Our position has not changed from last year, the ETA does not define what a lease is and does not differentiate operating leases from finance or capital leases. Capital leases may sometimes be treated by the lessees as purchases of property for purposes of their financial statements. The CCRA has indicated that all transactions that are leases will be treated as leases for GST/HST purposes, regardless of their accounting for purposes of financial statements. Whether an agreement between two parties constitutes a lease or some other form of financing is a question of fact which can only be determined by reviewing the terms of the agreement between the parties.

The CCRA has indicated at the 2000 Canadian Tax Foundation conference that it is planning to withdraw IT233R. It is the CCRA’s view that for income tax purposes, the determination of whether a contract is a lease or a sale must be resolved on the basis of the legal relationships created by the terms of the agreement, rather than any attempt to ascertain the underlying economic reality. Consequently, in the absence of a sham, a lease is a lease and a sale is a sale. However, notwithstanding the legal relationships, GAAR could be invoked when warranted.

It is not anticipated that the possible withdrawal of IT233R will have any impact on the CCRA’s position with respect to leases for GST/HST purposes.

Q.2 - Financial Services – Regulations/Section 139

A company is in the business of providing discretionary investment management services. In particular, the company receives monies from various clients and based on certain parameters agreed to in advance by the company and the client, invests the monies in the name of the client in various investments, such as the provision of loans to corporations. The company also services the loans. The company charges its client an annual fee of 30 basis points for the origination of the loan and the subsequent servicing.

(i) Please confirm whether the CCRA has a policy on whether the particular supplies in question - “origination” and “servicing” - would be considered separate supplies or a single supply under the CCRA’s current policies.

(ii) To the extent the two are considered separate supplies, and assuming the “fair market value” of the servicing is 10 basis points per year, does it follow that in this case the two supplies clearly would be exempt on the basis of section 139 of the Act?

(iii) Assume that the COST to the company of providing the origination service is 40 basis points (one time payment), and the cost to the company of providing the servicing is 10 basis points (annual), the cost of the taxable supply (servicing) would exceed the cost of the exempt supply (origination), at least in the case of long term loans. Does this affect the GST treatment of the combined supply? (in other words, is it relevant to the analysis that the cost of servicing exceeds the cost of origination in any particular transaction?)

(iv) If section 139 is not applicable in these circumstances, would the supply be exempt in any event based on the provisions of subsection 4(3) of the Financial Services (GST/HST) Regulations, on the basis the company is an “agent, salesperson or broker” and the services provided include arranging for the “issuance, renewal or variation … of the instrument for a person at risk”?

Reply

(i) CCRA does not have a policy dealing specifically with “origination” and “servicing” fees and whether or not they constitute multiple supplies or a single supply. This issue has been dealt with on a case-by-case basis.

Guidelines for determining whether there is a single supply or multiple supplies are found in policy paper P 077R “Single and Multiple Supplies”.

Summarizing the policy briefly, the following three factors should be considered first in arriving at a determination.

Whether some elements are inputs or themselves supplies
The provisions or terms of the agreement, contract or invoice
The number of suppliers and/or recipients.

Additionally the following questions may be asked to arrive at a determination

If the recipient did not receive all of the elements, would each element, in itself, and in the context of this transaction, be of any use to the recipient? [If yes, likely multiple supplies, if no, likely a single supply.]
Is the provision of a particular element contingent on the provision of another element. [If yes, likely a single supply; if no, likely multiple supplies.]
Is the recipient made aware of the specific elements (in detail) that are part of the package? [If yes, likely multiple supplies; if no, likely a single supply.]

(ii) Where origination and servicing are considered separate services and where origination per the terms of the agreement between the parties involved falls within the definition of a “financial service” per the ETA, section 139 may apply as long as there is no separate charge made for the service i.e. shown on an invoice or calculated separately and recognized as revenue in the providers books and records, and the estimated amount of the servicing is less than 50% of the total consideration.

(iii) The situation described, one time payment of 40 basis points of which 10 points are for servicing and a 10 point annual charge for servicing thereafter, indicates that there is a separate charge for origination and for servicing. Therefore, this is not a single consideration and precludes the use of section 139. Further if servicing is a separate item it will likely be excluded from being treated as a financial service by either paragraph (p) or (q) of the definition of financial service and will be taxable. The determination of whether the amount of consideration for the service exceeds the 50% requirement of section 139 is not necessary in this case.

(iv) Where section 139 is not available, all of the elements in the definition of financial service must be considered to determine whether a service will be taxable or exempt. It is CCRA’s position that paragraph (q) of the definition of financial service precludes the use of paragraph (t) of the definition where the specifics of a case fall within the ambit of paragraph (q). Accordingly where a management or administrative service is provided to an investment plan, or any corporation, partnership, or trust whose principal activity is the investing of funds and if the supplier is a person who provides management or administrative services to the investment plan, partnership, corporation or trust then those services will be taxable and paragraph (t) will not be applicable.

Q.3 - Self-Assessment on Offshore Investment Advisory Services

A Canadian resident financial institution makes investments in non-resident equity acquired on the New York Stock Exchange. Hence, such investments generate exempt financial service income because they are not acquired from the primary market or issuer. The Canadian investor hires a US investment advisor to oversee these investments. Is the Canadian financial institution/investor required to self-assess GST under section 218 on the investment advisory fee related to these US investments?

Reply

Section 218 of the Excise Tax Act (ETA) requires all persons to self-assess tax on taxable supplies of a service acquired outside Canada (“imported taxable supplies”) unless the service is excluded. Pursuant to para. 217(a)(i), an "imported taxable supply" means, in part, a taxable supply (..) of a service made outside Canada to a person who is resident in Canada, other than a supply of a service that is acquired for consumption, use or supply exclusively in the course of commercial activities of the person or activities that are engaged in exclusively outside Canada by the person and that are not part of a business or an adventure or concern in the nature of trade engaged in by the person in Canada.

The supply of an investment advisory service is a taxable supply; however, it is used by the Canadian financial institution (FI) in order to generate investment income from equities. For this reason, the advisory services would be considered to be acquired in the course of the exempt activities of the FI.

Since this supply is made outside Canada and it is not considered to be acquired by the registrant for consumption use or supply exclusively in the course of commercial activities of the Registrant, the service provided by the investment advisor is an imported taxable supply for the purpose of the definition of “imported taxable supply” in section 217 of the ETA. As such, the Canadian FI/investor is required to self-assess GST on the advisory fees under section 218.

Q.4 - Concurrent Leases

This question concerns the GST implications of concurrent leases in asset securitizations. The facts are as follows:

A leasing company ("LeaseCo") leases a fleet of vehicles to fleet operators (the "Lessees") under long term lease arrangements.
LeaseCo sells the vehicles subject to the leases to a Special Purpose Vehicle (the "Trust").
The Trust resells the vehicles back to LeaseCo subject to a master lease whereby the Trust concurrently leases the vehicles from LeaseCo for sublease to the Lessees under terms equivalent to those in the underlying lease agreements with the Lessees.
The Trust prepays a portion of the rentals due over the terms of the leases.
The Lessees, who are unaware of the concurrent lease arrangements, continue to pay the rentals, plus GST, to LeaseCo which collects these amounts on behalf of the Trust.

Questions

Does the CCRA consider concurrent leases to be leases for GST purposes?
Who should remit the GST paid by the Lessees? LeaseCo or the Trust?

Reply

Whether an agreement between two parties constitutes a lease or some other form of financing is a question of fact which can only be determined by reviewing the terms of the agreement between the parties. The CCRA has indicated that all transactions that are leases will be treated as leases for GST/HST purposes. A concurrent lease, where the agreement is considered to be a lease, will be treated the same as an operating lease for GST/HST purposes.

Generally, the effect of a concurrent lease is to transfer the lessor’s (LeaseCo) right of possession of the leased property to the concurrent lessee (the Trust). This right of possession exists concurrently with the de facto possession of the original lessee (the Lessees). Where the right of possession of the property is given under a concurrent lease agreement that does not directly provide for the current or intended transfer of ownership of the property, the agreement would be considered to be a lease.

In effect, under the terms of a concurrent lease, the concurrent lessee (the Trust) becomes the lessor of the property. The concurrent lease does not deprive the Lessees of possession of the property but does entitle the Trust to receive the lease payments under the original lease. As such, the Trust would be required to charge and collect the GST/HST payable by the Lessees and account for these amounts in its net tax calculation. Where such payments are charged and collected by LeaseCo on the Trust’s behalf, otherwise than as agent of the Trust, LeaseCo will also be liable to account for and remit the GST/HST. As it is not the CCRA’s intention to collect the tax twice, the CCRA’s policy with respect to third party remittances may be applied in these situations (P-131, Remittance of Tax by a Third Party). Where LeaseCo forwards the lease payments to the Trust and the Trust accounts for and remits the GST/HST, LeaseCo will be relieved of its liability to account for and remit the tax provided that the tax has been remitted by the Trust.

Q.5 - Sale of Accounts Receivable (Section 222.1)

A company involved in the leasing business assigns a future rental stream to a financing entity. Ongoing rentals and GST are collected from the lessees by the lessor/assignor and these amounts are then paid to the assignee. At the time of the assignment, is the assignor deemed to have collected the GST portion of the future rental stream? If not, is the assignee liable for the GST component of the rental payments?

Reply

Section 222.1 of the ETA will not apply when a party sells the right to receive a future stream of payments where under generally accepted accounting principles there is no underlying “account receivable”. As such, the Company will not be required to account for tax at the time the rights to a future stream of payments are assigned/sold to the financing entity.

According to the information provided, what is being sold/assigned is the right to future payments and not the lease itself. The right to be paid money is a “debt security” the transfer of which constitutes an exempt supply.

In a transaction of this nature, the assignor continues to be liable to account for GST/HST. However, where the payments are collected by the assignee rather than by the assignor then the assignee (financing company) could be liable to remit the applicable tax to the extent it was not accounted for by the assignor.

Q.6 - Administrative Service Fees

A portfolio of mortgages is sold to a financing entity on a serviced basis for a global amount. In its internal books and records, the vendor identifies a portion of the sale price as a service fee. Does the recording of a notional service fee in general ledger accounts render this amount taxable? If so, how does this compare to the situation where no separate service fee is recorded?

Reply

It is the CCRA’s view that the determination of the taxable status of a service fee under the Excise Tax Act may depend on several factors one of which may be whether or not that service fee is recorded separately in a company’s books and records. Other factors to consider are the details of the agreement between the parties, the particular practices in the industry (for example, NHA backed mortgages where service fees are regarded as material and are calculated separately for financial statement purposes), and also the treatment of such fees per Generally Accepted Accounting Principles.

The CCRA is currently conducting a review of mortgage securitization practices in the financial services sector. Although the review has not been completed, it is the CCRA’s observation that the agreements between the participants in this sector are extremely complex, and may vary significantly depending on the parties to the agreement. Accordingly, CCRA cannot comment generally on the tax status of service fees based only on one criteria of several which may need to be reviewed to determine whether a service fee is taxable or not. At this time CCRA can only issue rulings on a case-by-case basis relative to each agreement and the participants involved.

Q.7 - Policy Statement on “Arranging For”

Discussion of revised draft of policy statement on the meaning of the term “arranging for” as provided in the definition of financial service.

B. REAL PROPERTY

Q.8 - Real Property – GST Memorandum 19.5

Deleted.

Q.9 - New Housing Rebate

The section 256 new housing rebate is payable based on the fair market value of real property at the time construction is “substantially completed”. In Kemp (B.E.) v. Canada [1996] G.S.T.C. 32 (TCC) the Court reduced the fair market value of a “finished” house by 5% to acknowledge that “substantial completion” occurred at a point prior to “total” completion. Is the CCRA following Kemp in administering section 256? If so, should the proper reduction not be 10%, given the CCRA’s general view that substantial completion means 90%? Does the same concept apply to self-supply under section 191 where GST is payable on the fair market value at the time of substantial completion (ie., should a person generally self-assess on 90% of the fair market value of the completed structure)? The basic issue is whether tax is payable on the fair market value of the complex, as it exists at the time of substantial completion, or whether tax is payable, at the time of substantial completion, on the fair market value of the “finished” complex.

Reply

The CCRA administers section 256 of the Excise Tax Act in accordance with the legislative requirement that the fair market value on which the calculations are based is that of the residential complex at the time of substantial completion. Consistent with that position, the Minister in Kemp conceded that there should have been a 5% allowance having regard to the fact that the building was unfinished at the time of determination.

