26 February 2015 CBA Roundtable

This provides summaries of questions posed to CRA at the February 26, 2015 CBA Roundtable together with the full text of the CRA responses (translated into English where applicable). 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: The following comments represent our general views with respect to the subject matter and do not replace the law found in the Excise Tax Act (the ETA) and regulations. These general comments are provided for your reference and do not bind the CRA with respect to a particular situation. Since our comments may not completely address a particular situation, you may wish to refer to the ETA and regulations, or contact any CRA GST/HST rulings centre for additional information. All references to legislative provsions in our comments are reference to the ETA unless otherwise indicated.

Audit, Collections and Objections

Q.1. Disclosure to police (295(5.04), 241(9.5))

Summary of Question

a) Has the CRA developed a policy as to when it will or will not apply ETA s. 295(5.04) and ITA s. 241(9.5) and disclose information about serious criminal activity to police organizations?

b) If a person makes a voluntary disclosure that includes information about having engaged in serious criminal activity that falls within these provisions, under what circumstances will the CRA disclose this information to the police or other law enforcement agencies?

CRA Response to Q.1(a)

The CRA takes the protection of Canadians’ tax information very seriously. The confidence and trust that individuals and businesses place in the CRA is a cornerstone of Canada’s voluntary tax system.

Prior to the new legislation coming into force, the CRA could not, on its own initiative, communicate evidence of serious criminal wrongdoing to police or other law enforcement agencies except in extremely limited circumstances. This situation was at odds with the value Canadians place on justice, fairness and support for victims of crime.

The new legislation only allows the CRA to provide taxpayer information to police or other law enforcement agencies when there are reasonable grounds to believe the information affords evidence of a listed serious offence.

The CRA will not collect any additional information nor undertake any additional steps to uncover evidence of an offence. The provision is strictly limited to information that CRA officials gather in the course of their regular duties. The legislation does not create an expectation that CRA officials should proactively look for possible evidence of listed serious offences.

For example, evidence may be found during the execution of a search warrant during a criminal investigation or during the course of regular audit or collection activities.

The provision does not enable taxpayer information to be collected for the police or other law enforcement agencies nor to be provided to such organizations at their request. When seeking information from the CRA, police and other law enforcement agencies must continue to use other provisions contained in the Excise Tax Act and Income Tax Act, i.e., in the case of imminent danger, after criminal charges have been laid, or otherwise, through a judicial order. The CRA will not use its information gathering powers to gather information at the request of the police or other law enforcement agencies.

To ensure that the CRA continues to safeguard taxpayer information and only discloses information that is specifically authorized under the legislation, strict controls have been implemented, and no information will be released to the police or other law enforcement agencies without the approval of the Assistant Commissioner of the Compliance Programs Branch.

The CRA maintains discretion over whether information will be shared with the police or other law enforcement agencies. The legislation says that CRA may provide information if the requirements of the provisions are met. The discretion will be applied judiciously and with the utmost respect for the privacy rights of all Canadians.

The CRA is communicating with the police and other law enforcement agencies to provide details on the CRA process for releasing information and guidance on when the CRA will share information with them under the new legislation.

Any misuse of taxpayer information by a CRA employee will result in serious disciplinary action being taken, which could include termination of employment.

Since enactment in June 2014, the CRA has not exercised its authority under the new legislation.

CRA Response to Q.1(b)

b) The Voluntary Disclosures Program (VDP) policy does not preclude the CRA from releasing information to the police or other law enforcement agencies if there are reasonable grounds to believe that the information will afford evidence of a listed serious offence. By filing a valid voluntary disclosure, a person may avoid being penalized or prosecuted under the Acts administered by the CRA with respect to the information accepted under the VDP.

Information provided through the VDP would be subject to the same procedures as any other information gathered by the CRA during its regular activities. These strict controls ensure that the CRA continues to safeguard taxpayer information and only discloses information that is specifically authorized under the legislation. No information will be released to the police or other law enforcement agencies without the approval of the Assistant Commissioner of the Compliance Programs Branch.

The information available will be reviewed to ensure that there are reasonable grounds to believe that the information will afford evidence of a listed serious offence. A decision will be made based on the unique facts and circumstances of each particular case.

Q.2. Obtaining assessments/staffing of refund claim reviews

Summary of Question

a) How should registrants or their representatives get copies of Notices of Assessment that have been issued, if the registrant does not have a copy?

b) Why does the CRA not assign subsequent claims by the same registrant to the same office and auditor (Refund Integrity Officer) to make the review process more efficient?

CRA Response to Q.2(a)

a) A taxpayer (GST registrant) can contact the CRA (by phone, or by mail) to request a copy of a Notice of Assessment (NOA) that had previously been successfully issued. In general, notices can be reproduced for at least seven years from the original issue date. The NOA will be printed and mailed to the taxpayer. The phone number that we refer taxpayers/authorized reps to via our MyBA-View mail (correspondence) service is the Business Enquiries line: 1-800-959-5525 EN or 1-800-959-7775 FR.

The taxpayer (GST registrant) or their authorized representative can register to use the My Business Account (MyBA) secure portal. By doing so, they can then view the successfully issued NOA without the need to contact the CRA. Once in the MyBA secure portal they navigate to the View mail (correspondence) web page from either the sidebar of the MyBA Welcome page, or from the expandable program menus. The NOA is available for display on View mail (correspondence) for three years from the date of issue, however by saving the item to their computer they will be able to review it without having to connect to MyBA and will be able to store it for as long as they want.

CRA Response to Q.2(b)

b) In order to make the review process more efficient and effective, the refund integrity program implemented a new national risk assessment and workload management model, or pre-assessment national inventory (PANI) in 2012. PANI weighs and scores GST34 returns and rebates using algorithms and other risk assessment data. Implementation of the model and the change to a national workload management system were major shifts in the way we do business and how we manage risk.

Due to the PANI, we are no longer able to assign subsequent claims to the same office or auditor. However, when an examination is completed or a phone call is made to a registrant, the results of the examination or a summary of the conversation is captured within our system for the benefit of all screeners and examiners.

Q.3. Petitioning tax debtor into bankruptcy

What are the CRA's considerations as to when it will petition a tax debtor into bankruptcy rather than enter into an arrangement for payment? Is there a formal policy that the CRA follows? Are you able to indicate the factors that the CRA considers in making this determination?

CRA Response

Our main objective to petitioning a tax debtor into bankruptcy is to enhance recovery or future compliance.We consider the following factors when determining whether or not to petition tax debtors into bankruptcy:

• all recovery options have been fully exhausted resulting in little or no recovery to the CRA, including:
  • raising memorandum assessments against third parties;
  • pursuing trusts (family or otherwise) that hold debtor’s assets or in which the debtor may have vested interest;
  • challenging the division of family assets between the debtor and spouse under questionable separation agreements;
  • challenging any claim against the debtor’s interest in the family asset(s), or when debtor is holding such interest for the sole benefit of the spouse, on grounds of exoneration of equity; and
  • pursuing offshore assets and trusts in which debtor may have some interest or involvement.
• the debtor has assets in Canada or abroad, which we cannot pursue outside bankruptcy;
• evidence suggests that debtor is hiding assets in third-party names, which we cannot attack outside bankruptcy;
• there are certain financial transactions that can only be reviewed through the bankruptcy process;
• investigation into the debtor’s financial affairs is hampered by a lack of debtor cooperation, justifying a need for their examination through the bankruptcy process; or
• a cost-benefit analysis shows there is a reasonable expectation for recovery.

