Pending Canadian excise tax issues: December 7, 2005.

On December 7, 2005, Tax Executives Institute held its annual liaison meeting with officials of the Canadian Department of Finance on pending excise tax issues. Reprinted below is the agenda for the meeting, which was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Natalie St-Pierre of BCE Inc.

Tax Executives Institute welcomes the opportunity to present the following comments on commodity and excise tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 7, 2005, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Monika M. Siegmund, TEI's Vice President for Canadian Affairs, at 403.691.3210, or Natalie St-Pierre, Chair of the Institute's Canadian Commodity Tax Committee, at 514.870.6552.

Background

Tax Executives Institute is the pre-eminent professional organization of business executives who are responsible--in an executive, administrative, or managerial capacity for the tax affairs of the corporations and other businesses by which they are employed. TEI's 5,400 members represent more than 2,800 of the leading corporations in Canada, the United States, Europe, and Asia.

Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S., European, and Asian members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

A. Procurement Cards

During the meeting, TEI would like to provide its perspective on procurement card issues creating significant and unnecessary administrative challenges and costs for taxpayers (presentation attached).

B. Questions for the Department

1. Non-resident rebate respecting installation services

Section 252.41 of the Excise Tax Act (ETA) requires a non-resident, non-registered recipient of an installation service to file for a rebate "within one year after the completion of the service" in order to receive a rebate of the tax paid by the recipient in respect of the supply of the service. Subsection 252.41(1)(b) of the ETA protects against revenue loss owing to inappropriate rebates or input tax credits (ITCs) by non-commercial activities that acquire such supplies, so why only allow one year for applying for a rebate rather than the common two-year period allowed for other rebates, or even a four-year period consistent with the standard audit period?

As an example, consider a the following scenario: A Canadian registered supplier who installs tangible personal property into real property at a site in Canada for a non-resident, non-registered recipient is required to invoice the tax in respect of the supply. If the supplier fails to invoice the recipient, and on audit it is determined that the tax should have been invoiced, Canada Revenue Agency (CRA) will assess the supplier for the applicable goods and services taxes (GST) and harmonized sales taxes (HST). If the supply was made within the most recent year of the audit, a rebate may still be available if the time limit has not expired. But if the supply was made before the most recent audit year, it is likely that the one-year period will have expired.

Would the Department consider extending the time period?

2. Zero-rating maintenance obligations

Schedule VI, Part V (Exports), Subsection 13(a) applies a zero rate to supplies made "to a non-resident person who is not registered under Subdivision d of Division V of Part IX of the Act of tangible personal property, or a service performed in respect of tangible personal or real property, if the property or service is acquired by the person for the purpose of fulfilling an obligation of the person under a warranty."

Currently, GST-registered persons who provide warranty parts or services on either tangible personal property or real property in Canada to non-resident, non-GST-registered persons are not required to invoice the GST and HST on such supplies pursuant to this zero rated provision. GST-registered persons who provide maintenance parts or services on either tangible personal property or real property in Canada to non-resident, non-GST-registered persons, however, are seemingly required to invoice the GST and HST on such supplies, even though the property or service is acquired for the purposes of fulfilling an obligation under a maintenance agreement.

Consider the situation where leased goods are made available outside Canada, the lessor is a non-resident, non-GST-registered person, and the lease is a full-service lease (i.e., both goods and maintenance of those goods are provided under the lease). If the lessor subcontracts the maintenance to a Canadian registrant, the registrant is required to invoice the GST and HST (since the supply does not appear to be covered by a zero-rated provision) and the lessor is not eligible to recover the GST and HST because they are a non-GST-registrant.

Likewise, consider the situation of a non-resident, non-GST-registered person who has a maintenance agreement with its customer, where the goods covered under the maintenance agreement are located in Canada at the time maintenance is required (usually post the warranty period). Any GST-registrant who is subcontracted to provide maintenance for the non-resident, non-GST-registered person would have to invoice GST and HST because the goods are in Canada at the time the service is performed.

In both situations, short of registering for GST purposes (even assuming the non-residents could voluntarily register), there would be non-recoverable tax embedded in the cost to the Canadian customer for a truly commercial transaction.

