7 April 2022 CBA Roundtable

This provides summaries of questions posed to CRA at the April 7, 2022 CBA Commodity Tax Roundtable together with the full text of the CRA responses (apparently in draft form, as they include some sentence or paragraph fragments). (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.

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 Increasing FMV-based assessments on objections

Where a builder objects to a reassessment that is based on the determination of a higher FMV of the property, in what situations, if any, would the Appeals Directorate increase the reassessment further based on a higher FMV determined by another CRA appraiser during the objection process?

For example, where a builder, which self-assessed for GST/HST in respect of a newly constructed or substantially renovated purpose-built residential complex is reassessed based on an appraisal by the CRA valuations unit increasing the FMV of the property, on objection the builder will typically request that any further referral to the Valuations Unit be to a different CRA appraiser – who might determine an even higher FMV. Would any resulting upward adjustment be required to be approved by the Chief of Appeals as with other upward adjustments on objection?

CRA Comments

Subsection 301(3) of the Excise Tax Act (ETA) requires the Minister, to “….vacate or confirm the assessment, or make a reassessment”, when resolving an objection. This authority allows an Appeals Officer to exercise their judgement to make an upward adjustment with respect to a matter under dispute, or a related matter within the same period under objection, where the matter is of relative importance, including being in relation to the FMV of a disputed property.

The Appeals Branch has established procedures governing the issuance of upwards adjustments by Appeals Officers. When an Appeals Officer becomes aware of a potential upward adjustment, they will discuss the matter with their Team Leader and notify the objector (the builder in this particular example).

Any upward adjustment must be approved by the Appeals Officer’s manager or the Chief of Appeals. guidance on the meaning of the term “principal business” in section 149 of the ETA. The term "business" is defined in subsection 123(1) of the ETA to include a profession, calling, trade, manufacture, or undertaking of any kind whatever, with or without regard to an expectation of profit. Any activity engaged in on a regular or continuous basis involving the supply of property by way of lease, licence, or similar arrangement is also included in the definition. An office or employment is excluded from the definition of business.

Q.2 Adjustment denials by letter, not assessment

Where a registrant requests an amendment to a previously filed return and the CRA refuses to make the adjustments reflected in the amended return, the CRA is routinely issuing letters denying the adjustment rather than issuing a formal notice of assessment with no adjustments to which the registrant can readily file an objection. In some instances, where the registrant has objected to such denial letter, CRA accepted that the denial letter was effectively an assessment that denied the adjustments, and treated the objection as valid. In other instances, the CRA Appeals Division has refused to process such objections on the basis that denial letters were not reassessments.

Without a reassessment, and in instances where the CRA Appeals Division refuses to accept the objection as validly filed, the recourse to challenge a denial letter (or the CRA Appeals Division’s refusal to accept the objection) is an application for judicial review. However, the issue of a denial letter refusing to make the adjustment assumes that the decision to accept such adjustments, even if warranted, is discretionary. However, the courts have held that under a self-reporting regime, the CRA does not have discretion whether to process, even without adjustment, an amendment to a previously filed return.

Would CRA agree to issue nil reassessments rather than denial letters so that registrants can readily file objections?

CRA Comments

We are working cross-functionally with Appeals and the GST/HST Audit program to develop new policies and procedures to address this concern.

Q.3 Self-assessment re FF&E

CRA is consistently denying builders of purpose-built residential rental housing ITCs for GST/HST paid on appliances (fridge, stove, dishwasher and washer/dryer) for each unit and furniture/fixtures and equipment (FF&E) for common areas on the basis that the appliances and FF&E are for use in making an exempt supply of a rental. However, on the later of first rental and substantial completion, the builder is deemed to have sold the constructed building to itself and such sale is a taxable supply (and hence all inputs to bring the building to such state are for use in commercial activity).

On what basis does CRA distinguish appliances and common area FF& E from all other building inputs, such as windows, doors and flooring?

CRA Comments

Generally, the self-supply rules in section 191 deem a builder of a residential complex to have made a self-supply (that is, a sale and purchase) of the complex where certain conditions are met.

Generally, a "residential complex," as defined in subsection 123(1), is a combination of two or more elements that must include either a building in which one or more residential units are located (for example, an apartment building) or a mobile home, and that may include any common areas and appurtenances to the building or any appurtenances to the mobile home, and the land that is subjacent or immediately contiguous to the building or the mobile home. A supply of a residential complex is a supply of real property.

In respect of property in the Province of Quebec, real property includes "immovable property and every lease thereof". Immovable property comprises land and anything affixed thereto or which forms part thereof. While in the rest of Canada, real property is defined to include lands and tenements as well as every estate in real property, whether legal or equitable. It would also comprise anything that is affixed thereto or anything which forms part thereof. Therefore, in order to determine if a particular item forms part of the residential complex, it must be determined if it remains personal property (that is, a chattel) or if it has become part of the real property (that is, a fixture).

Whether personal property has become real property is a question of fact. Generally, if property is resting on its own weight or can be easily removed with no damage, such as unplugging an appliance, it would remain personal property. When personal property is even slightly attached, one has to consider both the degree and the object of the annexation to determine if personal property has become real property:

• The degree of annexation test generally involves the personal property being attached or connected to land or a building in a substantial manner, such as by nails or screws; the more firmly or irreversibly the personal property is affixed to the land or the building, the more likely it is to be regarded as a fixture.
• The object of the annexation test generally involves the purpose for which the personal property is attached or connected to the land. Generally, personal property is not regarded as a fixture where it is attached or connected to land for purposes of the enjoyment of the personal property. For example, the courts have long accepted that something which is affixed merely to facilitate its display, or in order to steady it, is not to be regarded as a fixture.

Any property inside a residential complex that remains personal property would not form part of the residential complex. Consequently, appliances and common area furniture and equipment that are not fixtures to the real property and remains personal property, would not be included as inputs in the construction of the residential complex.

Q.4 Generating assessments to engage s. 225(4)(c)

Achieving compliance after an HST-registered supplier has failed to charge HST and file returns can require filing HST returns for extended periods - which raises the issue of Notices of Assessment (NOAs) being made of the supplier so that its customers may claim input tax credits (ITCs) pursuant to s. 225(4)(c) beyond the normal 4-year period.

Question

Scenario #1

A registered supplier simply files its outstanding HST returns for the last 8 years, reporting the HST that it failed to charge for those reporting periods, and claiming available ITCs.

a) The CRA website states that a NOA will be issued upon filing an HST return if “your amount owing is more than the payment you made” (presumably tax, interest and penalties). If the registrant does not make a payment when returns are filed (waiting for the total payable), will NOAs be issued for all 8 years of returns filed, thereby allowing the registrant’s customers to claim ITCs beyond the normal 4 year period upon compliance with s. 225(4)(c)?

b) Does the answer to (a) potentially change if the registrant makes a payment on account, has a non-HST refund entitlement (e.g. income tax refund), or perhaps a non-resident bond was provided on registration – i.e., does CRA apply such potential offsets against amounts owing for taxes, interest and penalties before determining whether or not a NOA will be issued for a return filed? The concern is that if such amounts are applied entirely to the oldest return liabilities, NOAs may not be issued for those oldest returns (if no amount is “owing” on them after offset), precluding the registrant’s customers from claiming ITCs for the uncharged HST under s. 225(4)(c).

c) Will the registrant be allowed otherwise valid ITCs for all 8 years in determining net tax, and will any net tax refunds for reporting periods be applied to offset net tax liabilities under s. 296?

