CRA/TEI
LIAISON MEETING
DECEMBER 7, 2010
AGENDA
13:00 – 13:15 Opening/Introduction
• Brian McCauley / Pierre Bertrand
• Paul O’Connor / Kim Berjian
13:15 – 14:45 Technical Questions and Discussion
1. Recaptured Input Tax Credits (RITCs) (Discussion Leader: Carol Nixon)
• Question # 1a and 1d ( Owen Newell) and 1c ( Patrick McKinnon)
2. Audit Issues (Discussion Leader: Carol Nixon)
• Question # 2 (Catherine Séguin-Ouimet)
3. NETFILE (Discussion Leader: Kim Berjian)
• Question # 3a Verbal ( Heather Dewar) and 3b Verbal ( Danielle Zion )
4. Joint Ventures (Discussion Leader: Martina Krummen)
• Question # 4c ( Gunar Ozols )
5. Financial Services (Discussion Leader: Carol Felepchuk)
• Question # 5 Presentation (Dawn Weisberg / Ken Syer / Ivan Bastasic)
14:45 – 15:00 Refreshment Break
15:00 – 16:30 Technical Questions and Discussion (Continued)
6. Point of Sale Rebates (Discussion Leaders: Richard Taylor and Anne Giroux)
• Question # 6a (i) (Catherine Séguin-Ouimet), 6a (ii) (Owen Newell) and
6a (iii) (Dave Caron / Phil Nault)
7. Carrying on Business (Discussion Leader: Sunil Purbhoo)
• Question # 7 (Jeff Frobel )
8. Place of Supply Rules (Discussion Leader: Martina Krummen)
• Question # 8a (Jeff Frobel ) and 8b (Patrick McKinnon)
9. Non-GST Issues: Insurance Premium Tax (Discussion Leader: Edgard Goharghi)
• Question # 9 (Michael Hamilton)
10. Feedback on HST Technical Information (Costa Dimitrakopoulos)
• Feedback/Suggestions where current HST technical information could be clarified and what
other HST technical information products would be helpful
11. Feedback on Business Registration On-Line (Joanne Davis)
• Feedback/Suggestions for improving the user experience when registering on Business
Registration On-Line
16:30 Closing Remarks
CRA ATTENDEES
LEGISLATIVE POLICY & REGULATORY AFFAIRS BRANCH (LPRAB)
Brian McCauley Assistant Commissioner, LPRAB
Pierre Bertrand Director General, Excise & GST/HST Rulings
Ivan Bastasic Director, Financial Institutions & Real Property
Phil Nault Director, Public Service Bodies and Governments
Costa Dimitrakopoulos Director, General Operations and Border Issues
Owen Newell Manager, General Operations
Patrick McKinnon Manager, Border Issues
Dave Caron Manager, Aboriginals Affairs
Dawn Weisberg Manager, Financial Institutions
Ken Syer Manager, Specialty Tax
Gunar Ozols A/Manager, Goods
Jeff Frobel Industry Sector Specialist, Border Issues
Patricia Taylor Industry Sector Specialist, General Operations
Nathalie Robitaille Senior Rulings Officer, Softwood Lumber and Other Taxes
COMPLIANCE PROGRAMS BRANCH (CPB)
Lisa Anawati A/Director General, GST/HST Audit and Examination
Michael Hamilton Manager, Specialty Audits
Catherine Séguin-Ouimet A/Manager, GST/HST Technical Guidance
Jonathan Shimizu Senior Programs Officer, Specialty Audits
ASSESSMENT AND BENEFIT SERVICES BRANCH (ABSB)
Heather Dewar Director, Electronic Services
Danielle Zion Director, GST/HST Returns and Rebates Processing
Joanne Davis A/Director, Business Registration and Corporation Programs
Mark Mayer Manager, My Business Account and Services Promotion and
Liaison
Piero Urgolo Manager, Authentication Management Services Section
Antonio Aprile Manager, Represent a Client and Discounter Services
Section
Cindy Elder Senior Programs Officer, Business Registration Support
Section
TEI ATTENDEES
Paul O’Connor TEI Washington, President
Timothy J. McCormally TEI Washington, Executive Director
Eli J. Dicker TEI Washington, Chief Tax Counsel
Dan De Jong TEI Washington, Tax Counsel
CANADIAN COMMODITY TAX MEMBERS
Kim Berjian ConocoPhillips Canada
Carol Felepchuk TD Bank Financial Group
Richard Taylor Rogers Communications Inc.
Michael J. Willis Lafarge Canada Inc.
Robert J. Smith Air Canada
Diane M. Sekula CIT Financial Ltd.
Martina Krummen SNC-Lavalin Group Inc.
Tim Penny Xerox Canada Ltd.
Sunil Purbhoo General Electric Canada Inc.
Carol Nixon Lanxess Inc.
Pierre Bocti Hewlett-Packard (Canada) Co.
Anne Giroux Sears Canada Inc.
Edgard Goharghi Imperial Tobacco Canada
Robert C. Leprich Molson Canada
Dave Card Spectra Energy
Tax Executives Institute, Inc. (hereinafter “TEI” or “the Institute”) welcomes the
opportunity to present the following questions on Canadian commodity tax issues,
which will be discussed with representatives of Canada Revenue Agency (CRA) and the
Department of Finance during TEI’s December 7-8, 2010, liaison meetings. The
Canada Revenue Agency appreciates the opportunity to listen to comments and respond
to the questions.
QUESTION # 1: Recaptured Input Tax Credits (RITCs)
As a temporary measure beginning July 1, 2010, and effective through June 30, 2018,
large businesses and certain financial institutions (other than selected listed financial
institutions) are required to recapture input tax credits for the provincial part of the
harmonized sales tax (HST) paid or payable on specified property and services in
British Columbia and Ontario.
a. Amended Returns. Generally, if a registrant fails to report RITCs in the
appropriate reporting period, taxpayers must correct those omissions or errors on an
amended return for that period. Questions have arisen concerning what constitutes an
error that requires an amended return. For example, an invoice is delayed in the mail
and received after the appropriate reporting period. The invoice is paid promptly upon
receipt. Does this constitute an error requiring an amended return?
b. Penalties. The penalty for not reporting an amount as required under the RITC
rules is calculated as follows:
• A “base penalty” equal to five percent of the amount that should have
been reported minus the amount reported; plus
• One-fifth of the amount calculated above for each complete month (up to
a maximum of five months) that begins on the day the return was required to be
filed and ends on the earlier of (i) the day the person reports the particular
amount and reporting period, and (ii) the day the notice of assessment is sent for
the particular reporting period.1
1 Canada Gazette, Part II, Vol. 144, Extra No. 4, Electronic Filing and Provision of Information (GST/HST) Regulations
(June 17, 2010).
