21 May 2014 CBA Roundtable

This provides summaries of questions posed to CRA at the May 21, 2014 CBA Commodity Tax Roundtable together with the full text of the CRA responses. (The full text of the questions is available with a membership password at http://www.cba.org/Sections/Commodity-Tax,-Customs-and-Trade/Resources.)

CRA disclaimer: These comments do not replace the law found in the Excise Tax Act (the Act) and its Regulations. The comments are provided for your reference. As they may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact any CRA GST/HST Rulings Centre for additional information. ... A ruling should be requested for certainty in respect of any particular GST/HST matter. ... All statutory references are to the Excise Tax Act (the "ETA") unless otherwise stated.

Q.1. Scope of RC59 authorization

Summary of Question

What does the CRA considers to be the scope of authorization to make changes to a program account under authorization “Level 2”?

The CRA Business Window indicated that legal and accounting firms are not permitted to change the mailing address of a company in the CRA’s records, or to request that a non-resident registrant maintain its books and records outside of Canada, even where they have Level 2 authorizations. Are such requests within the scope of a Level 2 authorization of an RC59?

CRA Response

With the introduction of the E-RC59 in April 2014 we are reviewing all current processes including the authorization levels and what the representatives are entitled to perform under each of the levels.

Q.2. Incestuous s. 177(1.1) billing election

Summary of Question

BCo purchased tangible personal property from Aco, and they entered into a billing agent election under s. 177(1.1) such that BCo issued the invoice, and collected and remitted GST/HST on behalf of ACo in respect of the transaction. BCo reported the tax on its own GST/HST return, so that it could claim an offsetting ITC on the same GST/HST return. Does this work?

CRA Response

Under subsection 177(1.11), if a registrant acts as agent of a supplier in charging and collecting the consideration and tax payable in respect of a supply made by the supplier but the registrant does not act as agent in making the supply, the registrant is deemed to have acted as agent of the supplier in making the supply for the purposes of the election in subsection 177(1.1).

Where the conditions in subsections 177(1.1) and 177(1.11) are met, and an election under subsection 177(1.1) between a principal and an agent is made in respect of a supply, the GST/HST collectible in respect of the supply is to be included in the net tax calculation of the billing agent and not of the principal.

Based on the information provided, including the fact that BCo is the recipient of the supply made by ACo, it is unclear how BCo could be considered to have charged and collected the consideration and tax payable from itself in respect of a supply made by ACo as required under subsection 177(1.11). As such, the conditions required for a billing agent election to be made under subsection 177(1.1) do not appear to be met.

Whether a registrant is acting as a billing agent in charging and collecting the consideration and tax payable in a particular circumstance is a question of fact that would require a thorough examination of all the relevant facts. Although subsection 177(1.11) is meant to apply in circumstances where an arrangement is made between a principal and a bona fide billing agent, because we have not received any ruling or interpretation requests with respect to supplies made through arrangements such as the one described, we would be pleased to review any written submissions that you would like to make regarding the application of subsections 177(1.1) and 177(1.11) to the circumstances outlined in your question.

Q.3. Deemed trust re arm's length sales

Summary of Question

Can CRA collection agents apply s. 222(3) to pursue arm's length purchasers of the assets of a tax debtor?

CRA Response

Generally, where a person collects an amount as or on account of the GST/HST, the person is deemed under subsection 222(1) to hold the amount in trust for Her Majesty in right of Canada until it is remitted to the Receiver General or withdrawn in accordance with subsection 222(2). Where the amount is not remitted as required or withdrawn in accordance with subsection 222(2), the deemed trust will be extended under subsection 222(3) to any property of the person (and any property held by a secured creditor of the person that would be property of the person if not for the security interest) up to the value of the amount deemed to be held in trust under subsection 222(1).

Where subsection 222(3) applies to the property of a person, the deemed trust does not attach to any particular property. Rather, it is similar to a floating charge over all of the property of the person. Consequently, the person is free to sell or otherwise transfer property in the ordinary course of business. Where the person sells or transfers property, the deemed trust will detach from the property and attach to the proceeds of the sale or transfer. Where property that is subject to subsection 222(3) is transferred by a person to a third party with whom the person is not dealing at arm’s length, the person and the third party will be jointly and severally liable for the amount determined in accordance with the formula set out in subsection 325(1), as provided in GST/HST Policy Statement P-012R, Liability for Net Tax on Transfer of Business Assets.

Q.4. Reporting by garnishee

Summary of Question

A person has received a Direction to Pay under s. 317 in respect of the GST/HST indebtedness of a registrant that has made a taxable supply to the person. If it is thereby required to pay the GST/HST and the consideration to the CRA, how does it account for the GST/HST on the payment in remitting its net tax for the applicable reporting period?

CRA Response

The CRA will take into consideration the comments made by the members of the CBA during the meeting and further review the matter prior to issuing a response.

Q.5. Interest where prepayment of reversed assessment

Summary of Question

A registrant under audit makes a payment on account of its potential liability before the notice of assessment. If it successfully appeals the assessment, it is entitled to interest is due on the repayment calculated back to the date of the payment. The CRA system, however, appears to be programmed to calculate the interest only back to the date of the Notice of Assessment. The registrant has to watch for this error. What is the process for calculating interest on the repayment?

CRA Response

For GST/HST refunds, the CRA calculates interest on overpayments as per the provisions outlined in sections 229 and 230.

The Minister will pay interest on a net tax refund or on a refund of an overpayment of net tax for a reporting period that ends after March 31, 2007, beginning on the day that is 30 days after the later of

• the day the return in which the refund is claimed is filed with the Minister, and
• the day following the last day of the reporting period, and ending on the day the refund is paid.

Where a person has paid an amount on account of tax, net tax, penalty, interest or other amount assessed under section 296, and the amount paid exceeds the amount determined on reassessment to have been payable or remittable by the person, the Minister will refund the amount of the excess, together with interest on the amount, for the period beginning on the day the amount was paid and ending on the day the refund is paid.

If unusual account conditions present a scenario that cannot be processed normally through our automated systems, the CRA completes the necessary account adjustments manually and issues the correct refund to the taxpayer.

Without having more detail regarding the situation in question, it is difficult to determine the reason the taxpayer needed to contact the CRA for revisions to a refund interest amount paid.

Q.6. Failure to post security

Summary of Question

What are the implications of a non- resident's failure to provide the required security under s. 240(6)?

CRA Response

Subsection 240(6) outlines the security requirements for non-residents doing business in Canada. Subsection 240(7), outlines what the CRA can do when there is a failure to comply. Essentially, the provision states that the CRA can retain any GST/HST refund or rebate payable to a non- compliant non-resident as the required security, and any amount retained as security is deemed to have been paid to the non-resident person. Generally, the CRA would not pursue enforcement action under subsection 329(2) where a non-resident corporation failed to provide the required security.

Supplementary Question

When a non-resident who has voluntarily registered fails to provide security, will it be deregistered?

CRA Response

The Minister may, after giving reasonable notice in writing, cancel the registration of a person, provided the Minister is satisfied that the registration is no longer required. When cancelling a registration, the Minister will notify the person in writing and state the effective date of the cancellation.

Q.7. Discretion re refund payments

Summary of Question

It appears that refunds are being withheld when an audit is about to take place even if the returns have been filed and duly paid. Is this authorized?

CRA Response

Subsection 164(1) of the Income Tax Act and subsection 229(1) of the Excise Tax Act require that the Minister pay refunds with “all due dispatch” after the corresponding return is filed. This term allows for some discretion on the part of the Minister. When determining a refund amount, it is both fiscally responsible for the CRA to examine the potential liability of the claimant where other amounts may be due and payable and fair to both parties such that we are not put in the position of paying a refund and at the same time taking independent collection action to recover other amounts.

Q.8. CRA date-stamping of documents received

Summary of Questions

How does CRA acknowledge the delivery and time of delivery of documents?

CRA Response

The payment and enquiry counters are now closed at all CRA locations. As a result TSD staff will no longer receive correspondence directly from the public. Drop boxes are available for taxpayer use at CRA locations and they are emptied of their contents twice daily. The contents are stamped by CRA mail operations the same day they are received. For the first clearance each morning, items are date stamped with the previous day’s date. Also, if a taxpayer wishes to have proof of filing or payment, they can file or pay electronically to be provided with a confirmation number and the option to print a copy.