Scenario #2

What if the same registered supplier proceeds by voluntary disclosure?

a) The Canadian Bar Association was previously involved with ensuring NOAs were issued for all voluntary disclosures so that HST not charged and subsequently reported on disclosure could potentially be recovered beyond 4 years under s. 225(4)(c) (see 2003 CBA Roundtable, Q. 9 and Interpretation 46751, stating that a NOA should be requested). However it is not clear that this is still the practice under the new voluntary disclosure program, since disclosure officers say they now just make their relief decisions, the returns submitted with the disclosure are then sent “for processing” – and they don’t know how processing is handled. Further, Q.21 to the 2019 CBA Roundtable stated that under the new disclosure rules "a NOA will be issued once the voluntary disclosure has been accepted and finalized." The issue is potentially complicated by the new disclosure rules requiring payment of the net tax owing at the start of the disclosure, with returns sent for processing perhaps 1 or 2 years later. Will NOAs always be issued for each return filed when they are finally processed as part of a voluntary disclosure, on the same basis as under Scenario #1, whether or not the disclosure is ultimately allowed, and does the supplier have to request NOAs be issued?

b) Another complication concerns mandatory electronic filing for some registrants, and the associated penalty of $250 for each return not so filed. Historically, paper returns were typically submitted with HST voluntary disclosures if returns had not been filed. Paper returns will now trigger additional penalties if electronic filing is mandatory and the disclosure is denied. Disclosure officers have said that making a disclosure and filing the electronic returns separately the same day is a work-around - please confirm. In such case, the payment is made to Disclosures, the returns are filed electronically the same day, but the returns will be processed independently and long before a disclosure decision is made a year or two later (and processed without knowledge that the returns are even part of a voluntary disclosure). Will the payment of tax owing to the Disclosures Group (or available income tax refunds, non-resident security bonds, etc.) potentially prevent NOAs from being issued for some returns beyond 4 years, eliminating the application of s. 225(4)(c)? Is it possible for the disclosing supplier to provide a cheque with the disclosure application and request the Disclosures Group not to submit the cheque for processing until the NOAs have been issued?

c) Would the registrant’s disclosure application be considered as Category 1 – wash transactions (100% penalty and interest relief) or Category 2-general (100% penalty and 50% interest relief) if returns were not filed for 7 years, but all the uncharged HST involved wash transactions?

CRA Comments

Scenario #1

a) Under paragraph 225(4)(c) of the Excise Tax Act (ETA), a GST/HST registered recipient who is not a “specified person” as defined under section 225(4.1) can claim ITCs beyond the normal four-year limitation period under paragraph 225(4)(b) if the ITCs arise in respect of a supply made by a supplier who did not, prior to the four-year period, charge the tax in respect of the supply. For the recipient to claim the ITCs under paragraph 225(4)(c), however, the supplier must disclose to the recipient in writing that the Minister has assessed the supplier for that tax. Once GST/HST returns are filed, the registrant will receive a notice of assessment if either:

• a refund or rebate is owed.
• the amount owing is more than the payment made by the registrant. (emphasis added)

A notice of assessment will not be issued when:

• A return is filed and no business activity has been reported (nil return).
• A return is filed and the amount owing on the return equals the payment made on filing.

As a result, in the scenario described above, a notice of assessment should be issued as the amount owing would be more than the payment made by the registrant.

b) If the registrant makes a payment on account equal to the amount owing on the return, a NOA will not be issued.

An “offset” is allowed under section 318 of the ETA where a person is indebted to the Crown under Part IX of the ETA. However, subsection 315(1) of the ETA does not allow collection action under section 318 unless the amount has been assessed. Once a return is assessed, subsection 300(1) of the ETA would ensure that a NOA is sent to the registrant.

c) Subsection 296(2) allows input tax credits to be applied against the amount assessed for the same period even if they would otherwise be statute barred.

If there is an overpayment of net tax on the part of the registrant after the unclaimed ITCs are applied against the net tax of the reporting period, the CRA will apply this overpayment against any unpaid or unremitted amounts that arose before or after (up to four years) the reporting period, and that remain outstanding on the day the Notice of Assessment is issued. If there is still an overpayment, the CRA will refund the amount to the registrant with interest, provided that the Notice of Assessment is issued before the time limit for claiming the ITCs has expired and the person has filed all returns that are required to be filed.

Scenario #2

a) The Assessment, Benefit, and Service Branch (ABSB) has indicated that a NOA will be issued once the voluntary disclosure has been accepted and finalized.

Where a VDP application has been denied, the disclosed information may be referred to another CRA program area, where the disclosed information may result in an assessment or reassessment. The decision to issue a NOA would therefore vary depending on the actions taken by the CRA program area responsible for the disclosed information.

b) In order for a VDP application to be complete, it must meet the following five conditions to qualify for relief. The application must:

• be voluntary
• be complete
• involve the application or potential application of a penalty or interest
• include information that is at least one reporting period past due, and include payment of the estimated tax owing.

Where a person is required to file a GST/HST return electronically, but files a paper return instead, the CRA will accept the paper return as a valid GST/HST return. However, failure to file the return as prescribed by section 280.11 of the ETA would result in a penalty of $100 for the first failure, and $250 for each subsequent failure.

Section 281.1 of the ETA allows CRA (VDP) the discretion to waive or cancel penalties and interest on or before the day that is 10 calendar years after the end of a reporting period of a person. Where conditions of the section have been met, VDP can and will waive any electronic filing penalties, making a workaround unnecessary, as penalties and interest would be cancelled, when applicable.

If electronic returns were filed and processed before a disclosure decision was made, and a refund or rebate is owed, or the amount owing was more than the payment made by the registrant, a NOA would be issued. In cases where only paper returns are submitted with the disclosure, the CRA will associate any payment received to the appropriate account without delay. In cases where a VDP application is made, instructions will be forwarded on to hold the payment for the duration of the review. In any case, the payment of tax owing to VDP should not prevent NOA’s from being issued.

Therefore, the CRA will associate any payment received to the appropriate account without delay. In cases where a VDP application is made, instructions will be forwarded on to hold the payment for the duration of the review. In any case, the payment of tax owing to the VDP should not prevent NOA’s from being issued.

c) A Category 1 wash transaction specifically provides for relief for applications involving GST/HST wash transactions that are eligible for a reduction of penalty and interest as set out in GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations.

Where there is a wash transaction, the conditions listed in GST/HST Memorandum 16-3-1 for periods after March 31, 2007 are as follows:

• it must be demonstrated that the taxable supply in question was made to a registrant who would have been entitled to a full ITC if the tax had been properly applied, or to a federal department, or to a participating provincial government entity; or where an ITC is claimed by the wrong member of closely related group, or an associated person, it must be demonstrated that the person properly entitled to claim the ITC is a registrant that would have been entitled to a full;
• the person being assessed must not have been previously assessed for the same mistake and must have a satisfactory history of voluntary compliance;
• the person being assessed must have remedied the situation to ensure that tax is collected and ITCs properly claimed on future supplies of a similar nature; and
• the person being assessed must not have been negligent or careless in the conduct of its affairs in ensuring that tax is properly collected and remitted on its taxable supplies and that it claimed ITCs only where properly entitled to do so.

Category 2 provides relief for applications disclosing non-compliance or errors including, but not limited to, situations involving:

• GST/HST wash transactions that are not eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1 (for examples of non-eligible wash transactions, please see the memorandum);
• reasonable errors;
• failure to file information returns;
• no gross negligence or deliberate avoidance of tax; or
• over-claimed rebates.

Whether the registrant’s disclosure would be considered a Category 1 or Category 2 will be based on the judgment of the CRA officer/auditor and the delegated authority after considering the facts of the specific case.

Q.5 Medical fee sharing

P-238 discusses fee sharing in the context of a practice involving a principal practitioner and a locum, and involving a principal practitioner and contract associates, and states:

[Where there is a] bona fide arrangement to share fees, the CCRA will not consider the payment by the associate to be in respect of a supply of administrative services made by the principal. The underlying characteristic of this arrangement is an apportionment of the fee for the health care service rendered to the individual between the parties. Thus, for purposes of the ETA, the amounts apportioned between the two parties are not subject to tax.

However, if the locum or associate agrees to pay for use of the facilities of the medical practice, CRA considers the principal practitioner to have made a taxable supply which may consist of administrative services or real property.