2 ETA §§ 283 & 284.
The penalty imposed under this section is excessive, especially when compared with
penalties imposed for failure to answer a demand ($250 for each occurrence) or failure
to provide information when required ($100 for each failure).2 Is there any effort to
make the penalty more reasonable?
* * *
In addition to discussing the above issues during both the CRA and Finance liaison
meetings, TEI requests a written response from CRA concerning the following two
questions:
c. Internet Services. Under the old Ontario Retail Sales Tax (ORST) Act, Ontario
was the only province not to tax Internet services. In the Ontario Sales Tax Guide 651,
the Ontario Ministry of Revenue provided examples of Internet services that included
web hosting, advertising fees, etc. Similar guidance has not been issued under the
federal goods and services tax (GST) or HST.
(i) May registrants rely on Guide 651 for determining whether a
telecommunication service qualifies as an Internet service and thus is not
subject to the RITC rule for HST purposes in Ontario and British
Columbia?
(ii) If not, when will CRA issue administrative guidance on what is
considered an Internet service to assist registrants in identifying RITCs?
d. Employee Reimbursements. Consider the following example:
A fully commercial GST-registered corporation (i.e., eligible for full ITCs) in
Ontario (Supplier A) has a customer in the province who needs repairs to its
equipment permanently affixed to the real property in Ontario.
Supplier A sends its employee to the customer’s site to fix the equipment, which
will take two days to complete. The round-trip mileage to the customer’s site is
226 kilometers. The employee uses his own vehicle to travel to the site and is
reimbursed at 50 cents per kilometer.
Company A also provides the employee the option of submitting his out-of-
pocket expenditures or accepting a per diem allowance of $75 per night for
lodging and $56.50 per day for meals with no receipts. (For income tax
purposes, assume that these allowances are reasonable.)
The employee files the following expense report:
Mileage Allowance $113.00
Lodging Allowance $ 75.00
Meals Allowance $113.00 ($56.50 x 2 days)
Total $ 301.00
The example prompts the following questions:
(i) 13/113 of the $113.00 mileage allowance (i.e., $13.00) may be taken as an
initial ITC. Do the recapturing rules apply to the $13.00, i.e., is 5/13 or
$5.00 allowed as an ITC and 8/13 reported as an Ontario RITC? Or is the
full $13.00 allowed as an ITC?
(ii) 13/113 of the $75.00 lodging allowance ($8.63) may be taken as an initial
ITC. Please confirm that the lodging allowance is not subject to the
recapture rules.
(iii) 13/113 of the $113.00 ($13.00) meals allowance may be taken as an
initial ITC. Company A uses, however, the 50-percent reduction
provision when the expense account is initially processed. Thus, the
eligible ITC is $6.50. Please confirm that the recapturing rules apply to
this $6.50 amount, i.e., only 5/13 or $2.50 is allowed as an ITC and 8/13
($4.00) reported as an Ontario RITC.
ANSWER # 1: Recaptured Input Tax Credits (RITCs)
1a. An error requiring an amended return would include an over or under reported
RITC as a result of, for example, a computational error or an omission of an RITC from
an eligible ITC that arose during a reporting period.
The issuance of the invoice on a specified date within a reporting period creates an ITC
for the recipient, and hence the requirement for an RITC for that reporting period.
Based on the definition of specified input tax credit in section 29 of the New
Harmonized Value-Added Tax System Regulations No. 2, and the prescribed time to
report that specified provincial input tax credit in paragraph 30(d) of those regulations,
the receipt of the invoice described above would require an amended return.
Finance Canada has been apprised of the concerns raised by the TEI members.
1c.
(i) The term “Internet service” used in the Ontario publication to which the
question refers is not a term that is used in the Excise Tax Act or its
regulations and is therefore not relevant for GST/HST purposes.
Paragraph 28(2)(d) of the New Harmonized Value-Added Tax System
Regulations, No. 2 excludes “access to the Internet” for purposes of the
definition of a “specified property or service” in subsection 236.01(1) of
the ETA. This is not a new term for GST/HST purposes. The
interpretation of the term “Access to the Internet” for purposes of this
provision is the same as it has been and continues to be for purposes of the
HST place of supply rule that applies with respect to supplies of Internet
Access. This place of supply rule is currently found in section 32 of the
New Harmonized Value-Added Tax System Regulations and was in section
10 of the former Place of Supply (GST/HST) Regulations which had been
in effect since April 1, 1997.
(ii) In terms of guidance with respect to the meaning of the term “Access to
the Internet” for GST/HST purposes, the term could therefore not possibly
include any of the items that are described in the bulleted listed in the
Ontario publication as “Internet related services” other than the item in the
list that is actually referred to as access to the Internet. If there is any
uncertainty with respect to whether a supply that is made in a particular
situation would be considered to be a supply of access to the Internet for
GST/HST purposes or whether a particular supply that is made by
electronic means would be subject to the recaptured ITC provisions, a
GST/HST ruling should be requested from the CRA with respect to that
situation, as opposed to relying on the Ontario publication to make that
determination.
Consideration will be given to updating relevant existing GST/HST
publications to both confirm as indicated above that the interpretation of
access to the internet for GST/HST purposes, including for purposes of the
recaptured ITC provisions, remains the same as it was before the
introduction of those provisions, and to provide further guidance with
respect to whether certain supplies made by electronic means would be
subject to the application of the recaptured ITC provisions.
1d.
(i) Section174 of the Excise Tax Act deems the person paying the allowance to
have consumed or used any property or service in relation to the allowance.
In order for an allowance to qualify under section 174, it must meet several
conditions, one being the reasonableness of the allowance under the Income
Tax Act (ITA), which as you have indicated, would have been met.
13/113 of the $113.00 mileage allowance would be deemed to be the
amount of the HST paid on the allowance. Input tax credits with respect to
allowances paid for qualifying motor vehicles for use in Ontario and British
Columbia are subject to recapture. Motor vehicle allowances cover many
components (fuel, depreciation, insurance, licensing, registration, etc.) so
the view has been expressed that only a portion of the ITC for the
provincial component of the HST on a motor vehicle allowance should be
subject to recapture.