As to the stamping machines that were in CRA offices, the purpose of the stamping machine was to provide taxpayers with a way of date stamping a copy of their document or a list for their records only. The machines were not meant for stamping original documents to be placed in the box. The Agency relies on the date stamped by mail operations as the date received in the CRA.

As for documents couriered to a TSO, TSD staff would not receive the documents. F&A may be able to address this aspect.

Q.9. "Completeness" VDP requirement where no old records

Summary of Questions

ACo was required to be registered for GST/HST purposes, effective January 1, 199, but did not, and now wishes to make a voluntary disclosure. However, it does not have any records beyond 6 years. What discretion do officers of the CRA Voluntary Disclosure Program have to accept a voluntary disclosure where the information available cannot be “complete”, as described in IC00-1R3?

CRA Response

Taxpayers wishing to avail themselves of the CRA’s Voluntary Disclosures Program must demonstrate to the CRA how their disclosure meets the four VDP conditions as outlined in paragraphs 31-42 of the VDP Information Circular IC00-1R3 (IC). Taxpayers making a voluntary disclosure are expected to come forward and correct all their tax affairs. In cases where information or documentation is not available, this should be presented with the disclosure submission along with an explanation as to what information is outstanding, why it is not available and the steps taken to obtain such information. In addition, if more time is needed to obtain such information, this may be requested in the VDP submission.

VDP officers reviewing disclosure submissions must ensure that the VDP conditions have been met and where applicable, may contact the taxpayer or their authorized representative to either discuss the submission or to request additional information.

There is no limit to how many years a taxpayer is required to file with the VDP. However, the CRA does evaluate the information provided, along with the taxpayer’s compliance history, and the validity of the disclosed and outstanding information, in determining whether or not to proceed with opening statute-barred years. In the case of taxpayers who are considered non-filers, there is no statute-barred limit to observe.

GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations, lays out the criteria that VDP officers use in addressing disclosures seeking relief with respect to wash transactions.

Q.10. Direct TCC appeals

Summary of Question

Experience suggests that the screeners at the Intake Centres put an objection into the normal queue rather than dealing with a request for waiver of reconsideration. Is there any process that can be used to expedite the process for appealing directly to the Tax Court under s. 301(4) rather than waiting for the objection to be assigned to an appeals officer?

CRA Response

Addressed verbally at the meeting.

Q.11. S. 280.1 penalties where timely filing

Summary of Question

S. 280.1 computes a penalty based on a late filing. If the GST return is timely-filed but contains errors, e.g., ITCs claimed with insufficient documentary support, will any penalties be imposed under s. 280.1?

CRA Response

A penalty is imposed under section 280.1 when a person fails to file a GST/HST return for a reporting period as and when required under Part IX. In the scenario presented, since the return has been filed on time, the penalty under section 280.1 will not apply.

However, if as a result of an assessment or re-assessment of net tax for that reporting period, there is an amount owing to the Receiver General, interest at the prescribed rate under subsection 280(1) will apply to this amount, beginning on the first day following the day the amount was required to be remitted or paid and ending on the day the amount is remitted or paid.

Q.12. Waiver of penalties under s. 284.1(3)

Summary of Question

A registrant failed to file Forms GST 111 for its 2010 to 2012 years due to not realizing it was a “reporting institution.” What penalties will be imposed if the applicable forms are filed late in 2014?

CRA Response

The requirement to file an information return for financial institutions that are reporting institutions applies to fiscal years beginning after 2007. Penalties under subsections 284.1(1) and (2) were introduced to promote compliance and can apply if a reporting institution fails to report an amount as and when required, or misstates such an amount in Form GST111. This would include a situation where a reporting institution files its information returns late, but accurately.

It is important to note that a penalty under subsection 284.1(1) or (2) will only apply where the reporting institution did not exercise due diligence.

Subsection 284.1(3) provides the Minister of National Revenue with the authority to waive or cancel penalties payable under this section. This authority is delegated to certain positions in the CRA and is exercised on a case by case basis. Generally, penalties would be cancelled or waived where they have resulted from an extraordinary circumstance beyond a person’s control, which prevented the person from complying with the reporting requirements in section 273.2. The fact that a particular financial institution is unaware of its obligations to file an information return for its 2010-2012 fiscal years by itself would not generally be sufficient justification for the Minister to waive or cancel penalties payable under section 284.1.

However, under the Voluntary Disclosures Program GST/HST registrants can make disclosures to disclose information they have not provided during previous dealings with the CRA, and may avoid penalty or prosecution if they make a valid disclosure. The CRA's Information Circular IC00-IR3, Voluntary Disclosures Program provides more information on making a voluntary disclosure and can be viewed on the CRA's website.

Q.13. Restriction of s. 217.1(1)(b)(iii) to trust beneficiaries

Summary of Question

A “qualifying taxpayer” in s. 217.1(1)(b)(iii) references “persons having beneficial ownership” of the person’s property in Canada. Is this provision intended to apply to beneficiaries of non-resident trusts rather than, say, partners holding a partnership interest in a limited partnership?

CRA Response

The application of the phrase “persons having beneficial ownership” as it is referred to in subparagraph 217.1(1)(b)(iii) will depend on the particular facts describing the ownership structure of the entity.

If you have a question about the application of subparagraph 217.1(1)(b)(iii) to a particular situation, please provide the relevant facts and the agreements and we will review the request.

Q.14. Credit fees charged to investment fund by manager (para. (q))

Summary of Question

Corporation A, which provides management services to a partnership whose principal business is the investing of funds, also charges the partnership a fee for making an advance, granting credit or lending money (i.e., for services that would be financial services in the absence of (q).) Is the fee taxable?

CRA Response

As indicated in the question, where Corporation A is a person who provides management or administrative services to a partnership whose principal activity is the investing of funds, any other service provided by Corporation A, other than a prescribed service, is excluded from the definition of financial services found in subsection 123(1).

A prescribed service includes “the issuance of a financial instrument by or the transfer of ownership of a financial instrument from” Corporation A to the partnership as well as “the operation or maintenance of a savings, chequing, deposit, loan, charge or other account” the partnership has with Corporation A. As a result, if the other service provided by Corporation A to the partnership is not included in the list of prescribed services described above, this service would not be a financial service.

Q.15. RT accounts opened for FI imports

Summary of Question

CRA will open a GST/HST account for a financial institution (FI), bearing an “RT” 0001 suffix, for the purpose of processing self-assessment on imported taxable supplies. If the FI is not required to, and chooses not to, register, how functionally does the CRA distinguish between RT accounts of registrants and non-registrants?

CRA Response

If an FI is not required to register for GST/HST purposes and chooses not to register voluntarily, it would not be a GST/HST registrant by virtue of an account that has been opened for the purpose of processing a self-assessment of GST/HST under Division IV.

The CRA distinguishes between RT accounts of registrants and non-registrants based on the status indicated on our system.

Q.16. Determination of principal place of business of non-SLFI trust under SLFI rules

Summary of Question

The sole unitholders of a unitized master trust are two pension entity trusts, one of which is a non-SLFI with a trustee which has a Toronto head office, and which administers the Non-SLFI out of the trustee’s Alberta office. In these circumstances, it appears that the Non-SLFI’s investor percentage would be 100% for Ontario, and 0% for the other provinces, having regard to the fact that under Income Tax Reg. 2601(1), all of the Non-SLFI’s income is allocated to Ontario, since that is the only province in which the Non-SLFI is deemed to be resident per Reg. 2607, which further deems the Non-SLFI to be resident only in the province where its “principal” place of residence is located, being its head office. Does CRA agree?

CRA Response

Based on the information provided, we understand the following:

The master trust is a unit trust and would therefore be a distributed investment plan as defined in subsection 1(1) of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations). The sole unit holders of the master trust are two pension entity trusts.

The master trust requires the investor percentage for participating provinces of its unit holders for purposes of determining its provincial attribution percentage used in the special attribution method (SAM) formula under subsection 225.2(2).