Although P-238 does not elaborate on the technical basis for the fee sharing policy, s. 5, Pt. II, Sch. V exempts a supply of health care services that is rendered by a medical practitioner to an individual. The West Windsor Urgent Care decision (2005 TCC 405) suggests that a clinic is capable of being the recipient of health care supplies from a medical practitioner, notwithstanding the payment by the provincial insurance regime of the medical practitioner rendering the services. As a result, it appears that where one person (A) supplies exempt health care services to patients and engages a medical practitioner (B) to render those services to patients, then A’s supply to patients can be exempted (for example, under s. 5), and B’s supply to A can be exempted under s. 5.

a) What is a “bona fide arrangement to share fees”?

b) What is the statutory basis for exempting the apportionment of the fees under a bona fide arrangement to share fees?

c) Are exempt fee-sharing arrangements not limited to principal practitioner-locum and principal practitioner-contract associate arrangements?

d) To be an exempt fee-sharing arrangement, must the person supplying health care services to patients (A in the above description) be a licensed medical practitioner or medicine professional corporation under the applicable provincial law?

CRA comments

a) According to law dictionaries and jurisprudence, the expression “bona fide” means “in good faith”, honestly, genuinely, without simulation or pretense.

The CRA considers “a bona fide arrangement to share fees” to be the arrangement that best represents the economic reality of the transaction.

b) There is no section in Part IX that specifically addresses the situation. We could consider the application of section 5 of Part II of Schedule V to the Excise Tax Act as a basis to that position in the case of medical practitioner. Where a physician who has patients hires a locum to fulfill their duties during their absence, it could be considered that the physician has subcontracted the care to the locum. The supply of services of the locum to a patient would be exempt under section 5 of Part II of Schedule V and the supply of services to the physician by the locum would also be exempt under section 5 as it is a supply of a consultative, diagnostic, treatment or other health care service that is rendered by a medical practitioner to an individual.

The same approach could be taken in respect of other professional services that can be exempt in Part II of Schedule V where the exemption refers to services rendered to an individual.

c) The CRA is not aware of arrangements that would be of a similar nature. It would be a question of fact.

Considering that health care services legislation is of provincial jurisdiction, the rules applying in the province would have to be considered. For example, fee sharing might be only allowed between professionals regulated by the same regulatory body.

d) In section 5 of Part II of Schedule V, for an exemption of a health care services to apply, the service has to be rendered by a physician who is entitled under the laws of a province to practise the profession of medicine.

The CRA considers that some exemptions can apply twice to the same service as the requirement is that the service be rendered by a medical practitioner or a practitioner as defined in section 1 of Part II of Schedule V.

Q.6 ITCs for orthodontists

At the 2018 CBA Roundtable, Q.5 regarding Brian Hurd, and CRA’s administrative arrangement to allow 35% input tax credits to orthodontal practices, CRA indicated that it would prospectively phase-out that administrative arrangement and that it was preparing a publication discussing ITC availability to dentists and orthodontists.

Davis Dentistry (under appeal) conflicted with Brian Hurd.

a) What is CRA’s current position regarding the 35% ITC administrative arrangement.

b) Is there an expected publication date of the CRA’s response to the 2018 Roundtable.

CRA Comments

As mentioned in the background, the decision of the Tax Court of Canada in Dr. Kevin L. Davis Dentistry Professional Corporation v. The Queen conflicts with the decision of the same Court in Dr. Brian Hurd Dentistry Professional Corporation v. The Queen. The Brian Hurd decision was made under the informal procedure while the Dr. Davis decision was made under the general procedure.

Section 18.28 of the Tax Court of Canada Act (R.S.C., 1985, c. T-2) provides that “(a) judgment on an appeal referred to in section 18 (that is, an informal procedure decision) shall not be treated as a precedent for any other case.” Therefore, the Brian Hurd decision cannot be taken as a precedent. As mentioned, the Dr. Davis decision of the Tax Court of Canada is presently under appeal to the Federal Court of Appeal.

Consequently, there is no expected date of publication as the CRA will wait for the decision of the Federal Court of Appeal before taking any more steps in regard to the 35% ITC administrative arrangement.

In the meanwhile, the administrative arrangement will remain in effect until further notice. The administrative arrangement continues to apply where a dentist or dental corporation follows the terms of the arrangement: the dentist identified the two separate supplies, for example, the invoice issued to the patient identifies the consideration for the supply of the orthodontic appliance or artificial tooth separately from the consideration for the supply of the dental service, and the ITC claim relates to mixed-use purchases (to make both taxable and exempt supplies) such as overhead and general operating expenses and certain direct expenses or inputs (for example, personal property such as arch wires used exclusively to fabricate orthodontic appliances). The administrative arrangement does not include ITCs for capital property.

Q.7 MURC conversion to condos

The definition of “builder” in s. 123(1) includes a person who carries on the “construction” (not a defined term) of a “residential complex,” which is defined to include that part of a building which is a residential condominium unit. The builder of a residential complex is potentially required to self-assess under s. 191 or to charge GST/HST on a sale.

Para. 4(a), Pt. I, Sch. V exempts the sale of a unit situated within a multiple unit residential complex (“MURC”) that has been converted to a condominium complex by a builder, under certain circumstances. However, there does not appear to be an equivalent exemption from the self-assessment requirement in s. 191(1).

Assume that a person other than an individual with an interest in a MURC converts the MURC into condominium units, a process which, in addition to changing the legal ownership of the units, involves physical alterations to the MURC units but without substantial renovation of the MURC. The person intends to rent the resultant condominium units for residential use by individuals.

a) Does conversion of a MURC into condominium units without substantial renovation constitute “construction” of a residential complex, namely, residential condominium units?

b) Does the answer depend on whether the conversion changes the number of units, e.g., converting a 4-unit MURC into a 5-unit condominium complex?

c) If this constitutes construction of a residential complex, would 5, or only the 1 additional unit, be considered to be constructed?

d) If there is construction of a residential complex, is there an exemption from self-assessment under s. 191(1) upon residential rental?

CRA Comments

a) The term “construction” in the definition of “builder” in subsection 123(1) of the Excise Tax Act (ETA) and the verb ”construct” in related sections of the ETA, are not defined in the ETA. Therefore, the ordinary dictionary meaning of those terms should be referred to in interpreting the terms “construction” and "construct.” The Canada Revenue Agency (CRA) considers “construction” to be the creation of something new, and can be distinguished from repair, improvement, recombining or rearranging of something that already exists.

Whether the conversion of a multiple unit residential complex (MURC) into condominium units constitutes “construction” of residential condominium units is a question of fact. Subsection 123(1) of the ETA defines a "multiple unit residential complex" to be a residential complex that contains more than one residential unit, but does not include a condominium complex. That same subsection defines a "condominium complex" to be a residential complex that contains more than one residential condominium unit.

A "residential condominium unit" as defined in subsection 123(1) of the ETA includes a residential complex that is, or is intended to be, a bounded space in a building designated or described as a separate unit on a registered condominium or strata lot plan or description. As per the definition, only intention is required for there to be a residential condominium unit.

Where there is an intention to create residential condominium units in a building, the CRA would determine separately whether each residential condominium unit was constructed or substantially renovated for purposes of subsection 191(1) of the ETA, rather than whether the MURC as a whole was constructed or substantially renovated for purposes of subsection 191(3) of the ETA.

b) Whether the conversion of a MURC into residential condominium units constitutes “construction” or a substantial renovation of a residential condominium unit does not depend on whether there is a change in the number of units, but rather on the work performed on a particular residential condominium unit in the condominium complex. In order to convert a 4-unit MURC into a 5-unit condominium complex, it is possible that one or more residential condominium units underwent a substantial renovation. A substantial renovation is generally considered to have taken place where all or substantially all of the interior of a residential condominium unit has been removed or replaced and, upon completion, the renovated or altered unit is, or forms part of, a residential complex. Please refer to the information under the heading “Condominium units” in GST/HST Technical information Bulletin B-092, “Substantial Renovations and the GST/HST New Housing Rebate”.

c) Where a conversion occurs, the number of units the person is considered to have constructed or substantially renovated is a question of fact that depends on the work performed on each individual unit.

d) Pursuant to subsection 191(1) of the ETA, if a builder of a residential condominium unit constructs or substantially renovates the unit and subsequently gives possession or use of the unit under a lease, licence or similar arrangement to an individual as a place of residence, the builder is deemed to have sold and repurchased the residential condominium unit and to have paid and collected tax calculated on its fair market value.

