Bulletin B-095 June 2011 "The Self-assessment Provisions of Section 218.01 and Subsection 218.1(1.2) for Financial Institutions (Import Rules)"

The term Canadian activity means an activity of the person carried on, engaged in or conducted in Canada. It would include but is not limited to a business (as defined in subsection 123(1)) carried on. The phrase "carried on, engaged in or conducted in Canada" is intended to give the term "Canadian activity" a broad meaning.

For example, a qualifying taxpayer that is a non‑resident FI has a head office in the United States and a branch in Canada. The qualifying taxpayer acquires insurance from a related corporation outside Canada. Part of the insurance premium it pays is allocated to the Canadian branch and therefore is an outlay made or expense incurred outside Canada under subsection 217.1(2). The amount is also deducted by the qualifying taxpayer under the ITA. The amount is therefore required to be included in Part A of the formula.

The insurance premium is paid to a related corporation, and as such the premium is consideration for a specified non‑arm's length supply and is a permitted deduction under paragraph (k) of the definition of permitted deduction. However, paragraph (k) states that the consideration for the supply does not include an amount that is loading. Therefore, any portion of the insurance premium covering the related corporation's expenses of doing business, profit margins and any of the other items listed in the definition of loading above are not included in the amount for the permitted deduction. But any portion of the insurance premium covering the net premium of the insurance policy is excluded from the amount determined to be loading because of the exclusion in the definition of loading, and therefore would be part of the consideration for the specified non‑arm's length supply that is a permitted deduction.

Generally, the effect of Part A of the formula is that any expense or outlay made outside Canada that would be allowed as a deduction under the ITA, and is reasonably regarded as being applicable to a Canadian activity of the qualifying taxpayer, is included and forms the base for qualifying consideration. ...

Examples - Qualifying consideration - Part A

Example 1

A non-resident FI has its head office outside Canada and a branch in Canada. Certain head office expenses (e.g., software consulting services) incurred outside Canada are outlays made or expenses incurred outside Canada under subsection 217.1(2) and are with respect to the non-resident FI's Canadian activity. The expenses are deductible under the ITA. Therefore the amount is included in Part A of qualifying consideration. ...

Example 4

A non-resident qualifying taxpayer with a head office outside Canada and a branch in Canada purchases a computer outside Canada to be used in its Canadian activity. The amount is an outlay made or expense incurred outside Canada under subsection 217.1(2). Any amount in respect of capital cost allowance that is permitted as a deduction for purposes of the ITA and that is with respect to a Canadian activity is included in Part A of qualifying consideration

Example of internal charge

A qualifying taxpayer resident in Canada has made an election under subsection 217.2(1) to self‑assess on the total of its internal charges and external charges for a specified year. An amount is allocated by the qualifying taxpayer to its head office located in Canada for research services performed in the U.S. by the U.S. branch for use by the head office in Canada. The amount is deducted by the qualifying taxpayer in computing the income of the head office under the ITA and therefore meets the requirements of subparagraph 217.1(4)(a)(i). The amount is also required by the qualifying taxpayer to be included as income under the taxing statutes of the U.S. in computing the income of the U.S. branch and meets the requirements of subparagraph 217.1(4)(a)(ii). Since no part of the amount was accounted for under an external charge, no part was a permitted deduction, and the amount was not with respect to derivatives, the exclusions in paragraph 217.1(4)(b) do not apply. As a result, the whole amount allocated to the Canadian head office is an internal charge under paragraph 217.1(4)(a) and is subject to self‑assessment.

Non-resident trust (majority Cdn-owned) with Cdn activity and no Cdn PE

Example 5

A non-resident mutual fund trust has a non-resident trustee. The majority of the persons having beneficial ownership of the property of the trust are resident in Canada. The non-resident trust is carrying on activities in Canada, but does not have a permanent establishment in Canada (as defined in subsections 123(1) or 132.1(2)). The non-resident trust is a qualifying taxpayer because the non-resident trust is a FI carrying on activities in Canada and the majority of the trust beneficiaries are resident in Canada.

