposed amendments would be deemed to have come into force on May 18, 2019 once they receive Royal Assent.

(b) Where a cryptocurrency meets the proposed definition of a “virtual payment instrument” (VPI) it will also be a “financial instrument”. Paragraph (d) of the definition of “financial service” means the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument. None of the exclusions under paragraphs (n) to (t) of the definition of “financial service” would apply with respect to the supply of a VPI. Accordingly, the supply of a VPI is a financial service.

For GST/HST purposes, supplies of financial services are exempt under Part VII of Schedule V to the ETA, unless they are specifically zero-rated under Section IX of Schedule VI to the ETA. Therefore, suppliers should treat the supply of a VPI made to a Canadian resident as an exempt supply.

(c) The supply of a VPI made to a Canadian resident recipient is a supply of a “financial instrument”. Generally these supplies will be exempt to the extent that they meet the definition of a “financial service”. The supply of a VPI made to a Canadian resident is subject to the same GST/HST tax treatment regardless of whether the person supplying the VPI was the person that acted as a miner with respect to the issuance of the VPI or is another person involved in the making of a supply of a VPI.

(d) For GST/HST purposes, supplies of financial services are exempt under Part VII of Schedule V to the ETA, unless they are specifically zero-rated under Section IX of Schedule VI to the ETA.

We note that paragraph 1(e) of Part IX of Schedule VI specifically excludes from zero-rating a supply of a financial service made by a financial institution to a non-resident person, where the service relates to a financial instrument (other than an insurance policy or a precious metal) that was acquired, otherwise than directly from a non-resident issuer, by the financial institution acting in the capacity as a principal. Therefore, in the circumstances where a particular supplier of a VPI acquired the VPI otherwise than directly from a non-resident issuer of the VPI, the supply of the VPI by that supplier would be an exempt financial service, regardless of whether the VPI is supplied to a non-resident person or not.

Q.5 Coupons reimbursed by exempt supplier

MedCo, which exclusively makes medical supplies, provides its patients with a voucher, for parking at the nearby parking lot operated by ParkingCo., for $11.30, to cover the $10 parking charge plus HST. MedCo reimburses ParkingCo $11.30 for every voucher that ParkingCo accepts from patients of MedCo’s clinic.

Is ParkingCo required to charge HST to MedCo in addition to the $11.30, for a total of $12.77?

Comment: The voucher is a “coupon” under subsection 181(1). The rules in section 181 are intended to capture the appropriate amount of GST/HST on supplies that are paid for by way of coupon. In the case of reimbursable fixed dollar coupons, s. 181(2) requires ParkingCo to remit $1.30 of HST as if it had collected GST/HST from the patient. If a person had reimbursed ParkingCo for the voucher in the course of a commercial activity, it should be eligible for an ITC for $1.30. In this case, where Medco is engaged in exempt activity, it would be appropriate for MedCo to pay $11.30 (i.e., $10 plus $1.30 of HST) to ParkingCo, and not to receive any input tax credit for the $1.30. It would be inappropriate for ParkingCo to charge HST to MedCo in addition to the $11.30, because that would be double tax.

S. 181(5) refers to coupon redemption payments made “in the course of a commercial activity of a person,” but is silent regarding redemption payments made outside the course of commercial activity. However, s. 181(5)(a), which deems the redemption payment not to be consideration for a supply should apply even if the person is not making the redemption payment in the course of commercial activity. This rule should be regarded as being for greater certainty, otherwise, there would be inappropriate double taxation. Comments?

CRA response

If the voucher is a “coupon” as defined in subsection 181(1) and ParkingCo accepts the coupon as full payment for parking and the HST, the rules of subsection 181(2) would apply to deem ParkingCo to have collected the HST equal to the tax fraction of the coupon value at the time the coupon is accepted by ParkingCo. With respect to the payment of the coupon by MedCo, a person engaged exclusively in exempt activities, the rules of subsection 181(5) do not apply.

There is insufficient information in the question for the CRA to further comment on the payment made by MedCo to ParkingCo where subsection 181(5) does not apply. To make a definitive determination, the CRA would need to review all relevant facts, including the terms of the agreement between MedCo and ParkingCo.

Q.6 - GST/HST collected as agent added to net tax?

ServiceCo is a service provider and its services include the collection of consideration and GST/HST as a “billing agent” on behalf of its clients – but no election has been made under s. 177(1.1) with those clients.

CRA auditors have taken the position that the GST/HST collected in these circumstances is included in item “A” of the s. 225(1) “net tax” formula. However, since ServiceCo is collecting such GST/HST as an agent for its clients, it should form part of its net tax. Please confirm.

CRA response

Related to live case under audit, therefore no response provided.

Q.7 Single supply to resident and NR recipient

A supplier makes single supplies of a service for single consideration to two recipients (one a registered individual resident in Ontario, and the other a non-registered individual who has not provided a Canadian address). The service is a “pure” service, i.e. it is not personal or trustee services, or in relation to tangible personal property, real property, litigation, customs brokerage services premium rate telephone services, computer-related services and internet access, or air navigation services, or a location-specific event. The service is performed 70% in the U.S. and 30% in Ontario. The non-resident individual does not come to Canada at any time.

How should GST/HST be applied to the invoices if (a) the supplier bills them separately, or the invoice is rendered only to (b) the Canadian or (c) the non-resident recipient?

(d) If the supplier must collect GST/HST from the non-resident recipient, can the non-resident recipient claim a reimbursement of this GST/HST

CRA Comments

(a)(b)(c) There are insufficient facts provided regarding the nature of the supply and recipient to be able to provide an answer.

Generally, pursuant to paragraph 142(1)(g) of the ETA a supply of a service is deemed to be made in Canada if the service is to be performed in whole or in part in Canada. Various zero-rating provisions in Part V of Schedule VI to the ETA could potentially apply to zero-rate the supply of the service should it be determined that the supply is made to a non-resident person.

(d) There are insufficient facts provided to determine whether, in the circumstances described, the supplier must collect GST/HST on the supply. Based on the information provided, should GST/HST apply to the supply, there does not appear to be a mechanism in the ETA for the non-resident person to recover the tax that was correctly charged.

Q.8 S. 231 where immediate write-off

In the following situations, a supplier after debiting accounts receivable and crediting revenue for an amount it has invoiced, immediately reverses this entry:

Corporation A has determined that the recipient (Corporation B) is highly likely to go bankrupt in the near future, but nonetheless continues rendering services under a long-term agreement because there has not yet been default under that agreement, and renders its monthly invoice for services.
Corporation C’s customer (an individual) to whom it has made its event hall available on a particular day, refuses to pay any amount because of COVID restrictions. Although Corporation C’s external counsel advises that there is a 75% chance that Corporation C will establish its entitlement to be paid in court, its auditors indicate that Corporation C cannot recognize revenue from the rental because its collection is not reasonably assured.
Halfway through a 12-month contract for the provision by Corporation D of the use of its pipeline, the recipient states that it will not use the capacity and states that it is not obligated to pay due to force majeure. Corporation D continues to invoice Corporation E for the capacity amounts on a monthly basis in order to protect its legal rights. Although external counsel advises that there is a 60% chance of legal success, its auditors indicate that Corporation D cannot recognize such revenue because its collection is not reasonably assured.

