Pending excise tax issues: December 2, 2003.

On December 2, 2003, Tax Executives Institute held its annual liaison meeting with the Canada Customs and Revenue Agency on pending commodity and excise tax issues. The written agenda for the meeting, which was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock of the Royal Bank of Canada, is reprinted below. The answers to the questions will be posted on TEI's website.

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on pending commodity and excise tax issues, which will be discussed with representatives of the Canada Customs and Revenue Agency (CCRA) during TEI's December 2, 2003, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Mario M. Tombari, TEI's Vice President for Canadian Affairs, at 514.932.6161, ext. 2943, or Sherrie Ann Pollock, chair of the Institute's Canadian Commodity Tax Committee, at 416.955.7373.

Goods and Services Taxes (Gst)

1. Please confirm the responses given by CCRA representatives to the following three questions at TEI's 2003 Region I Conference in Gatineau, Quebec. The fourth question arose from subsequent discussions among TEI members.

(i) A GST-registered Canadian manufacturer sells its accounts receivable on a non-recourse basis to a financial institution (FI) in Canada. The manufacturer services the receivables and charges a fee to the FI. Is the fee subject to GST? Does it matter whether the FI is a related or unrelated entity?

(ii) A GST-registered Canadian manufacturer sells its accounts receivable on a non-recourse basis to a non-GST registered, non-resident company. The manufacturer services the receivables and charges a fee to the non-resident. Is the fee subject to GST? Does it matter whether the buyer is a related or unrelated entity?

(iii) Based solely on the fact situation outlined in subparagraph (ii) above, is the non-resident carrying on business in Canada and required to register for GST?

(iv) Would the answers to (i) through (iii) change if the accounts receivable were sold on a recourse basis?

2. At TEI's 2001 liaison meeting, CCRA was presented with the following fact pattern (question no.14):

   A GST-registered entity (CANCO) sells an item to
   a Canadian customer (Company X). The terms of
   delivery are FCA (free carrier) Company X's site in
   Ottawa. CANCO purchases the good from its U.S.
   parent in Boston, Massachusetts, which has itself
   acquired the good from a third-party U.S. supplier
   that delivered it to the parent's warehouse in Boston.
   The good is shipped from Boston to Company
   X's site in Canada. CANCO invoices Company X
   $100 for the good, $20 for a "handling and administrative
   fee," and $15 for the actual freight charge.
   All three amounts show as separate line items on
   CANCO's invoice to Company X.

   The $20 "handling and administrative fee" is a fee
   paid by CANCO to its U.S. parent for receiving,
   warehousing, and locating the transportation company;
   the $15 freight charge is for the actual transportation
   cost from Boston to Ottawa. U.S. parent
   pays the transportation cost to the transportation
   company and then invoices CANCO. CANCO then
   invoices both charges to its Canadian customer.

TEI asked whether GST applied to either the administrative fee or the freight charge. CCRA responded that both the $20 "handling and administrative fee" and the $15 freight charge were part of the consideration for the supply, irrespective whether the fee or freight charge were modified to reflect a higher or lower value than the actual freight charge.

Consider these additional facts: Assume that CANCO imported the goods into Canada and paid Canadian duty of $5, plus the Division III GST. This duty amount will be invoiced to Company X as a separate line item on CANCO's invoice to Company A, similar to the $20 "handling and administrative fee" and the $15 freight charge. Please confirm that:

(a) CCRA's 2001 answer to this question has not changed, i.e., both the $20 "handling and administrative fee" and the $15 freight charge are considered part of the consideration for the supply (along with the $100), and Division II tax applies to CANCO's invoice to Company X for all three line items ($135).

(b) When CANCO invoices Company X for the $5 duty amount as a separate line item, the $5 is also considered part of the consideration for the supply and Division II tax applies on CANCO's invoice to Company X for this item.

(c) The Division III tax that CANCO paid on importation of the goods into Canada is fully recoverable as an input tax credit (ITC) by CANCO, assuming standard documentation exists.

3. Assume that a non-registered non-resident (Company A) is selling goods to a Canadian GST registrant (Customer B), who is fully using the goods in its commercial activity and therefore is entitled to an ITC. Company A is not carrying on business in Canada and is not required to register for GST purposes. Customer B is a monthly filer and files on a calendar basis. Company A agrees to be the importer of record. Company A pays some Canadian duty and the Division III GST on the value of the goods imported. Consider the following transaction:

* Customer B issued a purchase order to Company A on November 15, 1999.

