A corporation formerly engaged exclusively in making taxable supplies contributes all of its assets to a partnership in exchange for an interest therein. The corporation’s sole assets thereafter are the partnership interest and cash.

Question

After the sale of assets to the partnership, can the corporation and the partnership make the election provided by section 156, assuming the corporation holds all or substantially all of the interest in the partnership and all or substantially all of the property of the partnership (other than financial instruments) is used in commercial activities?

Discussion

The question centres on whether the corporate partner can meet the test set forth in paragraph (c) of “specified member” in subsection 156(1). Since the corporate partner no longer makes supplies for GST purposes (though, at law, it is considered to make the supplies made by the partnership), query whether the specified member test can continue to be met. If the corporate partner cannot be regarded as a specified member of a closely related group, this severely limits the utility of the section 156 election where partnerships are involved.

CCRA Comments

We assume that the corporation and the partnership meet the other requirements of subsection 156(1) of the ETA. However, the corporation cannot be a specified member of a qualifying group in the particular fact scenario that has been described above, so the election in subsection 156(1) would not be available to the corporation and the partnership.

Once the corporation has become closely related to the partnership by acquiring its interest in the partnership, the corporation’s only property is that interest, which fits under paragraph (d) of the definition of financial instrument in subsection 123(1) of the ETA. Since the corporation has no property other than a financial instrument, it does not fit under the first part of paragraph (c) of the definition of “specified member” in subsection 156(1). Since the corporation ceased making supplies once it acquired the partnership interest, it does not fit under the second part of that paragraph either, so it cannot be a specified member of a closely related group.

If the election were available, it is not clear what advantage it would provide. The election would not have applied to the initial transfer of property from the corporation to the partnership, since they did not become closely related until that event occurred. The election obviously does not apply to taxable supplies from the corporation to the partnership, since the question indicated that the corporation no longer makes supplies. Since the corporation’s only assets consist of its partnership interest and cash, and it is not making supplies, it seems unlikely that the partnership is making taxable supplies to the corporation that the corporation would be using in commercial activities. Consequently, in the particular fact scenario in the question, it does not appear that there are any supplies to which the election could apply if it were available.

Q.2 - Partnerships – s. 272.1(2)

A corporation that has contributed all or substantially all of its assets to a partnership in consideration for all or substantially all of the interest in the partnership. The Corporation transfers all of its operational employees to the partnership. However, the executive group of employees is retained by the corporation. Assume the partnership (and, formerly, the corporation) is engaged exclusively in making taxable supplies. Assume the executive group is responsible for managing, among others, the partnership.

Question

Unless the partnership directly reimburses or is invoiced by the corporate partner, will the corporate partner in all circumstances be deemed to be carrying on the commercial activities of the partnership for input tax credit purposes for GST incurred on any expense paid for by the corporate partner that relates to the partnership?

Discussion

This question focuses on subsection 272.1(2) and the nexus between partners vs. partnership expenses that must exist to substantiate input tax credits for the corporate partner. The corporate partner should not be required to resupply to, or invoice, the partnership for partnership-related expenses to enable the corporate partner to claim input tax credits.

CCRA Comments

A corporation that is a member of a partnership and which has not made a supply to that partnership may nevertheless be eligible to claim input tax credits (ITCs) with respect to taxable inputs acquired and imported in the course of activities of the partnership, depending on the circumstances.

Where property or a service is acquired or imported by a corporation that is a member of a partnership, for consumption, use or supply in the course of activities of the partnership but not on the account of the partnership, subsection 272.1(2) of the ETA deems the corporation to be engaged in those activities of the partnership for the purpose of determining ITCs. This permits the corporation to claim ITCs under section 169 of the ETA with respect to such inputs to the extent that they were acquired or imported for use in the course of the partnership’s commercial activities, unless the partnership has reimbursed the corporation.

It is a question of fact whether a particular situation fits the requirements of section 169 and subsection 272.1(2). It is not clear from the information provided in the question what expenses were incurred by the corporation or whether they meet these requirements.

Q.3 - Supply by Partner to Partnership

ACo owns real property in Canada. ACo granted a right to purchase the property to BCo. BCo is a partner in a Partnership. BCo assigns its right to purchase the property to the Partnership. The Partnership then purchases the property from ACo. The Partnership is involved in land development. The Partnership Agreement is silent with respect to the foregoing transaction between BCo and the Partnership. All parties, including the Partnership, are registered for GST purposes.

Question

Would subsection 272.1(1) apply to deem BCo’s assignment of the right to the Partnership to have been done by BCo in the course of BCo’s activities? Or, would BCo’s assignment of the right to the Partnership be considered to be a supply of property to the Partnership otherwise than in the course of the Partnership’s activities pursuant to subsection 272.1(3), and thereby subject to GST as set out in paragraph 272.1(3)(a) and (b)?

What criteria does the CCRA use to determine if a partner is acting “otherwise than in the course of the partnership’s activities” pursuant to subsection 272.1(3)?

CCRA Comments

The determination of whether a general partner does something as a member of a partnership for the purposes of subsection 272.1(1) of the ETA depends on the particular provincial partnership law and the facts of a particular situation. Factors to consider include, but are not limited to, the following:

the terms of the partnership agreement;
the nature of the action undertaken by the partner; and
the partner’s ordinary course of conduct.

Based on the limited facts provided, it does not appear that the assignment of the right by BCo to the partnership is something to which subsection 272.1(1) would apply. It appears that the supply would be subject to subsection 272.1(3). As you are aware, we are currently reviewing the application of subsections 272.1(1), (2) and (3).

Q.4 - Partnerships and the Election to Offset Taxes and Refunds/Rebates

Will the CCRA consider allowing a Canadian Partnership (that is a member of closely related group) to be eligible to file the election for the offset of taxes by another member of a closely related group under subsection 228(7) and the Offset of Taxes (GST/HST) Regulation?

Currently, section 4 of the Regulation provides that only members of a closely related group that are “corporations”, may reduce or offset the tax that is remittable by another member. However, the definition of “closely related person” and “qualifying group” has been expanded in section 156 to include Canadian Partnerships. Will CCRA expand the scope of the election administratively to include partnerships? If not, has CCRA referred this matter to Finance recommending that the Regulation be amended?

CCRA Comments

Subsection 228(7) of the Excise Tax Act (ETA) allows a person to reduce or offset the tax that the person is required to remit by the amount of a refund or rebate that another person may be entitled to receive. To do so, the circumstances and rules prescribed under the Offset Of Taxes by a Refund or Rebate (GST) Regulations must be met.

Under section 4 of these regulations, the person who may reduce or offset the tax that is remittable and any other person who may be entitled to a refund or rebate under the ETA must both be corporations.

Therefore, the regulations do not allow partnerships to file this election. To do so, would require an amendment to the regulations. The issue has been brought to the attention of the Department of Finance.

B. INPUT TAX CREDITS

Q.5 - Interaction of s. 296(2) and s. 225

Assume Corporation X is not a specified person as defined in subsection 225(4.1). Further assume that corporation is audited in Year 8 and assessed for $100 of unremitted GST in Year 4. Finally, assume Corporation X paid $50 GST in Year 2, for which an input tax credit would have been available in Year 2, for which no input tax credit has been claimed (the “Unclaimed ITCs”).

Questions

Will the CCRA reduce the GST assessment by the amount of Unclaimed ITCs pursuant to subsection 296(2)?
Is the response different if the $100 unremitted GST is disclosed in a voluntary disclosure made in Year 8?
Please discuss the status of any court cases challenging the CCRA’s policy in this respect.

Discussion

Subsection 296(2) requires the reduction of a GST assessment for a particular reporting period for:

a) an unclaimed input tax credit “for the particular reporting period”; and

b) a deduction in determining net tax for the particular reporting period if it had been claimed in a GST return for the period.

Even if the unclaimed ITCs may not be an input tax credit “for” the particular reporting period within the meaning of subsection 169(1), the unclaimed ITC clearly would be a permissible deduction in arriving at net tax pursuant to either paragraph (a) or (b) of amount B in the definition of net tax in subsection 225(1). Any other interpretation results in an inappropriate windfall to the Crown.

CCRA Comments

1. The CCRA is not required to include any ITCs when assessing the net tax of a person other than ITCs for the particular reporting period, pursuant to subsection 296(2) of the ETA.

Subsection 296(2) refers to input tax credits for the particular reporting period and deductions in determining the net tax for the particular reporting period.

With respect to subsection 225(1) of the ETA to which you have referred, for the purposes of determining net tax, there are two components for element B in the determination of net tax. Paragraph (a) of element B includes input tax credits for the particular reporting period and input tax credits for preceding reporting period of the person. Paragraph (b) of element B is all amounts that might be deducted by the person in determining net tax of the person, i.e., bad debt reduction or adjustments for issuing credit notes.

Therefore input tax credits are not the same as amounts that may be deducted by the person in determining net tax. In other words these deductions are not input tax credits.

It should also be noted that subsection 225(1) makes specific reference to ITC for the particular reporting period and the preceding reporting period whereas subsection 296(2) only refers to ITC’s for the particular reporting period.

2. The response would be the same for a voluntary disclosure as above.

3. We are not aware of any previous or outstanding court cases challenging the application of paragraph 296(2) of the ETA.

Q.6 - BJ Services Case

In light of the strong decision in BJ Services v. The Queen, will the CCRA change its administrative position regarding;

a) ability of target corporations to claim input tax credits for GST on expenses concerning the actual or attempted takeover of that corporation, or

b) ability of public corporations to claim input tax credits for GST on expenses incurred primarily to enhance shareholder value (e.g., increase stock price)?

Also, what is the status of the BJ Services appeal?

CCRA Comments

The CCRA did not appeal the decision in BJ Services v. The Queen. The CCRA will apply the Court’s decision in that case to target corporations in similar fact situations.

With respect to part (b) of the question, it is not clear what expenses are being referred to. It is a question of fact whether particular costs in a particular situation meet the requirements for claiming ITCs.

Q.7 - ITCs – de facto Importers

Question

Can the CCRA comment on any plans Finance and/or the CCRA have on amending the ETA or administrative policy to deal with de facto importer issues? Are there any plans to amend the Division IV tax rules to deal with some of these situations? What is the expected timing of the same?

Discussion

It is understood that there are cases before the Tax Court on some of these issues, and it is possible that the CCRA’s current position will not prevail. If the CCRA loses these cases, will legislative amendments follow, or will the CCRA accept the decision of the courts.

CCRA Comments

As indicated in our response regarding this issue at our meeting of last year, we are not contemplating any changes to our interpretation regarding the de facto importer issue in terms of who can claim an input tax credit for tax paid on the importation of goods.

As indicated at our meeting of last year, the Department of Finance is aware of our interpretation and the consequential issues that have been raised. Only the Department of Finance may respond to the issue of any specific legislative amendments being contemplated and what the expected timing of any such changes would be.

With respect to the cases before the Tax Court, if our position were not to prevail, we could only properly evaluate at that time whether to accept the decision or to pursue the matter at a higher court. Again, only the Department of Finance may comment on whether any legislative amendments would be made as a result of such a decision.

Q.8 - Pre-Incorporation Contracts Adopted by NewCo & ITC Availability

ACo, a GST registrant who is engaged primarily in non-commercial activities, contracts on behalf of a related entity that is to be incorporated (BCo) for the purchase of various goods and services (eg., office equipment, telecommunication services, office space, etc.). Six months after the pre-incorporation contracts are entered into (and after taxable supplies have been made under the pre-incorporation contracts), BCo is incorporated.