(a) Is there a requirement to add the GST/HST on such invoiced amounts to net tax notwithstanding that no amounts have been booked as revenue or as bad debt expense?

(b) Given such immediate non-booking and write-offs, in what period could the Corporation ever claim a s. 231 deduction or receive a s. 232 credit?

CRA response

(a) In each of the situations referred to above, Corporation A, C and D invoiced a recipient for the supply of property or a service. Assuming that these are taxable supplies made in Canada, Corporation A, C and D would be required to include the amount they charged as tax on their invoice to their customer in their net tax on their GST/HST returns for the period.

Subject to the conditions in subsection 231(1.1) of the ETA, subsection 231(1) provides for the recovery of the GST/HST component of bad debts. In general, a supplier may claim a deduction from net tax for a bad debt where the following conditions are met:

the supplier made a taxable supply (other than a zero-rated supply) for consideration to a recipient with whom it was dealing at arm's length;
it is established that all or part of the total of the consideration and tax payable in respect of the supply has become a bad debt and the supplier writes off the bad debt in its books of account;
the supplier included the tax collectible in respect of the supply in determining its net tax reported in the return for the reporting period in which the tax became collectible and remitted all net tax remittable, if any, as reported in that return; and
the supplier claims the deduction in a return filed within the four year time limit set out in subsection 231(4).

Based on the information provided, it does not appear that the conditions of subsection 231(1) would be met. For example, it is not clear that all reasonable steps have been taken to obtain payment and that it has become evident that the debt has become a bad debt.

(b) If and when a bad debt deduction is available would be a question of fact to be determined on a case-by-case basis. Similarly, whether a deduction is available as a result of the application of section 232 would also be a question of fact to be determined on a case-by-case basis.

Q.9 - CRA obligation to apply s. 296(2.1)

Does CRA agree that the effect of s. 296(2.1)(c), as confirmed in the UPS case, is that, provided all the other conditions of s. 296(2.1) are met, unclaimed rebates are to be allowed notwithstanding that the normal rebate application period has not expired, regardless of whether the person claimed a rebate – and, if CRA agrees, will any steps be taken to clarify the discussion of this point in the CRA Audit and Examination Manual?

CRA response

We confirm and agree with the CBA’s interpretation on the application of subsection 296 (2.1). It is the auditor’s responsibility to apply an eligible rebate amount if we identify that it is a valid unclaimed rebate at the time that we are making an assessment of a person’s net tax or of any amount that became payable by the person. If no rebate application has been filed, the auditor will use our subsection 296(2.1) procedures in order to process an eligible rebate amount; it is NOT the registrant/claimant’s responsibility to complete a rebate application.

Section 33.1.2.1 on Offsetting Adjustments in the GST/HST Examination and Audit Manual (Audit Manual) was replaced in November 2019. Although the current version of this section provides greater details on how to address unclaimed rebates, including in situations where a rebate document already exists within our systems, this section must still be updated to further clarify and outline the steps needed to be taken by the auditor to process a valid unclaimed rebate amount. Specifically, this section is currently being updated to clearly indicate that it is NOT the registrant/claimant’s responsibility to complete a rebate application in these circumstances. We are currently updating our specific rebate procedures with our Rebates Processing team to ensure that our procedures are in line with the current position on the application od subsection 296 (2.1) of the ETA.

We trust that by updating our procedures and redrafting the relevant parts of the Audit Manual, we will be able to avoid further confusion over the application of subsection 296(2.1) of the ETA and ensure consistency in our audit programs.

Q.10 - Instalment interest where VDP wash transactions

A supplier makes a series of supplies of taxable services that it erroneously believed to be exempt from GST/HST, and then makes a voluntary disclosure on the basis (accepted by CRA) that the transactions were all wash transactions, so that grants the supplier full relief from penalties and reduces the applicable interest rate to 0% for each of the reporting periods that was accepted under the voluntary disclosure.

Under such circumstances, when the Notices of Assessment are issued for the periods disclosed, would CRA assess Instalment Interest in respect of the reporting periods that were accepted under the disclosure due to a failure to make instalment payments on time?

CRA response

Yes, we can confirm that instalment interest would be applied to the account given our system limitations. However, due to the nature of the transaction and VDP submission, it would likely be waived/cancelled. Internal discussions are currently underway on the processing and policies on the waiving of instalment interests with the Voluntary Disclosures Program.

Q.11 - Impact of Canadian home offices on s. 132(3)

CanCo. has a branch office in Scranton, Pennsylvania that constitutes a permanent establishment under the ETA, such that CanCo. is, pursuant to s. 132(3), deemed to be a non-resident person in respect of activities carried on through the Scranton office. Prior to the COVID pandemic, 10 Canadian resident CanCo. employees move from Canada to Scranton and began working out of the Scranton office. The Scranton office obtained two lucrative service contracts, one with a Canadian recipient (the “Canadian Contract”) and one with a non-resident recipient (the “US Contract”). With the onset of the pandemic, two of the Scranton office employees returned to Canada, where they worked out of their home offices, contributing an aggregate of 30% of the billable hours on each of the two contracts – and continued to work in the same manner and proportions after the pandemic subsided.

All material correspondence and communications with suppliers and the recipient continue to be directed and made through the Scranton office, and all contracts are signed there.

(a) What is the impact if the home offices do not constitute “permanent establishments” under the ETA?

(b) What is the impact if the home offices do constitute “permanent establishments”?

(c) Are there particular indicia that CRA will consider in determining whether the activities of CanCo. continue to be carried on through the Scranton office, despite the involvement of the Canadian home offices?

Note that, unlike s. 142(2)(g), where a service must be performed wholly outside Canada in order to be considered to be provided outside Canada, the test under s. 132(2) appears to have a “balance of probabilities” standard, so that the services would appear to be better characterized, as predominantly carried on through the Scranton office, not the Canadian home offices.

Also note that s. 132(4) should not apply to the Scranton office in respect of employees working through home offices in Canada because para. (c) of the definition of “service” in s. 123(1) specifically excludes anything supplied by an employee to an employer (in the course of, or in relation to, the employment relationship). Therefore, there should be no “service” rendered to the Scranton office by the Canadian employees working through home offices, for the purposes of s. 132(4), or otherwise.

CRA Comments

a) There are insufficient facts provided to determine whether the home offices constitute a “permanent establishment” under the ETA. However, GST/HST Policy Statement P208R Meaning of Permanent Establishment In Subsection 123(1) of the Excise Tax Act provides guidance on the matter.

Pursuant to subsection 123(1) of the Excise Tax Act, a permanent establishment means:

(a) a fixed place of business of the particular person, including

(i) a place of management, a branch, an office, a factory or a workshop, and

(ii) a mine, an oil or gas well, quarry, timberland or any other place of extraction of natural resources,

through which he particular person makes supplies, or

b) a fixed place of business of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the particular person and through whom the particular person makes supplies in the ordinary course of business.