One of the pension entity trusts is not a selected listed financial institution (Non-SLFI) because it meets the criteria in section 13 of the SLFI Regulations that in the preceding tax year less than 10% of its plan members were in participating provinces and the value of its assets or actuarial liabilities attributable to plan members in participating provinces was less than $100 million. This Non-SLFI does not meet the criteria in subsection 7(2) of the SLFI Regulations to be a qualifying small investment plan. The trustee of the Non-SLFI is a “custodial” trustee whose principal business is offering trustee services and it has offices in all provinces of Canada; the trustee’s head office is in Toronto; and the trustee administers the Non-SLFI out of the trustee’s Alberta office.

To determine whether or not we agree with your analysis provided in the above question, it is necessary to determine the application of various relevant provisions in the Income Tax Act and Income Tax Regulations. We have requested assistance from the Income Tax Rulings Directorate; however, they were unable to provide us a response within such a short time frame. Therefore, we are unable to confirm your analysis. However, we can provide the following comments.

We agree that paragraph 28(e) of the SLFI Regulations applies for purposes of determining the Non-SLFI’s investor percentage and that the investor percentage of the Non-SLFI must be determined according to the income tax allocation rules under the provisions of the Income Tax Regulations that are referred to in that paragraph.

We also agree that paragraph 28(e) of the SLFI Regulations includes an amount that would be the particular person's taxable income earned in the participating province, as determined for the purposes of the Income Tax Act under the rules prescribed in Parts IV and XXVI of the Income Tax Regulations if the person were a taxpayer under that Act and every reference in that Act and those Regulations to a permanent establishment of the particular person were read as a reference to a permanent establishment of the particular person as determined in accordance with subsection 132.1(2).

Under subsection 132.1(2), permanent establishment means in the case of a trust that carries on a business (within the meaning assigned by subsection 248(1) of the Income Tax Act), a permanent establishment (as defined for the purposes of Part XXVI of the Income Tax Regulations) of the person; or if the trust does not carry on a business, a place that would be a permanent establishment (as defined for the purposes of Part IV of those Regulations) of the person if the person were a corporation and its activities were a business for purposes of that Act.

As well, we agree that according to paragraph 28(e) of the SLFI Regulations, for purposes of determining the amount that would be the Non-SLFI ’s income in a participating province, the Non-SLFI would be treated as an individual and the province of residency would be determined in accordance with paragraph 5(d) of the SLFI Regulations. According to paragraph 5(d), the province of residency of the Non-SLFI would be where the trustee's principal business in Canada is located or, if the trustee is not carrying on a business, where the trustee's principal mailing address in Canada is located.

Once we receive a response from the Income Tax Rulings Directorate, we will provide you with an updated version of our response.

Q.17. Scope of loading definition

Summary of Question

Subparagraph 217(b)(i) of the definition of “specified derivative supply” states that the “all or substantially all of the value of the consideration is attributable to any error or profit margin, or employee compensation or benefits, reasonably attributable to the supply” and subparagraph 217(b)(ii) of the definition states that the amounts are not loading. However, this is potentially contradicted by the statement in the "loading" definition that “any error or profit margin, or employee compensation or benefits” is “loading”. Does the definition of “loading” exclude the amounts referred to in subparagraph 217(b)(i)?

CRA Response

Paragraphs (b)(i) and (ii) of the definition of specified derivative supply could be interpreted as mutually exclusive amounts. Paragraph (b) is the total of the amounts specified in subparagraph (b)(i) and amounts in subparagraph (b)(ii).

Q.18. Assignment of conditional sales contract

Summary of Question

The assignment of a right to be paid money is covered by the definition of a financial service. The CRA concluded in No. 15, TIB 105 that an automobile dealership assigning a loan is making an exempt supply. Similarly, in 11 July Ruling No. 34114, the CRA concluded that an automobile dealer’s assignment of a conditional sales contract is an exempt supply because it is a sale of a financial instrument and GST is not payable on the dealer reserve as it is part of the consideration from that sale.

9 January 2012 Ruling No. 112274 involves a Vendor selling equipment on credit to a customer, with the Vendor then assigning its rights under the sales contract to a third party (Company A). The CRA concluded that the assignment of the instalment contract does not constitute a financial service, but rather is a taxable supply of the equipment.

Has the CRA changed its view since TIB -105 and the 2002 ruling?

CRA Response

The term “conditional sales contract” is not defined in the ETA, however the Canada Revenue Agency (CRA) considers a conditional sale to take place when the vendor transfers possession of goods to a customer, but ownership passes only after certain conditions are met, such as when the purchase price has been paid in full. In this type of sale, the customer agrees to make payments for the goods over a period of time. The customer takes possession of the goods, but the vendor keeps title or ownership of the goods until the customer has met the specified conditions. Where a vendor enters into a conditional sales contract with a customer where the customer is purchasing property, the supply of the property to the customer under the conditional sales contract is generally a taxable supply. The assignment of the conditional sales contract is a separate supply.

Supplies of financial services are exempt under Part VII of Schedule V unless they are specifically zero-rated under Part IX of Schedule VI. A service will be a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition. A financial service includes, for example, under paragraph (d) of the definition, the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument. A “financial instrument” is defined in subsection 123(1) and includes a “debt security” which, in turn, is defined under that provision to include a right to be paid money.

Conditional sales contracts and assignments of those contracts may provide a financing vehicle. In such circumstances, the CRA may consider a conditional sales contract to be a “debt security” and a “financial instrument” as it represents a right to be paid money. When a conditional sales contract is assigned to a third-party and the purpose of the assignment is to transfer to the third- party the right to receive a stream of payments, the assignment of the conditional sales contract may be a financial service.

Any fee or commission received by the assignor from the assignee would generally form part of the consideration received for the assignment of the conditional sales contract, and therefore would not be subject to GST/HST where the assignment of the conditional sales contract is exempt.

Q.19. Meaning of "trust & loan corporation"

Summary of Question

A person whose principal activity is purchasing debt securities is a listed financial institution. Would such a person be a trust and loan corporation under s. 26 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations? In General Motors Acceptance Corp [2000] CTC 2061, a person does not become a lender by purchasing debt security. Similarly, the FCA in Pollock Sokoloff Holdings Corp [1976] CTC 349 held that a person receiving an assignment of debt is not a lender.

CRA Comments

We can confirm that a person whose principal activity is purchasing debt securities will not automatically be a trust and loan corporation for purposes of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations). It is a question of fact whether a particular person will be considered a trust and loan corporation or a loan corporation.

Although neither a trust and loan corporation nor a loan corporation is defined in the SLFI Regulations or the Excise Tax Act, it is our position that a corporation would be considered to be a trust and loan corporation or a loan corporation for GST/HST purposes if it is considered as such a corporation under the federal Trust and Loan Companies Act or an equivalent provincial statute. A corporation may also be considered a trust and loan corporation or a loan corporation if it is treated as such under other federal statutes.

In addition, it is our position that a corporation whose principal business is the lending of money or the making of loans is a loan corporation. Some factors to be considered in determining a particular corporation’s principal business include: the relative profits realized by each segment of a person's business; the total number of supplies made and the revenue received from supplies made in each business activity; the time, attention and effort expended in each business activity; and the corporate objects of the corporation. GST/HST Memorandum 17.6, Definition of "Listed Financial Institution" provides further guidance on determining a person's principal business.

It is a question of fact whether a person whose sole business activity is the purchase of conditional sales contracts or to receive an assignment of mortgages from a mortgagee is a trust and loan corporation or a loan corporation.

However, we can provide further guidance on whether these activities would be considered to be the lending of money or the making of a loan.

As discussed in the response to question 18, the CRA considers the term conditional sale contract to refer to an agreement under which the vendor transfers possession of goods to a customer, but ownership passes only after certain conditions are met, such as when the purchase price has been paid in full. Conditional sales contracts and assignments of those contracts may provide a financing vehicle. In such circumstances, the CRA may consider a conditional sales contract to be a “debt security” and a “financial instrument” as it represents a right to be paid money.

Where a third party purchases or receives an assignment of a conditional sales contract, the third party would generally not be considered to be lending money or making a loan to the assignor of the conditional sales contract.

In addition, where a person that is a mortgagee assigns a loan to a third party that the mortgagee has made to a mortgagor, the third party would not be considered to be making a loan to the mortgagor.