The CCRA’s interpretative position is that, for GST/HST purposes, “substantial completion” means that the construction or substantial renovation of the residential complex is at a stage of completion (generally, 90% or more) so that an individual is able to reasonably inhabit the premises. The stage of completion refers to the construction or substantial renovation of the structure, whereas the fair market value of the complex at the time of substantial completion includes the value of both the land and the partially completed structure. Accordingly, the fair market value at that time can be expected to exceed 90% of the fair market value of the completed complex.

Where an appraisal has been made of the completed complex, the allowance for the complex having not been completed at the time in question would depend on the relative value of the land and the stage of completion at which the complex was reasonably habitable.

Section 191 of the Excise Tax Act requires that the builder self-assess tax based on the fair market value of the residential complex at the later of the time possession is given and the time of substantial completion. The fair market value should be the appraised value of the complex at the relevant time, and not a percentage of the value of the complete complex. In any event, because the fair market value of the complex includes the value of the land, the value, at the time of substantial completion or possession as a percentage of the value at final completion, would exceed the percentage of completion of construction or substantial renovation at that time.

Q.10 - GST Collection on Real Property Sales - Bare Trusts

The CCRA’s position is that the beneficial owners, and not the bare trust/trustee, are generally the “recipients” (i.e., the persons obligated to pay consideration under the agreement for supply) in a purchase of real property. Effectively, the bare trust operates as an agency. Accordingly, the CCRA’s position is that it is the beneficial owners who must be registered in order for the vendor not to collect GST on the sale of real property pursuant to subsection 221(2). In Freidman Equity Developments Inc. v. Final Note Ltd. [1998] 41 O.R. (3d) 712, OCA (leave to appeal to the Supreme Court of Canada denied July 20, 2000), the Ontario Court of Appeal held, because of the combination of the “sealed contract rule” and the Ontario Land Registration Reform Act (which deems contracts transferring interests in land to be made under seal), that an undisclosed principal (i.e., beneficial owner under a bare trust) who did not actually sign the document was not liable under a mortgage whether or not the document was actually sealed. The Friedman case therefore suggests that, at least in Ontario, the bare trust/trustee who signs the transfer document (and not the beneficial owners who do not sign the document) may be the only “recipients” (i.e., persons liable to pay under the agreement) and who therefore must be registered for subsection 221(2) to apply. Please advise of the CCRA’s position regarding Freidman and subsection 221(2).

Reply

It continues to be the CCRA’s position that, upon the sale of real property where a bare trust (or trustee) is the purchasing party in the purchase and sale agreement, the beneficial owners, and not the trust (or trustee), are considered to be recipients for the purposes of subsection 221(2) of the ETA. Therefore, in this situation, it is the beneficial owners who must be registered in order for the vendor and purchaser(s) to obtain the benefit of paragraph 221(2)(b) of the ETA.

With respect to the “sealed contract rule” and the court decision in Friedman Equity Developments Inc., supra, we are still reviewing this decision and its implications on our policy.

C. SECTION 156 ELECTION

Q.11 - Use of a Newco – Section 156 Election

Technically, a new corporation that does not have any assets or which has not made any taxable supplies cannot make a section 156 election. Will the CCRA either consider (yet again) making an administrative concession in these circumstances or (preferably) recommend a legislative fix for this problem?

Reply

In order that an election under section 156 may be made, so that the transfer of the assets to Newco will be deemed to be made for no consideration, Newco must be a specified member of a qualifying group under subsection 156(1) prior to this transaction. Accordingly, we can only look at Newco’s property (or its supplies) exclusive of the assets of Parentco which will be transferred to Newco. Given the facts at issue, Newco would not appear to qualify as a specified member for the purposes of subsection 156(2) of the Act, as it would not meet either of the "all or substantially all" requirements found in paragraph (c) of the definition of specified member in subsection 156(1). Accordingly, Newco would not be eligible to make the joint election under subsection 156(2) with Parentco, with respect to the transfer of the assets from Parentco to Newco.

We have received general inquiries with respect to this issue in the past and have discussed the matter with the Department of Finance. We would be pleased to review the interpretation of this provision, taking into account any suggestions and comments we may receive. As such, we would appreciate being provided with factual situations that would illustrate the types of transactions that are being discussed in this question. Factual situations would assist us in our analysis of relevant transactions and would provide us with additional background information for our discussions with the Department of Finance, including discussions regarding the need for a legislative amendment.

Q.12 - Section 156 and Permanent Establishments

A non-resident corporation (“Parent Co.”) is the sole shareholder of a corporation resident in Canada (“Sub Co.”). Parent Co. also has a permanent establishment in Canada. By virtue of subsection 132(2) of the ETA, Parent Co. is deemed to be a resident of Canada in respect of activities carried on through its Canadian permanent establishment. Assume both Parent Co. and Sub Co. are GST registrants.

Can Parent Co. and Sub Co. enter into a section 156 election in respect of activities carried on by Parent Co. through its Canadian establishment?

Reply

We have assumed that the question is not in regards to non-resident insurers with permanent establishments in Canada.

In order to be eligible to file an election for nil consideration under section 156 of the ETA each corporation making the election must be a specified member of a closely related group, among other requirements. In general terms, subsection 128 (1) of the ETA provides that two corporations are closely related if both corporations are registrants and resident in Canada and certain capital stock ownership requirements are met.

It is the CCRA’s position that in order for the residency requirement in subsection 128(1) of the ETA to be met, the corporation in its entirety must be resident in Canada. Where a non-resident person has a permanent establishment in Canada, subsection 132(2) of the ETA provides that the person is deemed to be a resident but only in respect of the activities carried on through the permanent establishment. However, it should be noted that the person as a whole is not deemed to be resident in Canada - the deemed residency is limited to those activities carried on through the permanent establishment only. Therefore, where a non-resident parent corporation has a permanent establishment in Canada and is deemed under subsection 132(2) of the ETA to be resident in Canada in respect of the activities carried on through the permanent establishment, the residency requirement in subsection 128(1) of the ETA is not met as the corporation in its entirety is not deemed resident in Canada. The non-resident corporation and its Canadian subsidiary will not be closely related under subsection 128(1) of the ETA, and therefore will not be eligible to make the election under section 156 of the ETA.

Q.13 - Section 156 Election – Input Tax Credit Claims

A parent corporation and its wholly owned subsidiary have entered into a section 156 election (assume that all the criteria for the election are satisfied). As a result of the election, the supplies made between the corporations are deemed to be made for nil consideration. Does this affect either corporation’s ability to claim input tax credits?

Reply

Assuming all the criteria for the section 156 election are satisfied, and an election is entered into, every taxable supply (other than a supply of property, or of a service, that is not acquired by the recipient of the supply for consumption, use or supply exclusively in the course of commercial activities of the recipient and a supply by way of sale of real property) made between the specified members at a time when the election is in effect shall be deemed to have been made for no consideration. As a result, the tax payable in respect of eligible taxable supplies made between the specified members while this joint election is in place is nil.

The election has no effect on the ability of the electing specified members to claim input tax credits in accordance with the general rules found in sections 169 and 141.01. In this regard, subsection 141.01(7) ensures that any provisions deeming a supply to be made for no consideration will not apply for the purposes of determining the extent to which inputs used in making the supply are acquired, imported, used or consumed by the person for the purpose of making taxable supplies for consideration in the course of an endeavour of the person.

Q.14 - Section 156 and Partnerships

Subsection 156(2) of the ETA deems a supply of property made when an election is in effect to have been made for no consideration. Subsection 272.1(4) of the ETA deems a disposition of property by a partnership to a person as a consequence of that person ceasing to be a member of the partnership to have been a supply of property by the partnership to the person made for consideration equal to the fair market value of the property.

Can the CCRA confirm that an election made under section 156 between a partnership and one of the partners will apply to deem any transfer of property to the partner on dissolution of the partnership to have been made for no consideration?

Reply

The CCRA’s interpretative position is that generally, subsection 156(2) and subsection 272.1(4) may apply to partnership distributions.

Subsection 156(2) deems supplies to have been made for no consideration between qualifying closely related persons, even where such supplies would otherwise be deemed to be made at fair market value pursuant to subsection 272.1(4). However, applicable partnership statutes and all facts and circumstances of any particular scenario would need to be scrutinized in order to properly apply the interaction between subsections 156(2) and 272.1(4) to partnership distributions. In addition, subsection 272.1(7) should first be examined as to whether relief may be afforded under certain qualifying partnership reorganizations.

It should be noted that the section 156 election is not applicable to “any transfer of property to the partner”, as indicated in the question.

Relevant amendments to section 156 came into force on the announcement date of October 8, 1998. Prior to this date no election was available between corporations and partnerships.

The new rules allow eligibility for the election under section 156 to be extended to “Canadian partnerships” and corporations that are specified members of a qualifying group. To qualify as a “Canadian partnership” the members of the partnership must be corporations or partnerships and be resident in Canada. Only a group of Canadian partnerships or a group of Canadian partnerships and corporations are considered members of a “qualifying group” as defined in subsection 156(1), and will be able to make the election where they are closely related. The closely related rules for supplies between partnerships and corporations are outlined in subsections 156(1.1) to 156(1.3).

In addition, and as previously stated, the parties to the transaction must be specified members. This entails that the parties meet the requirement that the person’s property (other than financial instruments) was all or substantially all last manufactured, produced, acquired or imported by the person for consumption use or supply exclusively in commercial activity or, if the person has no property, all or substantially all of the supplies made by the person were taxable supplies.

Lastly, the election does not apply to a supply of a property, or of a service, that is not required by the recipient of the supply for consumption, use or supply exclusively in the course of commercial activities nor does it apply to a supply by way of sale of real property.

D. EXPORTS/IMPORTS

Q.15 - Zero-Rated Legal Services

A Canadian law firm has a non-resident, non-registered corporation as a client. The retainer is with the corporation and the advice generally is given to the corporation. The corporation pays the Canadian law firm’s fees. The law firm’s services are generally zero-rated pursuant to section 23 of Part V of Schedule VI to the ETA.

A Canadian plaintiff sues the corporation in an Ontario court. In the Statement of Claim, the plaintiff names as defendants the corporation, as well as a number of individual officers of the corporation. This is a common practice adopted by plaintiff’s counsel when commencing litigation against a corporation. The Canadian law firm files a Statement of Defence on behalf of the corporation and the named officers. The fees for the legal services are paid for by the non-resident corporation.

Question

Are the legal services zero-rated pursuant to section 23 of Part V of Schedule VI to the ETA? The service is really rendered to the corporation, not to the individuals, although the individuals are named in the Statement of Claim. However, the Statement of Defence is filed on behalf of both the corporation and the named individual officers. If the CCRA concludes that the supply is in part rendered to the individuals, arguably no GST should be payable in respect of the supply (section 23 of Part V of Schedule VI) since the service to the individuals is incidental to the representation of the corporation.

Reply

Section 23 of Part V of Schedule VI to the ETA zero-rates, in part, a supply of an advisory, professional or consulting service made to a non-resident person, but not including a service rendered to an individual in connection with criminal, civil or administrative litigation in Canada, other than a service rendered before the commencement of such litigation.

If the supply of the legal service is made to the non-resident corporation and the corporation is the only person to whom the legal services are rendered, then section 23 of Part V of Schedule VI to the ETA would apply to zero-rate the supply of the legal service.

However, to the extent that the Statement of Defence is being filed on behalf of the named individuals, it would appear that the services are being rendered to the individuals and consequently excluded from being zero-rated under paragraph 23(a) of Part V of Schedule VI to the ETA.

Q.16 - Zero-Rated Services – Computer Software

Section 7, of Part V of Schedule VI zero-rates the supply of services made to a non-resident person but excludes services in respect of tangible personal property that is situated in Canada at the time the service is performed or services rendered to an individual in Canada. Assume that a Canadian company (“Canco”) registered for GST purposes provides technical support services (e.g., telephone assistance, error fixing) with respect to computer software to a non-resident of Canada in the case where the non-resident has licensed that software to its Canadian customer (who is not an individual but a corporation). Can Canco zero-rate the supply of the technical support services under section 7 of Part V of Schedule VI? In other words, can one assume that the services provided by Canco are not in respect of tangible personal property situated in Canada since the computer software is not tangible personal property?

Reply

Canco's technical support services would not appear to be zero-rated under section 7 of Part V of Schedule VI. Specifically, to the extent that the technical support services are considered to be rendered to individuals (i.e. the Canadian corporation's employees) who are in Canada, those technical support services are excluded from zero-rating under paragraph 7(a.1) of Part V of Schedule VI.

