Canadian Committees Address Broad Array of Issues.

Retroactive Legislation, Advanced Ruling Fees, and GST Consequences of Lease-Purchase Agreements Attract TEI Scrutiny

Since the last issue of The Tax Executive, TEI's Canadian Income Tax Committee and Canadian Commodity Tax Committee have forcefully represented the interests of the business tax community in a number of submissions to Revenue Canada and the Canadian Department of Finance. The committees also made significant progress in developing the agendas for their annual liaison meetings with government officials in Ottawa. (Those meetings will be held in December.)

Retroactive Legislation

On September 10, 1999, TEI filed comments with Canada's Ministry of Finance objecting to Press Release 99-067, which announced legislation to overturn retroactively the results of certain taxpayer-favorable court decisions. In the letter to Finance Minister Paul Martin, TEI noted that, while the specific legislation affects only affects a narrow group of TEI member companies with "resource expenditures," the practice of introducing retroactive legislative affecting transactions and expenditures more than 11 years ago could undermine taxpayer confidence in the fairness, and perceived fairness, of the self-assessment tax system.

The letter from TEI President Charles W. Shewbridge, III notes that the Finance press release introduces substantial changes in the Income Tax Act in the guise of "clarifying" amendments. "If applied broadly to other interpretative disputes between taxpayers and the government," the comments said, "this form of remedial action ... is extremely inequitable and one sided. In other words, `Heads the government wins (in litigation); tails, taxpayers lose (by retroactive `clarifying' amendments)!'" The letter observes that among the perverse effects of retroactive legislation is that it undermines the Appeals function of Revenue Canada by encouraging taxpayers to "seek protection from retroactivity that the courthouse provides" for open tax years. The letter closes by urging the government to withdraw the retroactive legislation, and, if necessary to clarify the Act, reintroduce it with a prospective effective date.

The letter is reprinted in this issue, beginning at page 448. TEI's comments were prepared under the aegis of the Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofasco, Inc. Contributing substantially to the development of TEI's comments was Monika M. Siegmund of Shell Canada Ltd.

Advance Ruling Fee Increase

In other Canadian news, in response to a request from Revenue Canada, the Institute submitted comments on September 17, 1999, acknowledging the need for an increase in the hourly fee charged by Revenue Canada for Advance Income Tax Ruling. While noting that the increased fee (indeed, any fee) may be counterproductive to the goal enhancing taxpayer compliance (especially small business taxpayers), TEI said that, on balance, it supported the increasing the fee from $90 to $150 per hour (plus GST) as long as the increase is used to obtain additional staff resources to expedite the Advance Ruling process. TEI's comments on the hourly fee, prepared under the aegis of the Income Tax Committee, are reprinted in this issue, beginning at page 450.

GST Consequences of Lease-Purchase Agreements

The Institute's Canadian Commodity Tax Committee recently put the finishing touches on a letter critiquing Revenue Canada's policy statement concerning the Goods and Services Tax consequences of lease-purchase agreements with Indians. According to a letter filed by the Institute on August 20, the policy statement has broad ramifications and may affect lease-purchase agreements where possession of the property is initially given to the lessee outside Canada.

Issued on May 13, 1999, Revenue Canada's Policy Statement P230, Application of the Excise Tax Act to Leases, Licenses, and Similar Arrangements of Tangible Personal Property By Indians, Indian Bands, and Band Empowered Entities, addresses specific issues that arise from the interaction of Technical Interpretation Bulletin B-039R, GST Administrative Policy: Application of GST to Indians, and section 136.1 of the Excise Tax Act. In an August 20 letter from TEI President Charles Shewbridge, the Institute explained that subsection 136.1(1) was enacted to treat each leasing period as a separate supply to ensure that either GST or HST (harmonized sales tax) was imposed, based on the physical location of the leased good at the beginning of the "leasing interval." Proposed amendments to the subsection would deem the exercise of an option to purchase tangible personal property under a lease to occur at the time and place at which the person begins to have possession as a purchaser. The exercise of an option to purchase would thus be a separate supply under the Excise Tax Act.

In general, leases and purchases of tangible personal property to Indians, Indian bands, and band-empowered entities may be made free of GST/HST if certain conditions are met. Policy P-230 relates to the acquisition of property by Indians under a lease-purchase option and provides that the purchase will be relieved of GST/HST if, at the time first possession of the property, (1) the Indian has appropriate documentation and (2) the property is delivered to the reserve by the lessor or the lessor's agent.

The Institute stated that the new requirement that the leased property be returned to the lessor and redelivered to the reserve when the purchase option is exercised is unrealistic and administratively unworkable. "Most lessors are not cognizant of the geographic location of a leased good at a specific point in time," TEI explained. This is especially true for a highly mobile leased good like a motor vehicle. "Even if the lessor knows the exact geographical location of its leased good, it is highly impractical for the lessor to reclaim the good and physically deliver it to a reserve to permit the lessee to qualify" for tax-free treatment, the Institute said. TEI noted further that proposed subsection 136.1(1.1) may also be applicable in respect of leased goods that were initially made available outside Canada for which an option to purchase is exercised when the goods are in the possession of a lessee in Canada. The Institute thus recommended that, if proposed subsection 136.1(1.1) is adopted, it should be amended to provide that the place of supply is determined at the time the lease is initiated.

The Institute's comments were prepared under the aegis of its Canadian Commodity Tax Committee, whose chair is Glen S. Pye of Nortel Networks Corporation. Robert G. Westlake of GE Capital Canada Inc. contributed to the preparation of the submission, which is reprinted in this issue, beginning on page 452.