Q.20. QST administration by the Canada Revenue Agency: Quebec SLFI’S

Summary of Question

Pension entities with more than 90 % of their members in Quebec and less than 10% of their members in another province became Quebec SLFIs under the new Quebec Sales Tax ("QST") regime as of January 1st 2013. This qualification applies for QST purposes even though they are not considered a SLFI for GST/HST purposes, based on the exception in section 14 of the Selected Listed Financial Institution Regulations.

Quebec SLFI pension plans have been administered by the CRA since January 2013.

Some Quebec entities have continued to file their pension plan GST and QST rebates with Revenu Quebec after January 1, 2013 using combined form FP-4607, Pension Entity Rebate Application and Election. However, these entities should have claimed the QST rebate on form RC7294 - Final Return for SLFIs, which is not due until June 30, 2014. As a result, these entities prematurely claimed and received the QST rebate. In most cases, the entity received the refund according to the rebate application. We assume that the calculation of the rebate was correct.

1. As the CRA acts as agent for Revenu Québec, and considering the fact that the Quebec legislation regarding the SLFI and SAM rules has not been published as of January 15, 2014, how will the CRA treat the QST mistakenly refunded by Revenue Québec to Quebec SLFIs?
2. If the CRA considers it a problem, how should the SLFI correct the situation?

3. Please confirm that there should not be any penalties or interest assessed to Quebec SLFIs when QST or GST has been remitted or paid by/to the wrong tax authority.

Certain investment plans within a group GST/HST registration number (for SLFIs with a consolidated filing election) are considered SLFIs for QST purposes in 2013.

4.Are these QST SLFIs eligible to remain part of the GST/HST SLFI group with the other investments plans that are SLFIs for GST/HST purposes only? Alternatively, will there be a separate GST/HST and QST group registration number for these particular investment plans?

CRA Response

(1) to (3)

The response to questions 1) to 3) will vary depending on the facts of the particular situation. However, we can provide further information on the administration of the QST which should assist you in dealing with the type of situation described.

First, we can confirm that based on our understanding of the proposed changes to An Act Respecting the Québec Sales Tax (ARQST) a pension entity of a pension plan that has more than 90% of its plan members in Quebec (for example 91%) and less than 10% of its plan members in participating provinces (for example 9%) would be a selected listed financial institution (SLFI) for QST purposes, but would not be an SLFI for GST/HST purposes, provided the conditions in section 13 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations) are met.

Based on the information provided, it is not clear whether the pension entity is a registrant and the claim period for which the rebate was claimed is not indicated. As you are aware, for GST/HST purposes, the claim period for a pension entity rebate is based on whether or not the person is a registrant, specifically:

if a person is a registrant, its claim period is its reporting period;
if a person is not a registrant, it has two claim periods in a fiscal year, one that covers the first and second fiscal quarter and the second that covers the third and fourth fiscal quarter.

Section 402.13 of the ARQST, provides the equivalent definition of claim period for QST purposes. However, it also provides that if a claim period of a pension entity began before January 1, 2013 and would ordinarily end on or after that date, the pension entity is considered to have two separate claim periods; one that ends on December 31, 2012 and another that begins on January 1, 2013 and ends on the day that the claim period would have ordinarily ended.

In the situation described, where the pension entity is an SLFI for QST purposes only and is located in Quebec for claim periods that begin before January 1, 2013, the pension entity rebate application should be sent to Revenu Québec. For claim periods that begin after December 31, 2012, the pension entity rebate application should be sent to CRA.

As the pension entity is an SLFI for QST purposes, but not for GST/HST purposes, it would be eligible to claim a rebate for the GST and both the federal and provincial parts of the HST. However, any amount relating to QST would not be included in the rebate calculation.

Based on our understanding of proposed changes to the ARQST, the pension entity would make an adjustment to reduce its tax liability for QST under Element G of the special attribution method (SAM) formula in section 433.16 of the ARQST related to the amount of QST that would otherwise be claimed through a pension entity rebate. However, at this time there is no legislation in the ARQST with respect to the positive or negative prescribed amounts in Element G of the SAM formula in section 433.16 of the ARQST.

If the pension entity in the situation described is a registrant that is an annual filer, it would report its tax liability for GST/HST and QST purposes, using Form RC7294, Goods and Services Tax/Harmonized Sales Tax (GST/HST) and Quebec Sales Tax (QST) Final Return for Selected Listed Financial Institutions for fiscal years ending on or after January 1, 2013. However, if this is not the case the pension entity would have additional reporting requirements.

Where a pension entity that is located in Quebec is an SLFI for QST purposes, but not for GST/HST purposes, and it mistakenly filed a pension entity rebate application for GST and QST with Revenu Québec for a claim period that begins after December 31, 2012, the pension entity should contact CRA as soon as the error becomes known to request guidance on how to correct the error. In order to provide this guidance, CRA will require specific details of the particular situation as each situation will be dealt with on a case by case basis. Whether or not penalties and/or interest would be assessed where the pension entity has made an error when filing its rebate application and reporting its net tax would be determined based on the fact of the particular situation.

(4)

Based on our understanding of the proposed changes to the ARQST, a particular group of two or more investment plans that are SLFIs for both GST/HST purposes and QST purposes that have a consolidated filing election under section 54 of the SLFI Regulations for GST/HST purposes with their manager would also file on a consolidated basis for QST purposes. In addition, the manager would also be required to register the particular group for QST purposes.

Furthermore, based on our understanding of the proposed changes to the ARQST, a group of two or more investment plans that are only SLFIs for QST purposes and their manager would be able to make a consolidated filing election for QST purposes only. The effect of this election would be that the manager would file a single consolidated return for QST purposes for that group of investment plans. In addition, the manager would be required to register the particular group for QST purposes. It is also our understanding that each investment plan would be required to be registered individually and file separate returns for GST/HST purposes.

It is important to remember that currently there are no legislative provisions or draft legislative provisions related to the consolidated filing election and the related group registration requirements for QST purposes which could be referenced for further details.

Q.21. Recaptured input tax credits - errors in reporting

Summary of Question

Will CRA assess penalties under s. 284.01 where a large business inadvertently reports the wrong province to which a recaptured input tax credit relates (e.g., Ontario rather than B.C.), but this error does not result in an increase to the net input tax credits that should be reported?

CRA Response

Under section 284.01, a person is liable to a penalty amount prescribed by regulation if the person:

• fails to report an amount prescribed by regulation,
• fails to provide information prescribed by regulation, as and when required in a return prescribed by regulation, or
• misstates the amount or the information in such a return.

The Electronic Filing and Provision of Information (GST/HST) Regulations (the Regulations) prescribe the amounts, information, and the applicable penalties for the purposes of section 284.01. Section 5 of the Regulations sets out the prescribed amounts of specified provincial input tax credits (hereafter referred to as RITCs). Under subsection 5(3) of the Regulations, the prescribed amounts for persons, other than selected listed financial institutions, are the RITCs for each of the provinces of Ontario, British Columbia and Prince Edward Island that are required to be reported under section 236.01 in a specified return for a reporting period. Section 7 of the Regulations establishes the penalty amount where the person has under-reported, or failed to report, any of these prescribed amounts.

Applying the above noted provisions to the example provided, where a registrant inadvertently reported an RITC amount as relating to one province, Ontario, when, in actual fact, it should have been reported as relating to another province, British Columbia, an over-reported RITC amount has been reported for Ontario, and no RITC amount has been reported for British Columbia. As the penalty calculations in section 7 of the Regulations are based on the difference between the RITCs that should have been reported for each particular province in a specified return for a reporting period and the RITCs that were actually reported, or un-reported, for that particular province in that return, the over-reported amount of RITCs for Ontario would result in a negative penalty calculation for the prescribed amounts for that province. Pursuant to section 125, unless otherwise provided, a negative amount that is calculated from an algebraic formula is deemed to be nil. As a result, no penalty would apply to the over-reported RITC amount. However, the un-reported amount of RITCs for British Columbia would result in a penalty amount equal to a minimum of 5%, to a maximum of 10%, of that un-reported amount, where the amount remains unreported for 5 complete months or more.

Q.22. Recaptured input tax credits - timing considerations

Summary of Question

In January Year 1, a large business with a monthly GST/HST reporting period acquired a supply in Ontario, the supplier charged 13% HST on the supply, and the documentation required by s. 169(4) of the ETA was obtained. However, the business did not claim the ITC or the recaptured ITC until its GST/HST return which related to January of Year 2.