The CRA, and the Department of Finance in consultation with the
governments of Ontario and British Columbia, are in the process of
determining an administrative factor that GST/HST registrants may use in
determining what portion of an ITC for a motor vehicle allowance would be
subject to recapture. Persons would have the option of using this
administrative factor, or using their own reasonable allocation based on the
composition of the motor vehicle allowances that they pay.
Until such time, the CRA is advising large businesses to recapture the full
amount of the motor vehicle allowance (8/13ths of $13), and adjust these
recaptured amounts later once the use of an administrative factor is
approved. The CRA will update GST/HST Technical Bulletin, B104,
Harmonized Sales Tax – Temporary Recapture of Input Tax Credits in
Ontario and British Columbia, to inform registrants on the use of this
factor.
(ii) 13/113 of the $75.00 lodging allowance ($8.63) is deemed to be the amount
of HST paid on the allowance. An ITC on this amount would be available
based on the extent of use in commercial activity. The ITC taken on the
lodging allowance is not subject to the recapture rules.
(iii) 13/113 of the $113.00 ($13.00) meals allowance is deemed to be the
amount of HST paid on the allowance. An ITC on this amount would be
available based on the extent of use in commercial activity, for example
$13.00, subject to the 50% clawback under subsection 236(1) of the ETA
resulting in an ITC of $6.50. 8/13 of the $6.50 ($4.00) would be reported
as an RITC at line 1401 of Schedule B to the GST/HST NETFILE return.
QUESTION # 2: Audit Issues
a. Compliance Relief for Calendar Year 2010. Because of the delay in issuing
regulations relating to the HST, TEI recommends that CRA provide some
administrative penalty relief upon audit for the 12-month period following the
implementation date of the HST (July 1, 2010).
b. Substantiating RITCs and Proxies. ITCs are not subject to recapture in respect
of certain specified energy or telecommunication services. To simplify compliance,
proxies (eligible recovery percentages) may be used to determine (i) the portion of
“specified energy” considered to be used directly in the production of tangible personal
property (TPP) for resale, or for activities that are eligible scientific research and
experimental development (SR&ED) activities; and (ii) the proportion of the
consideration not attributable to specified telecommunications. What documentation
will taxpayers be required to provide to substantiate the RITCs and the use of proxies?
c. Use of Formulae. What documentation is required to substantiate the use of
formulae in calculating RITCs when not using proxies? Are formulae developed by (i)
internal engineers, or (ii) external engineers, acceptable?
ANSWER # 2: Audit Issues
a. Reporting penalties have been implemented to encourage accurate reporting of
information required to properly allocate GST/HST revenues among the federal and
provincial governments. It is important for businesses to make best efforts to fully and
accurately meet their obligations.
Penalties will be applied wherever considered necessary to achieve future reporting
compliance and/or where registrants have not made reasonable efforts to comply with
reporting requirements.
The CRA will practice “administrative tolerance” with respect to the new rules. The
rule of thumb will be: “Be tolerant and recognize that this is new for everyone”. In
considering the application of penalties, consideration may be given to whether a
registrant has acted in good faith and made reasonable efforts to fully and accurately
meet his obligations, particularly during transition to Ontario/BC HST. This being said,
each situation will be looked at on a case by case basis and the relief accorded where
necessary. The usual principles of fairness and due diligence will continue to apply.
b. Subsection 286(1) requires that a person must keep sufficient books and records
in such form containing such information as will enable the determination of the
person’s GST/HST liabilities and obligations or the amount of any rebate or refund to
which the person is entitled. An auditor must be satisfied that all of the conditions as set
out in the legislation are met and that available documentation enables the amount of
RITCs to be determined. For example:
-In respect of the use of a production proxy, documentation that supports the
determination of their major activity would be required.
-For SR&ED proxies, the company must have salary and wages that are eligible
for SRED purposes under the Income Tax Act to use this proxy; therefore, the
most recently filed T2 return could be used.
-For telecommunications proxies, the claim would be based on the services
indicated on the invoices as such they would be required to substantiate any
claims.
c. Each company is going to be unique in its calculations so it is hard to be
definitive in a global answer. Whatever documentation they
reviewed/prepared/created/whatever to support the final percentage must be made
available. So in the case of an internal study, an energy metering information would be
required if it is the basis of the final percentage recommended in the study. This
percentage allocation is no different than any other situation where inputs must be
allocated between taxable and exempt supplies. The method needs to be fair and
reasonable so all assumptions would also need to be stated.
QUESTION # 3: NETFILE
a. Use of MyBusiness. MyBusiness is an excellent online tool to permit taxpayers
to review their CRA accounts and decrease the administrative burden for both taxpayers
and CRA. There are, however, several challenges with accessing MyBusiness. A
taxpayer must provide a code or the line 150 amount from his or her personal tax return
to receive a password for accessing an employer’s corporate information. The internal
policies of many large tax departments forbid employees from providing personal
information to access the system.
All corporations must file an RC59 with CRA to authorize an employee to access a
corporation’s tax information. Under this process, only authorized persons may access a
particular corporate account. The tax director normally signs this document.
TEI recommends that a process similar to that used for the RC59 be used for access to
MyBusiness by corporate employees.
b. Issues relating to Electronic Filing of Returns, Electronic Payments, and
Amended Returns. TEI members are experiencing some challenges with the electronic
filing of excise tax returns. Taxpayers cannot amend the returns electronically once
they have been submitted. Assuming CRA can determine that the return has been
amended, is an upgrade planned to permit amendments? Also, taxpayers would like to
be able to save a draft return for review and approval before filing. Is an upgrade
planned to permit this process?
For internal control purposes, many taxpayers are required to have a review process in
place for tax filings, including the HST. One process that works well for taxpayers is
the integration of the electronic filing process with the banking system, which permits
the taxpayer to prepare, review, and approve the returns online. We understand that the
CRA wants to continue this process; we request an update on when the new
specifications will be given to the selected banks. Is there anything that TEI can do to
help accelerate the process?