Upon incorporation, and pursuant to its incorporating legislation, BCo adopts the pre-incorporation contracts making it “personally bound by the contract” and “entitled to the benefits thereof as if the corporation had been in existence at the date of the contract and had been a party thereto”. As BCo is engaged exclusively in commercial activities, it becomes GST registered on incorporation.

BCo pays any outstanding invoices for goods and services that were supplied prior to its incorporation (and reimburses ACo for any expenses that ACo has already paid to date). Assume BCo is not a small supplier.

Section 171(2) precludes a person from claiming an input tax credit (“ITC”) in respect of services supplied prior to the person becoming a GST registrant. Accordingly, since the services were acquired prior to BCo becoming a registrant, BCo cannot claim an ITC for GST payable on the services.

Furthermore, since BCo is not a “small supplier” it cannot claim an ITC pursuant to section 171(1) on any property that it owns at the time of becoming a GST registrant.

Under the regular GST rules, ACo is only entitled to claim an ITC to the extent it acquires a particular good/service for “consumption, use or supply in the course of commercial activities of the person”. Accordingly, since ACo is engaged primarily in exempt activities, it will only be eligible for an ITC if the adoption of the pre-incorporation contract is considered a taxable supply from ACo to Bco

Questions

1. What ITC’s can either ACo or BCo claim in respect of the pre-incorporation purchases?

2. Does the adoption of pre-incorporation contracts constitute “supplies” – being “the provision of property or a service in any manner” – of ACo’s underlying interest in the pre-incorporation contracts and any benefits accruing to date thereunder (therefore enabling ACo to claim full ITC’s on the pre-incorporation purchases of office equipment, etc.)?

CCRA Comments

Since BCo was not a small supplier, immediately before becoming a registrant, BCo will find itself outside the scope of subsection 171(1) of the ETA. As such, BCo will not be entitled to the relief, otherwise provided for under that provision. That is to say, BCo will not be entitled to claim input tax credits with respect to property it has on hand, at the time it becomes a registrant.

Furthermore, in accordance with subsection 171(2) of the ETA, BCo will not be entitled to claim input tax credits with respect to any tax that becomes payable after the time BCo becomes a registrant, to the extent that the tax is payable in respect of services supplied before BCo became a registrant or is calculated on the value of consideration that is a rent, royalty or similar payment attributable to a period before the time BCo became a registrant.

The CCRA recognizes that the Canada Business Corporations Act and certain provincial Corporations Acts, (including those of Ontario, Manitoba and Saskatchewan) provide that a corporation may, within a reasonable time after it comes into existence, adopt any written contract made in its name or on its behalf before it comes into existence. As a result of ACo having entered into contracts on behalf of BCo, the adoption of these contracts by BCo is not considered to be a supply by ACo to BCo.

In respect of the other jurisdictions which have not enacted similar legislation, the CCRA will normally accept the accounting for pre-incorporation transactions by a newly formed corporation where the following conditions have been met:

The facts clearly indicate that it is the intention of those persons who authorize the transactions in the situations described above that the business will be carried on by a corporation. This will usually be so where application for incorporation is made before or at the time the business is commenced or purchased.
The period of time between the commencement or purchase date and the incorporation date is relatively short or, if not, the delay is not due to any action taken or not taken by the parties involved.
There is no dispute between the persons authorizing the transactions and the newly formed corporation as to who will account for the transactions.
The effect on the combined tax liabilities of the parties involved is negligible, and
The corporation adopts any written contract made in its name or on its behalf before it came into existence in respect of the pre-incorporation transactions it is accounting for.

Please note that registrants should not assume that the CCRA will automatically accept pre-incorporation transactions as being transactions of the newly formed corporation BCo where ACo acts on behalf of BCo in arranging contracts. Each situation will have to be looked at on a case-by-case basis.

Where BCo adopts the pre-incorporation contracts making it personally bound by the contracts and entitled to the benefits thereof as if the corporation had been in existence at the date of the contracts and had been a party thereto, ACo will not be entitled to claim input tax credits with respect to the tax payable on those expenditures.

Q.9 - GST Voluntary Disclosures and Claiming Input Tax Credits

Questions

Where a supplier makes a voluntary disclosure and remits GST it failed to collect, can the registered purchaser who reimburses the supplier, claim input tax credits in respect of such GST, even if outside the normal reassessment period?

Discussion

The issue arises because 225(4)(c)(i) appears to allow the purchaser to claim input tax credits, but only where the supplier has been “assessed”.

CCRA Comments

It is our understanding that when a person makes a voluntary disclosure and a VDP officer accepts it as complete, and there is a debit balance on the account, the disclosure is then assessed. As there is now an assessment against the supplier and provided that all of the other requirements under paragraph 225(4)(c) are met, the purchaser would be entitled to claim an input tax credit for the amount if it was paid to the supplier.

CCRA is looking into the possibility of having all disclosures assessed whether or not there is a debit balance outstanding on the account.

C. ELECTIONS

Q.10 - Late-filed Section 167 Elections

The CCRA’s previously-lenient policies respecting late-filed section 167 elections appear to have recently been reversed. Does the CCRA have (or will it implement) a policy on late filing applications under section 167?

Recent experience suggests inconsistent experience with the CCRA on this subject. There seems to be no one person assigned to supervise the issue. Further, late-filed elections are expressly excluded from the voluntary disclosure program.

CCRA Comments

Whether or not the CCRA will accept a late filed election under subsection 167(1) will depend on the particular circumstances and facts of each case. Application should be made to the local Tax Services Office. Factors that may be considered in evaluating whether or not to accept a late filed election might include:

if extenuating circumstances prevented the parties from filing the election by the required date;
if the parties clearly met the criteria for making the election;
if both parties conducted themselves at all times as if the election had been made;
if there is no revenue loss to the government.

As previously stated, the evaluation will be done on a case-by-case basis.

In addition, consideration may also be given by CCRA’s audit officials in applying administrative tolerance if no election had been made and tax was not collected in respect of a supply of the assets of a business, in accordance with CCRA’s administrative position with respect to wash transactions. This is determined by the auditor on a case-by-case basis. In all cases, once again, it must be established that the vendor and purchaser met all the criteria for the election at the appropriate time. Generally, such consideration may be given only in situations where the tax would not have been payable had an election been properly filed, providing it does not result in a revenue loss to the government.

Lastly, as some of the property and services supplied by the vendor may not qualify for the election, e.g., under paragraph 167(1.1)(a), making the election on a timely basis would assist the parties in determining whether any tax is payable on the supply or a portion of the supply. If there is doubt about the applicability of the election, a request for an advance ruling may be submitted prior to the transaction. It should also be noted that each election is subject to audit by the CCRA to ensure that all the conditions for qualifying have been met.

Q.11 - Section 167 Election – Impact of Amalgamation

Can a registrant formed by the amalgamation of a taxable supplier and one or more other companies, make a section 167 election in a sale of business assets made following the date of amalgamation?

Section 167 applies to a vendor which has carried on, established or acquired a business. Section 271(c) provides that the transfer of assets from the predecessors to the amalgamated company is NOT a supply. Furthermore, section 271(b) provides for regulations that deem AmalCo and predecessors to be the same entity, but the list in the regulations excludes section 167. So, it is arguable that as AmalCo has not “carried on”, “established” or “acquired” any business, it cannot make the section 167 election. The opposing argument is that the deemed “no supply” is not the same as a deemed no “acquisition”. Also, AmalCo must have “carried on” the going concern, at least for a scintilla of time.

CCRA Comments

Based on the information supplied with the question, we have assumed that Amalco is not carrying on the business itself, that it is making the supply of the business immediately following the amalgamation.

Where an Amalco is formed, the provisions of paragraph 271(a) of the ETA deem the Amalco to be a separate person from its predecessors, except as otherwise provided under the ETA. One of the conditions for making an election under subsection 167(1) is for the supplier to be supplying a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier. Since a predecessor corporation is the entity that established or carried on the business, Amalco cannot be considered to have done so, since it is deemed to be a separate person. Thus, it does not appear that an election under subsection 167(1) is available in this situation.

Q.12 - Section 167 Election – Interpretation

Facts

A Canadian agricultural company, Company A, wishes to sell its unincorporated fertilizer division. Company A has contracts to supply garden stores and hardware stores across Canada with Company A’s trademarked brands of fertilizers, as well as the stores’ private brands. Company A has a manufacturing plant consisting of real property, machinery and equipment.

Another Canadian fertilizer company, Company B, has just been purchased by US Co. which wants to expand the Canadian business. Company B has a fertilizer factory which has the excess capacity to produce the fertilizers produced by Company A’s fertilizer division. Company B purchases Company A’s fertilizer division, including trademarks, contrast and goodwill, but not the factory and equipment. From Company B’s perspective, it is acquiring all of the property which it needs to carry on the fertilizer business previously carried on by the Company A’s fertilizer division.

Question

Does the CCRA agree that this transaction qualifies for a section 167 election?

CCRA Comments

There are several conditions that must be satisfied to make a valid election under subsection 167(1) of the ETA.

One of the conditions is that the supplier makes a supply of a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier. It appears from the facts provided that Company A is supplying trademarks, contracts and goodwill that were used in its fertilizer division, but not the factory or equipment used to produce the fertilizer. These three items supplied alone do not appear to constitute a business or part of a business carried on by Company A.

Subsection 167(1) also requires that under the agreement for the supply, the recipient is 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. Since “all or substantially all” is generally interpreted to mean at least 90%, any property not acquired under the agreement for the supply but that the recipient requires to carry on the business must fall within the remaining general margin of 10% of the fair market value of all the property acquired. Based on the information provided, it does not appear that the assets being supplied by Company A and acquired by Company B are sufficient to meet this requirement.

Q.13 - Joint Venture Elections – Bare Trusts

A beneficial owner incorporates a nominee company to hold title to commercial real property. The beneficial owner is registered for GST purposes. The nominee company sells something to the beneficial owner (e.g., a pen) to become a registrant and gets registered for GST purposes. Can the beneficial owner and the nominee company enter into a joint venture election pursuant to section 273 and can the nominee be the operator?

CCRA Comments

To make the joint venture election, the arrangement between the parties must be a joint venture and must be an undertaking that is described in subsection 273(1), prescribed by the Joint Venture (GST) Regulations, or recognized administratively as an eligible undertaking. Further information would be required to determine whether the arrangement was a joint venture and if the undertaking was eligible for the election.

Another requirement is that one of the participants in the joint venture must be registered and must be the operator of the joint venture. To register, a person must be engaged in a commercial activity as defined in subsection 123(1) (i.e, carrying on a business, engaged in an adventure or concern in the nature of trade, or making a supply of real property). It is not likely that the supply of a pen, in the absence of any other activities, would constitute a commercial activity by itself.

With respect to the nominee being the operator, Policy Statement P-106 Administrative Definition of a “Participant” in a Joint Venture states that a participant may be “a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture”. It is common for a nominee company to act as the trustee in a bare trust. Policy Statement P-015 Treatment of Bare Trusts Under the Excise Tax Act explains the CCRA’s position on bare trusts. A bare trust exists where a person, the trustee, is merely vested with the legal title to property and has no other duty to perform or responsibilities to carry out as trustee, in relation to the property vested in the trust. The sole duty of a bare trustee would be to convey legal title to the trust property on demand of and according to the instructions of the beneficiary as provided for within the trust instrument. The bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property. In such cases, the beneficial owner retains the right to control and direct the trustee in all matters relating to the trust property. The bare trustee would not be seen as carrying on any commercial activity with respect to the trust property, and thus the trust would not be eligible to register. Conversely, a trust will not be considered to be a bare trust where the trustee has other duties set out in the trust instrument which involve independent or discretionary powers and responsibilities.