* Company A shipped the goods on December 1, 1999, to Customer B.

* Company A issued an invoice to Customer B on December 3, 1999 (Division II tax is not charged).

* Company A imports the goods into Canada on December 4, 1999, and pays duty and Division III GST.

Company A and Customer B later realise that section 180 of the Excise Tax Act (ETA) could be used to flow through the GST Division III tax paid on importation by Company A to Customer B, permitting Customer B to recover the Division III GST without having embedded GST in the commercial transaction. On November 1, 2003, Company A issues an invoice to Customer B seeking reimbursement for the Division III tax Company A paid on the goods when they were imported in 1999. Assume that there is appropriate documentation and that Customer B has a four-year time period in which to recover the GST.

(i) When Customer B receives the invoice from Company A for the reimbursement of the Division III GST, may Customer B claim the invoiced GST as an ITC, given that the reimbursement invoice is four years less a month after the initial supply?

(ii) If the date on which Company A issues a reimbursement invoice to Customer B is changed from November 1, 2003, to December 1, 2003, may Customer B claim the invoiced GST as an ITC, given that the reimbursement invoice is four years after the initial supply?

(iii) If the date on which Company A issues a reimbursement invoice to Customer B is changed from November 1, 2003, to January 1, 2004, may Customer B claim the invoiced GST as an ITC, given that the reimbursement invoice is four years plus a month after the initial supply?

4. A GST-registered company resident in Canada (Company S) is in the business of designing, developing, and providing access to a database that contains information readily available from a variety of sources. Company S primarily employs researchers and other technical staff who ensure that the database is kept current. Company S has existing license agreements with Canadian and U.S. customers to allow them to use the database. Company S intends to sell to Company X (a non-registered, non-resident located in the United States) the right to market and license Company S's database worldwide other than for use in Canada. Company S will retain the right to market and license Company S's database in Canada (the "primary agreement").

(i) Please confirm that the sale of the right to market and license Company S's database worldwide other than for use in Canada is not subject to GST because it relates to intangible personal property that cannot be used in Canada.

Company S and Company X also agree to an ongoing separate agreement (the "secondary agreement") under which Company S will continue to use its staff to enhance existing databases, as well as to create new databases. The rights to market and license the right to use these updates and new databases will be also be sold to Company X under the same parameters as the initial agreement, i.e., Company X will have the right to market and license the enhancements and the new databases worldwide other than for use in Canada.

(ii) Please confirm that the sale of the right to market and license Company S's enhanced and newly created databases worldwide other than for use in Canada is not subject to GST because it relates to intangible personal property that cannot be used in Canada.

One year later, Company X decides to acquire the remaining rights of Company S to market and license Company S's databases in Canada, i.e., an addendum to the primary agreement is adopted. Company X also decides to enter into a similar arrangement for the ongoing enchantments to the existing databases and the creation of new databases for use in Canada, i.e., an addendum to the secondary agreement is adopted. Separate prices will be negotiated and identified for these rights in Canada.

(iii) Please confirm that the sale of the right to market and license Company S's databases in Canada is subject to GST (assuming a separate selling price is identified). In addition, any invoices for the ongoing enchantments to the existing databases and the creation of new databases for use in Canada will be subject to GST (assuming a separate selling price is identified).

Assume that the primary agreement is for the right to market and license Company S's databases worldwide for use both inside and outside Canada, and there is no segregation of the selling price between these rights.

(iv) Please confirm that Company S is required to invoice the GST on the full value of the selling price because there is no segregation of the selling price.

Assume, however, that the primary agreement is for the right to market and license Company S's databases worldwide for use both inside and outside Canada, but the agreement provides for the segregation of the selling price between these rights.

(v) Please confirm that Company S is required to invoice the GST on the separately identified selling price related to the "in-Canada" supply because the supply is considered to be made in Canada, but that Company S is not required to invoice the GST on the separately identified selling price related to the outside-Canada portion, even though the same agreement covered both supplies.

Similarly, assume that the secondary agreement is for the right to enhance existing databases and to create new databases, so that Company X acquires the right to market and license Company S's databases worldwide for use both inside and outside Canada, but there is no segregation of the selling price between these rights.