As indicated in the policy statement, there must be control at the place of business such as someone at the place of business who has the authority to make decisions with respect to the operations of the business. Further, supplies must be made through the fixed place of business such as someone being there that has the authority to regularly enter into contracts or accept purchase orders for the provision of supplies to other persons. If the home offices do not constitute “permanent establishments” in Canada, other than the fact the services would be considered to be performed in part in Canada, there would appear to be no other GST/HST impact.

b) If, based on all the relevant facts, it were determined that the home offices constitute permanent establishments for the supplies referred to in the question, this would call into question whether subsection 132(3) would apply in the first place.

c) Other than the indicia in GST/HST Policy Statement P-208R Meaning of Permanent Establishment In Subsection 123(1) of the Excise Tax Act the CRA has not issued any additional indicia. We would be happy to address the detailed facts of your scenario and issue a ruling on it, should you provide us with them.

Q.12 - S. 191(5) where couple construct 2 jointly-owned condos to be used as 1 residence

1. An individual (A) purchases a property in trust with other individuals including her husband (B), for development as a condominium complex (the “Complex”).
2. The Complex will consist of several residential condominium units, including Units 1 and 2.
3. On completion of construction, A and B will take title to two of the units (Units 1 and 2) jointly and intend to move into Units 1 and 2 and use them as their single place of residence.
4. While Units1 and 2 are registered as separate condominium units, they will be used functionally by A and B as a single place of residence with sleeping quarters in one unit and living quarters in the other.
5. Units 1 and 2 will not used for any other purpose between the time of construction and A and B moving in, and no ITCs will be claimed on the construction of the units (the “Two Units”).

(a) Do the Two Units constitute a “residential complex or an addition to a residential complex” for the purpose of s. 191(5)(b)?

(b) Does the Two Units being constructed for use as a single place of residence constitute them a place of residence under s. 191(5)(b) notwithstanding their separate registration?

(c) If not, could A and B each separately claim the s. 191(5) exception for one of the Two Units, being mindful that each Unit is owned jointly?

(d) Does the division of the living quarters between the Two Units mean that neither qualifies as a residential complex used primarily as a place of residence?

(e) Would the analysis differ if A (and B) are not builders respecting the Two Units; i.e., they come within the para. (f) exemption from “builder” in s. 123(1) (so that s. 191(5) is not relevant)?

CRA Comments

In order to provide a conclusive response to the above questions, all relevant facts would have to be submitted. Consequently, should you have a specific factual situation to address, we invite you to submit a ruling request.

Questions 12(a) to (d) are posed in the context of the application of the exception for personal use in subsection 191(5) of the Excise Tax Act (“ETA”). For purposes of the application of subsection 191(5), a builder of a residential complex (as per the definition of “builder” in subsection 123(1) of the ETA) must be an individual. Therefore, in order to provide a conclusive response to the above questions, it also would be necessary to determine who is a builder of a residential complex, particularly as Fact 1 includes that the property was purchased in trust with other individuals.

a) Paragraph (b) of the definition of “residential complex” in subsection 123(1) of the ETA states:

(b) that part of a building that is

(i) the whole or part of a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real property owned, or intended to be owned, apart from any other unit in the building, and

(ii) a residential unit,

together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the unit and that is reasonably necessary for its use and enjoyment as a place of residence for individuals,

Further, a “residential unit” is defined in subsection 123(1) of the ETA as:

(a) a detached house, semi-detached house, rowhouse unit, condominium unit, mobile home, floating home or apartment,

[…]

or that part thereof that

(d) is occupied by an individual as a place of residence or lodging,

[…]

(g) has never been used or occupied for any purpose, but is intended to be used as a place of residence or lodging for individuals;

For the purpose of subsection 191(5) of the ETA, it must be established if the Two Units, Unit 1 or Unit 2, constitutes a residential complex before looking at any of the conditions of paragraphs (a) to (d).

Based on Fact 2, we understand that Unit 1 and Unit 2 are separate condominium units that are (or are intended to be) separate parcels or other divisions of real property owned (or intended to be owned) apart from any other unit in the building. Based on Fact 3, we understand that Unit 1 and Unit 2 are intended to be used as a place of residence or lodging for individuals. Thus, one could argue that, pursuant to paragraph (b) of the definition of “residential complex” in subsection 123(1) of the ETA, Unit 1 and Unit 2 are separate residential complexes.

Although it is not stated in the facts, we assume that Unit 1 and Unit 2 are adjacent or subjacent to each other, and that modifications have been made to Unit 1 and Unit 2 in order to facilitate them being functionally used as a single place of residence of A and B. For example, we assume that, at minimum, there is internal access between Unit 1 and Unit 2. However, we do not know whether the modifications were made pre-construction so that Unit 1 and Unit 2 have lost their separate spacial identity and have become one fully integrated unit, or made post-construction so that Unit 1 and Unit 2 maintain their separate spacial identity and can easily be converted back to two distinct units; the wording in question (d) implies the former.

Further, and perhaps more importantly, we do not know whether there are any covenants registered on title or conditions stated in the condominium development’s declaration or disclosure statement providing that Unit 1 or Unit 2, if sold, has to be sold together with the other unit. If such a covenant or condition exists, then it might be difficult to argue that, for purposes of subparagraph (b)(i) of the definition of “residential complex” in subsection 123(1) of the ETA, Unit 1 and Unit 2 are owned (or intended to be owned) apart from any other unit in the building. If such a covenant or condition exists, one could argue that Unit 1 and Unit 2 effectively comprise one residential complex, even though legally they are two separate parcels or other divisions of real property.

This is a complicated issue, and to our knowledge, it is not one on which we have provided a definitive ruling or interpretation in the past.

b) The matter of whether a residential complex is used as a place of residence is not determined by the structure of the residential complex or the legal ownership of the residential complex per se, but rather it is based on factors such as the purpose of the stay, the amount of time of the stay, and physical presence. Paragraphs 15 to 18 of GST/HST Memorandum 19.2, Residential Real Property, provide more information about the meaning of “place of residence” including principles that need to be considered when applying these factors.

c) If each of Unit 1 and Unit 2 is a residential complex, and if each of A and B is a builder of each unit, then both A and B are subject to the self-supply rules of subsection 191(1) of the ETA. However, as long as a builder of the residential complex, whether it is A or B, or a related person (recall A and B are related as spouses) uses the unit primarily as a place of residence, and otherwise satisfies the conditions of subsection 191(5) of the ETA, they will be excluded from having to make a self-supply under any of subsections 191(1) to (4).

In other words, for each unit that qualifies as a residential complex, if either A, B, or both A and B uses the unit primarily as a place of residence, both A and B as builders and owners of the unit will be excluded from having to make a self-supply under any of subsections 191(1) to (4) of the ETA by virtue of the personal use exception of subsection 191(5), provided they meet all the other requirements at paragraphs (a) to (d).

In that regard, while Fact 5 provides an indication that the condition of paragraph 191(5)(c) of the ETA is met, under certain circumstances, this may not be the case, particularly if there is partitioning of the builders’ undivided interest in the real property or condominium units prior to possession of the units by the builders.

d) As previously indicated, whether a particular building or part of a building is a residential complex that is used as a place of residence is a question of fact, to be resolved by weighing all relevant facts and circumstances of the particular case at a particular point in time.

e) If A and B are not builders of a residential complex because of paragraph (f) of the definition of “builder” in subsection 123(1) of the ETA, they will not be subject to the self-supply rules in any of subsections 191(1) to (4), and accordingly, they will not be subject to the personal use exception in subsection 191(5).