Where a nominee company is registered and is named the operator, it must be responsible for the managerial or operational control of the joint venture. It is questionable whether a nominee company could come within both the definition of operator in P-106 and the definition of bare trustee in P-015.

There may be situations where a nominee company also performs various duties as an agent of the beneficial owner in addition to holding legal title to the real property. Whether a nominee company can “wear two hats” for purposes of the joint venture election would be a question of fact in each case.

D. FINANCIAL SERVICES / EXEMPT SUPPLIES

Q.14 - Online solicitation of loan/credit card applicants

ACo enters into a contract with BCo, pursuant to which BCo will design a fully-automated website to solicit, screen and approve prospective applicants for loans or credit cards issued by ACo. Prospective applicants enter all required information to complete the loan or credit card application online, using an application form designed by BCo, in consultation with ACo. All approved applications are electronically forwarded by BCo to ACo. BCo receives a flat fee from ACo for all loan and credit card applications processed (whether or not approved) and an additional fee for all loan and credit card applications that are ultimately accepted by ACo and result in loans advanced, or credit cards issued to applicants.

Question

Are the fees charged by BCo exempt from GST on the basis that BCo is providing a financial service of “arranging for” the issue of a financial instrument or “arranging for” the granting of any credit or the lending of money? If so, to what extent?

CCRA Comments

In the scenario presented the fees charged by BCo to ACo appear to be for the supply of a taxable service, i.e. the provision of a fully automated website and transmission of information entered on the website to ACo, based on ACo’s specifications for use as an input in ACo’s operations to process loan and credit card applications. The supply of a website and associated data services does not fall within the ambit of “arranging for” a financial service and the fees are subject to GST/HST.

The critical elements of the “arranging for” policy, is that the intermediary must be directly involved in the process of the provision of a supply of a financial service whether they are helping the supplier, the recipient or both in respect of that service. Further the intermediary must expend the time and effort with the intent to effect a supply of a financial service per paragraphs (a) through (i) of the definition of financial service.

BCo’s time and effort appears to have been expended solely and directly in the process of the design of a fully automated website and associated input form for the collection and transmission of data from users of the website who may wish to apply for a loan or a credit card from ACo. The information collected on the input form is based on rules and guidelines specified by ACo to determine whether an applicant may qualify for a loan or a credit card. Since the website is fully automated, BCo’s involvement appears to be with the initial programming of these rules into the system and not with the subsequent financial services process. Although BCo receives an additional payment for every qualifying applicant, in addition to a flat fee for maintaining the fully automated website, there is no indication that BCo in its own right expends any time and effort to effect the supply of a financial service to either party. BCo appears to be providing a taxable input to the supply of exempt financial services provided by ACo.

Q.15 - Treatment of a Customer List for GST Purposes

Question

What is the GST treatment of a supply by a financial institution of its customer list?

Discussion

Where a financial institution (the “FI”) makes a sale of business assets which does not qualify for the section 167 election, the question arises as to whether GST is applicable on the sale of the “customer list”.

In this connection, section 141.1(1)(b) deems the FI to have made the supply otherwise than in the course of commercial activities. However, in order to fall within 141.1(1)(b), the customer list must be (i) “acquired”, “imported”, or (ii) “manufactured” or “produced”. Since the FI did not “acquire” the list, the issue arises whether the FI would be considered to have “produced” the list.

The CCRA’s position is that a customer list is goodwill if part of the sale of a business, and otherwise it is intangible personal property. Therefore, again pursuant to its policy, a customer list CAN be sold separately, but goodwill may only be sold with a business.

The CCRA’s position is that IPP CANNOT be “produced” for purposes of 141.1(1)(b)(ii). So, a customer list cannot qualify for exemption from GST under this section. However, Kirk Moore suggested that a customer list that was previously “acquired” could fall within 141.1(1)(b)(i).

References: GST/HST Interpretation HQR0001102.

CCRA Comments

Where a person makes a supply of personal property, which is not sold as part of the supply of a business, this supply may not be subject to GST/HST if the conditions in subparagraphs 141.1(1)(b)(i) and (ii) of the ETA are met including the property having been acquired, imported, manufactured or produced.

It is a question of fact whether a customer list was acquired. If a customer list was acquired and is resupplied, and the other conditions in subparagraph 141.1(1)(a)(i) are met, the supply of the customer list may not be subject to GST/HST.

Although the ETA does not define the terms manufactured or produced, it is the position of the Canada Customs and Revenue Agency that a customer list does not appear to be something that could be manufactured or produced for the purposes of subparagraph 141.1(1)(b)(ii) of the ETA. (This position on the terms manufactured and produced is under review.)

Therefore generally the supply by a financial institution of a customer list, which is not supplied as part of a business, would be subject to GST/HST.

Q.16 - Taxable Supplies and the Application of Paragraph 141.1(1)(b)

Facts

Insurance Company A agrees in principle to sell its customer lists to Insurance Company C for $1 million. Insurance Company A has an affiliate, Insurance Company B, which has accumulated tax losses. In order to take advantage of these losses, Insurance Company A first transfers the customer lists to Insurance Company B in the context of a tax rollover. Company B immediately thereafter sells the customer lists to Company C for $1 million.

Questions

Please provide your views on the application of GST to these transactions. It would appear that paragraph 141.1(1)(b) would deem the transactions between Insurance Company A and Insurance Company B to be made otherwise than in the course of commercial activities. As well, it would appear that the supply of customer lists from Insurance Company B to Insurance Company A would not constitute a taxable supply because the supply was not made in the course of Insurance Company B’s business and did not constitute an adventure or concern in the nature of trade.

CCRA Comments

A customer list is considered to be intangible personal property. Section 165 of the Excise Tax Act (ETA) imposes a tax on every recipient of a taxable supply. A taxable supply is a supply made in the course of commercial activity. To determine whether the supply of the customer list from Insurance Company A to Insurance Company B is a supply made in the course of commercial activity, we turn to subsection 141.1(1) of the ETA. Specifically, paragraph 141.1(1)(b) provides that supplies of personal property will not be considered to be made in the course of a commercial activity if the property was consumed, used, manufactured or produced exclusively in non-commercial activities and the property was acquired, imported, manufactured or produced, exclusively for use or consumption in non-commercial activities. It is CCRA’s position that a customer list is not acquired, imported, manufactured or produced therefore subparagraph 141.1(1)(b) would not apply to exempt the sale of the customer list from tax. This position on the terms manufactured or produced is currently under review.

The sale of the customer list from Insurance Company B to Insurance Company C would also be a supply of intangible personal property and would be subject to tax unless exempted under a specific provision. It is a question of fact whether Insurance Company B has acquired the customer list for consumption or use in the course of commercial or non commercial activity therefore we cannot conclude whether subparagraph 141.1(1)(b) can be applied.

Q.17 - Exempt Health Care Services

The Health Care Services (GST/HST) Regulations (SOR/91-23, as amended), prescribe a number of exempt health care services. The main section in the regulation is short, and as follows:

Prescribed Health Care Services

2. For the purposes of section 10 of Part II of Schedule V to the Excise Tax Act, the following services, other than services related to the provision of a surgical or dental service that is performed for cosmetic purposes and not for medical or reconstructive purposes, are prescribed:

(a) laboratory, radiological or other diagnostic services generally available in a health care facility; and

(b) the administration of drugs, biologicals or related preparations in conjunction with the provision of services included in paragraph (a). Please provide a list of the types of services that the CCRA presently views (or has considered) as falling within that phrase “laboratory, radiological or other diagnostic services”. Please provide a list of type of services that the CCRA presently views (or has considered) as falling outside the same phrase.

CCRA Comments

Prescribed services for purposes of section 10 of Part II of Schedule V to the Excise Tax Act (the “ETA”) are diagnostic services. A diagnostic service is understood as being a technique, test or study procedure, together with the report of findings, which is used to assist in the determination of a disease. The Regulations are describing examinations on specimens taken from the human body, ionizing and nonionizing radiation used to produce diagnostic images and other similar techniques, tests and study procedures performed for diagnostic purposes.

Accordingly, when performed for diagnostic purposes on the order of a medical practitioner or practitioner, the following techniques, tests or study procedures supplied by a laboratory or radiology clinic are exempt pursuant to section 10 of Part II of Schedule V to the ETA: serological tests, urinalysis, echocardiography, fluoroscopy, and diagnostic imaging such as x-ray, CT scanning, magnetic resonance imaging, mammography and ultrasound.

Services that are not diagnostic services, i.e., that are not used to assist in determining a disease are not included in the Regulations. Examples are testing for the purpose of determining paternity or drug and alcohol levels.

E. EXPORTS / DROP SHIPMENT RULES

Q.18 - “Fair Market Value” Under Drop Shipment Rules/Place of Supply

Where the drop shipment (“DS”) rules in s.179(1) apply, a vendor of goods or commercial service provider to an unregistered non-resident must charge the non-resident GST on consideration equal to the “fair market value” of the goods “at that time”. In some situations, for example, the Canadian vendor subject to the DS rules sells goods to the non-resident, and the non-resident resells them to another purchaser at the higher price. In other cases, a Canadian commercial service provider performs services on goods the non-resident may have purchased or produced, and the non-resident sells to someone else at a higher price. Many practitioners apply s.179(1)(c.2) on the basis that the “fair market value” of the goods “at that time” is the non-resident’s selling price to its customer. The answer is not clear, however, as the words “at that time” in s.179(1)(c.2) appear simply to refer to when the Canadian supplier physically transfers possession of the goods to the third person, or the non-resident, without reference to a particular transaction or level of trade? What is the CCRA’s position about how the “fair market value” is to be determined, as often the price differential (between the non-resident’s purchase price of the goods, the purchase price of the goods plus the value of the commercial service, and non-resident’s resale price, to name a few valuation possibilities) can be significant?

As an example, suppose non-resident US Co. sells widgets to Canadian resident R Co., a retailer, for $12. US Co. in turn purchases the widgets from A Co. in Canada for $8 under circumstances where s.179(1) applies. US Co. also sells identical widgets purchased from A Co., under similar circumstances where the DS rules apply, to a Canadian wholesaler, W Co., for $10. How much GST should A Co. charge US Co. in respect of US Co.’s sales to R Co. and in respect of US Co.’s sales to W Co. - $5.60, $7, $8.40? If the GST to be charged by A Co. in respect of US Co.’s sales to R Co. is based on US Co.’s $12 selling price, should the GST really be 7/107 x $12 = $0.79, on the assumption R Co. can potentially claim an ITC under s.180 for the GST paid by US Co. (i.e., isn’t the fair market value of the widgets sold to R Co. really $11.21)?

CCRA Comments

The overall purpose of section 179 of the Excise Tax Act is to ensure that tax applies to goods in Canada that are supplied by an unregistered non-resident person for final consumption in Canada in the same way as tax would apply to the goods if they were acquired from the non-resident outside Canada and imported for that purpose. To achieve this, subsection 179(1) of the ETA provides where a registrant transfers physical possession of the goods to another person in Canada on behalf of an unregistered non-resident person, the registrant is liable to collect tax from the non-resident, generally calculated on the fair market value of the property at that time.

As for purposes of other provisions of the ETA that refer to “fair market value”, the CCRA's position is that the “fair market value” for purposes of subsection 179(1) of the ETA generally represents the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact.