Currently, Canada’s Income Tax Conventions with United States, Norway, Germany, United Kingdom, and New Zealand (not yet in force), contain collection assistance articles that do not limit the collection assistance of Income Tax or Excise Tax (GST) or any tax debts collected by, or on behalf of, the Government of Canada (CRA).

Only the Kingdom of the Netherlands treaty currently limits collection assistance to debts under the Income Tax Act.

Q.4. Late filing where recipient now bankrupt

Summary of Question

Q.4(a) Non collection of GST, late remittance and audit

Registrant ABC does not collect the applicable GST on supplies made through 2013 and is infomed at the end of May 2015 that it will be audited at the end of June 2015. Consider the following scenarios:

a) Having realized its mistake, ABC remitted the GST in December 2014.
b) Just before the audit, but after being advised of the upcoming audit, ABC realizes its mistake and remits the GST with its April return.
c) During the audit, after being advised of its mistake, ABC tells the auditor that he will remit the tax with its May return; this would be before an assessment is issued.

For each of these scenarios, would the auditor assess the amount of uncollected GST that was remitted late, but before the issuance of an assessment? What about interest?

Q.4(b) Non collection of GST, registered recipient is bankrupt

Registrant ABC does not collect the applicable GST on supplies made in 2012 to a specific registered recipient which went bankrupt in 2014. In a 2015 audit, the auditor identifies the 2012 failure to charge GST. Under which circumstances will the CRA refrain from assessing the GST and assess only the 4% amount?

CRA Response to Q.4(a)

For our response, we will assume that the registrant reported the late remittance as part of their GST/HST collected/collectible and did not simply make a payment. In each of the above situations, the auditor will make adjustments to the affected reporting periods including the reporting period which included the late remittance. For each of the adjusted returns where the registrant had not reported the GST/HST that should have been collected, interest will apply from the due date of the adjusted return for the reporting period to the day of the late remittance as per section 280 of the Excise Tax Act (ETA).

CRA Response to Q.4(b)

In the situation described above, the CRA would assess the GST/HST that the registrant under audit failed to collect in 2012. The wash transaction policy as set out in GST/HST Memorandum 16.3.1, Reduction of Penalty and Interest in Wash Transaction Situations, applies only to cancel or waive the interest and/or penalty applicable to the supply in question and does not apply to the actual tax that the supplier has not remitted by virtue of not having correctly charged and collected the tax from the recipient.

Q.5. Appeal delays

Summary of Question

It appears that the Objection process continues to be very slow, with many objections now taking over a year for mere assignment of the file. Does the CRA have any plan to improve the system, and, is there any mechanism or process whereby the appeal procedure can be expedited, particularly if it seems clear that the assessment should not have been issued in the first place or a delay poses a hardship to the taxpayer?

CRA Response

The Appeals Branch is aware of the delays in the resolution of objections and is actively addressing the backlog by introducing ways to increase efficiency. National inventory shelves for income tax and GST have recently been implemented to allow objections at the various complexity levels, to be assigned at the same rate, across the country. Tax practitioners can help streamline the process by gathering required documentation on a timely basis and by providing them at the earliest possible stage. Full disclosure at the assessment/audit stage may eliminate the need to file an objection. If an objection is filed, the required documentation should be gathered upon filing of the Notice of Objection or upon receipt of the acknowledgement letter.

Q.6. Sham criteria

Summary of Question

a) When CRA alleges "sham," what internal procedures are required before assessing on that basis?

b) What criteria does CRA apply in determining that a "sham" exists?

c) What is the role of the Aggressive Tax Planning Unit?

CRA Comments

Auditors are required to prepare a position paper in order to explain the assessing position and send it to the Aggressive GST/HST Planning (AGP) Section - HQ for review.

What criteria does the CRA use in determining its view that a "sham" exists?

The classic definition of sham was adopted in the first Supreme Court of Canada decision dealing with the concept of sham in MNR v. Cameron. In the Supreme Court of Canada decision in Stubart Investments Ltd. v. R., Estey J. explained that the sham doctrine and the judicial classification of incomplete transactions or ineffective transactions are “judicial measures for the control of tax abuse without specific legislative direction.”

A sham transaction: This expression comes to us from decisions in the United Kingdom, and it has been generally taken to mean (but not without ambiguity) a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality.

In order to determine if a particular transaction is a sham, an auditor needs to have sufficient audit evidence to support the following two elements of sham:

a) intentional deceit; and

b) legal rights and obligations presented to the CRA that are different than the actual ones.

a) Intentional deceit by the parties

In the Federal Court of Appeal decision in Antle, the notion of intentional deception in the context of a sham is clarified as follows:

The required intent or state of mind is not equivalent to mens rea and need not go so far as to give rise to what is known at common law as the tort of deceit (compare MacKinnon v. Regent Trust Company Limited, (2005), J.L.Rev. 198 (CA) at para. 20). It suffices that parties to a transaction present it as being different from what they know it to be.

b) Legal rights and obligations presented to CRA that are different than the actual ones

In the Snook v. London & West Riding Investments Ltd. decision, the sham analysis requires the element of false appearance creating between the parties, legal rights and obligations different from the actual legal rights and obligations (if any), which the parties intend to create.

In the Faraggi decision, the Federal Court of Appeal judge stated:

For a sham to exist, the taxpayers must have acted in such a way as to deceive the tax authority as to their real legal relationships. The taxpayer creates an appearance that does not conform to the reality of the situation.

c) What are the roles and responsibilities of the CRA's AGP Unit?

The mandate of the AGP program is to minimize losses to GST/HST revenue by identifying fictitious entities and persons participating in suspicious patterns of behaviour designed to undermine the tax system.

AGP aims to detect and prevent non-compliance as it relates to GST/HST refunds (including rebates). It is responsible for identifying existing and emerging GST/HST schemes, other arrangements, and transactions that result in a loss to Canada’s tax revenues.

AGP focuses on schemes based on fictitious transactions or series of transactions designed to undermine the tax system. When the sham argument is used to support an audit assessment, AGP – HQ is informed and works closely with the TSO in ensuring the two elements of sham are demonstrated and that our position is well supported. The final assessment is approved by AGP - HQ.

Q.7. Investment Plans that are SLFIs – Notices of Objection and Rebates

Summary of Question

Where amounts as or on account of the GST and the provincial component of the HST have been paid in error by a consolidated group of investment plans each of which is a selected listed financial institution or its manager, who should file a notice of objection or apply for a rebate. Should each investment plan file its own notice of objection etc. separately?

CRA Response

We are currently reviewing this matter and will respond under separate cover.

Q.8. Reopening previously assessed period to claim rebates

Summary of Question

If a registrant (such as a financial institution) has determined that it has overstated an amount of self-assessed tax reported in a previously-filed return which has already been assessed, it is precluded from claiming a tax-paid-in-error rebate by s. 261(2). If the period for objecting to the assessment has not expired, then the registrant can have the amount taken into account as an “allowable rebate” under s. 296 in the course of a reassessment to give effect to the decision with respect to the objection. If the 90-day period for objecting has expired, will CRA accept a written request that a reassessment be made to take account of the allowable rebate pursuant to s. 296, even if there are no offsetting update adjustments to net tax to be made at the same time?

CRA Response

Provided that the reporting period in question is within the limitation periods with respect to assessments under section 298 of the Excise Tax Act (ETA), the registrant may request a reassessment pursuant to subsection 296(1) of the ETA. The CRA may depending on the circumstances, accept the request and allow the adjustment to net tax, subject to documentary requirements and any applicable restrictions under sections 296 and 298 of the ETA.