A separate supply of fixing application software errors by modifying the software would not be regarded as a supply of a service in respect of tangible personal property but rather a service in respect of intangible personal property.

Q.17 - Importations – “Commercial Service”

Further to Question 19 posed last year, how narrow or broad will the definition of “commercial service” as outlined in Policy Statement P-151 be interpreted? For example, does it have to be a service to the goods as the policy seems to imply or can it be a service relating to the goods such as selling or installing the goods? “In respect of” is a broad term.

Reply

A "commercial service" in respect of tangible personal property is defined under subsection 123(1) of the ETA as any service in respect of the property other than a service of shipping the property supplied by a carrier and a financial service.

As indicated in the response to question 19 last year, a "commercial service" can include services other than the services enumerated in policy statement P-151 provided there is a "functional relationship" between the service and the goods, and if that functional relationship is more direct than indirect.

We interpret the term “in respect of” taking into consideration the functional relationship that exists between the service and the property. Accordingly, the service of installing tangible personal property would be in respect of the property, as the service has a direct functional relationship with the property.

Q.18 - Wash Transaction Relief – Importations

In response to a question in 1998, the CCRA indicated that there is no conceptual reason why wash transaction type relief should not apply to the underpayment of GST on imported goods (eg., where additional GST is payable because the value of imported goods is increased etc.), provided full ITC’s are available. Has there been any further consideration given to this issue? The relief would probably have to be under the Customs Act, since section 281.1 of the ETA allows relief from interest and ¬penalties under section 280.

Reply

Pursuant to section 214 of the ETA, the GST/HST in respect of imported goods is paid and collected under the Customs Act and any related penalties and interest are imposed, calculated, paid and collected under that Act.

Currently, there is no Customs Branch policy to waive penalty or interest when the GST/HST, in whole or in part, is not paid on imported goods by a person where the person can claim a full ITC. Discussions have taken place with our counterparts in Customs, and the matter is being considered.

Q.19 - Export Distribution Centre Program

How is implementation of the Export Distribution Centre program proceeding and where can we obtain information thereon?

Reply

The EDC program was first announced in the 2000 Budget. Proposed legislative amendments to implement the program were included in a Notice of Ways and Means Motion tabled by Finance on October 4, 2000, and proposed to become effective January 1, 2001.

Generally, the EDC program permits authorized non-manufacturing export-oriented businesses that add limited value to goods in the course of their processing or distribution activities to purchase or import inventory, certain inputs and customer's goods on a tax-free basis with the use of an EDC certificate.

Persons must apply to CCRA for authorization to use an EDC certificate. The prescribed EDC application form is currently being developed. However, eligible persons may currently apply in writing to the Audit section of their local Tax Services Office (TSO) for authorization to begin using an EDC certificate. The letter should indicate the person's BN, legal and trade names, and the date that they would like their application to be effective. There are Audit contacts for the EDC in most of the TSOs. Once approved, a letter of authorization setting out the effective period will be sent to the registrant and will serve as the certificate.

Persons wishing to obtain information on the EDC program can, of course, request an interpretation of the proposed amendments from their local TSO. Also, a GST/HST Technical Information Bulletin on EDC is being finalized and will be available shortly.

Finally, we note that the EDC program is currently proposed and not law. If the proposed amendments were not to become law, persons will be retroactively liable in the normal manner for not having collected tax on supplies, or not having paid tax on importations as a result of the use of EDC certificates.

Q.20 - Importer of Record – ITC Entitlement

What is the CCRA’s view on an importer of record’s entitlement to ITCs? To be entitled to ITCs does the importer of record have to be the owner of the goods at the time of importation? For example, a non-resident is the owner of the goods under a supply and install contract until the installation is completed but the recipient in Canada acts as the importer of record. Is the Canadian resident recipient entitled to the ITC? This example is not included in P-125 and the issue is unclear from the policy statement.

Reply

It is generally the de facto importer, rather than the importer of record, who is entitled to claim ITCs under subsection 169(1) of the ETA in respect tax payable under Division III (Division III tax) on the importation of goods provided the de facto importer is liable to pay Division III tax. The de facto importer is often, but not always, the owner of the goods.

However, it is CCRA’s position that if Division III tax is paid on the importation of TPP by a registered Canadian recipient of a supply of TPP by way of sale (i.e. the Canadian recipient is the “importer of record”), the Canadian recipient would be considered the importer of the TPP for the purposes of subsection 169(1) of the Act, whether or not the sale has been completed and the recipient is the owner of the goods at the time Division III tax becomes payable by the recipient. Therefore, the registered Canadian recipient may, in such a situation, claim ITCs in respect of Division III tax paid, provided that the other relevant conditions are met.

In your example, the Canadian recipient would be entitled to claim ITCs under subsection 169(1) provided the other relevant conditions for claiming ITCs are met.

Q.21 - Zero-Rated Export Services – Individuals

A U.S. company (X Co) does not carry on business in Canada and does not have a permanent establishment in Canada. It is not registered for GST/HST purposes. X Co licenses a specialized computer software program to a Canadian resident CanCo and provides a maintenance and support contract to licensed users of the software program. CanCo is registered for GST/HST purposes. The employees and directors of CanCo to which maintenance and support services may be rendered are residents of Canada. X Co does not have any employees or agents in Canada and therefore subcontracts with another Canadian resident corporation (Y Co) to undertake the maintenance and support services on its behalf. Y Co is registered for GST/HST purposes. Y Co invoices X Co for providing these support services to CanCo.

As part of its maintenance and support contract with CanCo, X Co agrees to provide a toll-free telephone help line, as well as support by way of e-mail and fascimile (including on-site assistance). The services are rendered by Y Co to a centralized person in CanCo (presumably an Information Technology specialist) who filters all such requests from individual employees of CanCo. This centralized person broadly distributes all responses and assistance received to every employee in CanCo.

Are the services provided by Y Co to X Co excluded from being zero-rated pursuant to section 7 of Part V of Schedule VI of the ETA by paragraph 7(a.1) as a service rendered to an “individual while that individual is in Canada”?

Reply

As in the case of question 16, Y Co's technical support services would appear to be excluded from being zero-rated under paragraph 7(a.1) of Part V of Schedule VI on the basis that the services are rendered to individuals (i.e. CanCo's employees) who are in Canada.

Q.22 - EOPS - Closely-Related Issues (Non-Residents)

Pursuant to the new Exporter of Processing Services Program, manufacturing service companies registered for GST purposes can import goods and materials without having to pay GST for further processing provided, inter alia, that the registrant manufacturing service company is not closely related to the non-resident person on whose behalf the processing is being done.

Given that residency in Canada is the threshold condition under section 128 of the ETA for attaining “closely-related” status between two corporations, how is it possible that a Canadian manufacturing service company can ever be closely related to the non-resident person on whose behalf the processing is being done?

Reply

Proposed amendments regarding the Exporters of Processing Services Program (EOPS) were included in the October 4, 2000, Notice of Ways and Means Motion tabled by Finance. Specifically, these provisions are proposed new sections 8.1, 8.2 and 8.3 of Schedule VII to the ETA which are proposed to become effective March 1, 1992.

With respect to the specific question, proposed section 8.3 provides that for the purposes of EOPS, the registrant and the non-resident person are closely related to each other if they would be closely related under section 128 of the ETA if the non-resident person were a registrant resident in Canada. The rule is therefore intended to deem certain persons who would otherwise not be considered to be closely related under section 128 of the ETA to be closely related solely for the purpose of excluding them from eligibility for EOPS.

Q.23 - Exported Services – Sale of Business

A Canadian company is retained by a U.S. insurance company to assist the insurance company in selling its Canadian Branch’s business. The assets of the branch consist essentially of insurance policies with a small amount of tangible property (office furniture). The services to be provided by the Canadian company consist of marketing the Branch’s assets to other insurance companies and negotiating the sale. In value terms, the value of the insurance policies make up 98% of the total, while the value of the office equipment makes up 2% of the total assets.

Do the services qualify as a zero-rated supply of a service rendered to a non-resident person? In this connection, does the inclusion of the tangible assets taint the zero-rated status?

Could the services qualify as an exempt supply of “arranging for” the transfer of ownership of financial instruments?

Reply

On the first issue as to whether the supply of the services made by Canco to Usco can be zero-rated under Part V of Schedule VI to the Act, this would depend on the nature of the supply itself and the intentions of the parties to the agreement for the supply.

Canco is to assist USco in selling Canb’s business, which would consist in marketing Canb’s assets to other insurance companies with the authority to negotiate the sale of Cand’s assts with third parties on behalf of USco.

To the extent that Canco is acting as an agent of USco, section 5 of Part V of Schedule VI to the Act, provides, in part, for the zero-rating of a supply of a service of acting as an agent of a non-resident person or arranging for, procuring or soliciting orders for supplies by the person, where the service is in respect of a supply made outside Canada by that person.

Should Canco arrange for the sale of Canb’s assets and negotiate the agreement for the sale on behalf of USco, then Canco would probably be acting as an agent for Usco, where the latter would be providing a supply of the property which would be deemed to be made outside Canada, so long as USco is not carrying on business in Canada, that is to say that Canb is out of business. If that is the case, then section 5 of part V of Schedule VI to the act may be applicable.

In respect to whether the furniture equipment would taint the zero-rated status of the supply, if section 5, as mentioned above, applies, then this question becomes moot.

It is unclear from the facts presented to what extent, if any, the supply of the tangible assets would be regarded as incidental. Concerning the third issue as to whether the services could possibly qualify as an exempt supply of “arranging for” the transfer of ownership of financial instruments, additional facts would be required regarding Canco's involvement in the transaction.

Q.24 - Status of Offshore Suppliers Using Canadian-based Subcontractors/Status of Supplies of Services performed by Canadian Contractors for Offshore Suppliers

It frequently occurs that an offshore business that makes sales of goods or supplies of services into Canada, will contract with Canadian-based companies for the performance of certain functions.

The questions are:

a) Whether the activities of the Canadian subcontractor could constitute the non-resident to be “carrying on business” in Canada; and/or

b) Whether the performance of the functions in Canada that constitute some or all of a “service” that the non-resident provides, result in the supply of the service being deemed made in Canada under paragraph 142(1)(g).

Discussion re: Part (a) –

A non-registered non-resident may sell tangible goods (say, electronic goods such cassette recorders) to a customer in Canada. The sale may be FOB either the United States or Canada. It may contract with an unrelated and independent Canadian-based service provider to provide after-sale servicing or warranty repairs that would constitute part of a single supply of the product by way of sale; or to provide an additional and separate after-warranty service for which the non-resident charges a separate service fee to the customer.

On the assumption that the separate services are provided somewhat frequently, will the activities of the independent Canadian subcontractor be considered to constitute business activity of the non-resident in Canada such that the non-resident may be considered to be carrying on business in Canada? Does it matter whether or not the Canadian service provider performs the billing of the services? What other factors might be relevant?

Discussion re: Part (b) -

There are situations where a non-resident person will be registered for GST and will charge GST on certain sales of products into Canada. Again, it might provide a certain line of services, both to Canadian residents and to offshore customers. It may again enter into a contract with a Canadian service provider to perform some functions relating to the services that are to be provided to the Canadians and offshore customers.

Will the activities of the Canadian service provider constitute the service being performed “in whole or in part” in Canada?

The concern in this situation, is that it can be difficult to determine with respect to which customers (Canadian or offshore) the Canadian service provider will perform functions that comprise part of the non-resident’s services, so that it can be onerous to determine whether GST in fact would apply to the service.

Reply

Part (a)

A non-resident who is not registered for GST/HST purposes makes supplies of tangible personal property (i.e. electronic goods such as cassette recorders) to customers (individuals) in Canada
The non-resident contracts with an unrelated and independent Canadian resident service provider to provide after-sale servicing and warranty repairs on the electronic goods. The non-resident invoices the Canadian customers for the supply of after-sale servicing and warranty repairs as either part of a single supply of the property, or, as a separate supply of a service.

Whether the non-resident person is “carrying on business” in Canada is a question of fact. Policy Statement P-051R, Carrying on Business in Canada provides guidelines to assist in that determination. The guidelines are made up of the following criteria which should be applied to the facts of the particular situation:

The place where the contract is made.
The place where the operations from which profits arise take place.
Other factors.

Where an analysis of the first two criteria gives rise to an inconclusive result, an analysis of the following “other factors” should be made:

The place where the goods were delivered.
The place where the payment is made.
The place where the goods in question were manufactured.
The place where the orders were solicited.
The place where the inventory of the goods is maintained.
The existence of any branch or office in the particular place.
The existence of any agents or employees authorized to transact business on behalf of the non-resident person in the particular place.
The place where bank accounts are maintained.
The place where back-up services under the contract are provided.
A list of the names and business of the non-resident person in a directory in the particular place.