The fair market value of the deemed supply under subsection 179(1) of the ETA may not necessarily always correspond to the non-resident’s selling price to its customers. By merely referring to the fair market value in the provision rather than to the actual selling price by the non-resident, the registrant is provided with certainty regarding the amount in respect of which tax must be collected from the non-resident at the time of transfer of physical possession of the goods. We note that subsection 179(1) of the ETA, as it was once proposed, contained a reference to the actual selling price by the non-resident person but that this was replaced with a reference to the fair market value to clarify the amount of tax that the registrant is required to account for. Also, the non-resident is not always required to reveal its ultimate selling price to the registrant.

With respect to the reference in the question to the specific calculation of the fair market value, we note that the “fair market value” of property or a service supplied to a person is defined in subsection 123(1) of the ETA to mean the fair market value of the property or service without reference to any tax excluded by section 154 of the ETA from the consideration for the supply.

With respect to the reference to whether the fair market value of the goods would include the value of the commercial service, previous subsection 179(1) of the ETA referred to the total of the fair market value of the property and the value of any commercial service supplied by the registrant to the non-resident that was not included in that fair market value. We note that this reference was changed to merely refer to the fair market value of the property in recognition of the fact that the fair market value would already reflect the value of the service.

Q.19 - Zero-Rated Exports

Can Sales of Conveyances Ever be Zero-Rated?

When you buy a car or airplane or ship, you have to drive, fly or sail it out of Canada, but that is “using’ it. Also, if you have to add engines to the aircraft, does it still qualify? What if you hire pilots to fly it. Is it using it? Or, is the pilot a “carrier” for purposes of section 12?

CCRA Comments

Supplies by way of sale may qualify for zero-rating as an export under section 1 of Part V of Schedule VI to the Excise Tax Act (ETA) where the conditions of that provision are met.

Where a person (other than a consumer) buys a car, airplane or ship in Canada for export and the conveyance is only driven, flown or sailed outside Canada to export it, the conveyance would not be considered by the CCRA to be used in Canada before the exportation for the purposes of the provision in question. This includes where pilots are hired solely to fly the plane out of Canada. However, the conveyance must not be driven, flown or sailed in Canada for any other purpose before or while it is being exported, such as for transporting goods or passengers.

Adding engines to an aircraft constitutes a significant alteration that goes beyond what is considered reasonably necessary or incidental to its transportation for purposes of section 1 of Part V of Schedule VI to the ETA. In addition, given the extent of the alteration it would be questionable whether the same property could be said to have been exported.

Q.20 - Intangible Personal Property – 142(1)(b)

Facts

A Canadian resort club sells memberships for $10,000 to Canadians and non-residents. The membership entitles each member to a 1 week all-inclusive time-share vacation at any of 15 five-star resorts across the world for the next twenty years. One of the destinations is Whistler, B.C. All other destinations are outside Canada.

Questions

Must GST be collected on the membership fees? If so, can the club charge GST on 1/15th of the membership fee?

CCRA Comments

We preface our comments with the information that the issue is under review by the Department of Finance.

In the past, we have considered situations with the following characteristics.

Club members are supplied with timeshare interests in the form of “points” which are purchased by a person in order to obtain the right to use and occupy resort accommodations on a timeshare basis.
Each unit of resort accommodation is assigned a nightly occupancy point value that varies depending upon the season of use, size of the unit and the resort location.
Prior to the timeshare owner securing a specific right by way of reservation, the resort club has no obligation to provide a timeshare owner with the right to use or occupy any particular resort property, in any particular location, at any particular time.
Subsequent to the timeshare owner’s acquisition of points and upon the resort club’s confirmation of a timeshare owner’s reservation, a specific right to use and occupy a particular resort accommodation for a specified period of time is formed.
Prior to the resort club confirming the reservation, the timeshare owner does not have a specific right to use and occupy a particular property; rather, the timeshare owner has a general right to use any one of a number of unspecified resort properties that are held by the resort club from time to time.
Until such time as a reservation is made and a specific right to use is formed, there is no direct connection between the points and a specific resort property in a particular location.

We will assume that the supply contemplated in this question is of the same nature. We will further assume that none of the properties are a residential complex as that term is defined in subsection 123(1) of the Excise Tax Act (ETA). This latter assumption is based primarily on the basis that all or substantially all of the supplies of units in each resort are provided for periods of continuous possession or use of less than sixty days.

Under the above situation, we would apply the GST in the following manner.

(a) The supply of points by the resort owner is a supply of intangible personal property related to real property situated in Canada and outside Canada. The points represent a non-specific right to use interest. Although the exercise of the non-specific right will

ultimately lead to a supply of real property by way of lease, licence or similar arrangement, the vacation credits, in and of themselves, do not constitute a “lease, licence or similar arrangement”. The supply of intangible personal property by the resort club is made in the course of a business carried on by the resort club. As Schedule V to the ETA contains no exempting provisions for such a supply, this is a taxable supply. Consequently, provided the supply is made in Canada, the supply is subject to tax under section 165 of the ETA.

(b) A supply of intangible personal property is deemed to be made in Canada, in accordance with paragraph 142(1)(c) of the ETA, if the property relates to real property situated in Canada. Similarly, a supply of intangible personal property is deemed to be made outside Canada, in accordance with paragraph 142(2)(c), if the property relates to real property situated outside Canada. In the circumstances where the intangible personal property relates in part to real property situated in Canada and in part to real property situated outside Canada, it is the position of the CCRA that the GST/HST will apply only to the extent that the intangible personal property relates to real property in Canada at the time consideration for the intangible personal property becomes due. Accordingly, it will be necessary to determine the proportion of the supply that is deemed to be made in Canada at the time consideration for the supply becomes payable. It is that portion of the supply that will attract tax.

In determining the proportion of the supply that is deemed to be made in Canada, and therefore subject to tax, the method chosen should be fair and reasonable. In this regard, if the resorts are of equal value in all respects (i.e. in terms of accommodations, amenities, etc.), an apportionment based on the ratio of the number of units in Canada to the total number of units throughout the world would be fair and reasonable. A consistent allocation method should be used from one period to the next unless there is a change in circumstances justifying a corresponding change in the allocation method. Whether the method suggested in this example is fair and reasonable is a question of fact that can only be determined by examining the particulars of the case.

(c) We would add that once the timeshare owner has confirmed a reservation to use specified resort accommodations in a particular location for a specified time interval, the supply of the accommodation made by the resort club is a supply by way of lease, licence or similar arrangement of real property for the duration of the time interval. That supply is deemed under subsection 136(1) of the ETA to be a supply of real property.

If the supply of the membership is a supply of real property, or includes a supply of real property, the foregoing analysis may still apply. The relevant legislative provisions in terms of the place of supply determination would be paragraphs 142(1)(d) and 142(2)(d). The CCRA’s administrative position concerning apportionment of membership rights, as described above for points-based timeshare arrangements, would also apply in this situation.

Q.21 - CCRA’s shift in interpretation of “carrying on business” – transitional issues

In TIB B-090, CCRA announced that it no longer followed its earlier approach, set out in Policy Statement P-051R, “Carrying on Business in Canada” and in Memorandum 2.5 – Non-resident registration. Under the earlier documents, based on earlier case law, CCRA referred to (1) the place where the contract is made, and (2) the place where the operations from which profits arise take place as being the “predominant” determining factors. In TIB B-090, CCRA no longer refers to factors 1 and 2 as being “predominant”. Factor number 1, the place of contract, is simply listed among the other 11 factors cited, and factor no. 2 is not referred to specifically at all.

This question does not question whether CCRA’s shift in position is correct or supportable, given the earlier case law.

The TIB, however, does not state how CCRA intends to implement the shift in its position. Specifically, TIB B-090 does not contain a specific “coming-into-force” statement in regard to the shift in position.

Neither Policy Statement P-051R nor Memorandum 2.5 has been amended, nor has CCRA posted any reference to refer to TIB B-090. Accordingly, there is an apparent contradiction in CCRA’s publicly stated positions. Could CCRA post such a reference?

Many offshore businesses, and their professional advisors, in reliance on CCRA’s “predominant” factor approach, considered the “place of contract” as a form of “safe harbour” in planning for operations in Canada, and took specific steps to structure the place of contract so as to be treated as carrying on business outside Canada. Will CCRA consider such businesses to be “grandfathered” under its new approach? Please comment generally on how CCRA proposes to administer the transition to the revised position set out in TIB B-090.

CCRA Comments

A note referring to B-090 has been posted in P-051R on the CCRA’s web site. A note will soon be placed on Memoranda Series 2.5.

There is no intention to provide “grandfathering” as referred to in the question. As set out in TIB-090, the determination of whether a non-resident person is carrying on business in Canada continues to be a question of fact to be determined on a case-by-case basis by reference to all relevant facts. The CCRA’s position continues to be based on the consideration of various factors, one of which continues to be the place of contract. As always, a non-resident must have a significant presence in Canada to be considered to be carrying on business in Canada. Any person that relied solely on the place of contract to determine whether the person was carrying on business in Canada and is now uncertain about that determination, can always request the CCRA’s view regarding that particular case.

Q.22 - Franchise Rights – HST Place of Supply Rules

Section 2 of Part II of Schedule IX states that

A supply of intangible personal property is made in a province if

(a) in the case of property that relates to real property,

(i) all or substantially all of the real property that is situated in Canada is situated in the province, …

(b) in the case of property that relates to tangible personal property,

(i) all or substantially all of the tangible personal property that is ordinarily located in Canada is ordinarily located in the province, …

(c) in the case of property that relates to services to be performed,

(i) all or substantially all of the services that are to be performed in Canada are to be performed in the province, …

(d) in any other case,

(i) all or substantially all of the Canadian rights in respect of the property can be used only in the province, …

[Please assume the place of negotiation is not in the province.]

For the purpose of this provision, how does CCRA determine whether the IPP “relates to real property”, “relates to services…” or is of “[an]other case”?

For example, a corporation, XYZ, holds the rights in Canada to the name “ABC” that is used in a chain of hotels. [The franchise could similarly relate to other types of operation that must be carried on at a specific location, such as a restaurant, retirement or nursing homes.] XZY enters into franchise agreements with businesses under which XYZ grants the franchisee the right to use the name ABC to operate a hotel in a specific geographic area. The franchise agreement states that the franchisee is granted the rights only for a specific “location” stated in the agreement and agreed to by XYZ and the franchisee, and, if the agreement refers to a new hotel that the franchisee will construct, XYZ must approve building designs, construction plans, etc. XYZ also provides a range of marketing activities to enhance to value of the chain, and to increase clientele. Although the marketing activities will not generally be tailored toward a specific franchise location, there may from time to time be campaigns that “feature” specific locations. XYZ also maintains a franchise-wide reservation network which customers access by calling a 1-800 number, and can reserve at the franchise that corresponds with their desired location.

Please assume that the franchise relates to a single hotel that is located in a Harmonized Province, that the “place of negotiation” of the contracts is in Ontario where XYZ has its offices, and that XYZ provides support services under the Franchise Agreement primarily in Ontario.

Assuming that a single-multiple supply analysis confirms that the hotel franchise agreement constitutes a supply of “intangible personal property”, does CCRA consider the supply -

to “relate to real property” [and therefore a supply made in a Harmonized Province when the hotel is located in a Harmonized Province]?
to “relate to services” [and therefore a supply made in Ontario where XYZ carries on its operations]? or
to be “in any other case”? If so, how does one determine where the “Canadian rights” are used?

Would it always be the case that either paragraph (a) or paragraph (d) would apply?

Should the franchise agreement be viewed as merely conferring a right to the franchisee to carry on a business, rather than being “in relation to real property”?