There is no exemption from self-assessment under subsection 191(1) because there is deemed to be a taxable supply. However, depending on the facts, there may be an exception to a self-supply under subsection 191(1) that could apply under any of subsections 191(5) to (7).

Q.8 Internal addition of MURC unit

The definition of “builder” in s. 123(1) includes a person who constructs an “addition” (an undefined term) to a multiple unit residential complex (“MURC”). Such a builder may be required to self-assess in respect of the addition pursuant to s. 191(4).

Revenu Quebec has stated that where self-assessment is required, the fair market value of the addition includes only the value of the addition to the building if the addition is constructed on the original land that was reasonably necessary for the residential use of the existing building (TVQ.226-1/R12, “Self-Supply of an Addition to a Multiple- Unit Residential Complex” (June 29, 2012)).

Assume that a person other than an individual with an interest in a MURC physically reconfigures the space within the MURC so that new residential units are created, but without substantial renovation of the MURC and without expanding the building envelope. The person intends to rent the resultant new units for residential use by individuals.

a) How should the meaning of “addition” be interpreted in the context of a MURC?

b) Does internal reconfiguration of a MURC resulting in new resident units but not expanding the building envelope not constitute an addition to the MURC?

c) Where there is an addition to a MURC requiring self-assessment, does CRA agree with Revenu Quebec’s statement that the fair market value does not include the original land if the addition is constructed on the original land that was reasonably necessary for the residential use of the existing building?

CRA Comments

a) Subsection 191(4) of the Excise Tax Act (ETA) refers to the phrase “the construction of an addition to a multiple unit residential complex.” A “multiple unit residential complex” is defined in subsection 123(1) of the ETA to be a residential complex that contains more than one residential unit, but does not include a condominium complex. Paragraph (a) of the definition of “residential complex” in subsection 123(1) of the ETA includes that part of a building in which one or more residential units are located. In this context, the CRA would consider the construction of an addition to a multiple unit residential complex (MURC) that expands the building envelope of the existing MURC to be the construction of one or more “residential units” as defined in subsection 123(1) of the ETA.

b) An internal reconfiguration of units within a MURC which results in new residential units but which does not expand the building envelope is not considered to be the construction of an addition to a MURC.

c) Where there is a construction of an addition to a MURC requiring self-assessment under subsection 191(4) of the ETA, the fair market value of the addition under paragraph 191(4)(e) of the ETA would not include the land if the addition to the MURC is constructed on land that is contiguous to the existing building and that was reasonably necessary for the use and enjoyment of the existing building as a place of residence for individuals.

Q.9 Conversion of commercial unit to residential units

A pre-1990 building with 30 residential rental units and one commercial unit rented for use as a convenience store (the “Commercial Unit”) is sold on January 1, 2019 to “NewCo” which, on January 1, 2020, terminates the Commercial Unit lease and then hires a construction company to convert the unit into four residential units, with first occupancy on December 1, 2020.

Will such conversion of the Commercial Unit constitute a conversion to residential use per s. 190, requiring the application of the self-supply rules in s. 191 and not the change of use rules in s. 206?

Note that:

• S. 136(2) apparently applied to deem there to be separate supplies to NewCo of (1) the residential units and (2) the Commercial Unit.
• S. 206 would appear not to apply as s. 195.1(1) provides that the completed residential complex is deemed not to be capital property of the builder unless the builder was deemed under s. 191 to have received a taxable supply of the residential complex.
• If s. 206 were to apply, tax would be computed on the basic tax content of the space no longer used in commercial activities (plus the GST/HST paid on the costs of converting the space) - and this would appear to be contrary to the policy of imposing tax on the FMV of new residential property.

CRA Comments

Although it may be possible to have more than one builder of a residential complex at the

The self-supply rules in section 191 that relate to a multiple unit residential complex (MURC) require the “construction” or “substantial renovation” of the complex, or the construction of an “addition” to a MURC, by a builder. Since the additional residential units in the present case are created within an existing building, this would not constitute “construction” or an “addition” to a MURC. Also given the small portion of the complex that was renovated (4 new units out of a total of 34 units), the renovation does not qualify as a “substantial renovation”.

Pursuant to subsection 190(1), where a person begins to hold or use real property as a residential complex, the person may be deemed to be a builder who substantially renovated the complex. For these deeming provisions to apply, all of the following conditions must exist:

a) the property must have been

b) last acquired by the person to hold or use as a residential complex, or

c) immediately before that time, held for supply, or used or held for use as capital property, in a business or commercial activity of the person,

d) immediately before the person begins to hold or use real property as a residential complex, the property was not a residential complex, and

e) the person did not engage in the construction or substantial renovation of, and is not, but for section 190, a builder of the complex.

A “residential complex”[1] is defined, in part, as “…that part of a building in which one or more residential units are located.” Where a building has more than one residential unit within it, the “residential complex” is the aggregate of all the residential units therein. A “multiple unit residential complex”[2] (MURC) is defined as “a residential complex that contains more than one residential unit, but does not include a condominium complex.” MURCs cannot exist within the same building. Consequently, the additional residential units located in the former Commercial Unit will become part of the same residential complex that already existed in the building. In the present case, when NewCo transforms the Commercial Unit into residential units, the whole building (together with common areas and other appurtenances to the building, and the land subjacent or immediately contiguous to the building), is the “residential complex”.

In this case, it is our opinion that, since the former Commercial Unit becomes part of the existing residential complex once it is converted to four residential units, the condition present in the preamble as well as in paragraph 190(1)(b) would not be met. More specifically, the preamble requires that a person begins to hold or use real property as a residential complex and paragraph 190(1)(b) requires that immediately before the person begins to hold or use real property as a residential complex, the property was not a residential complex. It may be true that, as the Commercial Unit was deemed a separate property per subsection 136(2),[3] immediately before the Commercial Unit is converted to residential units, that property was not a residential complex. However, in the present case, since there is already a residential complex in the building, the Commercial Unit will never begin to be used as a residential complex in its own right. It will be converted to residential units, which will not create a new residential complex, rather, the new units will become part of the existing residential complex.

Accordingly, the deeming provisions of subsection 190(1), which would have potentially deemed the person to be a builder and to have substantially renovated the residential complex (which includes the former Residence Portion), would not apply.

Since NewCo is not considered to have constructed or substantially renovated the residential complex, it is not considered a builder for the purpose of paragraphs (a) nor (b) of the definition of “builder” in subsection 123(1). Further, since the former part of the residential complex was previously occupied, we would not consider the condition in subparagraph (d)(ii) of the definition of “builder” to be met.

As such, this means that subsection 195.1(1) would not apply and would not prevent the application of the rules in section 206. Specifically, in this case, since NewCo is not a builder of the residential complex, it is not subject to the rules of subsection 195.1(1), meaning that the property would be capital property of NewCo.

Our understanding of the proposed fact scenario is that the entire Commercial Unit is converted to residential units. As such, since NewCo begins to use the property exclusively (that is, 90 per cent or more) for purposes other than commercial activities, subsection 206(4) would apply.

Accordingly, NewCo will be deemed under subsection 206(4) to have made, immediately before it begins to use the property exclusively for purposes other than commercial activities, a supply of the property by way of sale and to have collected, at that time, tax in respect of the supply equal to the basic tax content of the property at that time. NewCo will also be deemed to have received a supply of the property by way of sale and to have paid tax in respect of the supply equal to the amount determined under paragraph 206(4)(a), at the time it begins to use it exclusively for purposes other than commercial activities.