Q.9. Application of s. 296(2.1) to unreported rebates [TI translation]

Summary of Question

A corporation, which was not a registrant, acquired a property in January 2013, constructed a triplex apartment building thereon and on July 1, 2013 signed the first residential lease. However, it did not remit any tax under the s. 191(3) self-supply rule and also did not claim any input tax credits. In September 2014, it filed a GST return to remit tax on the self-supply of a residential complex under s. 191(3), a rebate claim for the tax paid during the construction of the building under s. 257, and a rebate claim for a new residential rental property under s. 256.2(3). It is in a net refund position.

Question

Would CRA apply s. 296(2.1) so as to eliminate interest (s. 280) and penalty (s. 280.1) applicable to the late filing of the return?

CRA Response

Subsection 296(2.1) of the Excise Tax Act (the Act) would not apply if the corporation had made its two rebate claims with the late GST/HST return subsequent to the reporting period in which the GST/HST was deemed to be collected on the sale of the multiple unit residential complex. In general, based on the information provided, it would appear that subsection 228(6) of the Act would apply in this case.

As this concerns a non-registrant, the corporation's reporting period is a calendar month. If the deemed supply was in July 2013, the corporation was required to report the GST/HST deemed to be collected on the supply in a GST/HST return for its July 2013 monthly reporting period. The corporation was required to file the return on or before the end of August 2013 and to remit any net tax due on that date.

However, the corporation did not file its return for the July 2013 reporting period until September 2014. When the corporation made rebate claims with the return in order to offset the amount of net tax that is due under subsection 228(6) of the Act, the amount of such rebates would only offset the amount of net tax that was due, and net tax would be considered to have been paid at the time the return was filed.

A "penalty for failure to file" is imposed under section 280.1 for GST/HST returns filed late and for which an amount is payable. As the return of the corporation for the July 2013 reporting period was filed after the due date of August 31, 2013, the penalty will apply even when the late-filed return made rebate claims.

The interest that would apply at the prescribed rate under subsection 280(1) would apply to the amount of net tax that was due from the day following the date on which the net tax became due until the day it was deemed to have been paid to the Receiver General through application of the refund amount to the amount of net tax that was due.

In general, subject to certain conditions, subsection 296(2.1) of the Act provides that when making an assessment of the net tax of a person or an amount payable under Part IX by the person, the Minister may apply the deductible rebate amount to the net tax or overdue amount. It is important to note that in order for subsection 296(2.1) of the Act to apply, the deductible rebate amount must not have been claimed by the person in a return filed before the day the notice of assessment was sent.

Q.10. GST charged on "supplies" between divisions

Summary of Question

A registrant has discovered that supplies between divisions of the same legal entity are not subject to GST/HST and the supplying divisions should not have been charging GST/HST to the recipient divisions.The recipient division claimed input tax credits to recover the GST/HST paid to the supplying division. If the registrant has not been audited, are there any steps it needs to take to resolve the situation?

CRA Response

The GST/HST does not apply to transfers of property and services between branches or divisions that are part of one legal entity.

The registrant may make a request for an assessment (or reassessment, if applicable) of the net tax for reporting periods of a branch or division by submitting a request in writing to the local tax services office providing the details of any requested adjustments to the previously filed GST/HST returns by the particular branch or division.

Where the CRA assesses or reassesses the net tax for a reporting period of a branch or division of the registrant or an amount payable under Part IX of the Excise Tax Act (ETA) where an input tax credit was claimed for an amount paid in error to another branch or division of the registrant, the CRA would disallow the input tax credit and apply an unclaimed allowable section 261 rebate under subsection 296(2.1) of the ETA, subject to any documentary requirements, time limitations and other applicable restrictions under sections 296 and 298 of the ETA.

Q.11. New housing rebate

Summary of Question

S. 254(2)(e) technically requires "ownership" to be transferred to the same "individual" under s. 254(2)(b) who signs the purchase agreement. If Mr. X signs the agreement but title is put in Mrs. X's name on closing, will CRA deny the rebate? In Kandiah, 2014 TCC 276, paras. 30-34, C. Miller J held this to be a reason for denying the rebate - but found that the home was not the couple's residence. However, he allowed the rebate in Rochefort, 2014 TCC 34,on the basis that the spouse not on title had "ownership" through spousal rights to the matrimonial home. Based on Rochefort, would CRA agree that provided the home is the couple's primary place of residence (and thus the matrimonial home), it does not matter who takes title as between the spouses?

CRA Response

Generally, section 254 of the Excise Tax Act (ETA) provides a new housing rebate of a portion of the GST payable on the sale of a newly constructed or substantially renovated single unit residential complex or residential condominium unit (referred to hereafter as a “new house”). Subsection 254(2) of the ETA includes seven paragraphs that set out various requirements that must be satisfied before the Minister can pay a rebate. For the purpose of this response, we will focus on three of the seven paragraphs, namely:

• paragraph 254(2)(a) which generally requires that the builder of a new house must sell the house to a particular individual;
• paragraph 254(2)(b) which generally requires that, at the time the particular individual becomes liable under the agreement of purchase and sale for the new house that he entered into with the builder, the particular individual must be acquiring the house for use as his primary place of residence or that of a relation; and
• paragraph 254(2)(e) which generally requires that ownership of the new house must be transferred to the particular individual.

Under the requirements in these paragraphs, ownership of the new house must be transferred to the same individual to whom the builder sells the house. Absent any other factors, this is the same individual with whom the builder enters into the agreement of purchase and sale for the new house. As explained in GST/HST Policy Statement P-111R, The Meaning of Sale with Respect to Real Property, our position is that ownership refers to legal ownership (i.e., titled ownership). Therefore, if legal ownership is not transferred to the same individual with whom the builder entered into the agreement of purchase and sale, then the requirement in paragraph 254(2)(e) of the ETA is not satisfied and the Minister cannot pay a rebate. For this reason, the CRA would deny the rebate in the scenario of Mr. and Mrs. X described in the question.

With respect to the Tax Court of Canada’s decisions in the Rochefort and Kandiah cases, we note that both cases were heard under the informal procedure, and as such, those decisions are binding on the CRA only in respect of those particular cases. The CRA is not treating those decisions as a precedent for any other case (even those cases with similar fact patterns).

Joint Venture Election and Bare Trust Issues

Q.12. Delegation by JV operator/common officers

Summary of Questions

Q.1 Corporation A, which has no employees other than an officer, is designated as the operator of a joint venture under an agreement in writing and is responsible for the venture’s managerial or operational control. Can Corporation A qualify as a “participant” in the joint venture where it subcontracts all of its responsibilities to third parties? That is, if it subcontracts all of the functions, can it still be a participant?

Q.2 Corporation A has, under a joint venture agreement evidenced in writing, made an investment by contributing resources, and takes or incurs a proportionate share of revenues or losses so as to qualify as a participant in the joint venture. Corporation B is designated as the operator of the joint venture under an agreement in writing and so qualifies based on its responsibility for the venture’s managerial or operational control. Would Corporation B be disqualified from being the operator by virtue of being wholly-owned by Corporation A and having the same officers and directors?

CRA Response

Our responses to both these questions are predicated by the fact that there has to be a joint venture at law.

The relevant issue in the hypothetical situation in Question 1 is whether Corporation B has managerial or operational control. As indicated in GST/HST Notice 284, Bare Trusts, Nominee Corporations and Joint Ventures, whether a person has the managerial or operational control of a joint venture is a question of fact which is determined through a full examination of the duties performed and the relevant agreements.