(vi) Please confirm that Company S is required to invoice the GST on the full value of the selling price because there is no segregation of the selling price within the secondary agreement.

Assume instead that the secondary agreement is to enhance existing databases and create new databases, so that Company X acquires the right to market and license Company S's databases worldwide for use both inside and outside Canada, and there is a segregation of the selling price between the rights to use inside and outside Canada.

(vii) Please confirm that Company S is required to invoice the GST on the separately identified selling price related to the "in Canada" supply, but that Company S is not required to invoice the GST on the separately identified selling price related to the outside-Canada portion, even though the same agreement covers both supplies.

(viii) Finally, please confirm that, if the supply made by Company S to Company X is the right to market, distribute, and license Company S's software worldwide (i.e., including in Canada), the supply will be zero-rated under Schedule VI, Part V, Section 10, because it will be a supply of intellectual property, or a right, license, or privilege to use such property, even though part of the supply is related to Canada.

5. A non-registered non-resident (Corporation A) directly sells goods (valued at $100) to its Canadian, GST-registered customer (Customer C). Customer C fully uses the goods in its commercial activity and therefore is entitled to an ITC. There is no related or unrelated Canadian entity involved as a middle party in this transaction.

Corporation A ships the goods directly from its location outside Canada to Customer C in Canada. In past transactions, Corporation A has been the importer of record of the goods and has paid the duty ($10), Division III GST tax ($7.70), and the brokerage charge ($15). Corporation A has relied on the provisions of ETA section 180 (relating to the receipt of property from a non-resident) to invoice the Division III tax to Customer C, who obtains a full Division III GST recovery (proper documentation is supplied). For one importation, Customer C (rather than Corporation A) imports the goods and pays the duty, the Division III GST tax, and the brokerage charge. GST of $1.05 is also invoiced on the brokerage charge.

(i) Please confirm that Customer C may claim an ITC for the Division III tax of $7.70, as well as the GST on the brokerage charge of $1.05.

Assume that Customer C invoices Corporation A to be reimbursed for the duty charge of $10 and the brokerage charge of $15.

(ii) Please confirm that Customer C is not required to invoice Division II GST on its invoice to Corporation A where Customer C seeks reimbursement from Corporation A for the duty and brokerage charge, because there is no supply being made from Customer C to Corporation A.

6. The new Kyoto Accord will require certain Canadian companies to purchase what are generally called "emission trading credits." Companies with emissions that exceed basic allowances must decide either to reduce their own emissions (if possible) or to buy additional allowances to cover emissions in excess of the allocated level. Emission offset credit "instruments" have been created and are now being bought and sold on the open market. How will these instruments--and their related costs--be treated for GST purposes?

7. A form of organizational special purpose entity, called a "Health and Welfare Trust," is emerging on the Canadian scene. These entities have been created to provide captive employee beneficiaries with surety of certain specific benefits, which may include group-term life insurance, private health services, and income determination (sickness or accident) benefits. Has CCRA considered whether these trusts are involved in commercial activities and thus eligible to claim 100 percent of any resulting ITCs?

8. The GST "Export Documentation" provisions--especially export certificates under current law--do not lend themselves to certain repetitive, high-dollar-volume commercial transactions. Service providers may be required to rely on the representations of the owner of the goods in respect of the ultimate place of supply and the tax status of the purchaser. This reliance seems out of place when the parties are held jointly liable in the event of error. Is CCRA willing to work with TEI to establish a process that better meets the needs of government and industry in this evolving area?

9. Company A, a non-registered non-resident, supplies and installs a generator for a GST-registered customer in Ontario. The value of the contract is $10 million. The customer uses the generator 100 percent in a commercial activity and is entitled to a full ITC. Company A hires a Canadian GST registrant to install the generator in Canada; the value of the installation work is $3 million. The installer initially invoices Company A the base amount, plus GST of $210,000. Once the generator is installed, it will be sold to an unrelated GST registrant and leased back to the original purchaser. The land on which the generator is situated and the building in which the generator is housed will not part of the sale/leaseback transaction.

(i) ETA section 252.41 outlines the requirements for obtaining the non-resident rebate in respect of installation services. Please summarize the steps required to be taken under section 252.41(1) for Company A to secure the rebate directly from the Minister: what form (e.g., GST form 189) is required, what additional documentation must be submitted with the form (e.g., a supplier/installer's invoice), and what other requirements must be met to facilitate the rebate.