Q.10 Change in use of residential leasehold

Homes in a new residential subdivision may be supplied under long-term leases, especially on First Nations lands. The “buyer” might acquire a home under a 99-year lease or sublease for a single lump sum (which might not be related to any lease intervals during the term) or for an upfront payment coupled with periodic charges.

Although the long-term lease of a home for residential occupation purposes by the same individual is exempted under s. 6, Pt. I, Sched. V, the lessee may offer the homes for short-term rental purposes. This creates issues due to the potential application of the rules in s. 6.1 or 6.11 to the headlease.

Part #1

How does a landlord under the 99 year lease determine its obligations for collecting GST with respect to upfront and ongoing payments?

Part #2

Under s. 168, the GST collectible under a lease depends on the time at which the consideration under the lease is paid or becomes payable. To the extent that an upfront payment is made at the closing of the lease transaction (i.e. the beginning), the GST is due at that time. However, it will not be known whether the long-term lessee will engage in short-term rentals in future.

a) If it is reasonably expected that the property will be used for residential purposes of the long-term lessee, is no GST collectible on the up front rent payment?

b) What happens if in the future the home becomes devoted exclusively to short-term rentals after being occupied for some period by the long-term lessee as a place of residence? Is the landlord expected to revisit the status of the upfront charge or any ongoing periodic rental charges?

c) What happens if the landlord, a registrant, has filed its GST/HST returns on a timely basis, but the change to short-term rental usage has occurred beyond the limitation period applicable to the receipt of the initial upfront rent payment?

CRA Comments

A definitive response to these questions would require a careful review of the wording used in the lease agreement. However, we can offer the following general information. In this response we assume that the Long-Term Lessee is an individual, that the lease agreement between the landlord and the Long-Term Lessee is a written agreement and that the consideration for any supply of short-term accommodation made by the Long-Term Lessee will exceed $20 for each day of occupancy. We have identified four questions in your submission and the answers to those questions are provided under each of the following sub-headings.

Part #1

If the Long-Term Lessee will be leasing the home (that is, a residential complex) initially for the purpose of its occupancy as a place of residence and the period throughout which continuous occupancy of the home is given to the same individual under the arrangement is at least one month, the lease of the home by the landlord to the Long-Term Lessee will be an exempt supply under paragraph 6(a) of Part I of Schedule V. As such, tax is not collectible on the upfront payment.

However, if the Long-Term Lessee will use the home initially to make short-term rentals, neither section 6.1 nor section 6.11 of Part I of Schedule V will apply to exempt the lease of the home to the Long-Term Lessee by the landlord. Therefore, this supply will be a taxable supply. If the landlord is a GST/HST registrant, under subsection 221(1), the landlord will be required to collect the tax payable by the Long-Term Lessee on the upfront payment.

Under subsection 168(1), tax is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due. Under subsection 152(2), where property is supplied by way of lease, licence or similar arrangement under an agreement in writing, the consideration, or any part thereof, for the supply shall be deemed to become due on the day the recipient is required to pay the consideration or part to the supplier pursuant to the agreement.

Under subsection 136.1(1), supplies of real property by way of lease, licence or similar arrangement are treated as a series of separate supplies for each lease interval to which a particular lease payment is attributable. For purposes of the GST/HST, a lease interval is the period that is the whole or part of the period during which possession or use of the property is provided under the lease, licence or similar arrangement. An upfront payment may be attributable to the whole or a part of the period during which possession or use of the real property is provided under the arrangement and that period is a lease interval. As well, if the periodic charges are part of the consideration for the lease of the real property and those periodic charges are attributable to a part of the period during which possession or use of the real property is provided under the arrangement, each of those periods to which the periodic charges are attributable would be considered to be a lease interval. The determination as to whether the balance of the lease term following the upfront payment consists of only one lease interval or multiple lease intervals will depend on whether a “periodic charge” made subsequent to the upfront payment is recognized as consideration for the lease of the home for GST/HST purposes.

Paragraph 136.1(1)(b) provides that the supply of the property for the lease interval is deemed to be made on the earliest of three dates. Whether the supply being made on that earliest date is an exempt supply or a taxable supply is a question of fact.

Therefore, if during a particular lease interval, the intent of the Long-Term Lessee is to use the home for the purpose of its continuous occupancy as a place of residence for a month or longer, that supply would be an exempt supply and the landlord would not have to collect tax on that supply. But, if during the next lease interval, the Long-Term Lessee intends to use the home to make short-term rentals, the lease of the home by the landlord to the Long-Term Lessee for the particular lease interval would be a taxable supply and, if a registrant, the landlord would have to collect tax on that supply calculated on the consideration for that supply (that is, on the particular periodic charge).

Part #2

a) If the Long-Term Lessee will be leasing the home (that is, a residential complex) initially for the purpose of their occupancy as a place of residence and the period throughout which continuous occupancy of the home is given to the same individual under the arrangement is at least one month, the lease of the home by the landlord to the Long-Term Lessee will be an exempt supply. As such, tax is not collectible on the upfront payment.

If the landlord is a builder of the residential complex, this purpose should be reflected in a self-supply of the residential complex by the landlord, assuming all of the conditions in subsection 191(1) apply.

b) It is not clear what is meant by the phrase “revisit the tax status”. If the Long-Term Lessee will use the home initially as a place of residence and after a period of time, the Long-Term Lessee begins to use the home exclusively for short-term rentals, there would be no requirement to change the tax status of the supply for which the upfront charge or any previous rental charge was attributable to, if the tax status of that supply was correctly determined at the time that the supply was deemed to be made under paragraph 136.1(1)(b).

However, as stated above, under subsection 136.1(1), supplies of real property by way of lease, licence or similar arrangement are treated as a series of separate supplies for each lease interval to which a particular lease payment is attributable. If, at the particular time that the supply of the home is deemed to be made by the landlord under paragraph 136.1(1)(b), the intention of the Long-Term Lessee is to use the home to make short-term rentals, the lease of the home by the landlord to the Long-Term Lessee for the particular lease interval is a taxable supply and, if a registrant, the landlord would have to collect tax on that supply.

It should also be noted that if there is a particular change to which the Long-Term Lessee uses the home, a deemed supply may apply to the landlord under subsection 191(1) and/or under a change-in-use provision.

c) As stated above, there would be no requirement to change the tax status of the supply for which the upfront payment is attributable to, if the tax status of that supply was correctly determined at the time that the supply was deemed to be made under paragraph 136.1(1)(b). Therefore, unless the tax status of the supply for which the upfront payment is attributable to was incorrectly determined at the time specified under paragraph 136.1(1)(b), a reassessment and time limitation for that reassessment would not be an issue.

Q.11 JV elections with multiple operators

Can a joint venture made under a single written agreement have multiple operators for different elements of the joint venture?

For example, a joint venture could encompass both the development and the leasing of real property, with the co-venturers electing with a development manager to be the operator of the development phase, and with a property manager as the operator in respect of the leasing of the property?

Assume that there will be overlap between the operational and managerial control exercised by the two operators, so that terminating the first joint venture election before the second election is made would not be possible, for example, there is a multi-phase project where development activities and property management activities could be occurring at the same time regarding different project phases. Also, assume that each operator is fully a “participant” in the joint venture (whether by ownership interest or by proper allocation of managerial/operational control).

CRA Comments

Assuming all conditions are met, a joint venture election made under section 273 allows for the participants in a joint venture to identify and appoint a participant to be an operator for the purposes of the joint venture. The election appointing the operator can be revoked and a new election, with a new operator, can be made. It is possible for participants in a joint venture to elect to have multiple operators with each operator having responsibility for a distinct element of the joint venture. Further, it is possible for such elections to overlap and run concurrently.