As further indicated in GST/HST Notice 284, evidence of a person having the necessary managerial or operational control may include having the authority to engage personnel or contractors on behalf of the joint venture. Where the person does not engage staff to perform any of the operator's duties, it is doubtful whether the person would be considered to have the managerial or operational control of the joint venture, subject to consideration of all relevant facts and agreements.

Where an operator has no staff and contracts out all of its responsibilities to other parties, the officers of the operator are often the same persons as the officers of the other participants (participants under paragraph (a) of the GST/HST Policy Statement P-106 administrative definition of “participant”). This would make it doubtful whether the operator actually has managerial or operational control of the joint venture, subject to consideration of all relevant facts and agreements.

With respect to the hypothetical situation in Question 2, where it can be determined based on consideration of all relevant facts and agreements that independent powers are given to Corporation B and that these powers in fact give Corporation B managerial or operational control of the joint venture, then Corporation B could be considered to be the operator of the joint venture.

Q.13. Co-ownership or 2 agreements as JV

Summary of Questions

Q.1 Can a written agreement, that describes the relationship between the participants as co-ownership of property (rather than as a joint venture), qualify as an agreement evidenced in writing for purposes of s. 273(1)?

Q.2 In Year 1, Corporations A and B enter into a (joint venture) “Initial Agreement” specifying their rights, responsibilities and relationship and under which they contribute resources and share proportionately in revenue or losses from the joint venture activities. In Year 2, they enter into the “Subsequent Agreement” with Corporation C in which it is designated as the operator of the joint venture and is assigned the responsibility for the managerial or operational control of the joint venture. Corporations A and B each execute a Form GST21 with Corporation C.

The rights, responsibilities and relationship between Corporations A and B are not discussed in the Subsequent Agreement. Could both the Initial and Subsequent Agreements collectively be considered “an agreement” for purposes of s. 273(1) so that s. 273(1)(c) could apply?

CRA Response

1) It may be possible that a co-ownership agreement may constitute an agreement evidenced in writing for purposes of subsection 273(1) of the Excise Tax Act, but this will be determined on a case-by-case basis. Furthermore, the nature of the agreement must be one of a joint venture at law. This would require at least two participants being participants under paragraph (a) of the definition of “participant” in GST/HST Policy Statement P-106 Administrative definition of a “participant” in a joint venture.

2) Based on the facts above, for purposes of subsection 273(1) of the Excise Tax Act, the CRA may consider the two agreements to constitute a single joint venture agreement with Company C as the participant/operator of that joint venture effective the date the Subsequent Agreement is entered into where no other provisions of the agreement affect the nature of the relationships between the parties. However, this could only be confirmed after examining the agreements. Furthermore, the nature of the agreement must be one of a joint venture at law.

Q.14. Recognition of nominee/prête-nom

Summary of Question

TVQ16-30/R1 « Contrat de prête-nom » states:

“All persons may hold property of others under a nominee agreement. For such agreement to be valid, the nominee agreement must have been entered into when the property was acquired or before, and must respect the provisions of the Civil Code of Quebec regarding mandates. Further, to be recognized for tax purposes, the mandatory and the mandatary must disclose such nominee agreement and its scope to Revenu Québec. ” (our translation)

The Quebec corporate income tax return (CO-17) contains a section “Information about the corporation” and one of the questions (paragraph 26) is the following: “Is the corporation a general partner, or a party to either a contract of mandate or a contract of prête-nom?” If a taxpayer indicates in its Quebec corporate income tax return (CO-17) for the calendar year 2014 (to be filed in 2015) that he did act as a prête-nom, would this cover him for GST (and QST) purposes for all transactions having taken place in 2014? We note that this question does not appear in the federal corporation income tax return. How would one notify the CRA of this? Is notifying only Revenu Quebec sufficient?

CRA Response

We are currently having discussions with Revenu Quebec regarding this matter.

Q.15. Backdated JV election for co-ownership

Summary of Question

Would the “temporary administrative tolerance” in Notice No. 284 extend to a registered bare trustee filing the returns in a real estate co-ownership situation where no s. 273 election had been made? Would it be possible to now do the election indicating the date the co-ownership began as the effective date? As an analogy, note the 2002 Roundtable, Q.15 indicating that a s. 156 election could be made retroactively if the parties had conducted themselves as if an election were in place (and the other conditions were satisfied).

CRA Response

The temporary administrative tolerance policy set out in GST/HST Notice 284 is no longer available for current reporting periods. The administrative tolerance was only available for joint venture elections which were made prior to 2015, for reporting period ending before 2015, provided all returns have been filed, all amounts have been remitted and the joint venture participants are otherwise fully compliant.

A co-ownership arrangement does not necessarily have the same characteristics as a joint venture and the section 273 election is generally not available to such arrangements. Furthermore, where there is a bare trust operator for a particular real estate co-ownership arrangement, the co-ownership arrangement cannot make a valid election.

Where in a particular fact situation, there is a valid operator, it can be clearly established that a joint venture exists for purposes of the section 273 election, and the parties were acting as if the election were in place, a back-dated election can be made that dates back to the date of the written co-ownership arrangement.

Q.16. Late registration of transferee of JV interest

Summary of Questions

Company B transfers its co-ownership interest in a commercial rental property on a rollover basis to Company C, whose sole activity is to hold the property. Erroneously, Company C is not registered at the time of the transfer. However, a joint venture election appointing the other co-owner (Company A) as operator under s. 273 is made. Six months later, it is discovered that Company C was not registered for GST/HST purposes as at the transfer date, so that Company B should have collected the GST/HST on the transfer. Company B is part of a group which makes supplies in excess of the small supplier threshold.

a) Can Company C register for GST/HST given that an election under s. 273 deems the supplies made under the agreement to be made by the operator (Company A) and not the participant (Company C)?

b) If Company C can register, is it possible to apply for retroactive registration back to the date of the transfer?

c) If Company C can register but not on a retroactive basis to the date of the transfer, Company C would have to pay the GST/HST on the value of the consideration of the interest in the property. Would s. 171(1) deny the ITC on the transfer as Company C would not meet the definition of small supplier?

d) If an election under s. 273(1) were not made between Company A and Company C, would Company C be entitled to register for GST/HST retroactively back to the transfer date given that it is making supplies by way of lease of commercial property and that it is not a small supplier?

CRA Response

For purposes of the following comments it is assumed that Company A was a GST/HST registrant when the joint venture election was made under subsection 273(1) of the Excise Tax Act (ETA).

a) It will be a question of fact whether Company C is required to register, or may voluntarily register, for GST/HST purposes where it is a co-venturer in a joint venture and an election has been made under section 273 of the ETA to have Company A account for the GST/HST as operator for the joint venture. To determine its eligibility to register, we would review the terms of the joint venture, the details of the transfer of the real property, and whether Company C undertakes a commercial activity that is not part of the activities of the joint venture.