S. 236.01(2) of the ETA requires a recapture of ITCs in determining a large business’s net tax “for the reporting period that includes a prescribed time”. The “prescribed time” for monthly GST/HST filers is the first day of the reporting period following the period that the tax became payable, where the input tax credit is not claimed and the recaptured input tax credit is not otherwise reported (pursuant to s. 30(1)(d) of the New Harmonized Value-added Tax System Regulations, No. 2)

Questions

Will the CRA assess a penalty under s. 284.01 or any other ETA provision for failing to report the recaptured ITC in its GST/HST return relating to January of Year 1?

Does the answer change if the supplier charged the HST in January of Year 1 but did not supply the required documentation until January of Year 2?

CRA Response

Generally, under section 236.01 and the New Harmonized Value-added Tax System Regulations, No. 2 (the NHVATS No. 2 Regulations), a large business is required to account for recaptured input tax credits (RITCs) for the provincial part of the HST paid or payable on specified property or services in the reporting period in which the HST became payable, or was paid without having become payable. The NHVATS No. 2 Regulations were amended to allow large businesses that are monthly and quarterly GST/HST filers, in certain circumstances, an additional reporting period to account for their RITCs. Specifically, for large businesses that have monthly reporting periods, where the input tax credit for the HST paid or payable has not been claimed, or the corresponding RITC has not otherwise been reported in the GST/HST return for the reporting period that includes the earlier of the day that the tax became payable, or was paid, the large business is able to report the RITC in the return for the following reporting period.

Under section 284.01, a person is liable for a penalty if the person fails to report, or under reports, RITCs as and when required. The penalty, as calculated under section 7 of the Electronic Filing and Provision of Information (GST/HST) Regulations, is equal to a minimum of 5% of the unreported or under reported amount to a maximum of 10% of this amount, if the amount remains unreported or under reported for a period of five complete months, or more.

In the scenario provided, under paragraph 30(1)(d) of the NHVATS No. 2 Regulations, the large business would have been required to report the RITC no later than the reporting period following the reporting period that the tax became payable, or the reporting period following the reporting period in which the tax was paid, whichever is earlier. As no information has been provided as to when the tax was paid, the assumption is made that the earlier of these two reporting periods would be the February Year 1 reporting period.

Since the RITC was not reported until the filing of the GST/HST return for the reporting period of January Year 2, the large business would be liable to a penalty under section 284.01 and as determined under section 7 of the Electronic Filing and Provision of Information (GST/HST) Regulations, equal to 10% of the unreported RITC amount.

The assessment of penalty would not be altered as a result of the supplier’s failure to provide the required documentation to support the claiming of the corresponding input tax credit itself, unless such failure resulted in a change to the date on which tax became payable.

Q.23. Input tax credits - property for personal use and enoyment of employee of shareholder

Summary of Question

A registrant acquires personal property strictly for the personal use, free of charge, of an employee or a shareholder. Under s. 170, the registrant may not claim an input tax credit for the GST/HST paid on the purchase, and under s. 173(1)(c) the use of the registrant in so supplying the property to the employee/shareholder is deemed to be use of the property goods in the course of a commercial activity – so that a resale of the goods is taxable under s. 200 or 141.1. On the resale, is the registrant entitled to claim an input tax credit for the GST/HST paid on the original purchase, and if so, on what basis?

CRA Response

Generally, GST/HST registrants pay the GST/HST on their taxable purchases or acquisitions of property and services, and claim input tax credits (ITCs) in respect of the tax paid or payable on those business inputs that relate to the making of taxable supplies.

However, in certain instances, even though an input may relate to a commercial activity, it may not give rise to a full or partial ITC. For example, if a registrant acquires personal property exclusively (i.e., 90% or more) for the personal consumption, use, or enjoyment of an individual who is an officer or employee of the registrant and no amount is charged for the personal use of that property, paragraph 170(1)(b) denies the registrant an ITC for the tax payable on the acquisition of that property, unless the benefit received by the officer or the employee is not a taxable benefit under section 6 of the Income Tax Act (ITA).

Similarly, where in or before a reporting period of a registrant that is a corporation, the registrant acquires personal property by way of lease, licence or similar arrangement primarily (i.e., more than 50%) for the personal consumption, use, or enjoyment in that period of an individual who is a shareholder of the registrant, or an individual related to the shareholder, paragraph 170(1)(c) denies the registrant an ITC for the tax payable on the acquisition of that property, unless the registrant makes a taxable supply of the property at its fair market value to the individual for consideration that becomes due in that period.

Where a registrant makes a supply (other than an exempt or zero-rated supply) of property or a service to an individual who is an employee or a shareholder, or a person related to the individual, which gives rise to a taxable benefit under certain sections of the ITA, section 173 applies. Under paragraph 173(1)(c), where property is supplied otherwise than by way of sale, the use made by the registrant in providing the property to the individual or the person related to the individual is deemed, for GST/HST purposes, to be use in commercial activities of the registrant. To the extent that the registrant acquired or imported the property or brought it into a participating province for purposes of making a supply of a taxable benefit, the registrant is deemed to have acquired or imported the property or brought it into a participating province for use in its commercial activities. By deeming this property to be for use in the registrant’s commercial activities, paragraph 173(1)(c) generally allows the registrant to claim ITCs for the GST/HST that became paid or payable on the property subject to the general requirements for claiming ITCs.

Therefore, in the scenario outlined in the question, even though paragraph 173(1)(c) deems the property to be for use in the registrant’s commercial activities, the registrant would not be entitled to claim an ITC for the GST/HST payable or paid on the original purchase if subsection 170(1) has denied the registrant an ITC in respect of that property.

When the personal property is subsequently sold, and the use of the property in commercial activities (including the deemed use in paragraph 173(1)(c)) results in the sale being a taxable supply under the provisions of sections 141.1 or 200, there is no provision in the ETA that allows an ITC as a result of that taxable supply, unless the personal property is a passenger vehicle.

If a registrant makes a taxable supply of a passenger vehicle that was being used as capital property in commercial activities, subsection 203(1) allows an ITC to be claimed, despite section 170, equal to an amount as determined by the formula in that provision.

Subsection 203(1) does not apply to supplies by municipalities or to vehicles that are designated municipal property of a person designated to be a municipality for purposes of section 259.

Q.24. GST in imports

Summary of Question

Supplier enters into an agreement to supply the "Goods" to the Customer on terms "DDU [Canada] INCOTERMS 2010" (Supply A). Supplier orders the goods from Foreign Manufacturer on terms (i) "FOB China INCOTERMS 2010" or (ii) "DDU [Canada] INCOTERMS 2010" (Supply B). Customer acts as Importer of Record of the Goods. Given that there is no "constructive importer" in the case of either Supply A or Supply B, which entity is entitled to claim an input tax credit in respect of any GST payable on the importation?

CRA Response

Based on the information provided, we agree that in the scenario provided there are two specified supplies made under subsection 178.8(1). We also agree that based on the information provided, Supply A, which is made on terms DDU Canada, would be deemed to be made in Canada under subsection 142(1) based on the fact that legal delivery of the goods to Customer occurs in Canada. We also agree that Supply B, which is made by a non-registered non-resident manufacturer who is not carrying on business in Canada, would generally be deemed to be made outside Canada under either subsection 142(2), where the terms of delivery for the goods are based on an Incoterm such as FOB China, or subsection 143(1), where the terms of delivery are based on an Incoterm such as DDU Canada.

Supplier, who is the recipient of a specified supply of the goods made outside Canada and does not make a supply of the goods outside Canada before their release, would be considered to be the constructive importer of the goods under subsection 178.8(2). However, Supplier, who was not the importer of record, would have to obtain the importation documentation from Customer to support the claiming of an ITC. Provided Supplier does not claim the ITC, Customer who is the importer of record and has the import documentation, will instead be considered to have imported the goods for consumption, use or supply in the course of its commercial activities and be entitled to an ITC for the tax on the importation of the goods. This will avoid the need for Customer to pass on the import documentation to Supplier to support the claiming of an ITC for the tax on the imported goods. Although not identical, the scenario provided is essentially the same as Example #12 in GST/HST Policy Statement P-125R Input Tax Credit Entitlement for Tax on Imported Goods in terms of the relevant facts.