Does it matter whether XYZ or the franchisee selects the specific location? For example, XYZ might only stipulate the region –city/town, or sector within a city- and the franchisee to select the specific real estate location within the town (e.g. TransCanada Highway at corner of Broad Street). Alternatively, XYZ might participate actively in the selection of the specific location.
Does it matter if the franchise agreement is for a new location and construction (where the franchisee will select a new location and construct a new building after the agreement is entered into); rather than for an existing building (as when either the original franchisee goes out of business and XYZ enters into a new franchisee agreement with a new franchisee)?

CCRA Comments

Generally, in order for a supply of IPP to be considered as relating to property or services for purposes of the provision in question, there must be a direct connection between the IPP and the property or services. Furthermore, in order for a particular paragraph of those listed to apply to a particular supply of IPP, it must be determined that the IPP relates only to what is described in the particular paragraph. An example of a supply of IPP that relates to real property is the supply of an option to purchase real property.

Pursuant to the franchise agreement in the example, the franchisee receives the right to use the franchisor’s name to operate the hotel in a specific geographic area, and the benefit of a range of marketing activities and a franchise-wide reservation network. Based on the assumption in the question that a single supply of IPP is being made, it would likely be paragraph 2(d) of the provision in question that would apply. In particular, the IPP does not appear to relate solely to either real property, tangible personal property or services.

The IPP would appear to be a right to operate the type of business developed by the franchisor. Where the franchisee always owns the hotel, be it one that already exists or one that is to be built by the franchisee at a location selected with the franchisor, the franchisee is not obtaining from the franchisor a right relating to that real property but rather the right to operate a type of business in the manner developed by the franchisor, including the benefit of use of the franchisor’s brand name and services. The fact that the right to operate the type of business is restricted to a specific location merely restricts where that right can be used as described in paragraph 2(d). If real property were to be acquired by the franchisee under the franchise agreement and again, assuming as the question does that a single supply of IPP is being made, it would have to be established whether that IPP can be considered as only relating to the real property for purposes of the place of supply rule.

Generally, to determine where the “Canadian rights” in respect of the IPP can be used, consideration must be given to the location at which the franchisee can avail itself, or benefit from, the IPP being supplied pursuant to the franchise agreement. Although it depends on the specific facts of each particular case, if the single supply of IPP in this case consists of a right to operate the business only at a specific location in the particular participating province, the supply of that IPP would likely be considered as having been supplied in that particular province pursuant to subparagraph 2(d)(i).

Finally, it should be noted that the response above could change to the extent that it is established that there are multiple supplies being made under the franchise agreement. All relevant facts and agreements would have to be provided in order to provide a conclusive response regarding the application of the place of supply rule with respect to a particular franchise agreement.

Q.23 - De-registration of a Non-Resident

Many non-residents who do not carry on business in Canada are registered for GST. Such non-residents often do not have any tangible, real or intangible property in Canada. When such non-residents request to deregister, and either ss. 171(3) and/or 200(2) applies, they are not generally liable for GST on their tangible and real property (since such property would be deemed to be supplied outside Canada by virtue of ss. 142(2)). However, it appears that such non-residents may have a technical GST exposure in respect of any intangible property (including intellectual property), on the (general) assumption that there is usually no restriction on the use of such property in Canada (i.e., para. 142(1)(c) may apply). Accordingly, even though the non-resident would not have incurred and/or claimed any GST on the acquisition of the intangible property, it may effectively have a self-assessment obligation in respect thereof (thereby expanding on the apparent intention of 171(3) and 200(2) as GST recapture provisions).

Has the CCRA developed a policy to address this apparent unintended result? If not, would the CCRA consider the use of Schedule VI, Part V, s. 10 to zero-rate the deemed supply of intellectual property (despite the fact that technically, at the time the supply is deemed to be “made”, the non-resident is still registered)?

CCRA Comments

Subsection 171(3)

The CCRA has adopted the position that upon ceasing to be a registrant, a non-resident person that has no permanent establishment in Canada is not required to account for any tax in respect of property (including capital property) that is located outside Canada, and not used in its commercial activities in Canada immediately prior to that time.

You present the view that a non-resident person may have a GST/HST exposure in respect of any intangible property (including intellectual property), at the time that non-resident ceases to be a registrant as there is usually no restriction on the use of intangible property in Canada (i.e., paragraph 142(1)(c) of the ETA may deem the supply to be made in Canada).

Subsection 171(3) of the ETA addresses the GST/HST consequences with respect to properties when a person ceases to be a registrant. Paragraph (a) deals with property other than capital property. Paragraph (b) deals with capital property.

If the property described above is not capital property the GST/HST will be exigible on the fair market value of the property. If the property is capital property, the non-resident person will also have GST/HST exposure because of the interaction between paragraph 171(3)(b) and subsection 200(2) of the ETA, where the property was used in the non-resident’s commercial activities in Canada immediately before the time the non-resident person ceased to be a registrant, where the basic tax content of the property is an amount other than zero. It should be noted that if it were the case that the non-resident did not incur any GST/HST payable with respect to the intangible property, as you suggested, the amount of the GST/HST the non-resident would be deemed to have collected would be nil.

As you pointed out, one of the conditions required for purposes of the zero-rating provision under section 10 of Part V of Schedule VI to the ETA is that the recipient of the supply must be a non-resident person who is not registered for GST/HST purposes at the time the supply is made.

Where a non-resident is deemed to have made a supply of intangible property at a point in time while the non-resident is still a registrant, the situation will fall outside the scope of section 10 of Part V of Schedule VI to the ETA. The CCRA has not adopted any specific administrative policy to provide relief in the situation you have described relating to intangible property. This issue will be brought to the attention of the Department of Finance.

Q.24 - Section 179(3) and (5) “Place of Supply” Rules

Section 179(3) applies to certain transactions involving exported goods and deems the supply of goods to be made outside Canada, and not subject to GST, in the following situation:

1. The purchaser is a non-resident who is not registered for GST;

2. The purchaser is not a “consumer” – which by definition in section 123(1) are limited to “natural person”; and

3. (a) Physical possession of the property is transferred to a carrier for export and delivery to a person at a place outside Canada (section 179(3)(c)(i)); or

(b) To the extent the property is not transferred to a carrier, all of the following conditions are satisfied:

(i) physical possession of the property is transferred at a place in Canada to the non-resident person or any other person for export,

(ii) after physical possession of the property is transferred, the property is exported as soon as is reasonable having regard to the circumstances surrounding the exportation,

(iii) the property has not been acquired by the non-resident person or any owner of the property for consumption, use or supply in Canada at any time after physical possession of the property is transferred and before the property is exported,

(iv) after physical possession of the property is transferred and before the property is exported, the property is not further processed, transformed or altered except to the extent reasonably necessary or incidental to its transportation, and

(v) the registrant maintains evidence satisfactory to the Minister of the exportation of the property.

Notwithstanding the foregoing, section 179(5) provides that transferring possession to a “bailee” in Canada for the sole purpose of shipping may effectively constitute deemed delivery to the non-resident in Canada.

Questions

1. What is the CCRA’s views on the meaning of a “bailee” and when will a carrier be considered a bailee? In this regard, we note that Black’s Law Dictionary refers to the bailee as the person to whom personal property is delivered under a contract of bailment and that a contract of bailment is referred to as the “delivery of goods or personal property, by one person (bailor) to another (bailee), in trust for the execution of a special object upon or in relation to such goods”.

2. To the extent a broad meaning of “bailee” is adopted (for example, if most carriers are considered a “bailee”), could you please confirm that section 179(3)(c)(i) would have little application in situations involving carriers since section 179(5)(c)(i) would deem physical possession of the property to be transferred to the non-resident at the time physical possession is transferred to the bailee/carrier. To the extent this is the case, reliance on the zero-rating export provisions or section 179(c)(ii) would be required, which generally indicate that satisfactory evidence of export must be maintained.

CCRA Comments

A carrier will be considered a “bailee” for purposes of subsection 179(5) of the Excise Tax Act in the circumstances in the provision. Generally, the provision deems a carrier, to whom tangible personal property of an unregistered non-resident person is transferred by a registrant, not to have acquired physical possession of the property for purposes of the drop-shipment rules. Rather than the carrier, it is the person to whom the goods are to be released that is treated as having acquired physical possession of the goods. The provision is merely intended to ensure that a registrant transferring physical possession of tangible personal property of an unregistered non-resident to a carrier is not required to account for tax on the property by virtue of that transfer.

The CCRA’s position is that subparagraph 179(3)(c)(i) of the ETA nevertheless applies to deem the supply made by the registrant to have been made outside Canada where the circumstances of that provision in fact exist. Specifically, where all other conditions of subsection 179(3) are met, the provision will apply where the registrant in fact transfers physical possession of the property to a carrier for export and delivery to a person at a place outside Canada. There would be no requirement to satisfy the conditions of subparagraph 179(3)(c)(ii) in this case.

Q.25 - Zero-Rated Tunnel Construction- Meaning of International Tunnel Authority

Section 2 of Part VIII of Schedule VI of the ETA zero rates a supply of property or a service to an international bridge or tunnel authority for use in the construction of a bridge or tunnel that crosses the boundary between Canada and the United States.

How does the CCRA determine whether a person is an “international bridge or tunnel authority” for purposes of this section? If the person is an owner/operator f an international bridge or tunnel that cross between Canada and the United States, would that be sufficient to be considered an “international bridge or tunnel authority”?

CCRA Comments

The term “international bridge or tunnel authority” is not defined in the Excise Tax Act. As such, the CCRA is left to consider what factors would be considered reasonable or relevant in interpreting those words.

In all circumstances, the determination of whether or not a person is an “international bridge or tunnel authority” is a determination that must be made on the merits of a given fact situation. The fact that a particular person is an owner/operator of an international bridge or tunnel that crosses between Canada and the US is one of the main factors to be considered. However, this fact alone would not be sufficient for that person to be considered an “international bridge or tunnel authority” for purposes of section 2 of Part VIII of Schedule VI to the ETA.

A starting point in determining whether a person is an “international bridge or tunnel authority” is the enabling legislation of the particular bridge or tunnel. The enabling legislation of a particular bridge or tunnel may come in the form of Government of Canada Acts, Orders in Council, federal incorporating legislation, provincial legislation and foreign (United States) legislation. These different types of legislation usually provide information that can be considered in determining whether a person is an “international bridge or tunnel authority”.

It is also reasonable that the CCRA would consider other agreements involving parties named in the enabling legislation. Although these agreements would not be viewed as definitive evidence of a person being an “international bridge or tunnel authority”, they would be a factor that the CCRA would consider. Similarly, the CCRA would consider other related information such as the incorporating documents or by-laws of a particular person.

F. ADMINISTRATIVE ISSUES

Q.26 - Voluntary Registration

Paragraph 240(3)(a) of the ETA permits a person to voluntarily register for GST purposes if the person is engaged in a commercial activity in Canada.

Assume for example that ACo is a corporation resident in Canada. ACo will purchase certain taxable tangible and intangible personal property in Canada and immediately resell this property to BCo in Canada. Assuming these are the only transactions that ACo will be involved in, will ACo be able to voluntarily register for GST purposes under paragraph 240(3)(a) and claim input tax credits for GST incurred on the purchase of the property?

CCRA Comments

To qualify to register voluntarily under paragraph 240(3)(a) of the Excise Tax Act (ETA), a person must demonstrate that it is engaged in a commercial activity as defined under subsection 123(1).

Persons who are in a start-up position and not yet making taxable supplies may be considered as being engaged in a commercial activity. However, persons commencing a business who apply to be registered, and where the provision of taxable supplies has not yet begun, should be able to demonstrate a clear intention to be engaged in a commercial activity.