Test of whether the expense (re qualifying consideration) was used in a participating-province activity

The provincial part of the HST is determined by a formula that in general terms is the qualifying consideration multiplied by the extent (expressed as a percentage) to which the expense that corresponds to the qualifying consideration was used in carrying on an activity of the qualifying taxpayer in the particular province. However, for a specified year that ends before July 1, 2010, tax is determined based on the extent of activity in each participating province in which the qualifying taxpayer is resident at any time in the specified year.

Exclusion for SLFIs

Selected listed financial institutions (SLFIs) that fall within section 225.2 are generally not required to self-assess the provincial part of the HST imposed under subsection 218.1(1.2). These FIs continue to use the special attribution rules under section 225.2… .

Ss. 132(2) and (3) rules do not apply for purposes of s. 217.1(1)(b)(i)

Qualifying taxpayer

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The reference to being resident in Canada in the definition of "qualifying taxpayer" does not include a non-resident with a permanent establishment under subsection 123(1) in Canada where that person is deemed under subsection 132(2) to be resident in Canada with respect to activities of the person carried on through the establishment. For example, a foreign corporation with a branch that is a permanent establishment under subsection 123(1) located in Canada is not a resident of Canada but is considered a non-resident with a permanent establishment in Canada.

Similarly, a non-resident does not include a resident with a permanent establishment under subsection 123(1) in a country other than Canada where that person is deemed under subsection 132(3) to be a non-resident in respect of activities of the person carried on through that establishment. For example, a corporation resident in Canada with a branch that is a permanent establishment under subsection 123(1) located in another country is not considered to be a non-resident.

Scope of s. 217.1(2)(d)

As a result, in the case of a resident qualifying taxpayer, if an employee performs duties outside Canada and a significant portion of those duties is performed at a qualifying establishment of the qualifying taxpayer outside Canada (e.g. a foreign branch), any compensation paid to that employee during the taxation year is treated as an outlay made, or expense incurred, outside Canada. If the duties are performed elsewhere outside Canada and not at a foreign branch of the qualifying taxpayer or of a person related to the qualifying taxpayer, the compensation paid to the employee is not an outlay made or expense incurred outside Canada.

Canco deductions for parent head office expenses are included

Examples - Qualifying consideration - Part A

Example 1

A non-resident FI has its head office outside Canada and a branch in Canada. Certain head office expenses (e.g., software consulting services) incurred outside Canada are outlays made or expenses incurred outside Canada under subsection 217.1(2) and are with respect to the non-resident FI's Canadian activity. The expenses are deductible under the ITA. Therefore the amount is included in Part A of qualifying consideration. …

Example 3

Data processing services were performed outside Canada by a foreign parent corporation for the benefit of a qualifying taxpayer resident in Canada in the qualifying taxpayer's Canadian activities. The expense incurred in respect of these services is an outlay made or expense incurred outside Canada under subsection 217.1(2). The expense is allowed as a deduction under the ITA. Therefore, the amount of the expense is included in Part A of qualifying consideration.

Example of specified non-arm’s length supply

Qualifying consideration - Permitted deduction …

For example, a qualifying taxpayer that is a non-resident FI incurred an expense for an insurance premium for property outside Canada used in part in respect of its Canadian branch. Part of the insurance premium is allocated to the Canadian branch. The insurance policy was acquired from a party that was dealing with the FI at arm's length. The amount of the premium allocated to the branch is an outlay made or expense incurred outside Canada under subsection 217.1(2). It is with respect to the qualifying taxpayer's Canadian activities and is deductible under the ITA. Therefore, the amount is included in Part A of qualifying consideration, but since the supply of the insurance policy was made by an unrelated third party it would also be deducted under Part B, and so there would not be an amount subject to self-assessment.