An election deems all property and services supplied, acquired, imported or brought into a participating province by the operator on behalf of a co-venturer(s), in the course of activities for which the joint venture agreement was entered into, to be supplied, acquired, imported or brought into the province by the operator and not by the co-venturer(s). As all such properties and services are, under the agreement, deemed to be made by the operator, it may be possible to have multiple participants elected as operators at the same time under the same agreement for GST/HST purposes if and only if the duties and obligations of each operator deal with discrete parts of the joint venture in the agreement or are distinct and clearly delineated in the agreement, without any overlapping parts or duties and obligations.

Allowing multiple elections for different joint venture operators under the same agreement at the same time would require a clearly detailed agreement delineating each operators’ parts, duties and obligations of the joint venture.

Q.12 PSB offsetting HST on realty purchases

A public service body person that is a GST/HST-registrant which acquires real property not primarily in the course of commercial activities is required to report the GST/HST on the GST60 return (for purchase of real property). This creates a cash flow issue as the full amount of tax must be submitted along with the GST60 return, but ITCs or public service body rebates are claimed in different returns and at different times, and are processed separately.

Is it possible to report the GST/HST in the registrant’s GST/HST Return GST34 for the reporting period that includes the closing date – just like other taxpayers who use the property more than primarily in commercial activities - and offset the self-assessed GST by claiming appropriate ITCs on line 108 or PSB rebates on line 111 of the same Return?

CRA Comments

Since the question did not specify what type of public service body the registrant is our comments will be limited to the general GST/HST provisions that apply to most public service bodies.

Where a GST/HST registrant acquires taxable real property and the supplier is not required to collect the tax, and is not deemed to have collected tax, on the sale pursuant to subsection 221(2), the purchaser is required to pay the tax under subsection 228(4).

Accordingly, where the purchaser will not use or supply the real property primarily (more than 50%) in commercial activities, paragraph 228(4)(b) specifies that the purchaser shall pay the tax to the Receiver General and file with the Minister in prescribed manner a return in respect of the tax in prescribed form containing the prescribed information.

In such cases, the prescribed form to report the tax due is Form GST60, GST/HST Return for Purchase of Real Property or Carbon Emission Allowances (GST60). The tax due in such cases is not permitted to be reported on the GST/HST registrant’s regular GST/HST Return (GST34).

Pursuant to subsection 228(6), the registrant may offset any tax remittable by the amount of any net tax refund or rebate claimed by that person in another return or application (such as the GST/HST Rebate Application for Public Service Bodies). To apply the offset, the two forms must be filed together.

The GST60 is required to be filed on or before the last day of the month following the calendar month in which the tax became payable.

The Form GST66, GST/HST Rebate Application for Public Service Bodies (PSB rebate) is calculated and claimed on a claim period by claim period basis. If a public service body is eligible for a PSB rebate and is a GST/HST registrant, its claim periods are the same as the reporting periods for its GST34 (e.g., monthly, quarterly or annually).

Therefore, if a registrant public service body’s PSB rebate claim and GST60 return are due to be filed at the same time, the registrant may offset any tax remittable when the forms are filed together.

With respect to the claiming of ITCs and filing GST60, pursuant to paragraph 169(4)(b), an ITC relating to the purchase of the real property may not be claimed until the GST60 has been filed. As such, subsection 228(6) would generally not be applicable. Any eligible ITCs must be claimed on the registrant’s GST34.

Please note, as most public service bodies generally have to use the primary use rule to determine their ITCs for purchases of real property, many public service bodies are not permitted to claim ITCs on capital real property that is acquired for use, or intended to be used, 50% or less in commercial activities. That is, unless the public service body has filed a section 211 election in respect of the property.

Q.13 Obtaining s. 211.12(5) notice of intent

Where a non-resident service provider wishes to register for GST/HST under the “simplified regime” but does not wish to submit a registration request pursuant to s. 211.12(3) out of fears that CRA may back-date the registration to July 1, 2021, what procedures can non-residents pursue to receive a Notice of Intent from CRA to register them pursuant to subsection 211.12(5)?

In this respect, s. 211.14(1) only requires persons that made a “specified supply” to collect tax from a “specified Canadian recipient” if they are registered:

211.14 (1) Supply – Canada — For the purposes of this Part and despite paragraphs 136.1(1)(d) and (2)(d), subsection 142(2) and section 143, if a person registered under this Subdivision makes a specified supply to a specified Canadian recipient, or makes a Canadian accommodation related supply to a recipient that has not provided to the person evidence satisfactory to the Minister that the recipient is registered under Subdivision D of Division V, the supply is deemed to be made in Canada and, in the case of a Canadian accommodation related supply that is included in Schedule VI, the supply is deemed not to be included in that Schedule.

Non-residents that were required to be registered are reluctant to submit a registration request under s. 211.12(3) as CRA may provide an effective registration date pre-dating their application. Nevertheless, these non-residents would like to start collecting the tax and they want to ensure that (i) the registration is prospective; and (ii) they have enough time to obtain satisfactory evidence as to whether any specified Canadian recipients are registered for GST/HST.

What process can these non-residents follow for the CRA to issue a notice of intent under s. 211.12(5).

Note that there is no benefit to the non-residents in requesting “forbearance” since they were not obligated to collect tax, as they were not “registered”. Moreover, would the CRA provide forbearance when the non-residents were simply not aware of the legislative changes that expanded the GST/HST registration requirements well beyond the Canadian borders?

CRA Comments

As stated in Budget 2021 and on the CRA’s digital economy webpages, affected digital economy businesses and platform operators are expected to comply with their obligations to register, collect and remit the GST/HST as set out under the new rules and legislative provisions.

Although the GST/HST digital economy measures were originally announced in November 2020, it was recognized that there would be insufficient time for most businesses to be ready to comply with the new rules from the announcement date. As a result, Budget 2021 committed the CRA to working closely with affected businesses and platform operators to assist them in meeting their obligations under the digital economy measures. In particular, where such businesses and operators could show that they had taken reasonable measures but were unable to meet their new obligations for operational reasons, the CRA would take a practical approach to compliance and exercise discretion in administering the measures during the 12-month transition period that started July 1, 2021.

To that end, the CRA has worked with a number of affected businesses and operators who wish to defer their registration under the simplified GST/HST regime. As part of that process, the CRA will ensure that the submission clearly demonstrates the efforts taken by the business or operator to comply with the new digital economy measures. No request for forbearance has yet been denied, and the CRA has approved all requested registration deferral dates that do not extend beyond June 2022, consistent with Budget 2021.

The CRA therefore encourages members of the CBA to take advantage of the 12-month transition period provided in Budget 2021 by making a written request on behalf of their clients for certainty regarding their clients’ obligations under the GST/HST digital economy rules. Submissions requesting forbearance continue to be made.

Once the transition period ends after June 2022, it will be expected that affected digital economy businesses and platform operators will be compliant with the new GST/HST measures, including the provisions relating to registration, filing, collection and remittance of tax. The CRA will continue to work with businesses and operators in accordance with its regular business practices; accordingly, where it is determined that a business or operator intentionally engaged in non-compliance, the CRA may, depending on the circumstances, take a stricter approach when interacting with that business or operator.

With respect to the Notice of Intent provision under subsection 211.12(5), it should be noted that it is a compliance tool to be used at the disposal of the CRA; it is not taxpayer-initiated. Subsection 211.12(5) permits the Minister to send written notice (Notice of Intent) to any person who the Minister believes is required to be registered, but has failed to register as and when required. A person who is required to be registered and receives a Notice of Intent is required to register under subsection 211.12(3).

Q.14 Lease/sale of aircraft to non-resident airline

S. 2, Pt. V, Sched. VI provides that the supply of property made to a non-resident person who is not registered for GST/HST qualifies for zero-rating when the property is acquired for consumption, use or supply “in the course of transporting passengers or property” and the nonresident carries on business of transporting passengers or property to or from Canada or between places outside Canada by ship, aircraft or railway:

2. A supply of property or a service (other than a supply of real property by way of sale) made to a non-resident person who is not registered under Subdivision d of Division V of Part IX of the Act at the time the supply is made, where the property or service is acquired by the person for consumption, use or supply

(a) where the person carries on a business of transporting passengers or property to or from Canada or between places outside Canada by ship, aircraft or railway, in the course of so transporting passengers or property;

…

Canadian jurisprudence (e.g., General Motors v. The Queen 2008 GTC 265) has confirmed that “in the course of” should be given a wide meaning that only requires a minimal connection.