(ii) Under section 252.41(2), Company A may submit an application for a rebate directly to the supplier. Please summarize the steps Company A must take under this subsection to secure the rebate from the "installer." What must the installer do in completing its GST return to recover the GST from the federal government?

(iii) Please confirm that, for purposes of section 252.41, a generator that is to be installed in Canada is considered to be "in real property located in Canada" and thus this section is applicable.

(iv) Please confirm that it is irrelevant whether Company A and the Canadian GST-registered installer are related parties.

(v) If the installer fails initially to invoice the GST of $210,000, but issues a "GST only" invoice in the same month that the non-resident submits its application to the installer--so that the installer effectively remits nil tax for that month--what are the consequences for the installer?

(vi) Does GST apply when the customer subsequently sells and leases back the "installed generator" (exclusive of the land and buildings)? Is this sale/ leaseback considered (a) a sale of tangible personal property, or (b) a sale of real property to which ETA sections 221(2) and 228(4) apply?

10. (A) A non-registered non-resident orders 1,000 units of pipe in 25-foot lengths from a Canadian GST-registered person (Supplier A) at a cost of $10,000. The non-resident tells Supplier A to deliver the pipe to Supplier B, a Canadian GST-registered person. The non-resident issues a purchase order to Supplier B to cut the 1,000 units of pipe into 5-foot lengths at a cost of $2,000, and instructs Supplier B to deliver the pipe to a third Canadian GST-registered person (Supplier C). The non-resident then issues a purchase order to Supplier C to electroplate the 5-foot units of pipe at a cost of $3,000, and instructs Supplier C to deliver the pipe to a fourth Canadian GST-registered person (Supplier D). The non-resident issues a purchase order to Supplier D to drill two holes in the electroplated 5-foot units of pipe at a cost of $4,000. Supplier D will then ship the finished pipe to the non-resident's location outside Canada.

The non-resident is willing to provide Suppliers A, B, C, and D with the certificate of proof of non-residence and non-registration provided for under Appendix B of GST/HST Memoranda Series, Chapter 4, Section 4.5.1 ("Exports--Determining Residence Status"). The non-resident also knows that a certificate (as outlined in Policy Paper P-107R, relating to drop-shipment certificates) must be completed and provided to each supplier in order for each supplier not to invoice GST to the non-resident.

Please confirm that:

(i) Supplier B must complete the drop-shipment certificate and provide it to Supplier A.

(ii) Supplier C must complete the drop-shipment certificate and provide it to Supplier B.

(iii) Supplier D must complete the drop-shipment certificate and provide it to Supplier C.

If, before invoicing the non-resident, Suppliers A, B, and C possess a copy of a signed certificate of proof of non-residence and non-registration from the non-resident, as well as the drop-shipment certificate, please confirm that Suppliers A, B, and C are not required to invoice the GST to the non-resident.

(B) Assume that the non-registered non-resident does not provide the certificate of proof of non-residence and non-registration under Appendix B of section 4.5.1, and that the P-107R certificates are not provided to Suppliers A, B and C on a pre-invoice basis. Suppliers A, B, and C all invoice the non-resident for the GST, but the non-resident deducts the amount of the GST from its payments. The required certificates are then provided to the suppliers.

With this documentation now in hand, may Suppliers A, B, and C now issue a credit note for the GST that was originally contained on their invoices to the non-registered non-resident?

11. At a recent symposium, a participant presented the following example: An unregistered non-resident orders goods from an Ontario GST-registered supplier (Supplier X). The order consists of 1,000 widgets at $1 each. The widgets are to be shipped in two 500-lot shipments directly to the non-resident's site in the United States. The first shipment is made and Supplier X invoices the non-resident for $500; GST is not included because the supply qualifies as a zero-rated supply. Supplier X has the second 500-lot shipment ready to be shipped when the non-resident cancels the second shipment. Per the terms of the order, Supplier X charges the non-resident a cancellation fee of $200. None of the widgets for the second shipment is physically shipped to the customer.

(i) Please advise whether GST applies to the $200 cancellation invoice.

Assume the same facts as above, but there is no contractual obligation for a cancellation charge. Supplier X and the purchaser, however, orally agree to the $200 cancellation amount.

(ii) In respect of the oral obligation, does GST apply to the $200 invoice?