Q.13 - Handling additional documentation provided on Objection

(a) Where additional documentation becomes available after an objection is with the appeals officer, must that officer review and analyze the additional documentation, or should it be sent to Audit for review and, if so, to the original auditor – and does the taxpayer have a say?

(b) If the appeals officer has a discretion whether or not to review significant additional documentation, how should this discretion be exercised?

(c) If there is a further review by Audit, is Appeals required to share this second report on the supplemental documentation with the taxpayer?

CRA Response

(a) Generally, in the fact situation described, the objection may be referred back to Audit for assistance. Upon receipt of the additional information/documents from a taxpayer, Appeals will review the documents and determine whether further audit work, examination or analysis is required. If audit assistance is required, a referral will be addressed to the responsible TSO. Once a referral for an objection has been received, Audit will advise the appeals officer of the name of the auditor who has been assigned the review and will establish a reasonable timeframe for completing the review.

(b) In situations where specific documents or information was requested by the auditor, but only provided by the taxpayer at the objection stage, the appeals officer is required to make a referral to audit. (Given the nature of their workload, the GST/HST Refund Integrity Program is excluded from this mandatory referral process).

Situations where a referral to Audit is discretionary include, but are not limited, to:

Where the net tax was estimated due to insufficient books and records;
Where the input tax credits were disallowed as the accounting records and/or documentation were not provided;
Where the new information provided for review is substantial;
Where an on-site visit is warranted to verify certain facts provided by the taxpayer;
Where the objection relates to an initial assessment concerning issues of prior years' returns currently being considered by Audit.

(c) Where an appeals officer makes a referral of an objection to Audit, Appeals will advise the objector or authorized representative that their file has been referred back to Audit and will assure them that the decision on the review will be the responsibility of Appeals. Appeals will conduct a follow-up every 30 days with the auditor. Upon receipt of audit findings, Appeals will review and consider the recommendation from Audit and will discuss it with the objector or authorized representative. Appeals may share the second auditor’s report addressing the submission of the supplemental documentation with the taxpayer, if requested, so the taxpayer can address any concerns.

Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4067/protocol-between-compliance-programs-branch-appeals-branch-canada-revenue-agency.html

Q.14 - Digital platforms

The Department of Finance described the problem prompting the introduction of the digital platform rules as follows:

Although these goods are situated in Canada at the time of sale, there is generally no requirement under the current rules for the non-resident vendor, or distribution platform operator facilitating the sale, to collect or remit the GST/HST when the goods are sold to a purchaser in Canada. This is because the non-resident third-party vendor is generally not considered to be carrying on business in Canada and the distribution platform operator is not considered to be the supplier of the goods.

However, in reference to Example 9 of GST/HST Policy Statement P-051R2, CRA concluded as follows:

The non-resident supplier is carrying on business in Canada based on the fact that the non-resident supplier has an inventory of goods for sale in Canada, the goods are delivered in Canada, and the non-resident supplier solicits orders in Canada.

Can these apparently contradictory positions be reconciled?

CRA Comments

The CRA’s administrative policy with respect to the determination of whether a non-resident person is carrying on business in Canada for GST/HST purposes, as described in P-051R2 has not changed.

The determination that the person in Example 9 of P-051R2 is carrying on business in Canada for GST/HST purposes is based on the facts in the question, including that the non-resident person maintains and inventory of goods in Canada and solicits orders for the supply of goods in Canada.

The Department of Finance statement referred to in the question and the proposed new measures cover a much broader range of scenarios.

Q.15 - Wash transactions

CRA often is assessing in wash transaction situations, for example, arguing that one GST registrant should have charged tax to a related GST registrant (who would have been entitled to full ITCs), e.g. based on the place of delivery or characterization of the supply, or arguing that the wrong party in a related group claimed the applicable ITCs based on agency issues.

Take the following example:

Taxpayer A claimed input tax credits for GST paid on the acquisition of certain goods or services on the basis that it acquired the goods for its own use. CRA on audit determines that Taxpayer A acquired certain goods or services as agent for a related person (Taxpayer B) rather than on its own behalf. There is factual support both for there being and not being an agency relationship.

Rather than informing the taxpayers that Taxpayer B (and not Taxpayer A) should be claiming the ITCs moving forward, CRA Audit will typically assess Taxpayer A to deny the ITCs, and will either impose full interest and penalties, or apply 4% wash interest:

(a) If the taxpayers accept the assessment, Taxpayer A pays the $20,800,000 amount assessed, Taxpayer B claims $20,000,000 of ITCs (assuming it is within time to do so), and the group is out of pocket $800,000 of wash interest. Few taxpayers will be willing to take this route. Also, in certain cases (e.g. where a waiver was given, or the CRA is taking advantage of the additional time to assess due to COVID), it will be too late for Taxpayer B to claim the ITCs.

(b) If the taxpayers object (so that Taxpayer A files a notice of objection), Taxpayer B will effectively have to claim the ITC currently (if it is able to do so), to ensure that it is within the 4 year period in case Taxpayer A ultimately loses its objection.

It is not clear that CRA's strict policy is appropriate, particularly in cases where the taxpayer has a viable arguable position and it is clear that it was not looking to circumvent the legislation.

CRA response

Audits are an important part of the CRA’s range of activities aimed at making sure the tax system is fair for everyone. During an audit, the CRA closely examines the books and records of a registrant to confirm whether they are fulfilling their tax obligations, following tax laws correctly, and receiving the benefits and refunds to which they are entitled. Assessing material noncompliance maintains the integrity of the tax.

For wash transactions, the CRA already exercises Ministerial authority in the form of reduced interest. You have suggested that for “wash transactions where the facts do not clearly support the CRA’s audit position”, the CRA and registrant should agree to only deal with the issue prospectively. However, there are a range of complexities in such transactions, and in all cases the auditor will propose the best assessment position based on the facts available to the auditor. Sometimes, after the registrant has supplied further information, the assessing position may be adjusted. If there are questions on the application of the law, CRA auditors have access to several tools and resources to ensure they are applying the law correctly. Finally, as you have noted, the Registrant has avenues of recourse to object to the CRA’s position if they still disagree.

Furthermore, assessing tax on a taxable supply provides a consistent application of the ETA. Making exceptions leads to inconsistencies and a perceived a lack of fairness.

We also note that some of the situations you have brought forward can be addressed by the proper making of an election under section 156 of the ETA (using form RC4616) for domestic members of a closely related group, thus eliminating the need to charge tax/claim ITCs between members.

If you have specific examples of where CRA audit’s position has been inconsistent with published CRA views, we invite you discuss those individually with us as we are committed to working with auditors to ensure a consistent, transparent and fair application of the law.

Q.16 - Meaning of builder

Where a corporation enters into an agreement to purchase one or more new pre-build residential complexes (condominiums or non-condominiums) and can establish that its intention was to lease the units to individuals as their primary place of residence, would the corporation be considered a “builder,” so that the s. 191 rules may apply?