It is a question of fact whether or not ACo intends to be engaged in commercial activity. Given the facts, it is not clear that ACo is involved in commercial activities to the extent that would qualify for voluntary registration under subsection 240(3)(a) of the ETA. Therefore, ACo may or may not register or be required to register and entitled to claim input tax credits for the GST incurred on the purchase of its property.

Should we receive a specific factual situation, we would be pleased to provide a ruling.

Q.27 - GST Reporting Periods

Does a deemed year end for income tax purposes result in a deemed year end for GST purposes?

For those GST registrants who file on a “fiscal year” basis, it is important to note that the definition of “fiscal year” is generally tied to “taxation year” for income tax purposes. So, a deemed year end for tax purposes appears to trigger a year end for GST purposes, which in turn triggers an end of the reporting period and a GST return must be filed. The CCRA appears pretty firm on this in the case of amalgamations (since section 245 is not listed in the regs) or in any other case, for filers on a fiscal year basis. However, what about for filers on a “fiscal quarter” or “fiscal month” basis? Can the CCRA’s computer system now handle such adjustments?

CCRA Comments

Subsection 123(1) of the Excise Tax Act (ETA) defines a “fiscal year” of a person as the period the person has elected under section 244 as the fiscal year, and, in all other cases, the taxation year of the person. The definition of “taxation year” in subsection 123(1) of the ETA refers to the taxation year of a person under the Income Tax Act.

In certain circumstances, such as when a corporation’s control is acquired by another person, the corporation may have a deemed fiscal year for income tax purposes. This results in the corporation having the same deemed fiscal year end for GST/HST purposes. Section 243 of the ETA determines fiscal quarters, and fiscal months with reference to a person’s fiscal year. Subsection 245(2) establishes a registrant’s reporting periods as fiscal quarters, fiscal months or fiscal years. Therefore, the deemed fiscal year for income tax purposes would also result in the person having a change in its GST/HST monthly, quarterly or annual reporting periods to reflect the new fiscal year end.

At this time, CCRA’s computer systems cannot handle such adjustments to a person’s current fiscal year. We will continue to administratively allow persons in such circumstances to file their GST/HST returns in that year without reference to the deemed fiscal year changes.

We have brought this issue to the attention of CCRA’s Assessment & Collection Branch that is in the process of redesigning the GST/HST computer systems.

Q.28 - GST Voluntary Registration

Please confirm whether a corporation that sells equipment from its head office in the U.S. to Canadian purchasers, may register voluntarily for GST purposes. Assume that the U.S. seller does not carry on business in Canada and that all equipment is delivered to the customer in the U.S.

Subsection 240(3) permits voluntary registration in certain circumstances. One of those is the export of TPP to Canada. This company should be entitled to register since it “exports” goods to Canada; however, the CCRA registration people in one of the Tax Services Offices took the position that in order to be able to register voluntarily under this provision, the person to be registered must be the importer of the goods.

CCRA Comments

Pursuant to subsection 240(3) of the Act, a non-resident person, who is not required to register for the GST/HST under subsection 240(1) of the Act, may voluntarily apply to register for the GST/HST. This includes a non-resident person who, in the ordinary course of carrying business outside Canada, regularly solicits orders for the supply by the person of tangible personal property for export to, or delivery in, Canada.

In this case, the corporation may be permitted to register providing it regularly solicits orders for the supply of tangible personal property for export to Canada. However, based on the information provided, even if the non-resident corporation is permitted to register voluntarily, it would not be entitled to claim an input tax credit under subsection 169(1) of the Act for the Division III tax paid at time of importation as it would not be the importer of the equipment.

Q.29 - GST and Wash Transactions Policy

Does the wash transactions policy apply in circumstances where a supplier failed to charge GST to a person who would be entitled to a full GST rebate as opposed to an input tax credit?

A consultant supplies services to a partner of a partnership. The consultant failed to charge GST to the partner of a law firm, who is not a registrant. If the consultant is audited and assessed for the failure to collect, can the consultant rely on the wash transactions policy to avoid interest or penalty over 4% of the GST amount, on the basis that the partner would be entitled to claim a rebate in respect of such GST?

CCRA Comments

The wash transaction policy does not apply in a situation where the recipient of the supply is entitled to a rebate instead of an input tax credit.

The wash transaction policy Memoranda Series 16.3.1 Reduction of Penalty and Interest in Wash Transaction Situations states in paragraph 3 that a wash transaction does not include a supply made to a recipient who would have been entitled to claim a rebate, as opposed to a full ITC, if the tax had been correctly charged.

Q.30 - GST/HST Registration Numbers

It was recently announced in Publication IN-312-V, “The New Electronic Services of the Ministère du Revenu”, that QST, and GST/HST registration numbers “can be obtained on the spot” on its website. Is the CCRA considering a similar initiative?

CCRA Comments

Currently, you can obtain a GST/HST Registration Number on-line at the CCRA’s website using the Business Registration On-line (BRO) service. It is designed so that businesses can conveniently register themselves for CCRA, New Brunswick, Nova Scotia and Ontario programs at one time.

We understand that the Ministère du Revenu (MRQ) has now added a verification feature to the electronic services available on their website however, it is only for the verification of QST registrations numbers. As we have previously received enquires in the past regarding a similar type service for validating GST/HST registration numbers on-line, Assessment & Collections Branch is presently looking into the possibility of providing this service. However, in the meantime you can still verify the validity of a GST/HST number by contacting your local Business Window and they will provide the information verbally or in writing if so requested.

Q.31 - Invoicing in Wash Transactions

Facts

Company A, a non-resident Texas corporation, which is GST registrant, sells goods to hundreds of Canadian customers across Canada. Its Canadian customers act as the importer of record and pay Division III tax at the time of importation. All of the customers are GST registrants eligible for input tax credits. Company A does an internal compliance audit and is told by its outside advisors that it may have to collect GST under Division II on its invoices because it is paying freight costs for delivery to its customers’ locations in Canada.

Questions

1. Must GST be collected by Company A? Does it make a difference if under the terms of the contract legal title passes in the United States?

2. If Company A makes a voluntary disclosure, must Company A pay the tax and send invoices to its customers in order to recover the tax? For what period?

3. It is understood that in situations like the one above, Revenu Québec does not require the tax to be paid and invoices to be sent where invoicing would be unduly cumbersome. Apparently, this subject has been discussed with the CCRA. Would the CCRA consider adopting the same policy as Québec?

CCRA Comments

1. Company A would be required to collect GST/HST on the supplies of the goods if they are delivered or made available to the recipients of the supply in Canada, and would not be required to collect GST/HST if the goods are delivered or made available to the recipients of the supply outside Canada.

To determine the place where goods shipped from outside Canada are delivered or made available, it is necessary to refer to the terms of the contract, the place where the goods are considered to be delivered or made available under the applicable sale of goods legislation and all relevant circumstances of the transaction. The place where title transfers is not the determinative factor of whether a supply of goods by way of sale is deemed to be made in Canada under the Excise Tax Act. The fact that Company A is paying freight costs for delivery to its customers’ locations in Canada could be an indication that the goods are delivered or made available to the recipients of the supply in Canada.

2. It is our current understanding that if company A makes a voluntary disclosure, it would be required to account for the tax pursuant to current assessing practices. Once a complete disclosure is made, it would be decided on the specific facts of the case how many years or periods would have to be accounted for.

3. It is our current understanding that Revenu Québec has not adopted the policy described in the question. However, we will be looking into this matter further.

Q.32 - Enforcement Manuals

Does the CCRA intend in the near future to update its enforcement manuals respecting seizures’ ascertained forfeitures (and assessments), and going forward revise the manuals to cover AMPS? Will these manuals be generally available or will it be necessary to file Access to Information Act requests?

CCRA Comments

Contraband and Intelligence Services Directorate is currently in the process of re-writing the Enforcement Manual. It hopes to have this task completed by the end of this calendar year. Copies will be made available to Public Reading Rooms. There will be references to AMPS in the Manual but only insofar as these relate to general enforcement policy - i.e., the use of AMPS in place of seizure and ascertained forfeiture.

Q.33 - CCRA’s Audit Policy

Can CCRA provide comments on aspects of its audit policy, including the following –

a) Is there a period of years over which audits of corporations are scheduled on a rotation basis?

b) What industries does CCRA currently consider to be higher priority for audit?

c) Are there guidelines for selection of specific registrants for audit? If so, please provide an overview of same.

d) Are there guidelines for the timeframe in which to complete an audit, and/or ensure the prompt completion of the audit (consideration given to delays introduced by the registrant, etc.)? If so, please provide an overview of same.

e) Who are the designated go-to persons if a registrant perceives it is having problems with the audit?

f) Please describe the steps for managerial review of the auditor’s practices, decisions, conduct, etc., and the frequency and expected degree of a manager’s involvement.

g) Please comment on Audit’s practice with respect to the circumstances in which they will agree to referring a contentious technical or assessment point for a “second opinion” as opposed to raising the assessment and leaving the issue to be addressed at the objection stage.

h) Please provide an update on the “1+1” audit practice.

CCRA Comments

a) In the Large File program, all files are risk assessed on a rotational basis. Audit assignment is then based on this assessment, taking into consideration resource availability. For the Small and Medium audit programs, audits are assigned based on our risk assessment system.

b) Within the Underground Economy (UE) sectors, the CCRA has identified the construction and hospitality sectors as national priorities. Each region may identify additional priority sectors for audit.

c) The CCRA does not target specific registrants for audit but, as part of the UE initiative, does target specific sectors. As part of the CCRA’s enforcement strategy, qualitative and quantitative risk management techniques are used on all files to identify complex issues and potential anomalies.

d) The timeframe of any tax audit is affected by such factors as the state of the books and records, the size and complexity of the business, and delays introduced by the CCRA or registrant (e.g. time taken to obtain technical interpretations). The CCRA promotes the timely completion of audits and strives to minimize any burden to the registrant’s business during the course of an audit.

Approximate timeframes are used for purposes of resourcing audit operations. However, once the audit has commenced, the tax-at-risk, the materiality of non-compliance, and the above-noted factors will all determine the actual time required to complete the audit. Auditors are encouraged to address all relevant issues in the most timely manner possible.

For Large Cases, the audit protocol provides targeted timeframes for audit completion. The Agency makes every reasonable effort to meet these mutually agreed timeframes, and delays are managed by the Large File Case Manager in consultation with the taxpayer.

e) In Large Case audits, the Large File Case Manager manages the audit and is the contact person for the registrant. In other cases, any issues should be addressed with the auditor first. If the problem is not resolved at this level, then the registrant may contact the auditor’s Team Leader.

f) During the course of an audit, the Team Leader is available to discuss and review the file with the auditor as needed. In the case of less experienced auditors, the Team Leader provides technical assistance and coaching in all stages of the audit. At a minimum, all audit files are reviewed by the Team Leader when completed and prior to processing.

The audit plan in a Large File audit is developed with the involvement of all specialized audit areas, and is subject to a challenge-review process. Large File Case Managers are expected to maintain a working dialogue with Large File taxpayers, and to raise issues to taxpayers as early as possible for resolution.

g) The CCRA promotes a proactive approach and encourages auditors to resolve issues at the audit stage wherever possible. Internal resources are provided to assist auditors with expertise in technical issues, specific areas or highly specialized industries. When dealing with contentious technical issues auditors may obtain the assistance of these internal resources, including specialized units, on a formal or informal basis.