Q.25. Residential real property

Summary of Question

If a non-resident vendor has erroneously represented in writing that the supply is an exempt supply described in any of sections 2 to 5.3, 8 or 9 of Part I of Schedule V, and the recipient does not know that the supply is not an exempt supply, does section 194 apply, and is the recipient liable for failing to have self-assessed the GST/HST payable on the supply?

CRA Response

We note that the CRA provided comments on the application of section 194 and the requirement to report tax in the 2009 meeting between the Canadian Bar Association and the CRA in question 31.

In the circumstances described in the present question, the purchaser would benefit from section 194 and would not be required to self-assess tax under subsection 228(4) in respect of the sale of the property, unless the purchaser knew or ought to have known that the sale was not exempt.

Where a non-resident supplier makes a taxable supply by way of sale of any real property (including a residential complex), the non-resident is not required to collect the GST/HST payable by the recipient of the supply. For purposes of paragraph 221(2)(a), a non-resident includes a person who is resident in Canada by reason only of subsection 132(2).

Where the non-resident supplier erroneously states or certifies in writing that the supply is an exempt supply described in any of sections 2 to 5.3, 8 or 9 of Part I of Schedule V, unless the recipient knows or ought to have known that the supply is not an exempt supply, section 194 applies and the recipient is not liable for failing to have self-assessed the GST/HST payable on the supply. Nonetheless, the non-resident supplier is considered to have collected an amount of tax, as set out in section 194, and remains liable for remittance of that tax.

Q.26. Life lease interests

Summary of Question

Section 3 of the Ontario Regulation 88/04 pursuant to the Land Transfer Tax Act “Exemptions – For Certain Life Lease Interests” states:

The Act does not apply to the reversion after July 18, 1989 of a life lease interest in a unit in a life lease development to the owner of the life lease development where sufficient information is provided to enable the Minister or any collector to determine that the following conditions are met:

The owner of the life lease development is a non-profit organization or a registered charity;
The reversion occurs pursuant to the terms of the agreement under which the life lease interest in the unit was originally acquired
The reversion occurs for the purpose of enabling the owner of the life lease development to sell the life lease interest to another purchaser.

Question

The CRA has issued rulings, for GST/HST purposes, with respect to life lease interests that are set up as exempt leases of residential units rather than a sale of a life lease interest. Can these transactions be structured as a sale of a life lease interest and reversion of the life lease interest while still allowing the transaction to be exempt for GST/HST purposes?

CRA Response

It is a question of fact whether any particular agreement provides for a supply of a residential unit or residential complex by way of sale or by way of lease, licence or similar arrangement (lease). As you mentioned, the CRA has ruled on several occasions that “life leases” are supplies by way of lease and our position has not changed. Of course each agreement must be examined on its own merits to determine whether the subject property is supplied by way of sale or lease.

Section 6 of Part I of Schedule V provides exemption for the lease of a residential complex, or residential unit in a residential complex, in certain circumstances. Often, section 6 would exempt the supply of a residential complex or a residential unit made under a life lease. However, that section does not exempt the sale of a leasehold interest in a residential complex or residential unit in a residential complex. The sale of such an interest may, but would not necessarily, be exempt elsewhere in Part I (or in Part V.1 or Part VI if the supplier is a charity or certain public service body, respectively).

Q.27. Place of supply - telecommunications services

Summary of Question

Is a supply of telecommunication services that is not deemed to be made in Canada, deemed to be made outside Canada? For example, a telephone call between persons in Canada and the U.S. is deemed to be supplied in Canada if the "two out of three" rule in s. 142.1 is met (i.e. two of the following three places are in Canada: where the call is emitted or received, or billed to). If under this rule the supply is not deemed to be made in Canada, is it nonetheless deemed to be made in Canada under s. 142(1)(g) if the service is partly performed in Canada?

CRA Response

A supply of a telecommunication service as defined in subsection 123(1) that is not deemed to be made in Canada under section 142.1 is considered to be made outside Canada. Therefore, in the example given, the supply of the telecommunication service that is not deemed to be made in Canada under the relevant two-out-of-three place of supply rule in paragraph 142.1(2)(b) is considered to be made outside Canada. The supply will not be considered to be made in Canada under paragraph 142(1)(g) if the service is partly performed in Canada.

Q.28. Determination of place of supply for telecommunication services

Summary of Question

1) Does s.142.1(1)(a) apply to determine whether the billing location for a telecommunication service is supplied to a recipient is in Canada?

2) If the three conditions under s. 142(1)(a) are satisfied, is the billing address determined by the location of the telecommunication facilities used?

3) If all conditions under s. 142(1)(a) are met, does that preclude the CRA from determining billing location under s. 142.1(1)(b)?

CRA Response

1) We agree that for purposes of section 142.1, paragraph 142.1(1)(a) will apply to determine whether the billing location for a telecommunication service supplied to a recipient is in Canada if:

the recipient has an account with a person who carries on the business of supplying telecommunication services,
the account relates to a telecommunications facility that is used or is available for use by the recipient to obtain telecommunication services, and
the consideration payable for the service is charged or applied to that account.

2) We agree that if all three of the conditions in paragraph 142.1(1)(a) as outlined in our first comment are satisfied, then it is the ordinary location of the telecommunications facility that is used or available for use by the recipient to obtain the telecommunication service that determines whether the billing location is in Canada or not. If that facility is ordinarily located outside of Canada, then the billing location is considered to be outside Canada.

3) We agree that it is only if one or more of the three conditions in paragraph 142.1(1)(a) as outlined in our first comment are not satisfied, then paragraph 142.1(1)(b) may apply to determine the billing location. We further agree that where all three of the conditions are satisfied, the analysis of subsection 142.1(1) ends and paragraph 142.1(1)(b) cannot apply to otherwise determine the billing location of the telecommunication service.

Q.29. Application of Aviva Canada decision

Summary of Question

In question 21 of 2013 CBA Q&As, the CRA expressed its views on the application of the 2006 Tax Court decision in Aviva Canada Inc. v. R.. The fact situation concerned an asset sale between arm’s length parties that involved an intermediate transfer from the original owner to a related party, and from that entity to the ultimate purchaser. The intermediate purchaser acquired the assets without using them and resold for no mark-up.

In the response, the CRA states: “Generally where a corporation makes a sale of property that is not exempt from GST/HST, it is engaged in a commercial activity for GST/HST purposes, and the sale of the property is taxable, regardless of whether there is a reasonable expectation of profit from the sale, or whether the transaction is part of a business the corporation regularly carries on.”

Question

Does the CRA’s opinion change where the intermediate purchaser is a partnership of corporations? Please assume that the partnership is a registrant.

[CRA responded to Q.21 of the 2013 CBA Roundtable with reference to Aviva that the sale of non-exempted property is taxable even if there is no prospect of gain. Does the CRA opinion change where the intermediate purchaser is a partnership of corporations?]

CRA Response

As stated in CRA’s response to question 21 of the 2013 CBA Q&As, the ability of an intermediary in the above scenario to claim input tax credits on its purchase of assets, and the requirement for it to charge GST/HST on its subsequent sale of those assets, depends on the specific facts of the transaction.

In response to question 21, we assumed that the intermediary was a corporation; however, the same rationale may also apply to a partnership of corporations that is a GST/HST registrant.

As stated in CRA’s response to question 21 of the 2013 CBA Q&As, it is CRA’s position that the decision in Aviva applies to a specific fact situation and we will apply the Court’s decision in fact situations that are the same as those in the Aviva case.

Q.30. Payment for damages where section 182 of the ETA does not apply

Summary of Question

A Supplier agrees to deliver 100 widgets to the Recipient at $10 per widget, but is only able to obtain 20 widgets. An action of the Recipient is settled by Recipient agreeing to release Supplier from all damages in exchange for a payment of $100 and for the provision by the Supplier of 20 widgets at no cost. Does CRA agree that the payment (20 widgets and $100) from the Supplier should be considered a non-taxable payment for damages, and that s.182 would therefore not apply?

CRA Response

We agree that section 182 would not apply to the damage payment described in your example. However, as provided in GST/HST Policy Statement P-218R – Tax Status of Damage Payments, Whether or Not Within Section 182 of the Excise Tax Act, the damage payment could be subject to the general taxing provisions if it can be linked to the provision of a taxable supply of property or a service made by the payee in return for the payment. Note that a release of liability is not regarded as a supply for GST/HST purposes.