Subject to certain exclusions, par. (b) of the definition of a “builder” provides that a person who acquires an interest in a residential complex at a time when it is under construction is a builder; and para. (d) generally provides that a person who acquires an interest in a condominium at a time when it is not registered as a condominium (or a residential complex that is not a condominium before it is occupied) will be a builder in situations where the person’s primary purpose was to (i) sell the complex or the person’s interest in the complex; or (ii) lease the complex to someone other than an individual who is acquiring the complex or parts otherwise than in the course of a business or an adventure or concern in the nature of trade.

Para. (h) excludes from a "builder" a “person described in any of paragraphs (a) to (c) whose only interest in the complex is a right to purchase the complex or an interest in it from a builder of the complex”.

(a) How do paras. (b) and (d) apply to a corporation that acquires one or more pre-build residential complexes where it has in fact leased the units to a person who acquired the complex for personal use (and not in the course of a business or an adventure or concern in the nature of trade).

(b) Can CRA also provide further guidance on the para. (h) exclusion in light of the following Finance Explanatory Notes [Bill C-62 (1990)] suggesting that this exclusion may not apply if a person enters an agreement to lease the units before they are occupied or to sell the units before they are occupied:

The second exclusion is for persons described in paragraphs (a) to (c) whose interest in a residential complex is a right to purchase the complex from the builder other than for purposes of resupply. This ensures that a person who merely enters into a purchase and sale agreement with a builder before the complex is completed is not treated as a builder.

CRA Comments

Question (a)

It is a question of fact whether a person is a “builder” of a residential complex as defined in subsection 123(1) of the Excise Tax Act.

Paragraph (b) of the definition of “builder”

Subject to the exclusions in paragraphs (f) and (h), subparagraph (b)(ii) of the definition of “builder” provides that a person is a builder of a residential complex where the person acquires an interest in the complex at a time when the complex is under construction or substantial renovation.

Paragraph (f) of the definition of “builder” excludes an individual described in paragraph (a), (b) or (d) who acquires the residential complex (or interest in it) otherwise than in the course of a business or an adventure or concern in the nature of trade. In other words, the scope of the exclusion includes both paragraphs (b) and (d), but the exclusion does not apply to persons that are corporations.

Paragraph (h) of the definition of “builder” excludes a person described in any of paragraphs (a) to (c) whose only interest in the residential complex is a right to purchase the complex (or an interest in it) from a builder of the complex. In other words, the scope of the exclusion includes paragraph (b) but does not include paragraph (d), and the exclusion applies to all persons including corporations.

Generally, in order for a corporation to be a builder of a residential complex under subparagraph (b)(ii), the interest that the corporation acquires must be more than a right to purchase the complex (or an interest in it) from a builder of the complex. For example, as indicated in the Finance Explanatory Notes [Bill C-62 (1990)], a corporation could be a builder of a residential complex under subparagraph (b)(ii) where the corporation is a developer-landlord who purchases an apartment building that is under construction, and finishes the construction, for the primary purpose of leasing the apartment units to tenants. Conversely, where a corporation is a purchaser-landlord who acquires a right to purchase an apartment building that is under construction for the primary purpose of leasing the completed apartment building to another person under a head lease (or for the primary purpose of leasing the completed apartment units to tenants) the corporation would not be a builder of the apartment building under subparagraph (b)(ii) because of the exclusion in paragraph (h); one would have to determine whether the corporation could be a builder of the apartment building under paragraph (d).

Paragraph (d) of the definition of “builder”

Subject to the exclusion in paragraph (f), generally, paragraph (d) of the definition of “builder” provides that a person is a builder of a residential complex where the person acquires an interest in the complex, if the complex is a condominium complex or residential condominium unit, at a time when the complex is not registered as a condominium or · in any case, before the complex has been occupied by an individual for the primary purpose of selling the complex (or parts thereof or interests therein) or leasing the complex (or parts thereof) to persons other than to individuals who will use the complex (or parts thereof) for their personal use.

As mentioned above, the scope of the exclusion in paragraph (f) of the definition of “builder” includes both paragraphs (b) and (d), but the exclusion does not apply to persons that are corporations. Further, the scope of the exclusion in paragraph (h) of the definition of “builder” includes paragraph (b) but does not include paragraph (d), and the exclusion applies to all persons including corporations. In other words, neither of the exclusions is applicable to the scenario presented by the CBA here in Question 16.

Generally, in order for a corporation to be a builder of a residential complex under paragraph (d), the interest that the corporation acquires could, at minimum, be a right to purchase the complex (or an interest in it) from a builder of the complex. However, regardless of the type of interest acquired, subparagraph (d)(iv) contains an exclusion where the primary purpose for acquiring the interest is to lease the residential complex (or parts thereof) to individuals who will use the complex (or parts thereof) for their personal use.

As mentioned earlier, a corporation that is a purchaser-landlord who acquires a right to purchase an apartment building that is under construction for the primary purpose of leasing the completed apartment building to another person under a head lease (or for the primary purpose of leasing the completed apartment units to tenants) would not be a paragraph (b) builder because of the exclusion in paragraph (h). In our view, it would be more appropriate to characterize the corporation’s acquisition of the interest as falling within paragraph (d). For example, a corporation could be a builder of a residential complex under paragraph (d) where the corporation is a purchaser-landlord who acquires a right to purchase an apartment building, that has never been occupied by an individual, for the primary purpose of leasing the apartment building to another person under a head lease. Conversely, if the corporation is a purchaser-landlord who acquires said right for the primary purpose of leasing the apartment units to tenants, the corporation would not be a builder of the apartment building for GST/HST purposes because of the exclusion in subparagraph (d)(iv).

Question (b)

Finance Explanatory Notes [Bill C-62 (1990)] states, “The second exclusion is for persons described in paragraphs (a) to (c) whose interest in a residential complex is a right to purchase the complex from the builder other than for purposes of resupply. This ensures that a person who merely enters into a purchase and sale agreement with a builder before the complex is completed is not treated as a builder.”

Please note that at the time Bill C-62 was enacted, subparagraphs (d)(iii) and (iv) of the definition of “builder” did not exist, and the part of paragraph (d) after subparagraph (d)(ii) simply said “for the primary purpose of making a supply of the complex or any part thereof or an interest therein by way of sale.” In addition, the exclusions were not listed under separate paragraphs, and what is now paragraph (h) simply said “a person described in any of paragraphs (a) to (c) whose interest in the complex is a right to purchase the complex from a builder of the complex.”

With this in mind, although the CRA cannot comment on the Department of Finance’s tax policy, it is our view that the Finance Explanatory Notes is simply saying that the exclusion (that is, what is now paragraph (h)) applied where a person acquired a right to purchase a residential complex from a builder of the complex, provided that the person’s primary purpose for acquiring the interest was not to sell the complex (or parts thereof or interests therein). In our view, this was just another way of stating that the exclusion did not apply to paragraph (d) as it was written at the time.

Q.17 - Interest relief where COVID delays in remittance

On June 29, 2020, CRA announced that there would be no extension of the relief previously announced on March 27, 2020, allowing all businesses to defer, until June 30, 2020, any GST/HST payments or remittances that became owing on or after March 27, 2020, and before July 2020.