ANSWER # 3: NETFILE (verbal)
QUESTION # 4: Joint Ventures
Under the GST system, a joint venture (JV) is different from a partnership because the
JV is not included in the definition of a “person” and thus cannot register and account
for the GST in its own right. Section 273 of the Excise Tax Act provides for a
simplified remittance and compliance process for JVs. Under this provision, a joint
election can be made by the JV participants to elect one party as the JV “operator,” who
accounts for the GST collected by the JV and claims the ITCs in relation to the
expenses incurred by the JV.
a. Prescribing Additional Activities. Under the Joint Venture (GST/HST)
Regulations, the JV election may generally be made for certain prescribed activities,
including activities relating to the construction of real property (e.g., feasibility studies,
design work, development activities and the tendering of bids undertaken in the
furtherance of a JV for the construction of real property). In addition, CRA has
administratively accepted numerous additional activities for the JV election, including
the maintenance of roads.
The lack of clarity with respect to whether other activities would similarly be
administratively accepted has created audit issues for some TEI members. During the
liaison meeting, we would like to address the following issues:
(i) Will Finance prescribe a list of additional administratively accepted
activities?
(ii) If so, will a process be implemented to ensure that new activities may be
prescribed on a timely basis?
b. Expansion of Election. Has Finance considered broadening the election to
permit all joint ventures engaged in commercial activities to make the election?
c. Activities under the Regulations. In addition, does CRA consider the following
activities covered by the current regulations:
(i) Project management services relating to real property to be constructed;
and
(ii) Environmental reports, services provided to obtain federal and provincial
authorization and permits, as well as supervision and surveillance services
directly or indirectly related to construction contracts?
ANSWER # 4: Joint Ventures
c. Subsection 3(1) of the Joint Venture Regulations provides that
“3. (1) Subject to subsection (2), for the purposes of subsection 273(1) of the Act, the
following activities are prescribed activities:
(a) the construction of real property, including feasibility studies, design work,
development activities and the tendering of bids, where undertaken in furtherance of
a joint venture for the construction of real property; and
(b) the exercise of the rights or privileges, or the performance of the duties or
obligations, of ownership of an interest in real property, including related
construction or development activities, the purpose of which is to derive revenue
from the property by way of sale, lease, licence or similar arrangement.”
Where a joint venture is formed for the purpose of constructing real property, paragraph
3(1)(a) prescribes, on an inclusive basis, certain other activities if they are undertaken in
furtherance of the joint venture. Activities which are not specifically included in
paragraph 3(1)(a), but which are essentially similar in nature to those that are included,
would be eligible activities for purposes of the joint venture election. Where the
activities described in parts (i) and (ii) of your question are undertaken in furtherance of
a joint venture for the construction of real property, they qualify for the election. It is a
question of fact whether any particular activity is undertaken in furtherance of a
particular joint venture.
Where paragraph 3(1)(b) applies, and where the activities in question are for the
purpose of deriving revenue from the property by way of sale, lease, licence or similar
arrangement, and which property is the object of the joint venture, they would qualify
for the election. Again, it is a question of fact whether the activities in question are in
furtherance of a particular joint venture.
Where such activities result in the making of supplies by the operator to the other co-
venturers in respect of which an election under subsection 273(1) of the Act has been
made, such supplies are deemed not to be supplies pursuant to paragraph 273(1)(c) . As
a result, no tax is payable on any consideration paid by the co-venturers. For paragraph
273(1)(c) to apply, the supply has to be made and acquired in the course of the joint
venture and must be acquired by the co-venturer exclusively in the course of the co-
venturer’s commercial activities.
QUESTION # 5: Financial Services
a. Pension Plans. During the meeting, TEI would like to discuss the following
issues:
(i) On September 23, 2009, the Department of Finance released draft
legislation, explanatory notes, and a backgrounder concerning several
measures aimed at improving and streamlining the application of the GST
to pension plans and the financial services sector. During our liaison
meetings, please provide a review of the obligations of employers and
pension plans stemming from that backgrounder and the HST regulations
relating to registrations, elections, deemed supplies, excluded activities,
rebates, the special attribution method (SAM) formula, and returns.
(ii) Would Finance consider exempting pension plans from the selected listed
financial institution (SLFI) requirements where less than 10 percent of the
members are outside a single participating province or less than 10
percent of the members are outside the non-participating provinces?
(iii) Consider the following example:
A fully commercial, GST-registered corporation (i.e., eligible for full
ITCs), in Ontario has a pension plan for its employees set up in a trust.
The corporation uses the calendar year.
Pre-2010 and during 2010, the corporation followed Technical
Information Bulletin (TIB) 032R in allocating its employer vs. plan trust
expenses for GST purposes. Most of the pension plan expenses incurred
are initially charged to the corporation, which pays the supplier’s invoices
and recaptures the GST. Subsequently, any TIB 032R plan trust expenses
are charged to the plan trust with GST invoiced, which the plan trust
absorbs as a cost. GST was invoiced in the first two quarters of 2010 and
Ontario HST in the last two quarters.
It is our understanding that under the deemed supply rule, these invoiced,
plan-trust supplies for the four quarters in 2010 must be included in the
deemed supply base for determining the amount of tax that the
corporation must remit on December 31, 2010; in effect, it must account
for the tax twice on the same supplies.
Although this “perceived duplicated” tax is subsequently factored into the
ultimate tax adjustment, it creates cash-flow issues. Please provide the
rationale for the inclusion of the GST/HST invoiced, plan-trust supplies in
the deemed supply rule.
b. Other Investment Plans. During our liaison meeting, please review the new HST
regulations for other investment plans that an employer might use to confer benefits to
its employees.
c. Annual Information Return.
(i) Please discuss the changes under consideration for the Annual
Information Return. Will de minimis financial institutions be relieved of
this obligation? Will entities such as pension plans be required to prepare
these returns?
(ii) Is consideration being given to incorporating this return into an SLFI’s
annual return to eliminate duplicate reporting?
d. Taxation of Financial Services. Is Finance considering an overall review of the
taxation of financial services, including expanding the tax base to include both fee and
margin services?
e. Annual Filings. How would a financial institution that is a monthly or quarterly
filer change its filing frequency to annual? Would a letter to CRA suffice?
f. Invoicing. The FI Backgrounder explains that financial institutions may ask
suppliers to list the federal and provincial portion of the HST separately to permit
proper reporting of the amounts. May the HST continue to be shown as a single
amount, and the provincial and federal portions displayed as memo items?
ANSWER # 5: Financial Services (Presentation)
To see the full presentation for ANSWER #5, please click here to access the PDF format of this document. The presentation can be found on page 21.