The damage payment described in your example appears to be entirely compensatory in nature and not linked to a supply of property or services. Consequently, it would not be subject to the GST/HST, regardless that part of it is made in cash (i.e., $100), and part of it is made in kind (i.e., widgets valued at $200).

Q.31. Application of GST/HST to derivative transactions involving emission allowances

Summary of Question

Is an emission allowance (e.g., a carbon offset) a commodity for GST/HST purposes? How is the trading of futures or options contracts on emissions allowances that are settled only in cash (or that may also be settled by delivery of the underlying emission allowance) treated?

CRA Response

The ETA does not define the term “commodity”. Its common dictionary meaning generally recognizes the term within the financial market as a bulk good, product, merchandise, article, physical asset, or other type or kind of tangible property. Accordingly, an emission allowance is not a commodity. An emission allowance is a right and, as such, is considered intangible personal property. Thus, an option or contract in respect of an emissions allowance would not be considered an option o a contract for the future supply of a commodity, as described in paragraph (f) of the definition of financial instrument found in subsection 123(1).

The definition financial instrument includes, in paragraph (i), “an option or a contract for the future supply of money or anything described in any of paragraphs (a) to (h)”. Since an emission allowance is not included in paragraphs (a) to (h) of the definition, it would only be considered to be a financial instrument where the option or contract is for the future supply of money. Where the option or contract can only be settled in money it may be considered a financial instrument. The trading of a financial instrument on the over the counter market would be considered a financial service. It is a question of fact whether a particular option or contract in respect of an emission allowance would meet the criteria of paragraph (i) and would require the relevant contract to make a determination.

Q.32. Interaction between section 144 with the PARS program

Summary of Question

Under the "PARS" program, the goods are "reviewed" in transit but the goods cannot be released until their arrival as the CBSA has to decide whether to inspect the goods or release them without inspection. For example, for transport by truck, where delivery is stated to occur when the goods enter Canada at the "frontier" but the goods are not yet released, is the supply outside Canada? Alternatively, where goods arrive by vessel subject to the Incoterm "DEQ" and the goods have not yet been released when the goods are at the dock, is the supply made outside Canada?

CRA Response

The determination of whether a supply of goods by way of sale is deemed to be made in Canada under the ETA in a particular situation, including where a particular Incoterm or the CBSA Pre-arrival Review System (PARS) is used, requires consideration of all relevant facts.

Several conditions must be satisfied in order for section 144 to apply to deem a supply of the goods to be made outside Canada. The goods must not only be delivered or made available to the recipient in Canada before their release as suggested with respect to the scenarios described above. The goods must also have been imported in compliance with the Customs Act or any other Act of Parliament that prohibits, controls, or regulates the importation of goods before the supply is made. Under section 133, the supply of the goods is deemed to be made when the agreement for the supply of the goods is entered into. Therefore, section 144 will not apply if the goods have not been imported before the agreement for the supply is entered into.

With respect to the reference to the Statement of Audit of Adjustments, since section 144 is an exception to the general place of supply rule under subsection 142(1), there would generally be no need to refer to section 144 unless that exception applies. If the supply of the goods is deemed to be made in Canada under subsection 142(1) and no exceptions to that rule apply, then in the absence of a specific request for additional information, it would be sufficient to simply indicate that the supply is deemed to be made in Canada under that provision. Where additional information is requested, the CRA will respond appropriately to that request.

With respect to the reference in the question to the documentation provided, we would like to confirm that documentation that merely confirms the delivery and release dates would be insufficient to establish that the previously indicated conditions of section 144 have been fully met.

Q.33. Application of section 144

Summary of Question

What is CRA’s policy about application of s.144 respecting the situation where goods are delivered or made available, in accordance with Incoterms, after the goods are imported but before Customs release?

CRA Response

Section 144 will not deem the supply of goods to be made outside Canada if the agreement for the supply has been entered into before the goods are imported. This includes where the goods are delivered or made available in Canada to the recipient in accordance with an Incoterm after the goods are imported and before their release.

The statement in the question is only referring to the condition in section 144 that the goods be delivered or made available in Canada to the recipient before they are released. As indicated in the previous CRA response referred to in the question, the goods must also have been imported in compliance with the Customs Act or any other Act of Parliament that prohibits, controls, or regulates the importation of goods. Under section 133, the supply of the goods is deemed to be made when the agreement for the supply of the goods is entered into. Therefore, section 144 will not apply if the agreement for the supply of the goods is entered into before the goods have been imported. Subject to any other exceptions, such as subsection 143(1), the supply of the goods that are delivered or made available to the recipient in Canada will be deemed to be made in Canada under subsection 142(1).

We note that the relevance of the timing of when a supply is made under section 133 of the ETA to the application of section 144 is reflected in the wording of the definition of a "specified supply" of goods under subsection 178.8(1). Specifically, this definition distinguishes between a supply of goods that are imported after the supply is made, and a supply of goods that have been imported in circumstances in which section 144 deems the supply to have been made outside Canada.

Q.34. Non-resident conventions

Summary of Question

How does a taxpayer determine the number of non- resident attendees to attend a foreign convention if it has not yet occurred?

CRA Response

The term “foreign convention” is defined in subsection 123(1) to mean a convention:

at least 75% of the admissions to which are, at the time the sponsor of the convention determines the amount to be charged as consideration therefor, reasonably expected to be supplied to non-resident persons; and
the sponsor of which is an organization whose head office is situated outside Canada or, where the organization has no head office, the member, or majority of members, of which having management and control of the organization is or are non-resident.

Section 189.2 deems certain supplies by a sponsor of a foreign convention, including admissions to the foreign convention, to have been made otherwise than in the course of a commercial activity of the sponsor. This means that sponsors of foreign conventions are generally not required to register for GST/HST purposes by virtue of holding a foreign convention in Canada, are generally not required to charge tax on their supplies of admissions to the convention, and are generally not entitled to claim input tax credits for related expenses.

Generally, as explained in GST/HST Memorandum 27.2, Conventions, any reasonable method can be used to make this determination. For example, the sponsor can use the percentage of admissions supplied to non-residents who:

attended previous conventions;
are usually invited to attend the convention; or
are listed as members of the organization.

In addition, any other reasonable method may be used depending on the circumstances. Whether a particular method used by a sponsor to make the determination in a specific circumstance is reasonable would require a thorough examination of all the relevant facts.

As stated in paragraph 34 of Memorandum 27.2, if, at the time of determining the amount to be charged as consideration for the admission, the sponsor determines that at least 75% of the admissions are reasonably expected to be supplied to non-residents, and discovers at a later time that less than 75% of the admissions were supplied to non-residents, the convention would still be a foreign convention for GST/HST purposes and therefore all the relevant provisions of the ETA that relate to foreign conventions, including the relieving provisions, will apply. Provided the percentages were determined using a reasonable method, subject to a review by CRA audit, there is no obligation in the ETA that would require the sponsor to determine the actual percentages post-convention.

To address the scenario provided, there may be circumstances where it may not be reasonable to make the assumption that because the appropriate percentages were met for the previous year’s event that they will be met for an upcoming event. The following is an example of where it would likely not be reasonable to make this assumption:

A society, based in Portland, Oregon, USA, held a convention last year in Sydney, Australia, where only three attendees out of 100 were from Canada. The prior year’s convention, which was held in Seattle, Washington, USA, had forty-five attendees out of 100 who were from Canada. In planning for this year’s convention in Calgary, Alberta, it would not be reasonable to just use the attendance from the Australian conference to determine whether the convention in Calgary will be a foreign convention or not, considering the attendance data for the Seattle convention and the geographical distances involved. A reasonable method to make the determination in this instance would likely consider more historical attendance data and an analysis of who attends or who does not attend their conventions based on the geographical proximity of the convention venue with the location of society members.

For a first year convention where the sponsor does not have the benefit of attendance data from prior conventions, the determination of the percentage of admissions that are reasonably expected to be supplied to non-residents should be based on the other information it has at the time that it determines the amount to be charged for the admissions. For example, a reasonable determination could be based on the country of residence of the invited delegates, the country of residence of association members, surveys of members’ intentions with respect to attending the convention along with any other information that it obtains in planning the convention.