Furthermore, in Q.1 of the FAQs posted on the CRA website, CRA stated that: “Interest will begin to apply to outstanding remittances and payments, and penalties will begin to apply to outstanding returns, effective July 1, 2020,” and that if a business continued to experience difficulty in remitting GST/HST and customs duty amounts owing, it could contact CRA and the CBSA to request cancellation of penalties and interest, and/or flexible payment arrangements with CRA.

(a) If a monthly GST/HST registrant filed its GST/HST returns on time (e.g., for February, March, April and May 2020), but decided to wait until June 30, 2020 to pay all its net tax remittances due to CRA but, due to Pandemic reasons, was able to pay them only by the end of August 2020, would that registrant be able to request and receive cancellation of the interest charged for late payments considering the pandemic?

(b) If the same situation occurred with another monthly registrant but it instead reached a flexible payment arrangement under which it had to pay interest on each payment agreed with CRA, would it be possible then, at the end of the flexible agreement, to also ask for the cancellation of the interests charged and paid to CRA?

CRA Response

(a) When businesses have not complied with the law because of circumstances beyond their control, they can ask for taxpayer relief. The taxpayer relief provisions give CRA officials the discretion to waive or cancel all or part of the interest and penalties charged to their account. Officials generally use this discretion when CRA actions, extraordinary circumstances, inability to pay or financial hardship, or other circumstances prevented the businesses from meeting their tax obligations. Each request will be reviewed on a case by case basis and evaluated on its own merits. To make a request to cancel penalties or interest, businesses or their authorized representatives should fill out Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. The form and all supporting documents can be submitted online at My Business Account or Represent a Client, by selecting the “Submit documents” service. The form and all supporting documents can also be mailed to one of the designated offices shown on the last page of the form, based on the physical location of the business.

For more information on how to submit documents, go to canada.ca/cra-submitdocuments-online. For more information on the taxpayer relief provisions and related forms and publications, go to canada.ca/penalty-interest-relief.

(b) As mentioned above, when businesses have not complied with the law because of circumstances beyond their control, they can ask for taxpayer relief. The taxpayer relief provisions give CRA officials the discretion to waive or cancel all or part of the interest and penalties charged to their account. Officials generally use this discretion when CRA actions, extraordinary circumstances, inability to pay or financial hardship, or other circumstances prevented the businesses from meeting their tax obligations.

Businesses have 10 years from the end of the calendar year in which the tax year or fiscal period at issue ended to make a request to the CRA for relief to cancel or waive penalties. If interest continues to accrue after a relief decision has been made, businesses can reapply at a later date if their circumstances have not improved. Each request will again be reviewed on a case by case basis and evaluated on its own merits.

To make a request to cancel penalties or interest, businesses or their authorized representatives should fill out Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest. The form and all supporting documents can be submitted online at My Business Account or Represent a Client, by selecting the “Submit documents” service. The form and all supporting documents can also be mailed to one of the designated offices shown on the last page of the form, based on the physical location of the business.

The CRA charges daily compound interest on any unpaid balance, and will pay interest on the amount we refund to businesses, if it applies.

Q.18 - S. 182 damages paid by partner

Aco (a resident registered corporation) agreed to make taxable supplies in Canada of tangible personal property to Bco (a resident registered partnership). A corporation resident in Canada that is a partner of Bco (Cco) agreed to guarantee the obligations of Bco under the contract.

If Bco defaults on its obligations and Cco is required to pay a liquidated damages amount under the contract, which it does without reimbursement by Bco, who can recover the ITC for the tax deemed paid under s. 182: Bco under s. 182; or Cco under s. 272.1(2)?

CRA Response

In general, subsection 182(1) of the ETA states that the amount paid for the breach of an agreement for the making of a taxable supply will be treated as consideration for the taxable supply. Notwithstanding the actual payer, this provision deems the recipient of the supply to have paid and the supplier to have collected GST/HST on that deemed consideration at the time the amount is paid.

Therefore, Aco would be deemed to have collected the GST/HST on the deemed consideration for the cancellation compensation and Bco would be deemed to have paid the GST/HST. Bco will be able to claim an ITC for the portion of GST/HST paid or payable if all the conditions in section 169 are satisfied.

Q.19 - Insignificant change in use

Aco changes its use of a building, which had been used 100% in making exempt supplies, so that thereafter it is used 90% for making exempt supplies and 10% in the course of commercial activities.

Two years later, it further changes the building’s use so that it commences to be used 80% for making exempt supplies and 20% for commercial use.

Can Aco claim a 10% ITC pursuant to:

(a) s. 206(2) in the first scenario; and
(b) s. 206(3) in the second?

In this regard, s. 197 indicates that changes of “less than 10%” are not to be taken into account, suggesting that a change of 10% is to be recognized for purposes of the change in use rules. However, s. 141 is to the effect that a use of 90% (under the CRA administrative practice) for exempt uses is equivalent to 100% for exempt use. S. 141 suggests that in the first scenario, Aco could not claim an ITC of 10%, whereas in the second scenario it could claim an ITC of 20%.

CRA Response

Question (a)

Section 206 of the Excise Tax Act (ETA) provides change-in-use rules that apply to most registrants, except registrants who are individuals who have acquired real property for use as capital property ("capital property").

The change-in-use rule in subsection 206(2) of the ETA applies where a registrant who last acquired real property for use outside the course of commercial activities begins, at a particular time, to use the real property in commercial activities. Provided the registrant has not become a registrant at the particular time, the registrant is deemed to have received, at the particular time, a supply of the real property by way of sale. Unless the supply is an exempt supply, the registrant is deemed to have paid tax at that time equal to the basic tax content of the real property at the particular time. Generally, where the change-in-use rule in subsection 206(2) applies, a registrant may be entitled to claim an input tax credit (ITC) for some of the tax deemed to have been paid under that subsection.

Generally, the change-in-use rules in subsections 206(2), 206(3) and 206(5) come into play where the registrant makes a significant change (i.e., 10% or more) in the use of capital property in its commercial activities. Generally, section 197 of the ETA provides that, for the purposes of subsections 206(2), 206(3) and 206(5), if a registrant changes the use of capital property in its commercial activities by less than 10% in a period, the change is considered to be insignificant and the registrant is deemed not to have changed the use of the capital property in its commercial activities throughout that period.

If a registrant changes the use of capital property in its commercial activities by 10% or more in a period, the change is considered significant and the change-in-use rule in subsection 206(2), 206(3) or 206(5), as applicable, comes into play.

In determining whether a change in the use of capital property in business activities is significant, the cumulative effect of the changes should be considered. For example, a 5% change at one point in time followed by another 5% change at a later date would cumulatively result in a significant change in use.

Generally, section 141 of the ETA includes overriding provisions under which, if substantially all of the use of the capital property (or substantially all of the use for which a person acquires the capital property) is in the course of particular activities of the person that are not commercial activities, then all of the person's use of the capital property (or the use for which the person acquired the capital property) is deemed to be wholly in the course of those particular activities. “Substantially all" means 90% or more.