Does s. 2 zero-rate all property that is purchased or leased by a non-resident airline whose sole activity is to carry on the business of transporting passengers? In particular, would an aircraft that is being leased or purchased for consumption and use by the airline in transporting passengers qualify for zero-rating?

CRA Comments

Whether a particular supply of property that is made to an unregistered non-resident airline is zero-rated under section 2 of Part V of Schedule VI is a question of fact.

As noted in the question, for a supply to be zero-rated under paragraph 2(a) of Part V of Schedule VI, the property or service must be acquired by the unregistered non-resident person for consumption, use or supply “in the course of so transporting passengers or property”. The words “in the course of” in section 2 are interpreted as imposing the following two requirements:

1. the person must be transporting passengers or property, whether the conveyance (i.e., ship or aircraft) is mobile or immobile, at the time the person consumes, uses or supplies the property or service acquired by the person; and
2. the consumption, use or supply of the property or service by the person must be connected with or arise from the provision of the service of transporting the passengers or property.

As explained in Finance Canada’s technical notes to section 2, as well as RC4027, Doing Business in Canada – GST/HST Information for Non-residents, property and services that could be eligible for zero-rating under this provision include:

• fuel and other supplies;
• railway junction and switching charges, pilotage services, aircraft landing fees; railway right-of-way charges, and warehouse fees;
• stevedoring services;
• spare parts, repair, and maintenance services; and
• air navigation services.

We are not aware of a case where a conveyance, described in section 2 of Part V of Schedule VI, would be the actual property being supplied under the provision. As a result, it would be necessary to review all of the relevant facts surrounding a particular transaction in order to determine whether zero-rating under section 2 could occur.

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

Q.15 Div. IV tax self-assessed in error

When a supplier has made a taxable supply to a resident recipient where the recipient would not be entitled to full ITCs in respect of the HST payable thereon, and the parties understand that the supply is made outside of Canada (including where the supplier considers that it is not carrying on business in Canada and is not registered at the time the supply is made), the recipient will self-assess and pay GST/HST under ss. 218 and 218.1.

If CRA later determines that the place of supply of the particular supply is within Canada (including where it determines that the supplier was in fact carrying on business in Canada and thus was required to be registered at the time the supply was made), CRA’s current practice is to assess the supplier for an alleged failure to collect GST/HST on the supply, regardless of whether the recipient has remitted the GST/HST.

Although the supplier will attempt to collect that GST/HST from the recipient, the latter will already have self-assessed and paid the GST/HST, resulting in double tax where there is no ability for the recipient to file for a “tax paid in error” rebate.

If the supplier can provide evidence satisfactory to CRA establishing the self-assessment and payment by the recipient of such GST/HST at issue, will CRA accept that evidence as satisfying the supplier and recipient’s obligations in respect of the GST/HST allegedly exigible on the supply?

CRA Comments

Generally, where it is determined that a person is carrying on business in Canada and is making a taxable supply in Canada, the person is required to register for the GST/HST and to charge and collect the GST/HST payable on the supply, except where the person is a small supplier.

A recipient of a taxable supply made in Canada by a registrant is not required to self-assess Division IV tax under section 218 or 218.1. If the recipient self-assess the tax, it has done so in error.

Where a recipient has self-assessed Division IV tax in error, the recipient may be eligible to claim a rebate of the tax, pursuant to section 261, provided the amount was not assessed under section 296. A section 261 rebate for tax paid/remitted in error can be claimed within two years after the day the amount was paid/remitted. Where a rebate under section 261 is restricted or is outside the two year period, the recipient may request a (re)assessment of the applicable return for the particular period.

Q.16 Discretionary relief for platform operators

The CRA’s website regarding GST/HST for digital economy businesses states:

The Government of Canada announced in the April 19, 2021 Federal Budget that the Canada Revenue Agency (CRA) will work closely with businesses and platform operators to assist them in meeting their obligations. Where the affected businesses and platform operators show that they have taken reasonable measures but are unable to meet their new obligations for operational reasons, the CRA takes a practical approach to compliance and exercises discretion in administering these measures during a 12-month transition period, starting July 1, 2021.

Before the CRA exercises its discretion in the administration of the new measures, an affected business or platform operator must first obtain the CRA’s written approval that such discretion will be exercised. Submissions may be made to the CRA after July 1, 2021, until further notice. Please contact us for further information and assistance [emphasis added].

Please provide an update regarding this new CRA program of providing advance approval for allowing discretion in connection with GST/HST registrations in the digital economy business, including:

a) How many businesses have applied for advance approval to date?

b) Of the businesses that applied for advance approval, how many were approved, how many were not approved, and how many are still pending approval?

c) Please explain how the CRA made its decisions to approve, or not approve, such requests.

CRA Comments

As the question notes, Budget 2021 committed the CRA to taking a practical approach to compliance and the exercise of discretion in administering the new GST/HST digital economy measures during a 12-month transition period beginning on July 1, 2021. Affected businesses and platform operators would need to show that they would be unable to meet their obligations by that date.

In order to meet this commitment, the GST/HST Rulings Directorate of the Legislative Policy and Regulatory Affairs Branch (LPRAB) established a committee with its counterparts in the Assessment, Benefit, and Service Branch (ABSB) and Compliance Programs Branch (CPB), whereby affected businesses and platform operators could seek approval to delay their registration under the new measures after they demonstrate the measures they took to try to comply, and the committee members could discuss and evaluate such submissions.

As part of this forbearance or tolerance approval process and to ensure that all submissions are evaluated on approximately the same criteria, each requestor must provide information related to its business including specific systems issues encountered by the business or operator that are causing a delay in compliance with the new digital economy measures. Additionally, the requestor should provide a description of the steps, resources and timelines or roadmaps involved in addressing the problems it is facing and the date on which it expects to be able to comply with the legislation.

The committee reviews, discusses and rules on each complete submission. Upon approval of the request for forbearance by each branch, the decision is first communicated verbally to the requestor, followed by written confirmation.

As of March 31, 2022, the CRA has received a total of 56 submissions, some of which relate to more than one entity. All told, the CRA has received requests in respect of 79 entities as of that date, of which 27 have been approved and 52 are still pending. To date, no request for delayed registration has been denied.

Q.17 Information required for s. 211.25 returns

S. 211.25 requires distribution platform operators in respect of qualifying tangible personal property supplies to file an information return for the calendar year, in prescribed form, containing prescribed information. The information return is due before July of the following calendar year, e.g., on June 30, 2022 for the period ending December 31, 2021. At the time of submitting these questions in February 2022, the form of information return has not been made available yet. The CRA’s website states:

In recognition of the practical approach to compliance and the discretion that the CRA is taking in administering the GST/HST measures during a transition period of up to 12-months starting July 1, 2021, the CRA is deferring the first calendar year information return to help affected businesses and platform operators adjust to the new reporting requirements. In short, information returns are not required for the 2021 calendar year. Going forward, the information return reporting requirement will be in effect for all other calendar years. For example, the information return for 2022 must be filed before July 2023. Procedures for filing the information returns will be issued in advance of the filing deadline [emphasis added].

Due to the lack of prescribed forms, distribution platform operators do not know what information they will be required to submit to CRA for the 2022 calendar year. It is not clear that the information that will be requested by CRA is the kind of information that businesses will necessarily track in the ordinary course.

Will CRA consider deferring the information return requirement until a reasonable time after the forms have been published, to enable businesses to ensure they are tracking the correct information?