Based on the limited information provided, it appears that the non-resident is not “carrying on business” in Canada. The fact that the after-sale and warranty services are performed on a regular basis by the independent Canadian contractor does not in any way imply that the non-resident is “carrying on business” in Canada through that contractors place of business. The Canadian contractor appears to be supplying the services to the non-resident who, in turn supplies them to the Canadian customer.

Where the Canadian independent contractor invoices the Canadian customers directly for services it performs in Canada, these supplies would be considered to be made in Canada and subject to GST/HST. The supplies are considered separate from supplies made by the non-resident and therefore have no impact on whether the non-resident is considered to be “carrying on business” in Canada.

Part (b)

In this scenario we have a non-resident registrant invoicing a Canadian resident individual for services that are, or, are to be, performed in Canada. Based on the information provided, the supply of the after-sale services and warranty repair services are deemed to be made in Canada by virtue of paragraph 142(1)(g) of the Excise Tax Act. Paragraph 142(1)(g) of the Act deems the supply of a service to be made in Canada if the service is performed, or, is to be, performed in whole or in part in Canada. Subsection 143(1) of the Act does not apply in this fact pattern as the non-resident is registered for GST/HST purposes.

Q.25 - Export Declarations (Section 15.2 of Part V of Schedule VI)

A registrant purchases natural gas under long term procurement agreements from a number of suppliers located at different places in Western Canada. Historically, 90% of all gas purchases are exported and 10% are resold in Canada. At the time the contracts are entered into, the purchaser does not know what portion of the gas will be resold in Canada. Further, because natural gas in a pipeline is fungible, the purchaser cannot identify which supplier sold the gas which is for resale in Canada. Can the purchaser provide export declarations to the vendors? If so, can the purchaser pay GST on 10% of its purchases in Canada in order to avoid penalties and interest with respect to the natural gas re-supplied in Canada?

Reply

The purchaser may not provide export declarations to the vendors.

Generally, a supply of natural gas made by a supplier to a registered recipient can be zero-rated under section 15.2 of Part V of Schedule VI to the ETA if, among other conditions, the recipient provides the supplier with a declaration in writing that the recipient intends to export the gas by means of a wire, pipeline or other conduit in specific circumstances. These circumstances are that the recipient exports the gas as soon after the gas is delivered to the recipient, that the gas is not acquired by the recipient for consumption, use or supply in Canada before the recipient exports the gas and, that after the supply is made and before being exported, the gas is not, excluding certain exceptions, further processed, transformed or altered in Canada.

In order to provide an export declaration under section 15.2 of Part V of Schedule VI to the ETA, the recipient must, from the outset, clearly be intending to export the gas that is being purchased. If the purchaser does not know at the time of purchase, as in this case, whether the gas purchased from a particular supplier will be exported, then the purchaser cannot and should not provide a declaration stating that the gas is intended to be exported in the circumstances described above.

It is also important to note that as a further condition for zero-rating under this provision, the supplier must not have known, and must not have reasonably been expected to have known, at or before the latest time at which tax would have become payable on the gas, that the purchaser would not export the gas.

We understand that the GST/HST rules in question governing the export of continuous transmission commodities were developed in close consultation with industry. Industry may wish to approach Finance regarding this issue if it is of sufficient concern.

Q.26 - ITCs and Imports

Question 19 last year involved imported goods purchased by a GST registered customer from a foreign supplier. The answer provided included a statement that "it is CCRA's position that if Division III tax is paid on the importation of TPP by a registered Canadian recipient of a supply of TPP by way of sale (i.e., the Canadian recipient is the "importer of record"), the Canadian recipient would be considered the importer of the TPP for purposes of 169(1) of the Act, whether the supply to him is made in Canada or outside Canada" . The Canadian recipient can therefore claim any ITCs in respect of the Division III tax paid, provided the other conditions are met.

In the situation where the foreign vendor is not registered or required to be registered, there is no additional Division II tax collectible by the vendor. Where a registered foreign vendor makes a supply in Canada, however (i.e.,the goods are delivered to the purchaser in Canada), Division II tax will also be collectible by the foreign vendor. Please confirm that the purchaser will be entitled to claim ITCs in respect of both the Division II and Division III tax in such a case where the goods are delivered to the purchaser in Canada and the purchaser acts as the importer of record.

Reply

Yes, where the registered purchaser acts as the importer of record and the goods are delivered to the purchaser in Canada, the purchaser would be entitled to claim ITCs in respect of both the Division II tax and the Division III tax it paid in respect of the goods provided the other relevant conditions for claiming ITCs are met.

E. REGISTRATION ISSUES

Q.27 - Registration-Administration

What is Headquarter’s policy regarding obtaining a Business Number from the Toronto Central/Core office? In numerous cases, Applications for a Business Number are not processed by the Toronto Central Office when any one of the following occurs:

(1) the business address is not a Toronto address and the mailing address is a Toronto address;

(2) the business address is a Toronto address and the mailing address is not a Toronto address;

(3) all of the directors are listed and addresses provided, but no SIN number is provided;

(4) the financial institution has not been identified (as it has not been selected);

(5) the fiscal year end has not been identified (as it has not been selected).

How can practitioners and the CCRA work together to get their want-a-be GST registrants into the system?

Reply

Back in 1994-95, one of the main reasons for implementing Business Number registration at the Business Windows was to provide CCRA clients with a one-stop business service. Normally we will accept an incomplete application for registration provided that there is a valid reason for being incomplete. However, we do reserve the right to refuse any application made where the application is not made in prescribed form containing prescribed information and filed with the Minister in prescribed manner.

The Business Number system functionality allows the registration of any client, regardless of his business location. Likewise the absence of SINs, financial institution information or fiscal year end date should not prevent registration as long as the client provides a valid reason for its omission. The registrant’s fiscal year end will be automatically defaulted to December 31st if no other date is provided.

Any concerns regarding registrations refusal may be directed to our Business Registration Section or to the Client Services Directorate of the Assessment and Collections Branch of CCRA.

Q.28 - Deregistration of a Nominee Corporation

ABC Co. is a subsidiary of XYZ Co. XYZ Co. is registered for GST purposes and makes taxable sales in Canada in excess of $6,000,000 per year. ABC Co. registered for GST purposes because it was going to purchase commercial real property. Prior to the closing of the real property transaction, the proposed structure for the transaction changed. In the end, ABC Co. entered into a Nominee Agreement with XYZ Co. and acquired the commercial property as a bare trustee for XYZ Co. (XYZ Co. is the beneficial owner). Pursuant to the Nominee Agreement, ABC Co. performed services for XYZ Co. for a nominal amount. ABC Co. does not have any other activities. Given that ABC Co. is involved in a commercial activity and is associated with XYZ Co., can it deregister? If ABC Co. cannot deregister and assuming that ABC Co. does not collect GST from XYZ Co. (because of section 156 of the ETA), can ABC Co. file annual GST returns?

Reply

As ABC Co. is involved in a commercial activity and is associated with XYZ Co. it is unable to deregister. As well, due to the association the threshold amount for the fiscal year exceeds $6 million and therefore requires ABC Co. to file monthly returns.

However, ABC Co. may make an application to have designated reporting periods pursuant to subsection 238.1(2) of the ETA, essentially requiring them to file only one return per fiscal year.

Q.29 - Small Supplier Registration

ABC Co. is a large U.S. corporation that does not carry on any business in Canada. However, ABC Co.’s supplies would be taxable if any were made in Canada and ABC Co.’s annual worldwide sales exceed $6,000,000 per year. ABC Co. incorporates a Canadian subsidiary. It is proposed that the Canadian subsidiary will purchase the assets of a business in Canada. Assume it takes six or more months to negotiate the asset transaction. Is the subsidiary a small supplier (prior to the transaction) or must it register for GST purposes as soon as it is incorporated because it is associated with ABC Co.?

Reply

With a few exceptions, the small supplier calculation for the purposes of subsection 148(1) of the ETA includes the value of the consideration for taxable supplies made inside or outside Canada by the person or an associate of the person. At the moment the Canadian subsidiary incorporates, it would not be considered a “small supplier” by virtue of its association to ABC Co.

The Canadian subsidiary would not be entitled to relief under subsection 171(1) of the ETA upon becoming a registrant, since it was not a “small supplier” immediately before that time. If the Canadian subsidiary would like to be in a position to claim input tax credits with respect to the property, it should register for the GST/HST prior to acquiring the property.

Q.30 - Small Supplier – Non-Resident

A non-resident company does not carry on a business in Canada, does not make any sales into Canada and is not registered for GST purposes. The non-resident company incorporates a wholly-owned Canadian subsidiary and does not immediately register the Canadian subsidiary for GST purposes because the world-wide sales of the Canadian subsidiary are expected to be well below $30,000 and the non-resident corporation is not informed about the existence of GST. The Canadian subsidiary purchases real property in Canada. It realizes that it has paid GST in respect of the purchase of the real property and decides to register for GST purposes.

Is the Canadian subsidiary a small supplier and can the Canadian subsidiary claim an input tax credit with respect to the capital real property if it registers following the purchase?

Reply

Based upon the information provided, it is difficult to say whether or not the Canadian subsidiary would be considered a “small supplier” since we have not been provided with the sales figures of the associated non-resident corporation. However, with a few exceptions, the small supplier calculation for the purposes of subsection 148(1) of the Excise Tax Act (ETA) includes the value of the consideration for taxable supplies made inside or outside Canada by the person or an associate of the person.

Where the taxable supplies of the non-resident parent corporation exceed the small supplier threshold, upon incorporation, the Canadian subsidiary would not be considered a “small supplier” by virtue of its association to the non-resident corporation.

Upon becoming a registrant, if the Canadian subsidiary was not a “small supplier” immediately before becoming a registrant, it would not be deemed to have paid tax under subsection 171(1) of the ETA. As such, it would not be entitled to claim input tax credits under subsection 169(1) of the ETA in respect of the capital real property.

If we can assume that subsection 171(1) of the ETA does not apply, and if the Canadian subsidiary was not a registrant during the reporting period during which the tax became payable, or was paid without having become payable in respect of the real property, the Canadian subsidiary would not be entitled to claim an input tax credit with respect to the property in accordance with subsection 169(1) of the ETA.

Q.31 - Small Supplier – Input Tax Credits

An individual is the controlling shareholder of a GST-registered corporation that has taxable sales in excess of $30,000 per year. The individual is not registered for GST purposes personally. This individual enjoys his/her hobby of inventing. One of his/her inventions has potential. The individual has not claimed any input tax credits in respect of his/her prototype. The individual decides to turn the hobby into a business and to roll the prototype into a newly incorporated company in order to apply for a patent and exploit the technology.

(a) Is the individual a small supplier or should the individual have registered for GST purposes on the basis that he/she is associated with a registered person?

(b) If the individual can register, can he/she claim an input tax credit with respect to the capital property?

Reply

In the case at hand, since the individual controls the corporation, the individual would be “associated” with the corporation. Since the taxable sales of the corporation exceed the $30,000 threshold, the individual would not be considered to be a “small supplier”.

Pursuant to subsection 127(2) of the Excise Tax Act (ETA), a person other than a corporation (e.g., an individual) is associated with a particular corporation for the purposes of Part IX of the ETA if the particular corporation is controlled by the person or by a group of persons of which the person is a member and each of whom is associated with each of the others. The individual would not be required to register under subsection 240(1) of the ETA until the individual made a taxable supply in Canada.

Upon becoming a registrant, the individual would not be entitled to relief under subsection 171(1) of the ETA, since he/she would not have been a “small supplier” immediately before becoming a registrant. As such, the individual would not be entitled to claim an input tax credit with respect to the tax paid or payable for the capital property.

F. PLACE OF SUPPLY

Q.32 - Place of Supply - Intangible Personal Property

Part A

An airline in Saudi Arabia offers a customer loyalty programme whereby it provides loyal customers with “points”, redeemable for free flights and other things. The Saudi Arabian airline has one flight to Canada, and is GST registered. The Saudi Arabian airline sells 100 points, for the equivalent of Cdn $100 to an Iraqi individual. While it is conceivable that the Iraqi might be able to use the 100 points to fly to (or from) Canada, there is no stated intention to do so.

Does the GST apply to the transaction?

(On one level of analysis, the points might be viewed as “IPP”, and under the “place of supply rules” for IPP, the points “may be used in whole or in part in Canada”, suggesting that the supply is “made in Canada”).