QUESTION # 6: Point of Sale Rebates
a. Sales Made Off Reserve. In a June 23, 2010 backgrounder, the Ontario Ministry
of Revenue provided guidance with respect to First Nations peoples (referred to as
Status Indians, Indian Bands and councils of an Indian band living off-reserve in
Ontario). Effective September 1, 2010, the “current retail sales tax exemption for Status
Indians, Indian bands and councils of an Indian band will continue for qualifying off-
reserve supplies (including sales and leases) as Ontario moves to the HST.” Thus, these
First Nations peoples are entitled to an exemption from paying the eight-percent Ontario
component of the HST on qualifying property or services at point-of-sale. The point-of-
sale exemption applies to qualifying off-reserve acquisitions or importations of property
or services that are for personal consumption or exclusively for consumption or use by
the band or the council of the band. Although framed by the Ontario Ministry of
Revenue as an extension of the exemption granted under the prior ORST Act, it
nevertheless is a departure from the harmonization of excise taxes across Canada
because it creates a special rule based on where the customer lives. In addition, this
partial exemption does not apply to all goods and services but only certain ones sold to
certain First Nations peoples living off reserve.
This policy announced two weeks before the implementation of the HST in Ontario . requires changes to the logic of billing and
point-of-sale systems, which may or may
not be possible based on the hardware and software limitations of such systems.
TEI requests CRA to provide a written response to the following comments:
(i) The less than three-month lead time to implement this new requirement
was insufficient to permit many registrants to re-program their billing
systems to apply the lower rate to a subgroup of tax-exempt customers. In
the future, TEI requests a more reasonable period of time . such as six
months be provided to implement the necessary systems changes. In
addition, if registrants were unable to comply with the five-percent tax
rate because of systems limitations, TEI requests that CRA show
administrative tolerance in respect of penalties for the transition period.
(ii) With respect to the point of sale rebate to First Nations peoples,
registrants are required to report such amounts on their tax returns. It has
been CRA’s position that such rebates may be shown on invoices as a tax
of five percent. In these circumstances, please explain why registrants
must report the eight-percent portion of the HST that was never charged
on the invoice as a form of rebate.
(iii) Because Ontario differentiates between First Nations peoples living off
and on reserve, registrants must now determine whether an individual
providing a status card is entitled to a full or partial HST exemption. The
only tool available to make such decision is the INAC website
(http://www.ainc-inac.gc.ca/index-eng.asp), which lists the name of
reserves throughout Canada with a postal code. This web site was not
established for GST/HST purposes, however, and is a limited tool because
the postal code listed on the website is not necessarily the only one that
would cover the reserve. TEI recommends that, if the status card is
produced and its number noted, that should be sufficient for purposes of
the exemption.
ANSWER # 6: Point of Sale Rebates
(i) Reporting penalties have been implemented to encourage accurate
reporting of information required to properly allocate GST/HST revenues among
the federal and provincial governments. It is important for businesses to make
best efforts to fully and accurately meet their obligations.
Penalties will be applied wherever considered necessary to achieve future
reporting compliance and/or where registrants have not made reasonable efforts
to comply with reporting requirements.
The CRA will practice “administrative tolerance” with respect to the new rules.
The rule of thumb will be: “Be tolerant and recognize that this is new for
everyone”. In considering the application of penalties, consideration may be
given to whether a registrant has acted in good faith and made reasonable efforts
to fully and accurately meet his obligations particularly during transition to
Ontario/BC HST. This being said, each situation will be looked at on a case by
case basis and the relief accorded where necessary. The usual principles of
fairness and due diligence will continue to apply.
(ii) Under section 3 the Draft Credit for Provincial Relief (HST) Regulations,
registrants making supplies of qualifying property or services to eligible Ontario
First Nations purchasers and who credit the purchasers with an amount equal to
the provincial part of the Harmonized Sales Tax (HST) are not required to
comply with the disclosure requirements of subsections 223(1) or 223(1.1) of the
Excise Tax Act (ETA). These suppliers are allowed to show the HST at the net
rate of 5% on the invoice and not the full 13% HST. For example, suppliers may
indicate:
• the total amount of the HST payable (or the total HST rate) with the
credited amount shown separately;
• the total HST payable as an amount net of the credited amount; or
• the total price of the qualifying property or service that includes HST at a
net rate of 5%.
For the purpose of calculating net tax under subsection 225(1) of the ETA for
reporting net tax, subsection 234(3) allowing for a deduction of an amount
credited pursuant to the Deduction for Provincial Rebate (GST/HST)
Regulations, does not apply to qualifying off-reserve supplies made to Ontario
First Nations. Suppliers who have credited eligible Ontario First Nations
purchasers an amount equal to the provincial part of the HST when making
supplies of qualifying property or services must report the 13% HST collected or
collectible at line 105 of the GST/HST Return even though they are permitted to
disclose HST net of the credit when invoicing, as described above.
Although the 13% HST is reported at line 105 and used in the calculation of net
tax at line 109, registrants may also claim a credit for the amount equal to the 8%
provincial part of the HST that they credited to the purchasers at the point of sale.
The suppliers will record this amount at line 111 of the return reducing the
amount owing and file the CRA form GST189, General Application for Rebate
of GST/HST, using reason code 23 with the GST/HST return.
(iii) HST generally applies in the same way as GST, and its application is
consistent with the provisions of the Indian Act. Goods and services sold to
Indians, Indian bands, and band-empowered entities that are relieved of the GST
are generally also relieved of the HST. Goods and services sold to Indians,
Indian bands, and band-empowered entities that are subject to GST are generally
also subject to HST.
This means that, as in all provinces with the HST, in Ontario services performed
entirely on a reserve and goods acquired on a reserve by an Indian customer are
fully relieved of the HST. Full relief also applies to goods acquired at a location
off a reserve by an Indian purchaser and subsequently delivered to a reserve by
the vendor or an agent of the vendor. Further, the CRA’s remote store policy
enables vendors who meet certain conditions to provide point-of-sale tax relief to
Indians, Indian bands and band-empowered entities on the acquisition of goods
without the need to deliver those goods to a reserve (for more information, please
see http://www.cra-arc.gc.ca/E/pub/gl/p-246/README.html). These
supplies are fully relieved of HST under the CRA’s Technical Information
Bulletin B-039, GST/HST Administrative Policy — Application of the GST/HST
to Indians. There is no requirement under the Indian Act or B-039 that the Indian
purchaser has to reside on a reserve.