Assume the same facts as above, but there is no contractual obligation for a cancellation charge and the purchaser cancels the purchase order before any of the 1,000 widgets is shipped. In other words, there is no written obligation for the purchaser to pay any cancellation charge and there are no widgets shipped to the purchaser. Supplier X and the purchaser, however, orally agree to a $400 cancellation charge.

(iii) Does GST apply to the $400 invoice?

In its response, CCRA stated that the application of the GST to the cancellation charge does not depend on whether there is an oral or written contractual obligation. In addition, CCRA indicated that the cancellation fee in these transactions is subject to GST. Please confirm that our understanding of CCRA's responses is correct. In respect of the latter response, please provide the legislative reasoning for the application of GST to the cancellation charges in these transactions.

12. For several years, TEI has raised concerns about documentation issues and claims for ITCs in respect of procurement card purchases. In last year's liaison meeting, CCRA indicated that the procurement card policy would be issued shortly. Please provide a status report on the policy.

13. On October 3, 2003, the Department of Finance released "Proposed GST/HST Amendments" that included a section on "Import Arrangements for Goods Supplied Outside Canada." See News Release 2003-046. Proposed new section 178.8 of the ETA would address circumstances in which a person is the recipient of a supply made outside Canada of goods that are imported into that country for that person's consumption, use, or re-supply, but another person effects the physical importation of the goods. The notice offers the example of a supplier of the goods who may effect the importation and account for any applicable taxes or customs duties on the goods at that time. This section provides an option "in certain cases, for the recipient and the supplier of the imported goods to elect for an alternative treatment that would avoid the need for the exchange of import documentation" (the "first election").

Consider the following factual situation:

   A non-resident, GST-registered supplier (Company
   A) makes a sale to its customer (Customer B) with
   the delivery terms FOB Boston, i.e., outside Canada.
   The goods are shipped to Ontario. Company A
   does not invoice, remit, or collect Division II GST
   since the supply is considered to be made outside
   Canada for GST purposes. Company A utilizes its
   business expertise, however, to arrange transportation
   and importation of the goods into Canada.
   Company A pays Division III GST at the time the
   goods are imported into Canada.

CCRA has previously stated that Company A is not entitled to the ITC related to this Division III tax because Company A is not the de facto importer; the recipient (Customer B) is. In CCRA's view, Customer B is legally the only party that may claim the ITC for the Division III tax.

In relation to the above fact pattern, please confirm the following in respect of the proposed first election:

(i) Under the proposed amendments, if Company A and Customer B make the first election, Company A will now be allowed to recover the Division III GST tax Company A paid on importation. In addition, Company A will be required to invoice Customer B the Division II GST on the value of the consideration as if the supply were made in Canada.

(ii) Instead of Company A selling the goods, a leasing company (Leasco) leases the goods to Customer B and is the importer of record. Assume the goods are made available outside Canada so that Division II tax does not apply. Under the proposed October 3 amendments, if Leasco and Customer B make the first election, Leasco will now be allowed to recover the Division III GST tax Leasco paid on importation. In addition, Leasco will be required to invoice Customer B the Division II GST on the value of the consideration for each leasing invoice as if the supply were made in Canada.

(iii) The news release states that the proposed changes are to be effective as of the date of the announcement (presumably October 3, 2003). For fully commercial pre-October 3, 2003, transactions, where the customer is entitled to full ITCs, will CCRA actively pursue these transactions on audit, even though there is no revenue loss to the government?

(iv) In every day business, these types of transactions occur. In most cases, the Division III tax has been claimed without the knowledge that the supply was made outside Canada and Division II tax does not apply. Usually, these transactions are discovered through either an internal or GST audit. On post-October 3, 2003, transactions, will CCRA permit suppliers that have recovered the Division III tax on such transactions--but have not initially invoiced the Division II tax because the election has not been made under this provision--to (a) make the election after the initial transaction has occurred, (b) as a result, invoice their customer the Division II tax, and (c) thus be allowed to recover the Division III tax?