Please confirm how the GST applies, and why.

Part B

Same fact situation as in Part A, but instead of a Saudi Arabian airline selling to an Iraqi individual, the airline is a U.S. airline which is registered for GST and regularly flies in and out of Canada, selling to a U.S. resident in Texas.

Reply

The "points" supplied by the Saudi Arabian airline entitle the Iraqi individual to a reduction or discount of the price (including a full reduction of the price in some cases) of the various supplies, including air travel, for which the "points" may be redeemed. We agree that the supply of the "points" is consequently a supply of intangible personal property (IPP). A supply of IPP is deemed to made in Canada pursuant to subparagraph 142(1)(c)(i) of the Excise Tax Act if the property may be used in whole or in part in Canada. Alternatively, subparagraph 142(2)(c)(i) of the ETA deems a supply of IPP to be made outside Canada if the IPP may not be used in Canada.

The supply of the "points" to the Iraqi individual is considered to be a supply made in Canada to the extent that the "points" may be redeemed in Canada. There is no indication that the terms of the "points" program would prohibit the Iraqi individual from redeeming the "points" in Canada.

As the supply of the IPP is considered to be a taxable supply made in Canada and the supplier is a registrant, tax will apply to that supply unless it is zero-rated. There is no provision which would zero-rate a supply of IPP to a non-resident person in a case such as this. The Department of Finance is aware of the various GST/HST issues surrounding the supply of "points" including when they are supplied to non-resident persons.

The response to this part is the same as in Part A noted above. There is no difference in the tax treatment of what is an identical supply of IPP on the basis that it is a US registered airline that may fly more frequently in and out of Canada rather than a registered Saudi Arabian airline that flies less frequently, but nevertheless does, fly in and out of Canada.

Q.33 - Place of Supply Rules – Railway Rolling Stock

The draft Place of Supply (GST/HST) Regulations provide specific rules in section 5 thereof to deal with the place of supply for railway rolling stock. Section 4 of Part I, of Schedule IX provides that the mutual agreement of a supplier and recipient will be determinative with respect to the place of supply even where property is actually located at a different place. With respect to the leasing of railway rolling stock, which of the two foregoing provisions will govern? In other words, the draft Regulations provide that a supply of railway rolling stock otherwise than by way of sale is made in a province if the supplier delivers the rolling stock or makes it available to the recipient of the supply in the province. However, section 4 of Part I of Schedule IX allows the parties to mutually agree upon the ordinary location of the property at a particular point in time. Do the draft Regulations override the ability of the supplier and recipient to decide what the ordinary location is?

Reply

Section 3 of Part IX of Schedule IX to the ETA provides that, notwithstanding any other Part of Schedule IX, a supply of property or a service is made in a province if the supply is prescribed to be made in the province.

A supply of railway rolling stock otherwise than by way of sale is a prescribed supply. More particularly subsection 5(1) of the draft Place of Supply (GST/HST) provides that such a supply is made in the province if the supplier delivers the railway rolling stock or makes it available to the recipient of the supply in the province.

Subsection 5(2) further provides that, where continuous possession of railway rolling stock is given under two or more successive lease agreements, the place of supply of the railway rolling stock is determined based on where the railway rolling stock was delivered or made available under the first of those agreements.

This resolves the practical difficulty of keeping track of where the railway rolling stock might be situated when a lease is renewed, which frequently arises within the industry.

If the supply of the railway rolling stock is made by way of sale, then section 4 of Part 1 of Schedule IX to the ETA would be applicable.

G. DEEMED TRUST/RECEIVERS

Q.34 - Duty to remit GST- Deemed trusts and Non-registered Non-resident Corporations

Does the CCRA believe that the deemed trust rules in section 222 apply to a person (NRNR) that is not registered for GST, is not resident in Canada and not carrying on business in Canada? For example, a payment, including GST, may incorrectly be made to a U.S. sister company of a Canadian resident, GST-registered corporation. The description of “net tax” in subsection 225(1) of a person, moreover, includes in “net tax” all amounts collected “as or on account of tax”, which includes tax collected in error.

Notwithstanding the territorial limitations of the scope of the ETA, would the CCRA take the position that the assets of the NRNR are imprest with the deemed trust under section 222?

Reply

Yes, it is our view that the deemed trust provisions under section 222 of the ETA do apply to a NRNR. Section 222 of the ETA essentially provides that every “person” who collects an amount “as or on account of tax” under Division II is deemed to hold the amount in trust for Her Majesty in right of Canada. This provision is not limited to “registrants”, but rather applies to “persons”.

A person’s net tax calculation for the purposes of subsection 225(1) of the ETA includes all amounts that became collectible and all other amounts collected by the person in a particular reporting period “as or on account of tax” under Division II of the ETA. Amounts collected as or on account of tax in error by a NRNR would have to be included in their net tax calculation.

In general, subsection 228(2) of the ETA provides that where a person’s net tax for a reporting period is a positive amount, they are required to remit that amount to the Receiver General.

A NRNR would be required to file a return for each reporting period for which net tax is remittable within one month after the end of the reporting period, pursuant to subsection 238(2) of the ETA. In accordance with subsection 245(1) of the ETA, the reporting period of a NRNR would be a calendar month.

Q.35 - Duty of Receivers of Non-resident/Non-registered Corporations

Please consider this question as a corollary to the earlier question relating to deemed trusts and non-registered non-residents.

Subsection 266(2)(c) imposes personal liability on the receiver for GST liabilities of the debtor corporation to the extent of the assets of the debtor available after the claims of creditors ranking ahead of the Crown, and after amounts that the receiver must pay to the trustee in bankruptcy.

There are cases where a firm resident in Canada may be the receiver of a Canadian corporation and for an offshore affiliate of the Canadian corporation.

Does the CCRA take the view that a Canadian-resident receiver could be liable under paragraph 266(2)(c) in respect of a non-resident corporation that is not registered for GST and is not carrying on business in Canada? If so, under what circumstances, and what would be the limits of this liability?

Reply

The question is too broad in scope to provide a response without knowledge of the specific facts regarding the nature of the appointment of the receiver, the relationship between the Canadian corporation and its offshore affiliate, and the transactions contemplated. Consequently, the extent of any liability can only be determined on a case-by-case basis.

Subsection 266(1) defines “receiver” and “relevant assets” of the receiver for purposes of the Excise Tax Act (the Act). Relevant assets are those properties, businesses, affairs or assets of the insolvent (the debtor) that are within the receiver’s authority. Paragraph 266(2)(a) deems the receiver to be an agent of the debtor in respect of the relevant assets and any activities performed or supplies made or received by the receiver in respect of the relevant assets are deemed to have been performed, made or received by the receiver on behalf of the debtor.

The receiver and the debtor are jointly and severally liable for the payment or remittance of all amounts that become payable or remittable by the debtor in respect of the relevant assets, before or during the period the receiver is appointed. Generally, the receiver’s liability for satisfying the pre-receivership GST/HST liabilities of the debtor will be limited to the extent of the property or money of the debtor in the receiver’s possession or under the receiver’s management or control, after satisfying claims of creditors that ranked in priority to the claim of the Crown on the day the receiver was appointed and after paying any amounts the receiver is required to pay to the trustee in bankruptcy of the debtor. However, pursuant to subparagraph 266(2)(d)(ii), the receiver is liable (and the debtor is not liable) for the remittance of any tax collected or collectible by the receiver. The payment or remittance by the debtor or the receiver of an amount in respect of the liability discharges the joint liability to the extent of the amount of the payment.

In addition, subsection 270(2) requires the receiver to obtain a clearance certificate from the Minister before distributing any property or money under the control of the receiver. The receiver, in failing to do so, will become personally liable for the payment or remittance of those amounts to the extent of the value of the property or money distributed.

As stated previously, with respect to liability arising in respect of a non-resident corporation that is not registered for GST purposes and is not carrying on business in Canada, one must look to the particular circumstances on a case-by-case basis and apply the relevant or specific provisions of the Act to supplies made by such persons.

As for the receivers services to the non-resident non-registrant person, generally tax is exigible on supplies made in the course of commercial activities unless relieved from tax elsewhere in the Act. Schedules V and VI to the Act contain a listing of supplies of property and services that are either exempt from tax or zero-rated, respectively. The tax liability arising as or on account of the transactions with respect to the relevant assets is separate from the tax payable on the services of the receiver in their capacity as receiver. Section 7 and/or section 23 of Part V of Schedule VI to the Act may apply depending on the nature of the transactions carried out and services provided by the receiver, whether they be under a security agreement, court order or appointment letter.

H. DROP-SHIPMENT RULES

Q.36 - Drop-Shipments – Subsection 179(4)

Where a Canadian vendor who sells goods to a non-resident person but retains possession of the goods rather than delivering the goods immediately to a third person who is a GST registrant, subsection 179(4) applies and deems the conditions specified in subsection 179(2)(b) [transfer of physical possession to third party registrant] and (c) [drop-shipment certificate] to have been satisfied.

Subparagraph 179(4)(b)(i) provides that the subsection is applicable where the vendor retains possession of the goods to transfer physical possession to any of: the non-resident person; a subsequent purchaser from the non-resident person; or a person designated by the non-resident person or a subsequent purchaser. There is no requirement in this subparagraph that the person acquiring physical possession be a “registrant”. Please confirm whether subsection 179(4) (and also 179(2)) applies notwithstanding that the goods are ultimately delivered by the vendor to an unregistered person.

Reply

Subsection 179(4) of the ETA does not require that the person described under subparagraph 179(4)(b)(i) and to whom physical possession of the goods are to be ultimately transferred be a registrant. Therefore, subsection 179(4) of the ETA can apply if the goods are ultimately transferred to a non-registrant.

It is important to note, however, that the registrant retaining possession of the non-resident's goods is also deemed under paragraph 179(4)(c) of the ETA to have acquired physical possession of those goods for the purpose described in paragraph 179(4)(b) and therefore remains potentially liable under the drop-shipment rules when the registrant actually transfers physical possession of the goods to another person.

Q.37 - Drop-Shipments – Leasing Arrangement

A non-resident (A) has a GST registered Canadian customer (B) who wishes to lease goods. The non-resident (A) acquires the goods from a Canadian supplier (C). The non-resident (A) then assigns the purchase contract and the lease agreement to a Canadian lessor (D). The Canadian supplier (C) delivers the goods directly to the Canadian customer (B).

(i) Please confirm whether this is a situation in which: the Canadian customer (B) is the “consignee” who must provide a drop-shipment certificate to the Canadian supplier (C) in order for subsection 179(2) to apply, on the basis the Canadian supplier (C) has transferred physical possession to the Canadian customer (B), which is a third person “consignee” as long as B is registered; or whether by virtue of subsection 179(4), subsection 179(2) applies and no actual drop-shipment certificate is required, on the basis that the Canadian supplier (C) delivers the goods to the Canadian customer (B), who is a person designated by the non-resident person.

(ii) This raises the issue of the interpretation of the phrase “retains physical possession of the property after [the transfer of ownership]”. In other words, what lapse of time is required between the transfer of ownership and transfer of possession, in order for subsection 179(4) to apply.

Reply

(i) B would only be considered to be a "consignee" under subsection 179(2) of the ETA in this case if C can be considered to be transferring physical possession of the goods to B under an agreement with A. Specifically, it would have to be established that B is the recipient of a taxable supply of the goods made by A. Subsection 179(4) of the ETA would not apply to the extent that there is no indication that C is retaining possession of the goods after ownership has transferred to A.

(ii) There is no specified lapse of time required in order for subsection 179(4) of the ETA to apply, but rather that the registrant merely retain possession of the goods at any time after ownership of the goods transfers to the non-resident for one of the purposes described in paragraph 179(4)(b) of the ETA. As indicated in the reply to question 36, it is important to note that if subsection 179(4) of the ETA were to apply, the registrant retaining possession of the non-resident's goods would be deemed to have acquired physical possession of those goods for the purpose described in paragraph 179(4)(b) and would therefore remain potentially liable under the drop-shipment rules when the registrant actually transfers physical possession of the goods to another person.

Q.38 - Drop Shipments Rules – Interplay with Real Property Law Principles of Affixation

(a) Subsection 179(1) applies where, as described in paragraph (a), a registrant either makes a sale of tangible personal property (TPP) to a non-registered non-resident (NRNR), or acquires possession of the TPP in order to make a “commercial service” (subparagraph (i)), and subsequently “causes physical possession of the property” to be transferred either to the NRNR or to a “consignee” (subparagraph (ii)).