CRA Comments

Requirements of the information return

• Distribution platform operators facilitating the supplying of qualifying tangible personal property are required to file an annual information return before July of the following calendar year.
• Timelines: As indicated by the CBA in question 18, the CRA has deferred the first calendar year information return to help affected businesses and platform operators adjust to the new reporting requirements. In short, the first information returns will cover the 2022 calendar year and must be filed before July 2023. The CRA is not considering a further deferral.

Design of the information return

• The information return will help the Agency to ensure that platform operators and underlying suppliers are complying with the new GST/HST legislative measures.
• The data to be reported by affected platform operators will be information that we anticipate the platforms are already collecting as part of their regular operations pursuant to the requirements of the Excise Tax Act (ETA). While the final list of all the detailed information to be reported is not yet available, examples of the prescribed information include the names, addresses and GST/HST registrations numbers of the sellers using the platforms.
• In the coming months, we will publish detailed filing instructions and the schema to help platform operators prepare for the collection of the data and the transmission of the information to the CRA. To reduce the duplication and the burden on platforms, the schema will be aligned with international standards.

Q.18 Audit updates

Please provide updates on:

a) CRA audits of cannabis producers under the Excise Act, 2001, e.g., specific targeted areas or areas of non-compliance.

b) CRA audits in connection with the fuel charge under Part 1 of the Greenhouse Gas Pollution Pricing Act.

c) GST/HST audit issues.

CRA Comments

a) Verbal update provided

b) Verbal update provided

c) Verbal update provided

Q.19 S. 181 coupon rules

Do the coupon rules set out in s. 181 apply in a scenario where reimbursements paid by Company A, a manufacturer/wholesaler of widgets, to Company B, a retailer, for the acceptance of customer loyalty points as set out below, such that Company A is eligible for an ITC in respect of any GST/HST embedded in the amount of the reimbursement paid by Company A to Company B?

Company A, a GST/HST registrant, sells widgets to Company B. Company B will re-sell widgets at its retail sites under a brand owned by Company A. Company B also operates a network of independent dealers who also own and operate retail sites under that brand. Company B will also re-supply widgets to its independent dealers for re-sale to retail customers. Widgets are typically sold as multiple units in a single transaction to retail customers.

Company A has an arrangement with Company C who operates a customer loyalty program, where loyalty points may be earned on eligible purchases by customers at retail sites owned by Company B or an independent dealer. Company C will supply loyalty points to Company A. Company A will re-supply points to Company B to be issued by Company B to retail customers upon earning points – or to independent dealers to be issued to retail customers of those dealers. GST/HST will be charged and collected on any taxable supplies of points.

Customers will be able to redeem loyalty points for a discount on the purchase of widgets at retail sites owned by Company B or its dealer. In exchange for one point, a customer receives a 10% discount per widget. Where a customer redeems points for a discount, Company A will reimburse Company B 85% of the value of the discount provided to the customer. For points redeemed by a dealer, Company B will pay a reimbursement to the dealer for an amount equal to the reimbursement received by Company B from Company A.

Customers may also be able to redeem loyalty points for a free service provided by Company B or its dealer in conjunction with the purchase of widgets in lieu of a discount. Where a customer redeems points for a free service, Company A will reimburse Company B for the cost of the service incurred by Company B or the dealer, which may vary from site to site. For points redeemed by a dealer, Company B will pay a reimbursement to the dealer for an amount equal to the reimbursement received by Company B from Company A.

1. Will the redemption of loyalty points by a customer for a discount applied to a purchase of widgets cause the creation and issuance of a coupon to the customer for the widget as defined under s. 181(1)? Specifically, will the acceptance of the points by Company B or its dealer result in the issuance of a coupon to the customer, which the customer is then considered to exchange for the discount applied to the customer’s purchase of widgets?

2. If the answer to (1) is yes, does the acceptance of this coupon by Customer B or its independent dealer require Company B or dealer to collect and remit an amount on account of tax embedded in the discount provided to the customer pursuant to s. 181(2)? Put another way, is Company B or dealer required to collect and remit an amount equal to the tax fraction of the coupon value, should the redemption points trigger the creation of a coupon?

3. If the redemption of points by the customer for a discount applied to the purchase of widgets triggers the creation of a coupon, would s. 181(5) apply, allowing Company A to claim an ITC for the amount of tax embedded in the reimbursement paid to Company B? Put another way, can Company A claim an ITC for an amount equal to the tax fraction of the coupon value which it pays to Company B for the acceptance of the coupon by Company B or its dealer?

4. If the redemption of points by a customer for a discount applied to a purchase of widgets does not trigger the creation of a reimbursable coupon pursuant to s. 181(2), how should the remuneration payable by Company A to Company B be characterized for the purposes of the GST/HST? Should there be an amount of GST/HST embedded in, or added to the remuneration that is paid by Company A to Company B, and would Company A be eligible to claim an ITC in respect of the GST/HST paid if it obtained an invoice or other documentation from Company B with sufficient information to support an ITC claim?

5. Does the redemption of points by a customer for a free service trigger the creation of a coupon as defined under s. 181(1), which is then exchanged for the free service? If so, does s. 181(4) apply when the coupon is accepted by Company B or the dealer?

6. If the redemption of points for a free service does not trigger the creation of an ‘other coupon’ as defined under s. 181(4), how should the remuneration payable by Company A to Company B be characterized for the purposes of the GST/HST? Should there be an amount of GST/HST embedded in, or paid in addition to the remuneration that is paid by Company A to Company B, and would Company A be eligible to claim an ITC in respect of the GST/HST paid if it obtained an invoice or other documentation from Company B with sufficient information to support an ITC claim?

CRA Comments

The following answers are provided in the context that the supply of the property or service is a taxable supply that is not a zero-rated supply made by a person that is a registrant at the time of the supply.

1. The acceptance of the loyalty points by Company B or its independent dealers is considered to be the acceptance of a “coupon” as defined in subsection 181(1), that is redeemed by a customer for a discount that is applied to the purchase of widgets.

2. Under subsection 181(2), in accepting points (i.e. the coupon) as partial consideration for a taxable supply that is not a zero-rated supply, Customer B or its independent dealer is deemed to have collected the tax that would have been collected had the points not been accepted. Pursuant to subsection 181(2), this includes an amount equal to the tax fraction of the value of the points redeemed (the coupon value) that is embedded in the discount allowed to the customer.

3. As identified in the response to 1), when Company B, or an independent dealer of Company B, redeems loyalty points and provides product discounts on their supplies of taxable property, their acceptance of points is identified as the acceptance of coupons pursuant to subsection 181(1). Where Company A pays an amount to Company B in respect of the coupons (points) redeemed by Company B, subsection 181(5) would apply, allowing Company A to claim an input tax credit (ITC) for the amount of tax embedded in the coupon value. However, without additional information, we are unable to determine whether Company A is similarly entitled when they make payments to Company B in respect of points (coupons) redeemed by an independent dealer of Company B.

4. As indicated previously, the supplier of widgets redeems customer loyalty points and receives payments from another person in respect of such redemptions. Subsection 181(2) applies as the scenario represented is that of a reimbursable coupon.

5. The redemption of loyalty points by a customer in exchange for a free service provided by Company B or an independent dealer would be considered the acceptance of a coupon as defined under subsection 181(1). Where Company B or its independent dealers accept the loyalty points as described, subsection 181(4) would apply.

6. As subsection 181(4) applies to the situation described in 5, the reimbursement of such a coupon is deemed under subsection 181(5) not to be consideration for a supply and the payment and receipt of the amount is deemed not to be a financial service. However, there would be no ITC available in this situation as the criterion in paragraph (c) is not met. This criterion refers specifically to a coupon entitling the recipient to a reduction of the price of a taxable supply that is not a zero-rated supply and for which there is a fixed dollar amount specified in the coupon; such a coupon is described in subsection 181(2). The situation described in 5 is in reference to the last paragraph in the Facts and Assumptions. The recipient, when the points are redeemed, opts in lieu of a fixed dollar amount of the price of widgets for a free service, the value of which varies depending on the location where the service is performed. In this case, the coupon is not considered to be for a fixed dollar amount.