The audit protocol provides a Dispute Resolution Process that identifies and involves more senior TSO management in a dispute where issues cannot be resolved between the Large File Case Manager and the Tax Manager.

h) Subject to certain exceptions, the common audit period policy includes the current year being audited plus the immediately preceding twelve-month period(s). For GST/HST or for concurrent/joint audits, the audit period coincides with the period defined for Income Tax purposes (the most recent fiscal period for which an Income Tax return has been filed, assessed and is available for audit), plus any returns filed for subsequent periods.

The 1+1 policy does not apply to the Large Business population, as transactions in these cases are complex, may extend over a period of time, and involve significant amounts of tax. However, the Agency has adopted a policy that, as a general rule, it will not re-open audit issue(s) or period(s) in Large File cases where the issue(s) or the period(s) have been properly addressed by audit, with certain exceptions. In addition, the Audit Protocol specifies the scope and timing of compliance activities relating to a specific case, which is developed in consultation with the registrant.

G. IMPORTATIONS/CUSTOMS ISSUES

Q.34 - Voluntary Disclosure (Imports)

An importer, which is engaged exclusively in commercial activities, conducts a customs compliance review of its importations and determines that certain duty-free goods have been undervalued. Will the CCRA confirms that if a voluntary disclosure is made, all interest will be waived on the underpaid GST? If not, why does CCRA’s policy differ from that in respect of voluntary disclosures concerning domestic transactions between registrants?

CCRA Comments

While the Voluntary Disclosure Program encourages client's to come forth with admissions of non-compliance, the policy is quite clear that only penalties, including the Specified rate of interest will be waived. The Prescribed rate of interest is still applied to any amounts owing.

Departmental Memorandum D11-6-5, appendix B, also states that when an importer, of his own volition, makes a voluntary amendment prior to any action being initiated by Customs, the Prescribed rate of interest shall be applied.

Due to the differing legislative base surrounding the application of GST on domestic versus imported goods, the legislation does not provide of the relief of interest on GST relative to imported goods.

Q.35 - Ascertained Forfeitures

It is understood that there have been ongoing discussions between Customs and GST Policy with respect to the amount of penalties, if any, which should be levied when an ascertained forfeiture has been made concerning the undervaluation of duty-free goods imported by a registrant. When only GST has been underpaid and the importer is entitled to claim input tax credits, it would appear that the maximum penalty should not exceeds 25% of the GST underpaid, as provided by section 285 of the ETA. Please comment.

CCRA Comments

In the course of the Customs-Wide Sanction Study (forerunner to AMPs), the GST parity argument was considered in detail. It was determined the only similarity between contraventions of GST provisions and Customs provisions occurred at or after time of accounting involving errors made on accounting documents and subsequent failure to correct errors. The foregoing did not include fraudulent transactions involving non-report of imported goods or false statements made in respect of goods that were reported.

That being said, certain aspects of the CBA argument were recognized. Foremost, the use of seizure and ascertained forfeiture as the primary tool to address non-compliance has been restricted to only "specified" commodities (alcohol, tobacco, drugs, weapons, child pornography) and to certain contraventions when higher penalties than those allowed under AMPs are required (e.g., contraventions 019, 020, 025, 031, 066, 069, 203, 344 - 346, 348). Otherwise, AMPs are applied and goods are accounted for in the normal manner for accounting. This allows the importer to claim any ITC applicable to the goods.

When it is necessary to utilize seizure or AF in respect of the goods, the terms of release use the same calculation method as used for the assessment of the AMP, however, these are not capped at $25K. In addition, the terms of release do not include amounts equal to the duties and/or taxes owing on the goods. The latter are collected separately as an accounting so that importers may claim any ITC that is applicable.

Q.36 - Dutiable Royalties

Please provide concrete examples of royalties considered dutiable. In this respect, greater direction than “those royalties which are paid in respect of goods as a condition of sale” is desired.

CCRA Comments

The Supreme Court's decision in response to the Mattel appeal stated that, for a royalty to be paid as a condition of the sale for export to Canada, the vendor of the goods must be entitled to refuse to sell goods to a purchaser, or repudiate the contract of sale, when a purchaser refuses to pay the royalty.

Examples of royalty payments considered dutiable and therefore are required to be added to the price paid or payable for imported goods;

1. The agreement to purchase goods is subject to the condition that the purchaser also pays the applicable royalties to either the vendor or to a third party. The condition that the royalties must be paid is stipulated in the contract of sale for the goods.

2. The agreement to purchase goods from a related-party vendor is not subject to the condition that the royalties be paid as a condition of the sale for export to Canada. The purchaser subsequently refuses to pay the royalties to the vendor. Goods are subsequently sold to the related purchaser subject to the condition that royalty payments be paid as a condition of the subsequent sale. In this case the royalty payments made subsequent to the purchaser's refusal to pay royalties on prior purchases must be added to the price paid or payable for the goods when appraising the value for duty.

H. OTHER

Q.37 - Fruit Juices

It is understood that the CCRA is reviewing its policies concerning the zero-rating of fruit flavoured drinks, e.g., fruit-flavoured teas, which heretofore have qualified for zero-rating notwithstanding paragraph (1)(d) of Part III of Schedule VI. (See response to question 24, Annual Meeting, February 28, 2002).

Please comment.

CCRA Comments

The CCRA is reviewing its policy on fruit flavoured teas and similar products (e.g., herbal teas, tisanes, etc.). Our current position can be summed up simply as “tea is tea”. Supplies of beverages which are characterized as tea, regardless of flavour or ingredients, are zero-rated.

As indicated last year, during the implementation of the GST the public was informed that the tax status of most foods would generally not change with the introduction of the GST.

Given the number of products that are currently being described as tea, the word has become somewhat of a misnomer. Many of the products currently marketed as a tea do not contain any real tea, which strictly speaking is made only from the camellia sinensis plant. New products currently described as tea may be comprised of herbs, fruits, roots, flowers, spices and other plant substances. Many of these products are marketed for their purported benefits or as an herbal remedy. Some of these products come in alternate forms such as powders or cubes.

Therefore, as a result of the proliferation of new products being called “tea” the CCRA is reviewing its position that “tea is tea”. At this point, it is too early to speculate as to the extent, if any, our position on “tea” will change.

Q.38 - Telecommunication Services – Fibreoptic Cable

Question 42 of the 2000 CCRA/CBA Question and Answer session addressed the CCRA’s existing policy concerning the rental of excess bandwidth or “dark fiber” in Canada. The treatment of underground fiber optic cable was addressed in question 16 of the 2002 CCRA/CBA Question and Answer session. However, there is still confusion as to how supplies of fiber optic cable should be treated for GST purposes.

Dark fiber generally means fiber optic cable without any installed optronics or other attached telecommunication equipment. The recipient of the dark fiber would install its own optronics to carry traffic on the fiber. In its response, the CCRA indicated that it considered dark fiber or bandwidth to constitute a telecommunication facility. Therefore, a person providing access to a telecommunications facility would be considered to be providing a telecommunication service pursuant to paragraph (b) of the definition of telecommunication service.

In the telecommunication industry, it is common for suppliers of dark fiber to provide access to the fiber by way of an indefeasible right of use (“IRU”) whereby the recipient has an exclusive right to use applicable strands of fiber optic cable over a pre-determined route for a fixed period of time, usually 20 years, with options to renew for additional terms. Generally, the useful life of fiber optic cable is estimated to be 20-25 years.

What is the CCRA’s current policy as to how IRU’s in dark fiber should be treated? In what circumstances would IRU’s in dark fiber be considered to be the supply of a telecommunication service? In what circumstances would an IRU in dark fiber be considered to be the supply of real property or tangible personal property? What factors does the CCRA consider in determining whether an IRU involves the sale of the fiber as opposed to the lease of the fiber?

In addition to IRU’s in dark fiber, companies in the telecommunication industry also enter into IRU’s involving dim fiber and lit fiber. Dim fiber generally means one or more wavelengths of light on a strand of fiber optic cable. In this case, the supplier provides the optronics to create the wavelengths of light while the recipient provides the optronics to carry the traffic over the wavelengths. Lit fiber generally means strands of fiber optic cable with installed optronics through which telecommunications are being transmitted. The optronics to carry the traffic is provided by the supplier.

Presumably in the case of lit fiber, the supplier is providing a telecommunication service. However, how would the supply of dim fiber be treated?

CCRA Comments

Paragraph (a) of the definition of "telecommunication service", at subsection 123(1) of the Excise Tax Act (ETA) states that a telecommunication service is "the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system". Paragraph (b) of the definition states that it is the"making available for such emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a)".

A "telecommunications facility" is defined as” any facility, apparatus or other thing (including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof) that is used or is capable of being used for telecommunications".

Dark Fibre

CCRA considers that dark fibre is capable of being used for the purpose of transmitting a signal and is a “telecommunications facility” as defined at subsection 123(1) of the ETA.

To the extent that the nature of a supply is an exclusive right to use applicable strands of fiber optic cable over a pre-determined route for a fixed period of time (i.e. made otherwise than by way of sale), CCRA would determine that the supply is the “making available a telecommunications facility”.

Such a supply would be treated as supply of a “telecommunication service” provided it is made by a person who carries on the business of supplying "the service of emitting, transmitting or receiving signs, signals, writing, images or sounds or intelligence of any nature by wire, cable, radio, optical or other electromagnetic system, or by any similar technical system". As a result, when a supply is of a “telecommunication service”, as defined in subsection 123(1) of the ETA, the rules specific to telecommunication services will apply to such a supply. For example, there are special rules pertaining to the zero-rating and the place of supply of “telecommunication services”. These special rules will apply to such supplies.

Nothing in the definition of “telecommunication service” deems such a supply to be either a supply of a service or of property. Consequently, the characterization of the supply of a “telecommunication service” as a supply of property or service will follow the normal rules of characterization and, absent a provision specific to telecommunication services, the normal rules would apply.

Therefore, if a given “telecommunication service” is a supply of making available a dark fiber, such a supply would be deemed, pursuant to subsection 136(1) of the ETA, to be a supply of the dark fiber itself provided that the supply is made by way of lease, licence or similar arrangement. To the extent that the fiber is affixed to or embedded in land (such as when it is buried underground), and is designed to stay there for its useful purpose, such a fiber may be considered as real property for GST/HST purposes. However, such a determination would be made on a case-by-case basis in accordance with the definition of real property in subsection 123(1) of the ETA and CCRA’s interpretative policy as well as statute law; contract law; common law or the Civil Code of Quebec; and leading jurisprudence of fixtures v. chattels, where applicable. The sale of a “telecommunications facility” is not considered to be a supply of a telecommunication service. If there was a sale of the dark fibre, then we would consider the sale to be a sale of real property, subject to the considerations noted in the above paragraph.

We understand that the supplies of IRUs are often made pursuant to contracts which have characteristics of both a sale and a lease. Each contract must therefore be examined on its own merits to be characterized appropriately. The position of the CCRA in respect of leases is that a contract that characterizes itself as a lease is to be considered as such.

Lit Fibre

We understand that lit fibre is the supply of emitting or receiving signals through the optronics provided by the supplier and used by the supplier for the purpose of supplying the service. Such a supply would constitute the supply of a telecommunication service under paragraph (a) of the definition of “telecommunication service” in subsection 123(1) of the ETA.

Dim Fibre

The question specifies that dim fibre generally means one or more wavelengths of light on a strand of fibre optic cable. In this case, the supplier provides the optronics to create the wavelengths of light while the recipient provides the optronics to carry the traffic over the wavelengths.

We are not clear as to the role of each party in this transaction. However, if in these circumstances, the supplier owns the fibre, creates the wavelengths of light from the data furnished by the recipient, and transmits the wavelengths it created to the optronics provided by the recipient for further carrying, it appears that the supplier may be supplying a “telecommunication service” as defined in subsection 123(1) of the ETA.