In the case of TPP such as equipment that is then installed into real estate, a technical question arises as to the application of subsection 179(1), and consequently the mechanism for relieving GST under subsections 179(2) et seq., given that personal property becomes real property upon its affixation to real property.

Does the CCRA have any concern that the TPP in paragraph (i) is not the property possession of which is given to the NRNR or to the consignee in paragraph (ii) because it had ceased to be TPP and had become real property by virtue of its installation into the real estate?

(b) A similar concern could arise with respect to the rebate for installation services under section 252.41, because the preamble refers to the situation “where tangible personal property is supplied on an installed basis by a non-resident supplier”. Again, as a technical matter, installations that become affixed to real property cease to be “tangible personal property” and become real property. Would the CCRA take the position that the rebate for installation services under section 252.41 does not apply in the case of supply-and-install contracts where the TPP installed becomes affixed to the real estate?

Reply

(a) The property as referred to in subparagraph 179(1)(a)(ii) of the Act relates specifically to the tangible personal property (TPP) cited in subparagraph 179(1)(a)(i) of the Act. Installation services are normally performed after physical possession of TPP has been transferred to a GST/HST registered person and not prior to the transfer of physical possession. Depending upon the facts surrounding the installation, section 252.41 of the Act provides for a rebate of GST/HST to an unregistered non-resident person in respect of tax paid by the non-resident for the service of installing TPP in Canada.

(b) Whether the TPP becomes real property after being affixed to real property has no impact on whether section 252.41 of the Act applies. In circumstances where all the remaining criteria of the section are met subsection 252.41 will apply regardless of the classification of the property subsequent to its installation.

Q.39 - Drop-Shipments – Carrying on Business

A non-resident company (“NR Seller”) enters into a contract with another non-resident company (“NR Buyer”) to sell computer parts. NR Buyer has a contract with a Canadian-based manufacturer of computers (“Manufacturer”). Manufacturer is registered for GST purposes. NR Buyer intends to resell the computers outside of Canada. Manufacturer exports all of the computers it produces for NR Buyer to a location outside of Canada. NR Seller agrees in its contract with NR Buyer to deliver the computer parts to Manufacturer in Canada. It is expected that over 1000 computer parts will be delivered in a particular year.

Scenario 1: NR Seller considers the CCRA policy on carrying on business in Canada and registers for GST purposes. NR Seller receives a drop-shipment certificate from Manufacturer. It appears that the requirements of subsection 179(2) of the ETA are satisfied. Consequently, the supply is deemed to be made outside of Canada. Assuming that this contract is the only activity of NR Seller in Canada, should NR Seller be registered for GST purposes? If NR Seller must register for GST purposes and files nil returns (as it receives drop-shipment certificates), may it file returns annually and post no security?

Scenario 2: NR Seller does not want to get caught in the GST system. Is NR Seller not carrying on business in Canada and consequently not required to register for GST purposes? Assume a Canadian customs broker does the importing and a warehouse in Canada makes each delivery to the Manufacturer. Also assume that all activities of NR Seller are outside Canada.

Reply

Scenario 1

Whether NR Seller should register is a question that is best concluded by the non-resident or its commodity tax advisor. Based on the information provided, and under the assumption that the contract for supply as outlined in the question is the only activity of the non-resident in Canada, NR Seller is not required to register for GST/HST purposes. With respect to security requirements, the initial amount of security required is based on 50% of the estimated net tax of the non-resident person, whether the net tax be a positive or negative amount for the first 12-month period following registration. After that, the security required is equal to 50% of the net tax during the person’s previous 12 month period. The non-resident person is responsible for estimating the net tax and calculating the amount of security required. In general, the amount of security that must be posted is set at a minimum of $5,000 and a maximum of $1 million. If a non-resident registrant's net tax either remitted or refunded is less than $3,000 and the non-resident's taxable supplies made in Canada (including zero-rated supplies) are less than $100,000 annually, the non-resident is not required to provide the minimum security. In these circumstances the non-resident is not required to provide security. However, in the absence of a provision waiving the requirement to provide security, the minimum amount of security required is administratively set at a nominal figure of $1. This amount of security need not be provided unless the Minister specifically requests the non-resident person to do so. With respect to reporting periods NR Seller will be assigned a reporting period based on their annual supplies of taxable, including zero-rated, goods and services, as well as the annual taxable sales of all their associates. In determining total taxable supplies NR Seller should not include supplies made outside Canada or zero-rated exports of goods and services. Where NR Seller determines their annual taxable supplies to be $500,000 or less they will be assigned an annual reporting period.

Scenario 2

As in scenario 1 NR Seller does not appear to be carrying on business in Canada and is ultimately not required to register. This conclusion is made with the understanding that the non-resident is not making supplies through the warehouse.

I. MISCELLANEOUS

Q.40 - Bare Trusts

Effective January 20, 1993, the CCRA changed from requiring bare trusts to be registered for GST purposes to requiring the beneficial owners to be registered. TIB B-068 “Bare Trusts” indicated that there would be no interest or penalties if beneficial owners registered to comply with the new policy prior to June 1, 1993, provided the bare trust, who was previously registered, had already remitted the correct amount of net tax.

There continues to be a problem whereby bare trusts are being registered instead of the beneficial owners. What is the CCRA’s current assessment policy in situations where beneficial owners voluntarily come forward now to register to comply with the CCRA’s position in cases when the bare trusts/trustees were previously registered, but the proper amount of net tax has been remitted? Will there be any interest or penalties assessed against the beneficial owners for non-remittance? The prospect of interest and penalties in a situation, like bare trusts, where there is substantial confusion and no revenue loss appears to be hindering ongoing corrective action to comply with CCRA’s policy.

Reply

Where beneficial owners make a valid voluntarily disclosure in accordance with the CCRA’s published policy, in addition to the waiver or cancellation of penalties, the CCRA will waive or cancel the interest provided that:

the error in registering the bare trust was made in good faith and not for the purposes of obtaining any benefits, and
all of the net tax remittable by the beneficial owners was remitted by the bare trust.

This position recognizes that, in these unique situations, there is no revenue loss, no amounts owing and that the amounts were simply reported and accounted for by the wrong person.

41. Voluntary Disclosures

Under the voluntary disclosure guidelines, a GST disclosure can be considered valid if it includes at least a prior year. When a disclosure is made that involves a number of years, it has been suggested that penalty and interest cannot be waived on transactions within the last year. What is the CCRA's position on this issue?

Reply

Paragraph 6.(d) of Information Circular 00-1, dated June 12, 2000, provides that information being disclosed must include information that is at least one year past due. This condition is considered to have been met when a disclosure of information that is not one year past due is disclosed with information that is at least one year past due.

The condition that information disclosed be at least one year past due was one of the main issues discussed on January 30, 2001, at a VDP consultation with private sector tax practitioners. Participants expressed the view that the requirement is not fair to those who must report on a monthly basis. We are reviewing recommendations and considering amendments to this voluntary disclosure condition.

42. Joint GST/QST Voluntary Disclosures

The new GST/HST voluntary disclosure program formally incorporates “no-name” disclosures. However, no such formal policy exists under QST.

Has the CCRA made any arrangements with the MRQ in connection with joint GST/QST disclosures made through the MRQ?

Reply

During the consultations that led to the development of the VDP policy announced June 12, 2000, the CCRA’s disclosures program was discussed with representatives of le Ministère du revenu du Québec (MRQ). We are informed by our Montreal tax services office that the Montreal regional office of the MRQ does accept no-name disclosures. They use the same policy and qualifying criteria when handling disclosures involving the GST and QST. We will be discussing the VDP further with the MRQ in terms of its consistent application in handling GST disclosures throughout the province of Quebec.

43. Retroactive Elections Under Section 177

Recently, the CCRA has confirmed that an election under section 156 may be made retroactively provided that the parties to the election have acted in a manner consistent with the election having been in place as of the date specified therein.

Can the CCRA confirm that an election made under subsection 177(1.1) or subsection 177(1.3) which specifies a date prior to its execution will be accepted as valid provided the parties to the election have acted in a manner consistent with the election having been in place as of the date specified therein?

Reply

We will accept the joint elections in subsections 177(1.1) and (1.3) of the ETA to be retroactively made provided the parties qualify for the election and have acted as if the elections had been made as of the retroactive date.

44. Prizes – Competitive Events

A registrant enters the horse racing business and purchases a horse that has wonderful potential. The supplier of the horse charges GST. If the horse wins a race, pursuant to subsection 188(2) of the ETA, the consideration is deemed not to be consideration for a taxable supply. Is the recipient entitled to claim an input tax credit in respect of its acquisition of the horse?

Reply

Based on the information provided, a registrant would be entitled to claim input tax credits with respect to the tax paid or payable on the acquisition of a race horse to the extent that it was used in the course of the registrant’s commercial activities in accordance with section 169 of the Excise Tax Act (ETA).

Explanation

The CCRA’s Taxation Interpretation Bulletin IT-433R explains the meaning of “farming business” and states that it includes the maintenance of horses for racing or exhibiting. Section 123 of the ETA defines “commercial activity” to include any business carried on by a person but excludes an activity engaged in by a person to the extent that it involves the making of an exempt supply or an activity engaged in by an individual without a reasonable expectation of profit. Whether or not a particular individual is engaged in an activity with a reasonable expectation of profit is a question of fact.

Since a “farming business” engaged in by an individual with an “expectation of profit” would fall under the scope of the definition of “commercial activity”, and the maintenance of horses for the purposes of horse-racing falls under the definition of “farming”, the expenditures described “may” have been incurred in the course of the registrant’s commercial activities.

An individual who is a registrant engaged in an activity (other than an exempt activity) with a reasonable expectation of profit would be entitled to claim input tax credits with respect to the tax paid or payable on the acquisition of a race horse, food & board, the cost of a trainer, and entry fees in accordance with section 169 of the ETA. However, each situation must be reviewed on a case by case basis.

45. GST Rulings

Can you explain the rulings process once a request is at Headquarters. How can we ensure it is dealt with on an expedited basis? Experience is that it tends to sit in HQ as there is no direct contact between HQ and the taxpayer’s representative. Can we be informed of the name of the Rulings Officer and given a target date for completion.

Reply

Requests for rulings and interpretations are received either by mail or facsimile transmission. Regardless of the manner in which they are received, all requests are treated in a similar fashion.

Once a request is received, it is sent to a Central Allocation Unit for input into an electronic tracking system. The request is assigned a case number in accordance with the date of receipt and allocated to the appropriate HQ technical unit for response.

Upon receipt of a case, the technical unit issues an acknowledgment letter to the client whereby the following information is provided:

confirmation of receipt,
the case number assigned to the request,
our policy for responding to written requests, and
the name and telephone of the technical unit’s Manager.

As stipulated in the acknowledgment letter, our policy is to respond to requests in the order in which they are received. When work on a file commences, the assigned rulings officer will contact the client in order to keep him or her informed. Until such time, we strongly encourage that any concerns regarding a particular request be addressed to the technical unit’s Manager.

The time required to complete a file will vary and is primarily dependent on the complexity of the issue(s) inherent within the request. Other factors that delay a response are an incomplete set of facts or description of transactions, the lack of pertinent supporting agreements or other documents, the need for consultation within the CCRA or other government departments, or the lack of client co-operation, etc.

Given all these factors, it becomes difficult to predict a target date of completion upon receipt of a request. Once work on a file is in progress, the rulings officer will be in a better position to determine when a response will be issued. This matter, in addition to any case issues, may be discussed with the rulings officer at the time contact is made with the client.

Our officers are trained to ensure that all clients are provided with timely service that is of the highest possible quality. In order to ensure that client satisfaction is maintained, we will be implementing a redress mechanism whereby clients can share any comments or concerns about the satisfaction of their service by writing directly to our Deputy Assistant Commissioner.

Q.46 - Disclosure of Information

What is the CCRA’s policy regarding appeals transparency and the disclosure of the auditor’s report and working papers at the Tax Court stage if not provided before (i.e., not disclosed at Notice of Objection stage). The reason this is important is that Justice apparently takes the position that this fairness policy of the CCRA (Justice’s client) ceases having application once the Notice of Appeal is filed.

Reply

We want to emphasize that Transparency is about ensuring that clients understand the basis of the assessment. Certain documents will be provided by our Justice Counsel and will include:

Copies of the Appellants tax returns;
Reports prepared by an auditor to support the assessment;
Working papers prepared by an auditor that are relevant to the issues in dispute;
Records of discussions between an appeals officer and an auditor regarding the assessment;
Copies of court decisions and relevant sections of the legislation relied on by an auditor to support the assessment;
Scientific, appraisal, and valuation reports relied on by an auditor to determine the assessment; and
Information obtained from a third party with whom the client is doing business, such as sales invoices, purchase orders, cancelled cheques etc.