When full relief of the GST/HST is not available on off-reserve purchases, in
Ontario, relief equal to the provincial part of the HST may apply to status
Indians, Indian bands and councils of Indian bands. The Ontario First Nations
point-of-sale relief is equal to the 8% provincial part of the HST on qualifying
off-reserve property or services acquired by eligible First Nation purchasers.
As the administration of the Ontario First Nation point-of-sale relief is the
responsibility of the Government of Ontario, and is based on Ontario Regulation
317/10 made under Ontario’s Retail Sales Tax Act (accessible online at
http://www.e-
laws.gov.on.ca/html/source/regs/english/2010/elaws_src_regs_r10317_e.htm)
, we recommend that you seek clarification concerning the vendor’s
responsibilities with respect to the certificate of Indian status cards and
determining residency of First Nation customers. The Ministry of Revenue of
Ontario can be reached as follows.
The telephone number is: 1 866 668-8297.
Request for written interpretations should be sent to:
Ministry of Revenue
Tax Advisory Services Branch
Retail Sales Tax Section
33 King Street West, 3rd Floor
Oshawa ON L1H 8H5.
QUESTION # 7: Carrying on Business
Policy Statement P-051R2, Carrying on business in Canada, outlines CRA’s position
on when a person is carrying on business in Canada. For leasing, when determining
whether a non-resident lessor is carrying on business in Canada, the examples suggest
that CRA considers the place where the non-resident lessor acquires the leased property
and the place where the property is delivered to the lessee to be the key factors. CRA’s
position appears to be contrary to jurisprudence and, as a result, has caused a great deal
of uncertainty in the area of cross-border leasing.
Attached in Appendix A are six examples of lease terms. Please identify the relevant
factors for determining when a non-resident lessor is considered to be carrying on
business in Canada and the basis for this conclusion.
APPENDIX A
QUESTION #7, FACT PATTTERN #1
1. A non-resident lessor, engaged in the business of supplying industrial equipment
outside Canada through a lease, enters into an agreement to lease equipment to a
resident registrant.
2. The lease agreement for the equipment is concluded in Canada.
3. Pursuant to the lease, the lessee acquires possession of the equipment outside
Canada at the beginning of the lease. The lessee subsequently imports the equipment for
use at its business facilities in Canada.
4. The lessee is responsible for all maintenance and servicing of the equipment
during the term of the lease.
5. The non-resident lessor does not solicit business in Canada.
6. The non-resident lessor has no agents or employees or facilities (either
management, sales or service) in Canada.
7. The non-resident lessor is not listed in any directories in Canada.
8. The non-resident lessor has a bank account in Canada.
9. The lease payments are made in Canada.
APPENDIX A
QUESTION #7, FACT PATTTERN #2
1. A non-resident lessor, engaged in the business of supplying industrial equipment
outside Canada through a lease, enters into an agreement to lease equipment to a
resident registrant.
2. The lease agreement for the equipment is concluded in Canada.
3. Pursuant to the lease, the lessee acquires possession of the equipment outside
Canada at the beginning of the lease. The lessee subsequently imports the equipment for
use at its business facilities in Canada.
4. The lessee is responsible for all maintenance and servicing of the equipment
during the term of the lease.
5. The non-resident lessor does not solicit business in Canada.
6. The non-resident lessor has no agents or employees or facilities (either
management, sales, or service) in Canada.
7. The non-resident lessor is not listed in any directories in Canada.
8. The non-resident lessor has no bank account in Canada.
9. The lease payments are made outside Canada.
APPENDIX A
QUESTION #7, FACT PATTTERN #3
1. A non-resident lessor engaged in the business of supplying industrial equipment
outside Canada through a lease enters into an agreement to lease equipment to a resident
registrant.
2. The lease agreement for the equipment is concluded in Canada.
3. Pursuant to the lease, the lessee acquires possession of the equipment outside
Canada at the beginning of the lease. The lessee subsequently imports the equipment for
use at its business facilities in Canada.
4. The lessor is responsible for all maintenance and servicing of the equipment
during the term of the lease.
5. The non-resident lessor does not solicit business in Canada.
6. The non-resident lessor has no agents or employees or facilities (either
management, sales or service) in Canada.
7. The non-resident lessor is not listed in any directories in Canada.
8. The non-resident lessor has no bank account in Canada.
9. The lease payments are made outside Canada.
APPENDIX A
QUESTION #7, FACT PATTTERN #4
1. A non-resident lessor, engaged in the business of supplying industrial equipment
outside Canada through a lease, enters into an agreement to lease equipment to a
resident registrant.
2. The lease agreement for the equipment is concluded outside Canada.
3. Pursuant to the lease, the lessee acquires possession of the equipment outside
Canada at the beginning of the lease. The lessee subsequently imports the equipment for
use at its business facilities in Canada.
4. The lessor is responsible for all maintenance and servicing of the equipment
during the term of the lease.
5. The non-resident lessor does not solicit business in Canada.
6. The non-resident lessor has no agents or employees or facilities (either
management, sales or service) in Canada.
7. The non-resident lessor is not listed in any directories in Canada.
8. The non-resident lessor has a bank account in Canada.
9. The lease payments are made in Canada.
APPENDIX A
QUESTION #7, FACT PATTTERN #5
1. A non-resident lessor, engaged in the business of supplying industrial equipment
outside Canada through a lease, enters into an agreement to lease equipment to a
resident registrant.
2. The lease agreement for the equipment is concluded outside Canada.
3. Pursuant to the lease, the lessee acquires possession of the equipment outside
Canada at the beginning of the lease. The lessee subsequently imports the equipment for
use at its business facilities in Canada.
4. The lessee is responsible for all maintenance and servicing of the equipment
during the term of the lease.
5. The non-resident lessor does not solicit business in Canada.
6. The non-resident lessor has no agents or employees or facilities (either
management, sales or service) in Canada.
7. The non-resident lessor is not listed in any directories in Canada.
8. The non-resident lessor has no bank account in Canada.
9. The lease payments are made outside Canada.
APPENDIX A
QUESTION #7, FACT PATTTERN #6
1. A non-resident lessor, engaged in the business of supplying industrial equipment
outside Canada through a lease, enters into an agreement to lease equipment to a
resident registrant.