If Company C makes a taxable supply in Canada in the course of a commercial activity engaged by it in Canada, otherwise than as a small supplier, it will be required to register for GST/HST purposes. However, as a result of making the joint venture election, Company C will not include consideration from taxable supplies deemed to have been supplied by Company A on its behalf in the course of the joint venture activities when determining if it has exceeded the small supplier threshold under section 148 of the ETA unless Company A is an associate. If Company C is not required to be registered but undertakes an activity that is not part of the joint venture agreement, it may be eligible to voluntarily register if the activity is a commercial activity engaged by it in Canada.

b) Retroactive registration back to the date of the transfer of the property would depend on whether Company C was required to be registered at that time under subsection 240(1) of the ETA. If Company C is currently engaged in a commercial activity in Canada as a small supplier it may voluntarily register and the date of registration will generally be the date that we receive the application for registration.

c) Where Company C is eligible to voluntarily register as a small supplier, subsection 171(1) of the ETA would apply for the purpose of determining an ITC in respect of property held by Company C for consumption, use or supply in the course of its commercial activities immediately before becoming a registrant. However, if it were to be established that Company C was not a small supplier, we confirm that subsection 171(1) of the ETA would not apply to allow Company C to claim an ITC in respect of the transfer.

d) Generally, if an election under subsection 273(1) of the ETA was not made by Company C and Company A, and Company C was making taxable supplies in Canada of real property by way of lease, then it would have been required to be register under subsection 240(1) of the ETA at the time it first made a taxable supply in Canada otherwise than as a small supplier. It will be a question of fact whether, in this situation, Company C was required to be registered at the time of the transfer of the real property.

Corporate Transactions and Elections

Q.17. ITCs under s. 186(1) for issuing shares (Stantec)

Summary of Question

Memorandum 8.6, para. 11, Example 3, indicates that “HoldCo” may not claim input tax credits (ITCs) under s.186(1) for legal and accounting costs incurred in connection with raising money through issuing shares, even where the issuance proceeds are used to purchase additional shares in “OpCo,” all of whose property is acquired for consumption, use or supply in widget manufacturing - on the basis that the services are acquired for consumption or use in relation to the first order supply (the share issuance) and not in relation to the shares of OpCo. However, in Stantec the Tax Court found that the s. 186(1) language implied a wide, rather than narrow, connection between the property and services acquired and the shares of the Opco, and rejected the above-noted example (published at that time in P-196R), stating:

I see no support for this one step removed doctrine. Policy P-196R allows the application of subsection 186(1) if the holding company incurs costs to simply buy an operating company shares, without raising money by issuing its own shares. I fail to see how one acquisition is in relation to the subsidiary company shares and the other is not.

In light of the Tax Court’s explicit rejection of the “one step removed doctrine,” does CRA intend to revise Example 3 to permit a Holdco to claim ITCs for costs incurred in connection with a share issuance of its own shares that relates directly to a purchase of additional shares in an Opco?

CRA Response

The Tax Court’s decision in Stantec Inc. v. The Queen was made under the informal procedure and was appealed. The Federal Court of Appeal declined to make a determination regarding the Tax Court judge’s findings pursuant to subsection 186(1) of the Excise Tax Act (ETA); which means they neither agreed nor disagreed. It was unnecessary to do so as it made a determination under subsection 186(2) of the ETA. We currently have no plans to revise Example 3 in paragraph 11 of GST/HST Memorandum 8.6, Input Tax Credits for Holding Corporations and Corporate Takeovers, but we are reviewing our interpretation of section 186 of the ETA.

Q.18. "Nominal value" in s. 156 - qualifying member

Summary of Question

Black’s Law Dictionary defines "nominal" as "trifling, especially as compared to what would be expected (lamp sold for a nominal price of ten cents)." How does CRA interpret "nominal" in para. (c)of “qualifying member”?

CRA Response

Whether property is considered to be of nominal value for purposes of the definition of “qualifying member” in paragraph 156(1)(c) of the Excise Tax Act (ETA) will be determined on a case by case basis. Generally, this determination will be made with reference to the value of the property and its significance relative to the commercial activity in question.

If there is a specific situation where there is uncertainty in this regard, CBA members are invited to submit the relevant facts so that we may provide our views for further guidance.

Q.19. S. 167(1) election on ITA s. 98(5) wind-up

Summary of Question

CRA has indicated (2001 CBA Roundtable, Q. 51) that a s. 167 election is not available where a partnership is wound up and each partner receives an undivided interest in the partnership property (as there is not a supply of the business to one recipient). On the dissolution of a partnership under ITA s. 98(5) of the Income Tax Act (i.e., all of the assets of the partnership are transferred from the partnership to a single partner), can the s. 167 election be made respecting the assets transfer to the single partner?

CRA Response

Where the rollover provisions of subsection 98(5) of the Income Tax Act (ITA) apply, an election under subsection 167(1) of the Excise Tax Act (ETA) could be available depending on the particular facts of each case.

An election under subsection 167(1) of the ETA is generally available where the parties to the transaction meet certain conditions, including the two following tests:

1. the supplier must sell to a single recipient a business or part of a business that was established or carried on; and

2. the recipient must be acquiring ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.

Also, for subsection 167(1) of the ETA to apply, there must be an agreement for a supply of a business that satisfies the conditions set out in subsection 167(1). Where the disposition of 100% of the partnership property from the partnership to the former member constitutes the supply of a business, and where an agreement for a supply of the business from the partnership, as supplier, to the former member exists, an election under subsection 167(1) of the ETA could be available, provided the conditions for the election are met.

Q.20. Closely-related test where non-voting shares

Summary of Question

Does the 90% test in s. 128(1)(a) only take into consideration shares that have “full voting rights under all circumstances” in both the numerator and the denominator? For example, Corporation A holds 100% of Corporation C’s class A shares, and Corporation B holds 100% of Corporation C’s class B shares. If the class B shares do not have full voting rights under all circumstances, are Corporation A and Corporation C closely related?

CRA Response

It is a question of fact as to whether a particular corporation is closely related to another corporation under section 128 of the Excise Tax Act (ETA). Assuming that the class B shares have no voting rights and that there are no other issued and outstanding shares, it appears that Company A and Company C are closely related as it owns 90% or more of the value and number of the issued and outstanding shares of the capital stock of Company C having full voting rights under all circumstances. It is important to note that the explanatory notes to section 128 of the ETA refer to a degree of common ownership of at least 90%. Furthermore, the determination of “closely related” is relevant for purposes of the elections under sections 150 and 156 of the ETA which respectively deem certain supplies between closely related corporations to be financial services or made for no consideration. The explanatory notes to these provisions refer to wholly-owned corporations. Any application of the provisions of section 128 of the ETA to a particular fact situation should be consistent with the policy intent of the provision.

Q.21. Non-application of s. 186 to s. 156 [TI translation]

Summary of Question

A parent corporation (which is not a financial institution) earns 60% of its income from management fees charged to its wholly-owned subsidiary (which is engaged exclusively in commercial activity, and also is resident in Canada) and 40% as interest and dividend income from the subsidiary. It claims full input tax credits under s. 169 (based on its management activity) and under s. 186 (respecting its interest and dividend income).

Does the deeming effect of s. 186 permit a s. 156 election to be made?

CRA Response

For the purposes of making an election under section 156 of the Excise Tax Act (ETA), a "specified member" of an eligible group is defined, in part, as a "qualifying member" of the group. Subsection 156(1) of the ETA defines "qualifying member" of a qualifying group to include a registrant that is a corporation resident in Canada and who meet certain conditions, including the following:

(i) the registrant has property (other than financial instruments and property having a nominal value) and has last manufactured, produced, acquired or imported all or substantially all of its property (other than financial instruments and property having a nominal value) for consumption, use or supply exclusively in the course of commercial activities of the registrant.

In determining whether the registrant met the above criteria for "all or substantially all," the value of financial instruments and property having a nominal value should not be taken into account. In calculating the level of commercial activity, the registrant would divide the value (e.g., the carrying value) of the other property that is used, consumed or supplied in the course of commercial activities by the value of all other property held by the registrant.