However, to protect sensitive information regarding other individuals and businesses and to maintain the integrity of the tax system, certain third party information must remain confidential and cannot be provided. Additionally, information subject to client/solicitor privilege and legal opinions will be withheld.

47. Current “Hot” Issues

Could the CCRA provide the CBA with the top 5 issues for audit, policy and legislation and appeals.

Reply

The main issues for appeals are to be discussed throughout the response to question # 48 which provides an update on recent court cases. Areas relating to policy and legislation will be discussed throughout the meeting while providing the responses to the various questions.

The following addresses the top issues for audit.

One of the main issues is with respect to the establishment of the GST/HST Prepayment Program.

The program is a high priority for the Agency.
It represents a key element of the overall compliance strategy.
The program includes all credit returns and rebate applications.
All of these returns and applications are subject to risk assessment at the time of filing.
Credit returns and rebate applications showing indications of potential risk of non compliance are sent to the Tax Services Offices for further review.
The primary objective of the prepayment program is the identification of potential fraud or gross error prior to payment of the amount.
One type of fraudulent scheme identified by the prepayment program is multi-cell body activity.
A multi-cell body is a type of scheme in which one or more individuals set up multiple GST/HST registrations for the sole purpose of obtaining GST/HST refund claims for which they have no legal entitlement.
Potential multi-cell activity or individual cells are identified during the course of:
- enhanced registration reviews of potentially high risk new registrants;
- risk assessments at the time a credit return is filed;
- prepayment reviews, prepayment audits or post-payment audits; and
- through the use of specific profiling techniques based on known characteristics of multi-cell body activity.
Characteristics of a multi-cell body include:
- entities that have no commercial activity;
- multiple registrations linked by common elements;
- registrants who provide misleading or false information upon registration; and
- registrants that file credit returns.
We have successfully identified a number of multi-cell bodies filing credit returns.
Several bodies are under audit and investigation.
In conclusion, the early detection of potentially fraudulent credit returns is a priority for the Agency. We are continuing our work to address the issue of multi-cell body activity.

The other main issue is tax evasion in the electronic environment. Zapping refers to the deletion of sales through software manipulation of financial information (sales) and may be conducted via computer or electronic cash register. For example, the deletion of sales information may be conducted in the restaurant industry via its computer systems and in a grocery store there may be evidence of the deletion of sales via the electronic cash register.

Zapper software and the MRQ

Since 1997, more than 100 searches have been conducted
New legislation provides for the definition of books and records, the prohibition of zappers, the presumption of use and penalties
improve guidelines and procedures
training (cash registers)
Technological research

Grocery Store Scenario CCRA

large stores, multi-million dollars sales
use of electronic cash registers, operating stand alone (off line)
sales of one cash register are deleted
cash to the owners

CCRA Action Plan

Share knowledge with other tax administrations (FTA, Provinces, IRS etc.)
Combine our efforts, where possible to identify schemes and possible solutions
Focus efforts on maintaining books and records (electronic records)
developed training material (electronic cash register and audit techniques)

Q.48 - Status of Jurisprudence

Please provide a summary of important GST/HST, FST and excise tax cases pending before the Tax Court and federal and provincial courts.

Reply

KEY COURT DECISIONS

PAUL BROTHERS - EXCISE TAX

Paul Brothers, carrying on business as Gestion ADL, were licensed to manufacture tobacco products on the Pointe Bleue reserve in Quebec. They failed to pay excise tax in respect of the tobacco products they would manufacture. Paul Brothers have appealed all four assessments to the Federal Court - Trial Division on the basis that they are not required to pay tax by virtue of section 87 of the Indian Act.

The issue is whether section 87 of the Indian Act applies to goods that are manufactured on a reserve and intended to be sold off-reserve in commercial quantities to non-Indians.

The appeals are significant, since many more manufacturing businesses are likely to relocate on-reserve if the courts find that Paul Brothers are not required to pay excise tax.

Case will be heard on April 23rd in Quebec.

SHIPS’ STORES ENTITLEMENTS - MARITIME SHIPPING - EXCISE TAX

The issue in this case is the eligibility of non-export shipping on Canada’s maritime coasts to purchase diesel fuel exempt of excise taxes. A number of companies have made applications for a refund of taxes paid on diesel fuel sold to a number of shippers and operators of ferries on both coasts and some fresh waters other than the Great Lakes.

The applicants are challenging the promulgation of the 1988 regulations, which limit the refund entitlement to Great Lakes shipping and export shipping.

The appeals by BC Ferries were heard by the Federal Court/Trial Division on January 11 and 12, 2000. On February 21, 2000, the Court rendered judgment in favour of the Crown, and dismissed the appeals with costs. BC Ferries has filed an appeal to the Federal Court of Appeal.

Case will be heard on March 15, 2001.

WESTERN CONSTRUCTION CO. LTD.- EXCISE TAX

The Appellants had purchased heating oil not subject to excise tax and used it in a manufacturing process. They were subsequently assessed for diverting exempt heating oil to a taxable use as diesel fuel under subsection 23(9.1) of the Excise Tax Act governing diversions.

The issue involved in this case was whether the fuel oil that was intended for use and was actually used by the Appellants to heat aggregated rock in the manufacturing of asphalt is heating oil within the definition of diesel fuel in subsection 2(1) of the Excise Tax Act.

The Canadian International Trade Tribunal held that heating oil could be inclusive of commercial and industrial applications and therefore, the heating of aggregated rock was an exempt use of the fuel oil as an industrial application.

The case is under review.

R.J.R. MACDONALD INC. - EXCISE TAX

R.J.R. MacDonald paid sales and excise taxes on the sample products given away free. Subsequently, refund applications were filed for the taxes paid on these samples.

In considering the refund applications, the Minister found that the imposition of ad valorem federal sales tax on samples constituted double taxation and that tax was refunded to the company based on the Molson Nfld. Brewery case.

The excise tax under Part III of the Excise Tax Act was not refunded as there was no double taxation as was present in the case of ad valorem taxes imposed under Part VI of the Act. R.J.R. MacDonald then appealed the determination to the Federal Court-Trial Division.

The Federal Court ruled in favour of the company on the basis that subsection 23(10) of the Act failed to provide for a deemed sale necessary to impose the excise tax.

The Federal Court of Appeal allowed the appeal filed by the Agency. The Court found that subsections 23(1), 23(2) and 23(10) provided a complete charging provision and that the excise tax was therefore, exigible.

The company has 60 days in which to seek leave to appeal to the Supreme Court of Canada.

CHRYSLER ST-JOVITE - GST (Car Flip)

The issue is whether car dealers are relieved from collecting or remitting GST on their sales of automobiles to natives on a reserve. A number of car dealerships have appealed their assessments to the Tax Court of Canada. These car dealers sold automobiles to natives located on a reserve. They were assessed on these sales on the basis that the automobiles were at no time the personal property of a native on a reserve since they were never actually delivered to a reserve.

Chrysler St-Jovite sold 95 new vehicles to natives. The said vehicles were alleged to be sold on a reserve. The Agency argued that the natives were nominees for the non-native third parties and should have collected GST on the sale of vehicles. The Agency also argued that the appellant willingly participated in a tax scheme to obtain a tax benefit.

On January 24, 2001, the Tax Court of Canada ruled in favour of the appellant. The Agency is presently reviewing its position and has thirty days to appeal the decision to the Federal Court of Appeal.

SCHOOL BOARDS - GST

School board contracts with transportation company to transport children to and from school. Transportation company charges GST in respect of service to school board. School board entitled to claim MUSH sector rebate in respect of GST paid.

School board believes it is entitled to full ITCs and claims difference between amount of ITC and amount of rebate paid.

On February 22, 2000, the Tax Court ruled in favour of the Agency.

An appeal has been filed by the School board.

J. SUPPLEMENTARY QUESTIONS

Q.49 - Commercial Activity

Consider the following circumstances. A professor has been employed by a Canadian university for a number of years. Under the terms of the professor’s employment contract, the professor retains all or a part of the intellectual property rights arising from any invention or process developed by the professor. Would the sale of such rights to the University, or to another person, constitute a supply made in the course of a commercial activity and therefore require the professor to register and collect GST if the consideration exceeded $40,000? Would the answer change if the consideration received by the professor were a royalty payable out of the proceeds of successfully commercializing the intellectual property rights?

Reply

The sale of intellectual property rights is a supply for purposes of the ETA. The supply of all or part of the rights by the professor would be considered to be outside of the scope of the professor’s employment.

Whether a supply is made in the course of a commercial activity will depend on the facts of the particular situation. There are insufficient facts in the above scenario to determine whether or not the supply would be made in the course of a commercial activity. Reference should be made to P-167R, Meaning of the First Part of the Definition of Business and P-176R, Application of Profit Test to Carrying on a Business in making a determination. For example, where it is determined that the activity engaged in by the individual meets the definition of business for GST/HST purposes, the supply would not be made in the course of a commercial activity if there is no reasonable expectation of profit.

If the facts of the particular circumstance provide that the supply is made in the course of a commercial activity, the professor will be required to register and collect GST/HST if the consideration for the supply exceeds $30,000.

Where the consideration for the supply is in the form of a royalty payable out of the proceeds of commercializing the property, the answer is the same as above. The professor would be required to register and collect tax after the professor no longer qualifies as a small supplier.

Q.50 - Section 156 Elections – Partnership Interest Holding Corporations

Assume a holding or subsidiary corporation (“Holdco”) in a closely related group is a partner in a partnership that is part of a “qualifying group” as defined in subsection 156(1). Further assume that Holdco has no assets other than a partnership interest and has no activities and undertakes no supplies except as a member of the partnership. This is typical of the manner in which many corporate partners are established.

For a corporation holding no assets other than a partnership interest (a financial instrument as defined in subsection 123(1)), all or substantially all of that corporation’s supplies must be taxable supplies in order for that corporation to be a “specified member” as defined in subsection 156(1). At law, a corporate partner is considered to be carrying on the business of the partnership (and, by implication, making the supplies made by that partnership). However, subsection 272.1(1) deems such supplies to have been made by the partnership and not by the partner.

Will such a corporate partner be considered to be a “specified member” of the qualifying group for purposes of allowing the partner and the partnership to make an election pursuant to section 156? Will an initial contribution of property by the partner to the partnership (perhaps many years or decades ago) alone be sufficient to satisfy this test? If not, the expansion of section 156 to include partnerships and their partners would appear to be somewhat of a moot exercise. Will the CCRA agree to raise this issue with the Department of Finance?

Reply

The election for nil consideration under section 156 applies to transactions between specified members of a qualifying group. The term “specified member” is defined in subsection 156(1) of the Excise Tax Ac (the Act) and requires that, among other things, a person’s property (other than financial instruments) was all or substantially all last manufactured, produced, acquired or imported by the person for consumption use or supply exclusively in commercial activity or, if the person has no property, that all or substantially all of the supplies made by the person were taxable supplies.

A partnership is defined to be a person for purposes of the Act. In addition and as pointed out in the question, subsection 272.1(1) deems supplies to have been made by the partnership rather than by the partner. The Act clearly outlines a different scheme for partnerships than is found at Common Law.

It is a question of fact whether or not the aforementioned test established in the definition of “specified member” is met, thereby allowing a partner to elect with the partnership pursuant to section 156. It is unlikely that an initial contribution of property to the partnership would, on its own, allow the partner to satisfy that test. However, we would welcome any representations, suggestions and comments, including descriptions and analysis of factual situations addressing this issue. Factual situations would assist us in our analysis of relevant transactions and legislation and would provide us with additional background information necessary for our discussions with the Department of Finance regarding the policy intent and the availability of the section 156 election in these situations.

Q.51 - Dissolution of Partnership – Application of Section 167 to Majority Partner

On the dissolution of a partnership and a distribution of undivided interests of partnership property to the former partners, if an undivided 91% interest in the partnership assets is distributed to a single majority-interest partner, will the CCRA permit an election to be filed by the partnership and the majority-interest partner?

Reply

When a partnership is dissolved and the partnership property is distributed to the partners, two supplies are taking place: the supply to the partnership of each individual partner's interest in the partnership (which is an exempt supply as it is the supply of a financial instrument) and generally, the supply by the partnership to each individual partner of a proportionate interest in the partnership property (which results in each partner being subject to GST/HST on taxable supplies of property distributed) . The individual partners, if registrants for purposes of the GST/HST, may be able to claim ITC’s on tax paid on the supply to them of the partnership property, provided they otherwise qualify. In this case, the undivided interests in the partnership assets will be transferred to the former partners in accordance with their partnership interests. We assume that the majority-interest partner has a 91% undivided interest in the partnership.