2. The lease agreement for the equipment is concluded in Canada.
3. Pursuant to the lease, the lessee acquires possession of the equipment outside
Canada at the beginning of the lease. The lessee subsequently imports the equipment for
use at its business facilities in Canada.
4. The lessee is responsible for all maintenance and servicing of the equipment
during the term of the lease.
5. The non-resident lessor does not solicit business in Canada.
6. The non-resident lessor has no agents or employees or facilities (either
management, sales or service) in Canada.
7. The non-resident lessor is not listed in any directories in Canada.
8. The non-resident lessor has no bank account in Canada.
9. The lease payments are made in Canada.
ANSWER # 7: Carrying on Business
With respect to that part of the question referring to the examples in GST/HST Policy
Statement P-051R2 involving leases of tangible personal property, our position with
respect to this issue remains as set out in our response to question #8 from our meeting
in 2006. In particular, as indicated in that response, the policy statement clearly
indicates that the factors that are significant for purposes of determining whether a non-
resident is carrying on business in Canada for GST/HST purposes in a particular case,
and whether the non-resident consequently has a significant presence in Canada,
ultimately depends on the nature of the business activity under review, and more
specifically, the type of supply being made. In addition to Examples 1 to 5 of the policy
statement, the policy statement also uses the example in the narrative of a supply of
property by way of lease to illustrate this point by stating that factors that are of greater
importance in such a case are the place where the property is acquired by the non-
resident lessor and the place where the property is delivered to the lessee.
With respect to the examples in the Appendix, as indicated in the policy statement, the
determination of whether a non-resident is carrying on business in Canada is relevant
for purposes of subsection 240(1) of the Excise Tax Act, which generally provides that
every non-resident person who carries on business in Canada, other than a small
supplier, must register for GST/HST purposes if the non-resident person makes a
taxable supply in Canada. Based on the information provided, the supply being made
by the non-residents in all of the examples in the Appendix is a supply of tangible
personal property by way of lease and the lessees in all of the examples are acquiring
possession of the property outside Canada. Pursuant to subsection 142(2) of the ETA, a
supply of tangible personal property otherwise than by way of sale is deemed to be
made outside Canada if possession or use of the property is given or made available
outside Canada to the recipient of the supply. As a result, none of the non-residents in
the examples in the Appendix would be considered to be making a taxable supply in
Canada of the leased property and, more importantly, would not be required to register
under subsection 240(1) on that basis regardless of the issue of carrying on business.
There would therefore be no requirement for GST/HST purposes for a determination to
be made with respect to whether the non-residents in the examples in the Appendix are
carrying on business in Canada.
QUESTION # 8: Place of Supply Rules
a. Single vs. Multiple Supplies. With the introduction of the HST in Ontario and
British Columbia in July 2010, new place of supply rules have been introduced for
certain services. These rules include significant changes in the application of taxes to
services relating to real property. Generally, the place of supply rules relating to real
property contain three basic application rules that can be summarized as follows (similar
rules apply to services provided in relation to TPP):
Rule 1:
The service will be considered to be made in a participating province if the real
property is located primarily (50 percent) in the participating province. If the
work performed is in relation to one building, the location of that building would
determine the place of supply. If the services relate to more than one building,
the services will be considered performed in the participating province in which
the “greatest proportion” of buildings is located; this province will determine
the applicable tax rate.
Participating provinces include New Brunswick, Nova Scotia, Newfoundland,
Ontario, and British Columbia. Non-participating provinces include Prince
Edward Island, Quebec, Manitoba, Saskatchewan, and Alberta, as well as the
Northwest and Nunavut Territories and the Yukon. Where the supply is made
primarily in non-participating provinces, only GST will apply.
Rule 2:
If the real property is situated primarily in a participating province, but the
“greatest proportion” cannot be determined because there is an equal
proportion of buildings in two or more participating provinces, the participating
province with the highest rate is considered to be the place of supply.
Rule 3:
If the place of supply cannot be determined under Rule 2 because the two
participating provinces have the same rate of tax, that particular rate is applied.
Generally, the place of supply would be determined by the business address of
the supplier most closely connected with the supply, provided that this address is
located in one of the specified provinces. Alternatively, the place of supply
would be considered to be in the specified province that is closest in proximity to
the business address of the supplier that is most closely connected with the
supply.
Where services are provided under one agreement and relate to one building, it is
easy to apply the place of supply rules . and determine the applicable tax rate.
The location of the building would determine the place of supply and the
GST/HST would be collected accordingly. Questions have arisen, however,
concerning the application of the rules where services are provided under a single
contract for buildings located across Canada.
First, how should one determine the “greatest proportion”? Is it based on the
number of buildings, square footage, value of the real property, or another
method?
Second, the “greatest proportion” factor may be relevant only in determining the
place of supply for a national agreement where a single supply is made.
Consideration should be given to situations where multiple supplies are made
under the same agreement. If there is a single supply, one tax rate will apply to
the entire consideration payable under the agreement. If there are multiple
supplies, however, we believe that multiple tax rates will apply because the rate
determination will be made on a supply-by-supply basis. TEI invites discussion
of this issue.
3 Canada Gazette, Part II, Vol. 144, No. 12, New Harmonized Value-added Tax System Regulations (June 9, 2010).
b. Deemed Delivery. TEI requests that CRA provide written responses to the
following questions:
(i) Consider the following example:
A Co. is an Ontario-based, GST registrant engaged in 100-percent
commercial activity. A Co. supplies tangible personal property (TPP) to
B Co., which is located in British Columbia.
The terms of sale are FCA Hamilton, ON, and B Co. takes legal delivery
of the goods in that Province. B Co. is a regular customer of A Co. and,
at the time of placing a purchase order, instructed A Co. to contact B
Co.’s common carrier directly to advise when the TPP would be ready for
pickup at A Co.’s premises. B Co. provided the common carrier with
contact information when the purchase order was initiated.
In the above example, B Co. retains the common carrier . it negotiates
the freight rate and perils of risk, is accountable to resolve delays, and
pays all freight charges, including fuel surcharges associated with the
service. TIB B-078, Place of Supply Rules under the HST, discusses
“deemed delivery,” as outlined in Schedule IX, Part II, section 3:
Tangible personal property is deemed to be delivered in a particular
province, and not to any other province, if the supplier ships the property
to a destination in the particular province that is specified in the shipping
contract for the property, or otherwise transfers possession of the property
to a common carrier or consignee retained by the supplier on behalf of the
recipient to ship the property to such a destination in the particular
province on behalf of the recipient.