Q.39 - New Housing Rebate – 254(2)(e) – Title Taken in Different Name

Is the new housing rebate under s. 254 available if title is taken in the name of a person other than the one who signed the Agreement of Purchase and Sale as purchaser?

On a strict reading of para. 254(2)(e), if Husband signs the purchase agreement and directs title to be given in the name of Wife on closing, then the rebate is not available, because ownership is not being transferred to “the particular individual” who became liable under the purchase agreement under 254(2)(b). This is the case even if Husband and Wife will both live in the home as their primary place of residence.

Will administrative relief be granted to allow the rebate in each of the following cases?

a) title is directed to the spouse, and both will be living in the home as primary place of residence;

b) title is directed to another family member (e.g., a child or parent), and both will be living in the home as primary place of residence;

c) title is directed to another family member, who will be living in the home as primary place of residence, but the person who signed the purchase agreement will not be living there;

d) title is directed to an unrelated person, who will be living in the home as primary place of residence, and the person who signed the purchase agreement will not be living there.

CCRA Comments

Pursuant to subsection 254(2), where the builder of a residential complex makes a taxable supply of the complex by way of sale to a “particular individual”, and the requirements of paragraphs 254(2)(a) through (g) are met, “the Minister shall…pay a rebate to the particular individual equal to….” (followed by a description of how the amount of the rebate is determined).

Paragraph 254(2)(e) describes one of the requirements mentioned above; i.e. that “ownership of the complex… (be) transferred to the particular individual after the construction or substantial renovation thereof is substantially completed.”

The terms of paragraph 254(2)(e) are clear: they require that the particular individual who has entered the agreement for the purchase of the residential complex be the one to whom ownership of the complex is transferred. Technically, it appears that this requirement would not be met where ownership (i.e., title) is transferred from the vendor to another individual.

The question posed is essentially whether, as a matter of administrative policy, we would accept that the requirement of this paragraph is met in a situation where the particular individual has directed that title to the property be registered in the name of another individual who is a relation of the particular individual.

Except for the circumstances described under scenario (d) above (see comments below), as a matter of administrative policy, if a request of this nature arose, we would recommend extending rebate eligibility where title is vested in an individual that is a relation, subject to a review of the surrounding facts, and subject to consultations with the Department of Finance on this application of the rebate provision.

While, as a matter of policy, we would recommend extending the rebate requirements in the circumstances described under scenarios (a), (b) and (c) above, subject to the comments in the preceding paragraph, we would not consider that the requirements for the rebate are met under scenario (d). The reason for this is that, under (d), the particular individual will not occupy the house and title is directed to an individual that is an unrelated person. That is, in this situation, the following legislative requirements are not met:

the requirement under paragraph 254(2)(b) that “the particular individual is acquiring the complex for use as the primary place of residence of the particular individual or a relation of the particular individual.”
the requirement under paragraph 254(2)(g) that “the first individual to occupy the complex as a place or residence is…in the case of a single unit residential complex, the particular individual or a relation of the particular individual….”

Q.40 - Capital Property – All or Nothing Approach

Subsection 199(4) sets out an “all or nothing” rule for the acquisition of improvements to capital personal property based on whether or not the improvements are acquired primarily for use in commercial activities. Under subsection 123(1), an improvement to capital property includes any property or service acquired in respect of the capital property to the extent that the consideration for the property or service acquired is included in the adjusted cost base of the property (“ACB”) for Income Tax Act (Canada) purposes.

Subsection 199(2) sets out an “all or nothing” rule for the acquisition of capital personal property based on whether or not the property is acquired primarily for use in commercial activities.

Is the Department of Finance considering extending and amending subsection 199(2) to include taxable services, such as brokerage services, acquired by a purchaser for use in acquiring capital personal property, to the extent that the consideration for acquiring those services is included in the ACB of the property acquired? Such an extension/amendment would seem to bring subsection 199(2) in line with the scope of subsection 199(4)? What are the CCRA’s comments on such a proposed amendment?

CCRA Comments

Your concerns will be brought to the attention of the Department of Finance. Subsection 199(2) refers to personal property that is for use as capital property. There is no reference to the adjusted cost base of capital property in subsection 199(2) to include taxable services as is the case with subsection 199(4) dealing with improvements. As a result of this, for purposes of determining the input tax credit entitlements of a registrant with respect to taxable services, the general rules under section 169 of the ETA will apply. That is to say, the registrant will be entitled to claim input tax credits with respect to the acquisition fees, based upon the extent to which they relate to their commercial activities.

Q.41 - “Hot” Audit Issues and Current Cases

Please provide an update on the most current “hot” audit issues and cases being worked on by the CCRA. Please also provide an update on the cases dealing with sales of vehicles to status Indians.

CCRA Comments

GST audit issues continue to arise in a broad range of areas of the legislation. The following are examples of technical issues that arise in field audits:

Treatment of various segments of an entity’s operations as commercial activities and claiming of related input tax credits. These issues arise in the context of financial institutions as well as public service bodies and governments
Whether funding related to particular activities carried out by a PSB or government represents consideration for a supply.
Place of supply rules in electronic commerce transactions
Appropriate claiming of input tax credits on importation of goods. This issue involves detailed examination of documentation in situations where the importer of record may not be the actual purchaser of the goods.
Application of Division IV – self-assessment of tax on imported taxable supplies

At Headquarters, we are currently finalizing the policy on the use of procurement cards and methodology for claiming input tax credits on purchases made with these cards.

Cases dealing with issues related to sales of vehicles to status Indians are before the Courts and it would be inappropriate to comment further. The CCRA continues to investigate the problems of “car flipping”.

Q.42 - Business Numbers

Is a new registration and business number required where an amalgamated corporation assumes the name of a predecessor? What about where a partnership admits new partners but the name remains the same?

CCRA Comments

Amalgamations

Where an amalgamated corporation (“Amalco”) assumes the name of a predecessor corporation (“Predco”), a new registration and business number is not required. It is up to Amalco to decide if it wants to use one of the Predco’s BNs or if it wants a new BN.

In any case, CCRA clients should contact the local CCRA tax services office as soon as possible when an amalgamation occurs.

Partnerships

In the case of a partnership admitting new partners the answer depends on the legal ramifications of the change in the partnership. If, according to the partnership agreement and the relevant provincial partnership statute the partnership is not dissolved but is a continuation of the same partnership then the same registration and BN is used.

However, if the original partnership is dissolved and a new partnership is formed in law then a new registration and BN are required unless subsection 272.1(7) of the Excise Tax Act applies. Generally, subsection 272.1(7) of the ETA applies if:

the majority of the members of the predecessor partnership, which together had more than 50% interest in the capital of the predecessor become members of the new partnership of which they comprise more than half of the members, and
all or substantially all of the property distributed to those members in settlement of their capital interests in the predecessor partnership is transferred to the new partnership

then the old registration and business number is used unless the new partnership is registered or applies for registration.

Q.43 - Closely Related Persons

Subsection 128(2) of the ETA provides that "where under subsection (1) two corporations resident in Canada are closely related to the same corporation, or would be so related if all of the corporations were resident in Canada, they are closely related to each other for the purposes of this Part." Paragraph 15 of GST Memoranda (New Series), 17.14 provides that "The phrase "if all the corporations were resident in Canada" includes all corporations relevant in determining closely related status as well as those corporations attempting to establish a common relationship. As a result, all relevant corporations resident and non-resident will be considered Canadian residents when determining if two corporations, who are factually resident and registrants, are closely related." The French translation of paragraph 15 of GST Memoranda (New Series), 17.14 is a direct translation of the English, providing "L'expression « si toutes les personnes morales résidaient au Canada » englobe toutes les personnes morales pertinentes lors de la détermination du statut de liaison étroite de même que les personnes morales tentant d'établir une relation commune. Par conséquent, toutes les personnes morales pertinentes résidentes ou non résidentes seront considérées comme des résidents du Canada au moment de déterminer si deux personnes morales, qui sont effectivement résidentes et inscrites, sont étroitement liées." However, the phrase that actually appears in the French version of subsection 128(2) of the ETA is "Les personnes morales résidant au Canada qui sont étroitement liées à un tiers, ou qui le seraient si celui-ci résidait au Canada, sont étroitement liées pour l'application de la présente partie." Could the CCRA please confirm that regardless of the discrepancy between the French version of subsection 128(2) of the ETA and the French version of paragraph 15 of GST Memoranda (New Series) 17.14, the administrative position of the CCRA regarding subsection 128(2) remains as stated in paragraph 15 of GST Memoranda (New Series) 17.14.?

CCRA Comments

The position of the CCRA regarding subsection 128(2) is as stated in paragraph 15 of the GST Memoranda (New Series) 17.14 which provides that “The Phrase “if all the corporations were resident in Canada” includes all corporations relevant in determining closely related status as well as those corporations attempting to establish a common relationship. As a result, all relevant corporations resident and non-resident will be considered Canadian residents when determining if two corporations, who are factually resident and registrants, are closely related”.

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27 February 2003 CBA Roundtable

A. PARTNERS AND PARTNERSHIPS

Q.1 - Partnerships – s. 156 Election

Question

Discussion

CCRA Comments

Q.2 - Partnerships – s. 272.1(2)

Question

Discussion

CCRA Comments

Q.3 - Supply by Partner to Partnership

Question

CCRA Comments

Q.4 - Partnerships and the Election to Offset Taxes and Refunds/Rebates

CCRA Comments

B. INPUT TAX CREDITS

Q.5 - Interaction of s. 296(2) and s. 225

Questions

Discussion

CCRA Comments

Q.6 - BJ Services Case

CCRA Comments

Q.7 - ITCs – de facto Importers

Question

Discussion

CCRA Comments

Q.8 - Pre-Incorporation Contracts Adopted by NewCo & ITC Availability

Questions

CCRA Comments

Q.9 - GST Voluntary Disclosures and Claiming Input Tax Credits

Questions

Discussion

CCRA Comments

C. ELECTIONS

Q.10 - Late-filed Section 167 Elections

CCRA Comments

Q.11 - Section 167 Election – Impact of Amalgamation

CCRA Comments

Q.12 - Section 167 Election – Interpretation

Facts

Question

CCRA Comments

Q.13 - Joint Venture Elections – Bare Trusts

CCRA Comments

D. FINANCIAL SERVICES / EXEMPT SUPPLIES

Q.14 - Online solicitation of loan/credit card applicants

Question

CCRA Comments

Q.15 - Treatment of a Customer List for GST Purposes

Question

Discussion

CCRA Comments

Q.16 - Taxable Supplies and the Application of Paragraph 141.1(1)(b)

Facts

Questions

CCRA Comments

Q.17 - Exempt Health Care Services

CCRA Comments

E. EXPORTS / DROP SHIPMENT RULES

Q.18 - “Fair Market Value” Under Drop Shipment Rules/Place of Supply

CCRA Comments

Q.19 - Zero-Rated Exports

CCRA Comments

Q.20 - Intangible Personal Property – 142(1)(b)

Facts

Questions

CCRA Comments

Q.21 - CCRA’s shift in interpretation of “carrying on business” – transitional issues

CCRA Comments

Q.22 - Franchise Rights – HST Place of Supply Rules

CCRA Comments

Q.23 - De-registration of a Non-Resident

CCRA Comments

Q.24 - Section 179(3) and (5) “Place of Supply” Rules

Questions

CCRA Comments

Q.25 - Zero-Rated Tunnel Construction- Meaning of International Tunnel Authority

CCRA Comments

F. ADMINISTRATIVE ISSUES