Since there is not enough information in the example with respect to the value of the property of the parent corporation, we cannot comment on its eligibility for the election. However, when more than 10% of the property of the parent corporation (other than financial instruments and property having nominal value) was last manufactured, produced, acquired or imported for consumption, use or supply exclusively in the course of exempt activities, the parent corporation cannot make the election.

Finally, the question refers to subsection 186(1) of the ETA. The deeming effect of subsection 186(1) of the ETA generally allows certain corporations to claim ITCs on expenses relating to shares of another corporation that is related to them or indebtedness of that corporation where the conditions of this subsection are satisfied. The provisions of subsection 186(1) of the ETA apply only for the purpose of ITC calculations and have no impact on the eligibility criteria for the election under section 156 of the ETA.

Q.22. “Nominal value” in s. 156

Summary of Question

Assume that, at the time that a newly-established registrant seeks the application of s. 156 to its purchase of $1 billion worth of assets, its only property (purchased immediately before) is a computer with a value of $300. The computer is not “nominal” in absolute value terms (if “nominal” means close to zero), but ownership of the computer might not satisfy s. 156(1)(c) if “nominal” is measured relative to the $1 billion of acquired assets. How does CRA interpret “nominal” in these circumstances?

CRA Response

Whether property is considered to be of nominal value for purposes of the definition of “qualifying member” in paragraph 156(1)(c) of the Excise Tax Act (ETA) will be determined on a case by case basis. Generally, this determination will be made with reference to the value of the property and its significance relative to the commercial activity in question.

Whether a $300 computer is of nominal value would depend on its relative value to the commercial activities for which it is acquired. Assuming that the subsequent acquisition of $1billion in assets is for consumption, use or supply exclusively in the commercial activities of the registrant, it would appear that the computer would be of nominal value. As such, the registrant may be a “qualifying member” where the conditions of subparagraph 156(1)(c)(iii) of the ETA are met.

Administration

Q.23. Registration by CRA without notice

Summary of Question

New ss. 241(1.3) to (1.5) require CRA to give 60 days’ notice before registering a person who has failed to register. How does this affect the decades-old auditing practice of simply assigning a GST/HST registration number to someone who should have been registered, and then assessing the person under that number for unremitted net tax?

CRA Response

The CRA’s new discretionary registration authority under subsection 241(1.5) of the ETA does not preclude the CRA from assessing a particular person who should have been registered for unremitted net tax. If the CRA exercises the authority under subsection 241(1.5) of the ETA to register a particular person, the CRA could still assess that person under paragraph 296(1)(a) of the ETA for unremitted net tax in respect of reporting periods prior to that person’s effective registration date.

Q.24. Withdrawn

Q.25. Recovery of overpaid GST for assessed month

Summary of Question

Company A has collected the appropriate amount of GST/HST from its customers, but has remitted twice the amount of GST/HST collected - and has also been assessed for those months. Can it recover the overpaid amounts through amended returns?

CRA Response

As Company A has been assessed for the reporting periods where the overpayments have been made, paragraph 261(2)(a) of the Excise Tax Act (ETA) precludes it from claiming a rebate under section 261.

Under subsection 299(3) of the ETA, an assessment, subject to being vacated on an objection or appeal and subject to a reassessment, is deemed to be valid and binding.

Thus, where there has been an assessment for a reporting period, Company A may file a Notice of Objection to that assessment within ninety days after the day the Notice of Assessment is sent to Company A pursuant to subsection 301(1.1) of the ETA. A separate Notice of Objection must be filed for each disputed assessment.

Where Company A has not filed a Notice of Objection within the 90-day time frame, then pursuant to section 303 of the ETA, Company A may file an application for an extension of time to file the Notice of Objection if there is a valid reason for failing to file the objection on time. The application must be made within one year after the expiration date for filing the Notice of Objection.

Alternatively, and provided that the reporting period in question is within the limitation periods with respect to assessments under section 298 of the ETA, Company A may request a reassessment of its net tax for a reporting period pursuant to subsection 296(1) of the ETA. At its discretion, the CRA may accept the request and allow the adjustment to net tax for the reporting period, subject to documentary requirements and any applicable restrictions under sections 296 and 298 of the ETA. The request should be made in writing to the local CRA tax services office and provide the details of any requested adjustment to the previously filed GST/HST return.

Upon a reassessment of net tax for a particular reporting period, paragraph 296(4.1)(a) of the ETA provides for a time period of four years to apply an allowable section 261 rebate to the outstanding liabilities of Company A under paragraph 296(3.1)(b) of the ETA. However, pursuant to paragraph 296(4.1)(b) of the ETA, any amount of an allowable section 261 rebate remaining after applying the rebate to any outstanding liabilities cannot be paid out to Company A beyond the two-year time limit under 261(3) of the ETA. Also, a refund will not be paid out unless Company A has filed all returns that are required to be filed as set out under subsection 296(7) of the ETA.

Q.26. Assignment of corporate tax account on non-resident registrations

Summary of Question

What should a non-resident do if it wishes to voluntarily register for HST/GST purposes but does not (contrary to CRA practice) want a corporate tax account assigned?

CRA Response

Every corporation who registers with the CRA for a GST/HST account also receives a corporate tax account as there is a legal requirement for certain non-resident corporations to file a corporate tax return. Every non-resident GST/HST registrant speaks to a CRA officer when opening an account; they are also sent a “New GST/HST Registrant” package. If a non-resident corporation confirms they have no legal obligation to file a corporate tax return with the CRA, they can close the corporate tax account by phone or by mailing an RC145 Request to Close Business Number (BN) Account.

Q.27. Potential Rulings involvement in non-resident registrations

Summary of Question

CRA’s process for registering non-residents takes at least five weeks. What does the process entail, and why so long?

CRA Response

Detailed overview of the entire, internal process involved in the registration process for non-residents:

• Applications are reviewed for completeness and required documentation.
• Applications are then forwarded to a senior agent for a phone interview to determine the applicant’s eligibility for registration (treated first in/first out except for urgent cases).
• If registration is required, or the applicant choses to voluntarily register, the senior agent discusses filing obligations and requirements to ensure the applicant is compliant with the Excise Tax Act (helps reduce non-compliance as many of these taxpayers are not familiar with Value Added Tax).
• Security requirements (applicable only to non-residents) are also discussed.
• Complex cases are referred to GST/HST Rulings with all the details gathered during the phone interview.
  • If Rulings determines the applicant should be registered, they inform the non-resident office via email and the account is activated immediately.
  • If Rulings determines the applicant cannot be registered, they inform the non-resident office via email and the application is withdrawn.
  • Rulings advises applicants during their phone conversation as to whether or not they can and should register.
• When registration is complete, the senior agent emails the new registrant package and informs the taxpayer of their registration number.

Why the process can take so long:

• A noted increase in the volume of requests since 2009-2010, coupled with budget reductions, has contributed to delays in the processing of applications.
• Several phone calls are often needed in order to determine eligibility; authorized representatives may not be aware of all aspects of the business.
• There can be delays when awaiting required documents such as articles of incorporation, copies of contracts, or invoices.
• Businesses from other countries may be less familiar with the CRA’s GST/HST compliance rules; in addition there are other obligations specific for non-resident businesses such as security requirements that need to be addressed.
• Requests that are sent to Rulings may be subject to further delays depending on the Rulings workload and complexity of the case.