The deemed delivery concept is revisited in the Place of Supply
Regulations, Part I, Division I, section 3.3 Please confirm that Ontario
HST applies to the transaction.
(ii) Consider the following examples:
D Co. is a Quebec-based, GST and QST registrant, engaged in 100-
percent commercial activity. D Co. supplies corporeal movable property
(TPP) to E Co., located in British Columbia.
Under its contract with D Co., E Co. takes legal delivery of the goods in
Quebec. Freight is “prepaid and charge”; thus, D Co. contacts a common
carrier to ship the goods to E Co.’s manufacturing plant in Victoria, BC.
The common carrier invoices D Co. D Co. will pay the carrier’s invoice
and invoice E Co. for the cost of the freight as a separate line item on D
Co.’s sales invoice to E Co.
Based on the deemed delivery concept applicable to transactions with
harmonized provinces, please confirm that the 12-percent HST applies to
the transaction.
(iii) The facts are the same as above, except that E Co. makes all the freight
arrangements to pick up the corporeal movable property from D Co.’s
Quebec-based plant (i.e., D Co. has no involvement with the freight
carrier).
Please confirm that only GST applies to this transaction.
ANSWER # 8: Place of Supply Rules
With respect to the first question, section 14 of Division 3 of Part 1 of the New
Harmonized Value-Added Tax System Regulations to the Excise Tax Act is the relevant
provision to determine the province in which a supply of a service in relation to real
property. It provides that a supply of a service in relation to real property is made
(a) in a participating province if the real property that is situated in Canada is
situated primarily in participating provinces and
an equal or greater proportion of the real property is not situated in another participating
province, or
(ii) if subparagraph (i) does not apply, the tax rate for the participating
province is the highest among the participating provinces for which no
greater proportion of the real property is situated in another participating
province; and
(b) in a non-participating province if the real property that is situated in Canada is
not situated primarily in participating provinces.
For purposes of this rule, the determination of the relevant proportion of the real
property is based on the physical size of the entire real property (for example, based on
square footage) pursuant to its legal description. Factors such as the value of the real
property or the number of properties (unless they are of equal size) would therefore not
be relevant to the determination.
With respect to the second question, the place of supply rule for a supply of a service in
relation to real property applies to each supply of a service that is being made. We
agree that where based on the facts it is determined that multiple supplies of services are
made, regardless of whether the supplies are made pursuant to a single contract or
multiple contracts, the determination of the place of supply is made on a case-by-case
basis by applying the relevant place of supply rule to each supply of a service that is
made.
b.
(i) Based on the information provided, we agree that the taxable (other than
zero-rated) supply of the goods would be made in Ontario pursuant to
section 1 of Part II to Schedule IX of the Excise Tax Act and that HST at a
rate of 13% would consequently apply to the supply.
(ii) Based on the information provided, we agree that the taxable (other than
zero-rated) supply of the goods would be made in BC pursuant to sections
1 and 3 of Part II to Schedule IX of the ETA and that HST at a rate of
12% would consequently apply to the supply.
(iii) Based on the information provided, we agree that the taxable (other than
zero-rated) supply of the goods would be made in Quebec pursuant to
section 1 of Part II to Schedule IX and that GST at a rate of 5% would
consequently apply to the supply.
4 R.S., 1985, c. E-15, s. 4; 1999, c. 17, s. 147.
QUESTION # 9: Non-GST issues: Insurance Premium Tax
Part I of the Excise Tax Act (ETA) imposes a 10-percent tax on insurance premiums
against risks in Canada that are placed with:
• An insurer authorized under the laws of Canada or a province to transact the
business of insurance, if the contract is entered into or renewed through a broker
or agent outside Canada; or
• An insurer not authorized under the laws of Canada or a province to transact the
business of insurance.
This “self-assessed” tax was introduced in 1942 in the Special War Revenue Act (now
the ETA). Before April 1997, the tax was administered by the Office of the
Superintendent of the Financial Institutions and was transferred at that time to CRA.
The statute provides that the tax does not apply “to the extent that the insurance is not,
in the opinion of the Commissioner, available in Canada.”4 The term “not available in
Canada” is not defined in the ETA, and the only reasons CRA deems acceptable are the
unavailability of the particular class of insurance from authorized insurers or the lack of
market capacity at that particular time for that class of insurance. The latter exception
has not been defined.
In spite of the lack of guidance, the tax has been imposed retroactively and administered
in a subjective and arbitrary manner. Taxpayers have been denied the benefit of the
exemption despite possessing letters from an insurer denying coverage.
ANSWER # 9: Non-GST issues: Insurance Premium Tax
The CRA assumed responsibility for the administration of the tax on insurance
premiums effective April 1, 1997. The Office of the Superintendent of Financial
Institutions (OSFI) formerly held this mandate.
Since the transfer of this responsibility, the CRA has published three documents. In
February 1998, Excise Tax and Special Levies Notice ET/SL 36 was released, outlining
basic facts on Insurance Premiums other than Marine. Updated version ET/SL 36R was
issued in February 2005. These notices outlined what was exempt from tax, who is
required to pay the tax and how to apply for an exemption from the tax. The latter also
provides interpretation on terms included within the legislation.
In February 2009, CRA released Memorandum 7-1 – Special Levies – Insurance
Premiums under the Excise Taxes and Special Levies Memoranda Series. This
memorandum provide more information on the filing of returns, exemptions, payments,
assessments, objections and includes a listing of types of marine insurance which are
exempt from this tax.
Compliance initiatives are carried out by the CRA in order to ensure a level playing
field for all taxpayers for any particular tax program, including Part 1 tax on insurance
premiums. Imposing the tax prospectively would not be fair to those taxpayers who
have been compliant with the legislation.
QUESTION # 10: HST Technical Information
Feedback on HST Technical Information:
Feedback/Suggestions where current HST technical information could be
clarified and what other HST technical information products would be helpful.
QUESTION # 11: Business Registration on-Line
Feedback on Business Registration On-Line:
• Feedback/Suggestions for improving the user experience when registering on
Business Registration On-Line.
CONCLUSION
Tax Executives Institute and the Canada Revenue Agency appreciate this opportunity to
present, listen and/or respond to the various comments and questions for discussion.