Would the Department consider amending Schedule VI, Part V, Section 13 of the ETA to cover obligations under "maintenance or other service contracts" in addition to the existing warranty obligation?

3. Outsourcing by entities providing exempt services

The Department indicated during previous liaison meetings that it would be interested in reviewing whether the GST burden borne by entities providing exempt services was appropriate in respect of outsourcing services that are currently provided by employee labour. Could the Department provide an update on work that has been done on this issue, and whether it intends to address the issues outlined below?

When a financial institution, for example, looks at the possibility of allowing a third party to perform services that are currently provided in-house, it must overcome the barrier of not being able to recover the GST on services not previously subject to GST (as employee labour). This makes any attempt at "outsourcing" difficult. Thus, financial institutions have difficulty taking advantage of opportunities to reduce costs and increase competitiveness. Certain other jurisdictions have either implemented solutions to address this, or are in the process of reviewing proposals to resolve this concern.

Australia currently allows financial institutions to make a recovery of 75 percent of the VAT charged to them for any supplies that fall under their definition of outsourcing services. The remaining 25 percent of VAT charged is subject to the normal recovery rules. This effectively removes the distortions created by the GST when financial institutions review the costs and benefits related to replacing employee labour with supplies by third parties. New Zealand has also implemented a regime which allows for the zero-rating of financial services supplied to a registered business making taxable supplies.

The European Commission also appears to be taking another look at the feasibility of applying VAT to financial services. In some respects, this would be a welcome step, as it would allow financial institutions to increase their recoveries of GST, reducing their costs and allowing them to be more competitive.

While the Australian solution may be an easier proposal to implement from an administrative standpoint, either solution would allow entities providing exempt services to take greater advantage of the services that are available from unrelated third parties. Is the Department of Finance considering any options to alleviate this concern? Would the Department consider either implementing a proposal similar to that which has been adopted in Australia or New Zealand?

4. Broadening zero-rated intangible personal property and services

Please provide an update on work regarding broadening the zero-rating provisions for intangible personal property and services. Are changes to the zero-rating provisions for intangible personal property or services to bolster the competitiveness of Canadian companies making supplies to a global marketplace under consideration? The following examples (which have been included in previous liaison meeting agendas) illustrate three areas of concern:

(a) Intangible Personal Property--While intellectual property is zero-rated under section 10 of Part V of Schedule VI of the ETA, analogous provisions do not exist for other intangible personal property. Because the place of supply rules (outlined in paragraph 142(1)(c) of the ETA) tax intangible personal property if it can be used "in whole or in part" in Canada, the potential exists for taxing supplies that actually have very limited use in Canada. GST-registered suppliers are thus placed at a competitive disadvantage compared with non-registrants providing similar global solutions. The place of supply rules can also put suppliers who are unfamiliar with the limited application of zero-rating provisions in a position of unintended non-compliance. Expanding the zero-rating provisions to apply to all intangible personal property would permit GST-registrants to compete more effectively on a global basis. TEI invites discussion of this issue.

(b) Telecommunication Services--Currently, section 22.1 of Part V of Schedule VI of the ETA limits the zero-rating provision for telecommunication services to supplies that are made to a person carrying on the business of supplying telecommunication services. Because products characterized as telecommunication services are growing exponentially, this narrow exemption puts GST-registered suppliers at a competitive disadvantage when providing telecommunication services to persons located outside Canada.

Many customers using these services are not in the business of supplying telecommunication services, and the inability to zero rate these services makes GST-registered suppliers uncompetitive in a global marketplace. One solution would be to restrict the types of services that are considered to be telecommunication services. Combining this with a broadening of the zero-rating provision so that it applies to all non-registered non-residents (similar to section 10 of Part V of Schedule VI of the ETA) would provide a longer-term solution.

(c) Services--Because the words "rendered to" in paragraph (a.1) of section 7 of Part V of Schedule VI of the ETA (which attempts to zero rate certain services made to non-residents), are interpreted to refer to the party who takes advantage of the service being provided, rather than the party who has contracted for the service; the provision has the effect of putting GST-registered suppliers at a competitive disadvantage when marketing their services to global customers.