Q.28. Selected Listed Financial Institution – Rebate of PVAT

Summary of Question

Where a selected listed financial institution (SLFI) files a rebate application pursuant to s. 261 for tax paid in error under Division II or IV of the ETA, please confirm the following:

a) the rebate application should apply only to the rebate amount as or on account of the GST amount at issue, i.e., excluding provincial value added tax (“PVAT”);

b) under s. 263.01, a SLFI generally is not entitled to a rebate of the PVAT. Rather, “G2(iii)” in para. 46(a) of the SLFIAttribution Method (GST/HST) Regulations (Regulations) provides a net tax adjustment under component “G” in s. 225.2(2) where the rebate amount in respect of the GST under s. 261.; and

c) where a tax adjustment transfer (“TAT”) election is in effect between the SLFI and its manager, the PVAT rebate under component “G” is transferred to the manager in accordance with the TAT election pursuant to s. of the Regulations, so that the PVAT “rebate” is “paid” through the manager.

CRA Response

We are currently reviewing this matter and will respond under separate cover.

Q.29. VDP interest relief not restricted to wash transactions

Summary of Question

The standard form letter following an accepted voluntary disclosure refers to interest relief. Is this is a reference to the waiver of interest in “wash” scenarios. Please discuss interest relief following an accepted voluntary disclosure.

CRA Response

In addition to penalty relief, if a disclosure is accepted as valid by the Voluntary Disclosures Program (VDP), the Minister may grant partial relief in the application of interest against a taxpayer in respect of assessments for years or reporting periods preceding the three most recent years of returns required to be filed. This relief is not limited to GST/HST wash transactions.

Q.30. Audits following voluntary disclosures

Summary of Question

Please comment on the scope of the CRA’s audits post-voluntary disclosure.Please confirm that the CRA auditor may audit the books and records of the company but is not authorized to take a different legal position than the position accepted for purposes of the voluntary disclosure.

CRA Response

Under the Voluntary Disclosures Program (VDP), the VDP officers determine whether a disclosure meets the four conditions of the program:

1) voluntary;

2) complete;

3) penalty; and

4) one year past due.

However, they do not audit or verify the accuracy of the information provided in the disclosure.

In the standard form letter when VDP accepts a disclosure it states that we have accepted this disclosure only for the amount of income/tax disclosed. However, the VDP has not verified the accuracy of the information they gave, and the CRA may audit or review the information in the future.

Q.31. VDP contact person

Summary of Question

The standard form letter provides the name of the relevant team leader in the voluntary disclosures unit but does not provide contact information for that person. Rather, the taxpayer is provided with the CRA’s Business Window general hotline. Please comment on why this is the case.

CRA Response

Not all taxpayer correspondence requires that a contact name in the Voluntary Disclosures Program (VDP) be provided. If a disclosure is accepted, a decision letter is provided to the taxpayer advising them that their information is being sent for processing and that they will receive an official notice of assessment at a further date. In this case, no further information is required from a taxpayer and no further contact is necessary to be made by a VDP officer. Normally once the accepted disclosure has been sent for processing, any follow-up enquiries may be made to the General Enquiries telephone lines. The officers who respond on these lines can verify whether the assessments have been processed and if they are not able to provide a response, they will contact the appropriate CRA area and have them call back the taxpayer.

In cases where the disclosure submission involves a no-name (anonymous) situation or in cases where a submission is missing information, a VDP letter will be sent out requesting the necessary information and will include a contact name and telephone or fax number of an officer in the VDP. These numbers are specifically linked to the VDP and not the general enquiries lines.

If a disclosure is denied, a taxpayer is provided with the process to request a second level administrative review. This involves sending a letter to the Director or the Assistant Director of the tax centre where the disclosure decision was made. The General Enquires telephone numbers are standard inclusions in these letters.

At any time, a taxpayer may write or fax a question to the appropriate VDP office and these contacts will be responded to in a timely manner.

Q.32. Voluntary Disclosures - Post-Voluntary Disclosure Interest

Summary of Question

In some cases, CRA has been charging interest on amounts that were disclosed, calculated from the date of filing the initial voluntary disclosure letter. Please confirm that in the case of “wash transactions” interest for unpaid assessments should only be calculated from the date that the Notices of Assessment are issued pursuant to GST/HST Memorandum 16.3.1, para. 21.

CRA Response

As noted in GST/HST Memorandum 16.3.1, if the disclosure involves a wash transaction that is accepted under the Voluntary Disclosures Program, interest is reduced up to the date of the Notice of Assessment. If there is an unpaid balance remaining after this date, interest would accrue until paid.

Q.33. ITCs claimed for when unregistered registrant

Summary of Question

Can a person claim input tax credits in a reporting period after its registration in respect of GST/HST paid in periods where the person was a registrant but not registered for GST/HST assuming it is otherwise within the limitation period?

CRA Response

Generally, yes, a person can claim input tax credits (ITCs) in a return filed for a reporting period after it becomes registered in respect of GST/HST paid in reporting periods during which the person was a registrant, but not registered for GST/HST, assuming it is otherwise within the applicable ITC limitation period under subsection 225(4) of the Excise Tax Act (ETA) and all other legislative conditions have been met, including the ITC documentary requirements.

Under subsection 169(1) of the ETA one of the conditions for claiming an ITC is that the person must be a registrant during the reporting period in which the GST/HST becomes payable by the person, or is paid by the person without having become payable, on the property or service acquired, imported or brought into a participating province by the person for consumption, use or supply in the course of the person’s commercial activities. A “registrant” is defined under subsection 123(1) of the ETA to mean a person who is registered, or who is required to be registered, for GST/HST purposes.

Other Issues

Q.34. Use of s. 141.01(2) free supply rule by holdco

Summary of Question

54669 dated November 29, 2004 indicated that a holding corporation that made free supplies of management services to related corporations with operating businesses could claim ITCs to recover the GST/HST that it paid on expenses incurred in providing the free supplies. However, in, for example, 2010 CBA Roundtable, Q. 20, CRA indicated that the “free supply” rule does not allow a registrant to claim ITCs in situations where it receives dividend income from the corporation receiving the benefit of the free supply. When does s.141.01(4) allow a registrant to claim ITCs on expenses that are incurred for the direct benefit of another person where it also earns interest, dividends or partnership distributions from that person?

CRA Response

It is a question of fact whether subsection 141.01(4) of the Excise Tax Act (ETA) would apply in a particular circumstance. However, where a person provides property or a service to a person for no consideration but receives interest or dividend revenue from that person it is unlikely that ITCs would be available as a result of the application of subsection 141.01(4). If you have a question about the application of subsection 141.01(4) of the ETA to a particular situation, please provide the relevant facts and the agreements and we will review the request.

Q.35. S. 325 assessment re transfer before s. 323 preconditions satisfied

Summary of Question

After an arguable failure of Corporation X to charge and remit GST/HST, its director ("Director A") transfers his cottage to his wife for nominal consideration. Two years later Corporation X is assessed in respect of its non-collection, and subsequently appeals to the Tax Court. It is not until after this that CRA for the first time fulfils the requirements in s. 323(2) by filing a s. 316 certificate for Corporation X's tax liability in the Federal Court, and taking steps to prove that execution for that amount has been returned unsatisfied in whole or in part. Thereafter, CRA assesses Director A under s. 323. Does s. 325 apply to the transfer of the cottage?Note that although Filippazzo v. The Queen, 2000 DTC 2326 suggests yes, Walsh, 2009 TCC 557 and Savoy, 2011 TCC 35 suggest that CRA cannot support a director's liability assessment without proving that the requirements in s. 323(2) have first been complied with, suggesting that there is no tax liability on Director A for the purposes of the application of s. 325 until the requirements of s. 323(2) are met, thereby crystallizing director's liability.