Sponsors must maintain documents supporting their calculation of the percentage of admissions that are reasonably expected to be supplied to non-residents in order to prove that a convention was a foreign convention, and make these documents available to the CRA on request. Under subsection 286(1), these documents must be kept in Canada unless the sponsor gets permission from the CRA to maintain them outside Canada.

Q.35. Supply characterization and place of supply - intangible versus service

Summary of Question

Conference example

ABC Co hosts a two day conference on the latest developments within a particular field and engages various experts to present papers and lead workshops at the conference. The conference is open to any individual that would like to attend. The fee is paid by the individual or the individual's employer.

Training session example

ABC Co supplies a two day training session for employees of XYZ Co on the latest developments within a particular field. ABC Co is engaged by and paid by XYZ Co directly to develop and deliver the content for the training session.

Question:

How does s. 17 (personal services) and s. 28 (services in relation to a location specific event) apply?

CRA Response

With respect to the examples given, the factors that are considered by the CRA in determining whether a particular supply is a supply of intangible personal property or a service are outlined in GST/HST Technical Information Bulletin B-103 Harmonized Sales Tax - Place of supply rules for determining whether a supply is made in a province. A key factor in making this distinction is whether the supply includes the provision of any rights and if so, whether those rights are the predominant element of the supply. Generally, as further indicated in B-103, a supply may be characterized as a supply of a service in a particular situation where it is determined based on a complete set of facts that the supply does not include the provision of rights, or the rights are merely incidental to the supply. The provision of the right to attend a professional development conference, workshop, seminar, or training session, would therefore generally be considered to be a supply of intangible personal property for GST/HST purposes. The place of supply rules in sections 6 and 7 of the New Harmonized Value-Added Tax System Regulations (Regulations) would generally be relevant to the determination of whether such a supply of intangible personal property would be made in a participating province or not.

Generally, to determine that a particular supply is a service, it would have to be established based on a complete set of facts that the predominant element of the supply is a service. The determination of the relevant place of supply rule in the Regulations that would then apply to the supply of the service in such a case would require consideration of all relevant facts. The place of supply rule in section 28 of the Regulations for services that relate to a location-specific event is found in Division 5 of the Regulations, which sets out place of supply rules that are intended to address special cases. These place of supply rules apply, where the relevant conditions are met, despite the more general place of supply rules for services in Division 3 of the Regulations, such as the rule for personal services in section 17 of the Regulations.

As indicated in B-103, to be considered a service in relation to a location-specific event for purposes of section 28 of the Regulations, there must be a direct connection between the service and the event. Specifically, the event must be the object of the service. Generally, this would include services supplied to an organizer of an event such as event planning or the performance of the event. Generally, in order for the place of supply rule in section 28 of the Regulations to apply to a supply of a service, it would have to be established based on a complete set of facts that the conditions of the provision have been met. This would include establishing that the object of the service is a particular type of event that is referred to in the provision, and that the service is performed primarily at the location of the event.

The place of supply rule in section 17 of the Regulations could apply to the supply of a service if it is determined based on a complete set of facts that all of the relevant conditions have been met, including the requirement that the service be rendered to an individual or group of individuals and that it be performed all or substantially all in the presence of the individual or group of individuals to whom it is rendered.

Generally, a supply of a service to which section 17 and 28 of the Regulations do not apply would be subject to the general place of supply rule for services in section 13 of the Regulations, which is generally based on the home or business address in Canada of the recipient that the supplier obtains in the ordinary course of its business.

Q.36. Exempt health care services - ambulance service

Summary of Question

The court determined [in Angels Of Flight Canada Inc. v. The Queen, 2009 TCC 279&d1=&d2=&su=0">2009 TCC 279], that an ambulance service is not required to be licensed or certified by a province in order to be exempt pursuant to section 4 of Part II of Schedule V. Is CRA still planning (as indicated at the 2009 Commodity Tax Symposium) to issue a GST/HST Notice to update its policy concerning the meaning of an “ambulance service” for purposes of section 4 of Part II of Schedule V to the ETA?

CRA Response

On May 22, 2009, the Tax Court rendered a decision in Angels Of Flight Canada Inc. v. H.M.Q., 2007-2766(GST). It found that the Appellant was in the business of operating an ambulance service for purposes of the exemption from the GST/HST in section 4 of Part II of Schedule V.

The Appellant carried on the business of supplying non-emergency land transportation services of individuals in Ontario. These services involved transportation to and from medical appointments, retirement homes, long-term care facilities, clinics and personal residences in specialized vehicles that are equipped with standard medical equipment, medical supplies and generally with a nurse escort.

What was significant was that the Appellant did not hold a license or certificate to operate an ambulance service in Ontario. The CRA had historically interpreted an “ambulance service” to mean a service offered by a person who is licensed and regulated by appropriate provincial health authorities to offer such a service.

The Tax Court found that it was not necessary for the Appellant’s operations to be licensed or regulated as section 4 of Part II of Schedule V did not stipulate this as a requirement for the exemption to apply (which is unlike other exempting health care provisions where provincial licensing or regulation is a requirement, e.g., section 5 of Part II of Schedule V which exempts certain health care services rendered to an individual by a medical practitioner, which is defined in section 1 of that Part to mean a person who is entitled under the laws of a province to practice the profession of medicine or dentistry).

The Tax Court also found the Appellant’s operations were similar to those of regulated or licensed ambulance operators transporting patients in similar non-emergency situations because of its use of similar vehicles, substantially similar equipment and supplies, and trained transfer staff.

This decision was not appealed and the CRA abides by the court’s determination that an ambulance service is not required to be licensed or certified by a province in order to be exempt pursuant to section 4 of Part II of Schedule V. However, all of the other criteria set out in the decision must be present for a particular service to qualify as an ambulance service.

Since that decision in 2009, the Health Care Sectors Unit has had to manage a number of competing priorities, and as a result has not moved forward with the referenced GST/HST Notice. Considering that the Tax Court’s decision did not result in a fundamental change in the CRA’s position with respect to the meaning of ambulance service, it has been decided not to issue a specific GST/HST Notice on the subject but rather, to include information on the tax status of ambulance services in a future publication dealing generally with health care.

Q.37. GST/HST treatment of orthotics

Summary of Question

(This question was removed from the agenda.)

Q. 38. Update on audit issues and discussion

Summary of Question

Are there any new or developing issues in the audit area?

CRA Response

An update was provided at the meeting.

Q.39. Update on Court Cases/Objection and discussion

Summary of Question

In Casa Blanca Homes Ltd. v. R., 2013 TCC 338, [2013] G.S.T.C. 128, the Tax Court ruled that no GST/HST is payable on a deposit "purchased" by a purchaser's assignee who takes over an existing contract for the purchase of a new home. Does the CRA accept the result?

Are there any other new or developing issues in the Court Cases/Objection Area?

CRA Response

While the CRA accepts the result in that specific case which was not appealed, the CRA remains of the view that a purchaser's assignee who takes over an existing contract for the purchase of a new home provide does not generally acquire two separate supplies under the assignment agreements. The amount paid for the assignment includes any amount that is intended to cover outlays and expenses, such as a deposit paid by the original purchaser, whether or not these amounts are separately identified. The CRA’s view is that the rights acquired by the assignee, upon payment of the entire amount to the assignor, consist of a bundle of contractual rights. The CRA remains of the view that the entire amount paid for an assignment of rights under a purchase and sale agreement of real property forms part of the consideration for a single supply of the rights. Accordingly, if the person’s sale of their interest to an assignee purchaser is taxable, the total amount payable for the sale of the interest is subject to GST/HST, including any amount the person paid as a deposit to the builder.

This position is set out in the CRA publication GI-120, Assignment of a Purchase and Sale Agreement for a New House or Condominium Unit.

The CRA is also of the view that the deposit is not a "debt security" and therefore also not a "financial instrument". The assignment of a contract for the purchase of a new home does not, in the CRA’s view, result in the transfer of ownership of a financial instrument. There is no acquisition of a separate financial instrument. Rather, the assignee acquires the assignor’s interest in the real property and the rights under the contract.

For these reasons, the CRA’s will continue to examine similar cases on the basis of the facts of each case and in light of the these principles.

An update and a handout dealing with current cases were provided at the meeting.