As an example, consider a GST-registered supplier establishing a call centre in Canada. The supplier contracts with a non-resident to provide information to the non-registrant's customers (the services provided are not considered to be professional, advisory, or consulting services). The persons that request information are not the non-registrant's employees, but may be its customers or potential customers. Most parties to whom information is provided are located outside Canada, but if any of the parties requesting information are located in Canada, the services will be "rendered to" the latter party and therefore fall outside the zero-rating provision.

Canadian-based call centres serve a global clientele. The inability to use the zero-rating provisions in situations where some requestors (who are not the contracting party) are situated in Canada makes the Canadian-based centre less attractive than one situated outside the country. The wording of section 7 of Part V of Schedule VI of the ETA should be amended to add the word "recipient" after "individual" (viz., "a service that is rendered to an individual recipient while that individual is in Canada") to put Canadian suppliers on an equal footing with their foreign competitors situated outside the country.

5. Harmonization 

At TEI's Canadian Tax Conference in May 2005, the Department representatives mentioned that they were reviewing possible proposals for making harmonization of provincial retail sales taxes and the GST more attractive to the provinces. Please provide an update on progress that has been made, and future plans to assist the provinces in replacing their retail sales taxes with a value-added tax.

6. Joint venture election prescribed activities

Will the Department consider initiating legislation prescribing activities for the purposes of the section 273 joint venture election? TEI is concerned that such legislation and implementing regulations might adversely affect existing joint ventures, particularly in circumstances where a registrant has been provided with guidance from CRA which assents to the section 273 election--and thus the venture participants invoke the election--and the joint venture's activity does not end up being a prescribed activity under legislation later enacted. Will the Department confirm that any legislation will not affect existing section 273 elections?

7. Input tax credits for financial services and section 186

Will the Department consider amending section 186 to include partnerships and trusts? In some industries, the use of partnerships is more common than the use of corporations, but the availability of ITCs tends to be problematic. A corporation that owns an interest in another commercially active corporation is deemed to be involved in the same commercial activity and thus, ITCs are claimable. Yet a partnership that owns an interest in another commercially active corporation is deemed to be involved in a financial service and thus, ITCs are not claimable. Would the Department consider amending section 186 retroactively to redress this inequity?

8. Claims for overpaid excise tax on fuel purchases

The current process for submitting applications for refund/deduction of excise taxes for overpaid excise tax on fuel purchases (N15 claims) creates confusion and uncertainty for both end-users and fuel suppliers. It also imposes undue compliance and administrative burdens on the fuel suppliers.

Based on the prevailing practice of CRA district offices, some end-users currently rile N15 claims through fuel suppliers, while others rile N15 claims directly with CRA. Additionally, some end-users have received written authorization permitting them to file non-Part IX ETA refund claims directly with CRA. We understand that the current legislative framework of the FET legislation requires that N15 claims be riled by the fuel supplier to CRA on behalf of end-users.

Will the Department consider amending the Act to permit the submission of N15 claims directly to CRA by end-users, rather than requiring the supplier to submit claims on their behalf?

9. Multi-employer plans and GST rebates

Under amendments to the ETA proposed October 3, 2003, the definition of "multi-employer plan" would be changed to include all registered pension plans that have more than one participating employer. This means that a pension plan in which more than 95 percent of the members of the plan are employed by a related group of employers would be eligible to claim the 33 percent GST rebate. On November 17, 2005, the Department issued a notice of proposed amendments indicating that these changes would not be pursued. The notice also indicated that a revision to CRA's technical information bulletin B-032R, Registered Pension Plans, would be sufficient to address this issue.

We believe that multi-employer plans with related employers may be significantly penalized compared to other plans without these amendments because such plans have never been allowed to claim any amount of GST (either through a rebate or an ITC through the employers).

Please explain the Department's rationale reflected in its November 17, 2005 notice.

Conclusion

Tax Executives Institute appreciates the opportunity to present its comments in respect of pending income tax issues. We look forward to discussing our views with you during the Institute's December 7, 2005, liaison meeting.