The question is whether the majority-interest partner and the partnership may use the election under subsection 167(1) of the Excise Tax Act on the supply by the partnership to the majority-interest partner of an undivided 91% interest in the partnership assets.

The CCRA’s position with respect to the availability of the election under subsection 167(1) where there is a supply of a business or part of a business is explained in Policy P-188. When a business or a part of a business is supplied to more than one recipient, each of whom will have an undivided interest in the business or part of a business, the view of the CCRA is that there has not been the supply of a business (or a part of a business) to any one of the recipients. Therefore, the conditions in subsection 167(1) will not be met and the election will not be available.

While the applicability of an election pursuant to subsection 167(1) is a question of fact in each case, the supply by a partnership of an undivided interest in the partnership property to one of the partners would generally not be considered to be a supply of a business or part of a business and, as a result, the election under subsection 167(1) would not be available.

Q.52 - Policy P-103R and Section 167 Elections

Policy P-103R indicates that the CCRA considers the transfer of an undivided interest in a joint venture to qualify for the election pursuant to subsections 167(1) and (1.1), provided that the joint venture contains the characteristics identified in the Policy. Assume that a corporation (“Seller”) holds an undivided 50% interest in a joint venture that satisfies the characteristics set forth in Policy P-103R. If Seller sells 40% of its interest (i.e., a 20% working interest) to a single purchaser, would an election pursuant to section 167 be available in respect of the sale? Nothing in Policy P-103R requires the Seller to dispose of all of its interest in the particular joint venture.

Reply

In general terms, where all the requirements of subsections 167(1) and (1.1) of the ETA are met with respect to the supply of a business or part of a business the supplier and recipient may make a joint election to have no tax payable in respect of the supply (with certain exceptions stated in subsection 167(1.1) of the ETA).

Policy Statement P-103R “Transfer of an Undivided Interest in a Joint Venture” extends the election to a supply of an undivided interest in a joint venture but only in limited circumstances. Specifically, the policy provides that the supply of an undivided interest in all the joint venture property and the rights and obligations attached thereto will be considered to be the supply of a business or part of a business for purposes of the election under subsections 167(1) and (1.1) of the ETA but only where the joint venture has the following characteristics:

a group of persons engaged in a specific business for a limited period;
the business is not structured as a corporation, a partnership or a trust;
each co-venturer or participant has a direct undivided interest in the joint venture property and in the commodity produced by the joint venture;
each participant is a party to all the joint venture agreements such as the operating agreement and the ownership agreement;
a right of mutual control and management of the business; and
a contribution by the participants of money, property, effort, knowledge, skill and other assets to the joint venture.

Unless all these requirements are met with respect to the supply of an interest in a joint venture, the supply of the interest will not be considered to be the supply of a business or part of a business for purposes of the election.

We understand from the question that a corporation holds a 50% undivided interest in a joint venture presumably meeting the requirements of P-103R. The corporation then supplies 40% of its interest to a single purchaser. At issue is whether the supply of the 40% interest meets the requirements of P-103R on the presumption that P-103R does not require the corporation to dispose of all of its interest in the joint venture.

The information submitted concerning the facts of this supply is limited. Based upon the limited facts presented, provided that the operating agreement permits a party to it to sell all or part of its interest, and that the transaction provides the recipient with an undivided interest that meets all of the requirements stipulated in P-103R, (i.e. that the purchaser of the interest becomes a party to all of the joint venture agreements including the operating agreement, that the purchaser obtains a right of mutual control and management of the business of the joint venture, etc.), it is likely that the supply of the interest by the corporation in these circumstances can be considered to be the supply of a business or part of a business pursuant to P-103R. As a result, an election pursuant to subsections 167(1) and (1.1) of the ETA could be available in respect of such a supply.

Where, however, the supply does not meet all of the requirements stipulated in P-103R such that the corporation is merely supplying an interest in the undivided interest that it holds in the joint venture, the 40% interest would not be considered to be a supply of a business or part of a business pursuant to P-103R and, consequently, the election pursuant to subsections 167(1) and (1.1) would not be available.

Q.53 - Refund of GST Charged In Error

CanCo, a Canadian company registered for GST purposes, has been charging GST on goods supplied to USCo, a U.S. company registered for GST purposes for the past three years. The goods were exported and should have been zero-rated for GST purposes.

Please confirm the following:

(a) that USCo cannot claim any input tax credits with respect to GST paid on the supply of these goods, since this is GST that has been charged in error;

(b) that USCo must seek any refund on GST paid in error from CanCo pursuant to subsection 232(1) or alternatively, apply for a rebate under section 261, if CanCo refuses to issue USCo a refund and the requisite credit note;

(c) that pursuant to subsection 232(1), CanCo is limited to refunding GST paid in error to USCo for the past two years only in which the GST was charged and collected on the goods supplied to USCo; and

(d) that CanCo could retroactively adjust (i.e., reduce) the purchase price of goods supplied in the third year previous to USCo and thereby refund any GST paid in error by USCo in the third year previous pursuant to subsection 232(2), which otherwise would accrue to the Minister as a “windfall”.

If (d) is not acceptable, please comment on whether there is any other method or procedure under the ETA by which a recipient can recover GST paid in excess of the tax that was collectible by a supplier beyond the two year limitation period stipulated in subsection 232(1). If there is no other method available, then in the above example the tax paid in year 3 would accrue to the Minister as a “windfall”.

Reply

USCo is not entitled to claim ITCs for the amounts paid as or on account of GST/HST in error. Pursuant to subsection 169(1) of the ETA, an ITC can only be claimed in respect of tax payable or paid. Subsection 123(1) of the ETA defines “tax” as being tax payable under Part IX of the ETA.

It should be noted that if:

USCo has claimed an ITC for an amount paid, in error, as or on account of GST/HST,
CanCo has not refunded or credited the amount in accordance with section 232 of the ETA, and
USCo is entitled to a rebate in respect of that amount pursuant to section 261 of the ETA but has not filed a rebate application,

USCo is not required to request that the CCRA adjust its net tax to account for the unentitled ITC. Should the net tax be subsequently assessed, the unentitled ITC would be denied and the amount would be offset by the available rebate. As such, USCo would not incur any penalty or interest charges.

We concur with the statements made in paragraphs (b) and (c) subject to the above comments on the claiming of unentitled ITCs in respect of an amount paid, in error, as or on account of GST/HST.

With respect to paragraph (d), subsection 232(2) of the ETA does not apply given that there is no tax that was collected, only an amount as or on account of tax.

Q.54 - Drop-Shipments

Assume a GST registered Canadian vendor, CanCo, located in Toronto, sells goods to US Co, an unregistered non-resident of Canada. US Co sells the goods to Z Co, a Canadian purchaser also located in Toronto, and has CanCo ship the goods directly to Z Co in Toronto by common carrier. CanCo stocks the goods at its Branch operation in Buffalo from where the goods are shipped by common carrier to Z Co in Toronto.

CanCo’s contract with US Co provides for delivery and transfer of title to US Co in Toronto at Z Co’s receiving dock. US Co’s sale to Z Co also calls for delivery and transfer of title to Z Co to take place in Toronto at Z Co’s receiving dock. CanCo acts as the importer of record of the goods, pays the applicable GST on importation and claims an input tax credit in respect thereof. The bill of lading whereby the goods are shipped by common carrier from Buffalo to Toronto names Z Co as the consignee.

Do the drop-shipment rules in section 179 of the ETA apply? Under the general rules in paragraph 142(1)(a) the supply by CanCo to US Co is deemed to be made in Canada (i.e., the goods are delivered in Canada). For subsection 179(1) to apply, however, subparagraph 179(1)(a)(ii) provides that physical possession must be transferred by CanCo to US Co or a third party at a place in Canada. Since the bill of lading states that the carrier is required to transfer physical possession of the goods to Z Co, paragraph 179(5)(a) deems physical possession of the goods to have transferred form CanCo to Z Co when the goods are picked up by the carrier in the US, and the condition in subparagraph 179(1)(a)(ii) appears not to be met. Accordingly, section 179 does not appear to apply, so CanCo is not required to charge US Co GST on the fair market of the goods (i.e., US Co’s sale price to Z Co). Rather, CanCo appears to be required to charge GST on its selling price to US Co under the regular rules, and US Co is also not required to charge GST on its sale to Z Co. If Z Co is not using the goods exclusively in commercial activities, there also does not appear to be any self supply rule applicable.

A similar result would appear to follow if all the above facts were the same, except CanCo was a GST registered US company operating only out of Buffalo.

Reply

Scenario 1

The drop-shipment rules of section 179 of the ETA would apply in this case.

For purposes of the drop-shipment rules, subsection 179(5) of the ETA provides that when a registrant transfers physical possession of goods to a carrier for the sole purpose of shipping the property to a named person to whom the carrier is to release the goods, the registrant is deemed to have transferred physical possession of the property to the named person at that time and not to the carrier.

Therefore, when CANCO transfers physical possession of the goods to the carrier, CANCO is instead deemed to have transferred physical possession of the goods to ZCO at that time.

Although subsection 179(5) of the ETA deems the transfer of the goods to the carrier to be a transfer to ZCO at a particular time, it does not affect where physical possession of the goods is considered to have been transferred by CANCO to ZCO for purposes of the drop-shipment rules. Specifically, CANCO would be considered to have transferred physical possession of the goods to ZCO in Canada for purposes of subparagraph 179(1)(a)(ii) of the ETA. As a result, CANCO would be required to collect tax from USCO on the fair market value of the goods unless ZCO provides CANCO unless ZCO provides CANCO with a drop-shipment certificate.

Scenario 2

Our reply would remain the same if all of the facts were the same except that CANCO was a GST/HST registered US company operating only out of Buffalo.

You are here

14 February 2001 CBA Roundtable

A. FINANCIAL SERVICES

Q.1 - Lease vs. Financing

Part A

Part B

Reply

Q.2 - Financial Services – Regulations/Section 139

Reply

Q.3 - Self-Assessment on Offshore Investment Advisory Services

Reply

Q.4 - Concurrent Leases

Questions

Reply

Q.5 - Sale of Accounts Receivable (Section 222.1)

Reply

Q.6 - Administrative Service Fees

Reply

Q.7 - Policy Statement on “Arranging For”

B. REAL PROPERTY

Q.8 - Real Property – GST Memorandum 19.5

Q.9 - New Housing Rebate

Reply

Q.10 - GST Collection on Real Property Sales - Bare Trusts

Reply

C. SECTION 156 ELECTION

Q.11 - Use of a Newco – Section 156 Election

Reply

Q.12 - Section 156 and Permanent Establishments

Reply

Q.13 - Section 156 Election – Input Tax Credit Claims

Reply

Q.14 - Section 156 and Partnerships

Reply

D. EXPORTS/IMPORTS

Q.15 - Zero-Rated Legal Services

Question

Reply

Q.16 - Zero-Rated Services – Computer Software

Reply

Q.17 - Importations – “Commercial Service”

Reply

Q.18 - Wash Transaction Relief – Importations

Reply

Q.19 - Export Distribution Centre Program

Reply

Q.20 - Importer of Record – ITC Entitlement

Reply

Q.21 - Zero-Rated Export Services – Individuals

Reply

Q.22 - EOPS - Closely-Related Issues (Non-Residents)

Reply

Q.23 - Exported Services – Sale of Business

Reply

Q.24 - Status of Offshore Suppliers Using Canadian-based Subcontractors/Status of Supplies of Services performed by Canadian Contractors for Offshore Suppliers

Reply

Q.25 - Export Declarations (Section 15.2 of Part V of Schedule VI)

Reply

Q.26 - ITCs and Imports

Reply

E. REGISTRATION ISSUES

Q.27 - Registration-Administration

Reply

Q.28 - Deregistration of a Nominee Corporation

Reply

Q.29 - Small Supplier Registration

Reply

Q.30 - Small Supplier – Non-Resident

Reply

Q.31 - Small Supplier – Input Tax Credits

Reply

F. PLACE OF SUPPLY

Q.32 - Place of Supply - Intangible Personal Property

Reply

Q.33 - Place of Supply Rules – Railway Rolling Stock

Reply

G. DEEMED TRUST/RECEIVERS

Q.34 - Duty to remit GST- Deemed trusts and Non-registered Non-resident Corporations

Reply

Q.35 - Duty of Receivers of Non-resident/Non-registered Corporations