CRA Response

Note: The question states that the CRA “fulfils the requirements in subsection 323(2) of the ETA” but later states “by taking steps that will allow it to prove execution”. Taking steps is not sufficient as the execution must be proved for the requirements in subsection 323(2) of the ETA to actually be fulfilled.

If the execution has not been proven to date (it is still with the sheriff’s office, for example), then the CRA cannot raise a director’s liability assessment under section 323 of the Excise Tax Act (ETA). However, the transfer of assets did happen after the date of the failure by the director to ensure that the remittances were made. As a result, the potential for a section 325 non-arm’s length assessment exists, as made clear in Pliskow v. The Queen, 2013 TCC 283 (see paragraphs 13-20). Nevertheless, until there is a debt assessed against the director, the CRA cannot assess his spouse in relation to that transfer. The requirements in subsection 323(2) of the ETA must be fulfilled to raise both assessments.

If proof of the execution had been returned, and assuming there are no other barring issues, the CRA can raise the assessment against the director under section 323 of the ETA, and then can assess the spouse for the non-arm’s length transfer under section 325 of the ETA since the transfer happened after original default occurred.

Regarding the case law quoted, the following is a summary of how each one does or does not apply to the situation:

1. Filippazzo v. The Queen, 2000 DTC 2326 – This case correctly notes that after a director’s liability assessment was raised (and yes, proof of the execution existed), then a non-arm’s length transfer assessment was validly raised.

2. Walsh v. The Queen, 2009 TCC 557 – This case was lost due to a technicality. Although it also had proof of the execution, this was not provided during disclosure. As a result, the appeal was granted. If the proof of execution had been provided by the CRA before this trial, then the assessment would have been valid, unless the appeal was granted for a different reason.

3. Savoy v. The Queen, 2011 TCC 35 – This case is similar to Walsh in that the proof of execution was not provided during disclosure. In addition, the requirement at paragraph 323(2)(b) of the ETA was at issue. The judge determined that the corporation had been dissolved, and under paragraph 323(2)(b) of the ETA, a proof of claim was required within 6 months, and this was not done. So even if the CRA had not lost this case over the technicality regarding providing the document during discovery, it still would have lost on appeal.

Q.36. Determination of “Investor Percentage”

Summary of Question

Q. 16 from the 2014 CRA/CBA Roundtable, which was not answered due to the need for assistance of the Income Tax Rulings Directorate, was resubmitted.

CRA Response

A verbal update was provided by Phil Kohnen (Income Tax Rulings Directorate).

Q.37. Zero-rated drugs

Summary of Question

Given the confusion around Part I of Schedule VI to the Excise Tax Act (ETA) and the proposed amendments, can the CRA confirm that unconditionally zero-rated drugs includes all drugs that are or would be required to be sold under prescription of a medical practitioner or authorized person if the drugs were sold in Canada?

CRA Response

Part I of Schedule VI to the Excise Tax Act (ETA) provides for the zero-rating of prescription drugs and biologicals. Certain supplies of drugs and biologicals are zero-rated unconditionally and other supplies are zero-rated only when certain conditions related to their supply are met.

Section 2 of Part I of Schedule VI to the ETA provides for the zero-rating of certain drugs and substances without conditions in paragraphs a), c), e) and g). These drugs and substances are zero-rated throughout the distribution chain i.e., from manufacturer to distributor to pharmacist to consumer.

Paragraphs b), d) and f) of section 2 of Part I of Schedule VI to the ETA zero-rate the supplies of drugs when certain conditions are met. Paragraph b) provides for the zero-rating supply of a drug that is set out on the list established under subsection 29.1(1) of the Food and Drugs Act or that belongs to a class of drugs set out on that list, other than a drug or mixture of drugs that may, under that Act or the Food and Drug Regulations, be sold to a consumer without a prescription. If the drug or mixture of drug can be sold to a consumer without a prescription, the supply won’t be zero-rated. However, if the drug or mixture of drug can’t be sold to aconsumer without a prescription, the supplies are zero-rated throughout the distribution chain i.e., from manufacturer to distributor to pharmacist to consumer.

Paragraph d) of section 2 of Part I of Schedule VI to the ETA provides for the zero-rating supply of a drug that contains a substance included in the schedule to the Narcotic Control Regulations, other than a drug or mixture of drugs that may, pursuant to the Controlled Drugs and Substances Act or regulations made under that Act, be sold to a consumer with neither a prescription nor an exemption by the Minister of Health in respect of the sale. If the consumer can purchase the drug with neither a prescription nor an exemption by the Minister of Health, the supply of the drug is not zero-rated and the supplies of that drug are not zero-rated throughout its distribution.

Paragraph f) of section 2 of Part I of Schedule VI to the ETA provides for the zero-rating supply of a drug the supply of which is authorized under the Food and Drug Regulations for use in an emergency treatment. Only the supplies that are authorized under those regulations can be zero-rated. It should be noted that the authorization would include the name of the practitioner to whom the drug can be sold.

Drugs and substances can be zero-rated under section 2 of Part I of Schedule VI to the ETA as long as they are not labelled or supplied for agricultural or veterinary use only.

Section 3 of Part I of Schedule VI to the ETA also provides for the zero-rating supply of a drug when the drug is for human use and is dispensed under certain conditions. The first possibility is when the drug is dispensed by a medical practitioner (i.e., a person who is entitled under the laws of a province to practise the profession of medicine or dentistry) to an individual for the personal consumption or use of the individual or an individual related thereto. The second possibility is where the drug is dispensed on the prescription of a medical practitioner or authorized individual (i.e., an individual, other than a medical practitioner, who is authorized under the laws of a province to make an order directing that a stated amount of a drug or mixture of drugs specified in the order be dispensed for the individual named in the order) for the personal consumption or use of the individual named in the prescription.

“Prescription” is defined in section 1 of Part I of Schedule VI to the ETA to mean a written or verbal order, given to a pharmacist by a medical practitioner or authorized individual, directing that a stated amount of any drug or mixture of drugs specified in the order be dispensed for the individual named in the order.

Where section 3 of Part I of Schedule VI to the ETA applies, the only supply that is zero-rated is the “final” supply. All other supplies throughout the distribution chain won’t be zero-rated and will be subject to the GST/HST at the applicable rate.

If neither section 2 nor 3 of Part I of Schedule VI to the ETA can apply, the supply of the drug is not zero-rated. In order to zero-rate the supply of a drug that is medically necessary but not listed in Part I of Schedule VI, an amendment to Part I would be required. This is a matter of tax policy and is of the responsibility of the Department of Finance Canada.

Q.38. Update on audit issues

Summary of Question

Question

Please provide an update regarding any new or developing issues in the audit area.

CRA Comments

An update was provided at the meeting.

Q.39. Update on court cases/verification for ITC claims

Summary of Question

Question

At the Commodity Tax Symposium, the CRA indicated that it was considering Revenu Quebec's policy of imposing verification obligations on taxpayers claiming input tax credits. However, the Federal Court of Appeal recently decided in Salaison Lévesque Inc. c. R., 2014 CarswellNat 5138, 2014 CAF 296 (Cour d'appel fédérale) that Revenu Quebec's policy was not valid. How does the Salaison decision impact on the CRA's considerations.

Please provide an update regarding any other new or developing issues in the Court Cases/Objection Area.

CRA Response

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

Canada Revenue Agency