Section 18 of GST/HST Memorandum 19-4-2, Commercial Real Property - Deemed Supplies, provides an explanation of the interaction between sections 141, 197 and 206 of the ETA.

With respect to a registrant that is not a financial institution, if the extent to which the registrant uses capital property in commercial activities does not exceed 10% (meaning that substantially all of the use of the property is in activities that are not commercial activities), the use of the property is deemed to be in activities that are not commercial activities under section 141.
While a change in use of 10% or more is normally considered to be a significant change in use (i.e. because section 197 considers any change of less than 10% to be insignificant), section 141 nevertheless considers that the entire use of the capital property is not commercial activities. In practice, therefore, there is no change in use.
Therefore, with respect to a registrant that is not a financial institution, subsection 206(2) only applies where the registrant begins to use capital property in commercial activities to an extent greater than 10%.

Therefore, Aco cannot claim an ITC when it begins to use 10% of its capital property in its commercial activities.

Note that the rules under section 141 do not apply to financial institutions. If Aco is a financial institution and its use of capital property for exempt purposes has been reduced from 100% to 90% and 10% of the use is now in its commercial activities, the rules in subsection 206(2) apply. Section 197 does not apply in this situation because the percentage of use of the capital property assigned to commercial purposes is 10%. Therefore, this is a significant change in use. As a financial institution, Aco is entitled to claim an ITC for some of the tax that is deemed to have been paid by virtue of subsection 206(2). Other change-in-use rules may apply to financial institutions.

Question (b)

Assuming that Aco is not a financial institution, the additional 10% use of capital property in its commercial activities, in addition to the first 10% change in use in its commercial activities, results in a significant cumulative change in use, allowing subsection 206(2) of the ETA to apply. In effect, Aco has changed its use of capital property from 100%, to 80% for exempt purposes and 20% for commercial purposes. Aco is therefore entitled to claim an ITC for some of the tax that is deemed to have been paid pursuant to subsection 206(2).

If Aco were a financial institution, it would have already begun using the capital property in its commercial activities after the first 10% change in use in its commercial activities. Under subsection 206(3) of the ETA, Aco is deemed to have received a supply of 10% of the capital property for use exclusively in its commercial activities and, assuming the supply is not an exempt supply, is deemed to have paid tax in respect of the supply. Aco is then entitled to claim an ITC for the additional 10% increase in use of the capital property in its commercial activities.

Q.20 - Audit Issues

(a) Cannabis excise duty audits

Please provide an update regarding CRA audits of cannabis producers under the ETA. What kinds of issues are auditors primarily looking for, and are there specific areas of non-compliance of concern to the CRA?

Darren Weiner provided a verbal update

(b) Carbon fuel charge audits

Please provide an update regarding CRA audits in connection with the fuel charge under Part 1 of the Greenhouse Gas Pollution Pricing Act.

Stephane Moreau provided a verbal update

(c) GST/HST audits

Please provide an update on GST/HST audit issues.

Alex Ho provided a verbal update from the GST/HST audit programs.

Q.21 - Court Cases / Objections

Please provide an update on recent and current court cases and objections.

Douglas Wood provided a verbal update

Q.22 - COVID tests outside clinic

COVID-19 tests results may be required in order to travel or to work.

Are COVID-19 tests exempt if performed outside a hospital or medical facility, and does the answer differ depending on whether the test is a swab test that must go to a diagnostic laboratory for analysis, or a rapid test where a machine conducts the analysis on-site?

Are COVID-19 swab or rapid tests made on the order of a medical practitioner/nurse/pharmacist in a medical clinic, travel clinic or pharmacy exempt pursuant to Sched, V, Pt. II, s. 5 or 10?

Are rapid COVID tests performed by someone who is not a medical practitioner/nurse/pharmacist (e.g., a travel agency without a connection to a medical practitioner, nurse or pharmacist) taxable?

Are swab or rapid COVID tests made as a result of an order of the government of Canada or a province or a municipality taxable?

Are swab or rapid COVID tests on the order of an employer (e.g., a law firm, accounting firm, a retail business, a manufacture) taxable?

CRA Comments

Section 5 of Part II of Schedule V to the ETA exempts a supply of a consultative, diagnostic, treatment or other health care service that is rendered by a medical practitioner to an individual. A “medical practitioner” is defined as a person who is entitled under the laws of a province to practice the profession of medicine or dentistry. Accordingly, a supply of a COVID-19 test would only be exempt under section 5 where rendered by a medical doctor or a dentist.

Section 10 of Part II of Schedule V to the ETA exempts a supply of a prescribed diagnostic, treatment or other health care service rendered to an individual if made on the order of (a) a medical practitioner or practitioner[1]

(b) a registered nurse authorized under the laws of a province[2] to order such a service if the order is made within a nurse-patient relationship; or

(c) a person that is entitled under the laws of a province to practise the profession of pharmacy and is authorized under the laws of the province to order such a service, if the order is made within a pharmacist-patient relationship; and

The supply must be a “qualifying health care supply” and not a “cosmetic service supply” as those terms are defined in section 1 of that Part.

"Prescribed" health care services, which are exempt from GST/HST, are found in the Health Care Services (GST/HST) Regulations[3] made under the ETA. The following services are "prescribed" services:

(a) laboratory, radiological or other diagnostic services generally available in a health care facility[4] ; and

(b) the administration of drugs, biologicals[5] or related preparations in conjunction with the provision of services included in paragraph (a).

The phrase “laboratory, radiological or other diagnostic services generally available in a health care facility” in the Regulations means a test, study or investigative and analytical procedure, together with the interpretation of the results and the report of findings, that is of the type generally available in a health care facility (such as a public hospital) and that is used to assist in the detection and determination of the cause of a disease.

The Government of Canada has indicated that there are two different kinds of COVID-19 tests: 1) Tests to find out if you currently have COVID-19 (diagnostic tests); and 2) tests to find out if you have previously been infected by COVID-19 (antibody tests).

Diagnostic Tests[6]

Tests such as molecular polymerase chain reaction (or “PCR”) tests detect the virus itself and diagnose COVID-19. If you’re being tested for a possible current case of COVID-19, you’ll receive one of these tests.

There are different ways samples can be collected for a PCR test, including through a nose swab, throat swab, or saliva sample. To detect the virus, these samples are then sent to a laboratory for analysis with results returning in 1-3 days, or, for point-of-care testing (also called antigen or nucleic acid tests, or “Rapid Tests”)[7] , results are provided while you wait. A positive laboratory-based or point-of-care test means that you currently have COVID-19.

Is the COVID-19 test a “prescribed” diagnostic, treatment or other health care service

There can be no argument that both diagnostic COVID-19 tests (PCR or Rapid Tests) and antibody tests (Serology Tests) are performed for detecting COVID-19 infections, whether old or active. As such, a supply of any of these tests is a prescribed service for purposes of section 10.

Is the COVID-19 test made on the order of a medical practitioner or practitioner, authorized registered nurse, or authorized pharmacist

In order to meet the criteria for exemption under Section 10, in addition to being a prescribed service, the tests would also need to be made on the order of one of the above-listed practitioners.

This means that where a COVID-19 test is supplied at the request of an employer, these tests would not meet this condition and would therefore not be exempt under section 10.

Where an individual voluntarily submits to a COVID-19 test in order to meet requirements that do not stem from medical purposes, such as workplace or travel requirements, these tests would not meet this condition as they have not been provided on the order of one of the above-listed practitioners, and would therefore not be exempt under section 10.

A general provincial or federal health order regarding COVID-19 testing from the office of a Chief Medical Officer of Health[8] does not constitute an order of a medical practitioner or practitioner for purposes of the ETA. When issuing a provincial or federal directive, these officers are acting in their capacity as a public servant and not as e.g. a physician within a doctor-patient relationship.[9] In addition, we would question if the supply by the laboratory is made on the order of such health official or if the order is simply to the citizen to get tested, which they may or not.

PCR Tests

Generally, when a medical practitioner, practitioner, nurse or pharmacist orders their patient to undergo testing, either the order/requisition will be sent directly to the applicable testing site or laboratory, or alternatively (as is often the case with blood tests) the patient is provided with a written requisition from the physician/practitioner/nurse/pharmacist to take with them to their test. This requisition will also detail where the results should be sent following the test.

Under certain circumstances, an individual may be asked by their physician to obtain a COVID PCR test, for example prior to a scheduled surgery. In these instances, the individual may be provided with a written requisition from their physician or, in some cases, directly from the hospital. This requisition will generally recommend a publicly-funded testing site to attend, and will specify that the results of the test are to be sent directly to the requesting physician or hospital.

In such instances, the PCR test may be supplied on the order of a physician, and as such, may qualify for the exemption under section 10. This determination would need to be made on a case-by-case basis, and would be a question of fact in each instance. The following would need to be examined to confirm whether section 10 can apply:

Whether the requisition is a bonafide order from a medical practitioner or practitioner;
What information is included on the requisition (i.e. whether the requisition contains testing instructions for the laboratory analysing the sample obtained from the individual, or whether it only contains information as to where to send the results).

Rapid Tests

Because Rapid Tests are not considered to be as accurate as PCR tests, these tests are not generally available in hospitals or other health care facilities[10] , but rather are used only in situations of specific need where the services of a laboratory aren’t required. This means that Rapid Tests would not generally meet the threshold for exemption under section 10. Further, for the same reason, Rapid Tests are not generally ordered by medical practitioners for their patients in scenarios which require accurate results.

Serology Tests or Antibody Tests[11]

Antibody (“Serology”) tests use a sample of your blood to check for antibodies, which the body produces after having been exposed to the virus. A positive serology test means that, at some point, the individual was infected by the virus. Serology tests aren't used to diagnose COVID-19 in early stages of infection, since they don't detect the virus itself.

Where an individual has been provided with a requisition from a medical practitioner or practitioner, or other authorized person under this section, to obtain a Serology test, such a supply would likely meet the requirements for exemption under section 10. This is because, like in the case of other blood tests, a requisition for a serology test will generally include specific instruction for the tester, such as what antibodies to test the blood for. This determination will be a question of fact, in each instance.

While the CRA can provide some general, scenario-based information that might be of use to practitioners, we do not yet have enough transaction-based data to provide a specific position on the tax status of COVID-19 testing. As the COVID situation is constantly evolving, any determination must be made on a fact-based, case-by-case basis involving an analysis of any transactions involved, agreements in place, and requisitions in question in a given situation.

11 Government of Canada on Testing for Covid-19, supra

1 Defined in section 1 of this Part as a licensed physician or dentist, or a person licensed to practise one of various other health care professions (or, where there is no regulation of that profession in the province, a person with equivalent qualifications), respectively.

2 “Province” is defined in the Interpretation Act to include the territories.

3 SOR/91-23, as amended, section 2

4 Examples of laboratory services include blood and urine testing. Examples of radiological services include X-ray, ultrasound, MRI and CT scan services. Examples of diagnostic services include urinalysis and serological tests.

5 Such as vaccines, blood and plasma derivatives

6 Ibid.

7 Where sample collection and testing is done at the time and place of care. There are two types of rapid tests: antigen and nucleic acid tests. The latter involves molecular testing, same as the traditional PCR test, whereas antigen tests look for proteins from the virus, but not the virus itself. Point-of-care technology is used in placed where it’s needed most, including rural, remote and isolated communities, or specific high-risk settings where it’s important to have fast test results without having to send samples to a laboratory, such as hospitals, airports or long-term care homes. In Ontario, larger employers have been encouraged to purchase their own rapid COVID-19 tests to screen employees.

8 This is the general title for most similar positions across the provinces, however actual title may vary. For the purposes of this document, CMOH refers to the office of the highest provincial health officer in each province.

9 The Public Health Agency of Canada Act (S.C. 2006, c.5, ss. 6-7) states that the Chief Public Health Officer is the lead health professional of the Government of Canada in relation to public health, and is an officer of the Public Health Agency of Canada.

10 SOR/91-23, supra.: “prescribed” services include laboratory, radiological or other diagnostic services generally available in a health care facility (emphasis added).

11 Government of Canada on Testing for Covid-19, supra

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25 March 2021 CBA Commodity Taxes Roundtable

Q.1 Effect of s. 191(3) assessment on NRRP assessment

CRA response

Question (a)

Question (b)

Q.2 2nd CRA appraisal on appeal of s. 191(3) assessment

CRA response

Q.3 S. 256.2(10) assessment if no rebate claimed

CRA response

Q.4 Virtual payment instruments

CRA response

Q.5 Coupons reimbursed by exempt supplier

CRA response

Q.6 - GST/HST collected as agent added to net tax?

CRA response

Q.7 Single supply to resident and NR recipient

CRA Comments

Q.8 S. 231 where immediate write-off

CRA response

Q.9 - CRA obligation to apply s. 296(2.1)

CRA response

Q.10 - Instalment interest where VDP wash transactions

CRA response

Q.11 - Impact of Canadian home offices on s. 132(3)

CRA Comments

Q.12 - S. 191(5) where couple construct 2 jointly-owned condos to be used as 1 residence

CRA Comments

Q.13 - Handling additional documentation provided on Objection

CRA Response

Q.14 - Digital platforms

CRA Comments

Q.15 - Wash transactions

CRA response

Q.16 - Meaning of builder

CRA Comments

Question (a)

Paragraph (b) of the definition of “builder”

Paragraph (d) of the definition of “builder”

Question (b)

Q.17 - Interest relief where COVID delays in remittance

CRA Response

Q.18 - S. 182 damages paid by partner

CRA Response

Q.19 - Insignificant change in use

CRA Response

Question (a)

Question (b)

Q.20 - Audit Issues

(a) Cannabis excise duty audits

(b) Carbon fuel charge audits

(c) GST/HST audits

Q.21 - Court Cases / Objections

Q.22 - COVID tests outside clinic

CRA Comments

Is the COVID-19 test a “prescribed” diagnostic, treatment or other health care service

Is the COVID-19 test made on the order of a medical practitioner or practitioner, authorized registered nurse, or authorized pharmacist

PCR Tests

Rapid Tests

Serology Tests or Antibody Tests[11]

Q.2 2^nd CRA appraisal on appeal of s. 191(3) assessment