A second election is made available under the proposed new rules where the recipient of the imported goods and the supplier do not opt to treat the supply of the goods as if it had been made in Canada. Under the general rules, the recipient would be the only person entitled to any abatement or refund of GST in circumstances in which customs duty, if any, on the goods would be relieved, such as if there were an overvaluation of the goods. Under the election, however, the recipient and the person who has acted as the importer of the goods for customs purposes could agree to have that person claim the abatement or refund instead of the recipient. In that event, the person who has acted as the importer would have to issue to the recipient a "tax adjustment note" indicating the amount of the abatement or refund obtained. The consequences for the recipient of receiving the tax adjustment note would be similar to those that result from the receipt of a credit note from a supplier for a post-sale tax adjustment in respect of a domestic purchase.

Assume that Company A, who is the supplier and the importer of record but not the de facto importer, incurs duty, plus Division III GST. Under CCRA's current reasoning, Company A is not entitled to claim an ITC for the GST. If the first election is not made, to recover its costs, (1) Company A would have to seek reimbursement of both the duty and Division III GST costs from Customer B. Apparently, Customer B would then take the portion of the ITC to which it is entitled. This process appears similar to the process used for the section 180 flow-through, which permits a flow-through of the ITC entitlement in respect of purchases by a registrant from a non-resident, non-registered person if certain conditions are met. The problem appears to be that the supplier in this fact pattern, Company A, is a GST registrant and thus section 180 is unavailable.

(v) Assuming documentation support for the duty and the Division III tax is attached to the reimbursement invoice from Company A to Customer B, is Customer B entitled to claim an ITC for its portion of the commercial activity, and if so, under what provision of the ETA?

If Company A overpaid duty at the time of importation--perhaps because NAFTA rights were not claimed and the MFN rate of duty applied--there would also be an overpayment of GST. Company A could then (a) file the amended customs entry form (B2), (b) receive and deposit the refund of the duty and GST, and (c) generate an equivalent "tax adjustment note" to Customer B, who, in turn, would add back any GST ITC to which it was not entitled. Is the analysis outlined above correct?

14. (A) Consider the following factual situation:

   LI1 is a "listed financial institution," as defined in
   ETA section 149(1)(a) (but is not a credit union or
   a member of a mutual insurance group), and is a
   GST-registered corporation because it has a degree
   of commercial activity. LI1 owns 100 percent of
   two subsidiary corporations (SU1 and SU2), both of
   which are registered for GST purposes. On January
   1, 2004, LI1 will transfer all of its employees
   to SU1. On the same date, LI1 will sell its entire
   business to SU2, which will make SU2 a "listed
   financial institution." SU1 and SU2 will have an
   agreement whereby SU1 will supply services to
   SU2.

Please advise whether SU1 and SU2 qualify to elect under section 150 (providing for group relief) to exempt the supply of services from SU1 to SU2 from GST.

(B) Consider the following factual situation:

   LI2 is a "listed financial institution" under ETA
   section 149(1)(a) (but is not a credit union or a
   member of a mutual insurance group) and is a GST-registered
   corporation because it has a degree of
   commercial activity. LI2 owns 100 percent of a
   subsidiary corporation (SU3), which is registered
   for GST purposes. On January 1, 2004, LI2 and
   SU3 will establish a partnership (PNSP1). LI2 will
   transfer all of its employees to SU3. On the same
   date, LI2 will transfer its entire business to PNSP1
   in return for a partnership interest. This will make
   PNSP1 a "listed financial institution." SU3 and
   PNSP1 will have an agreement whereby all the
   SU3 services will be charged to PNSP1.

Please advise whether SU3 and PNSP1 qualify to use the section 150 election to permit the supply of services from SU3 to PNSP1 to be processed without invoicing GST.

15. Two unrelated companies, A and B, are both resident registrants that form a joint venture (JV) and agree to sign the JV election form (GST 355). Consider the following three scenarios:

(i) Company A will manage and operate the JV. May Company B elect to be the operator and file the GST for the JV, even though Company A has all the supporting documentation, i.e, Company A has actually managed the JV, issued all related invoices, and paid the supplier invoices for expenses incurred by the JV?

(ii) Company C (a resident, GST-registered, 100-percent owned subsidiary of Company A) will manage and operate the JV. May Company A or Company B elect to be the operator and file the GST for the JV, even though Company C has all the supporting documentation, i.e., Company C has actually managed the JV, issued all related invoices, and paid the supplier invoices for expenses incurred by the JV?

(iii) Company A and Company B will incorporate and register Company D. Company A and B will own Company D in the same proportion as their respective interests in the JV. Company D has no activity other than having been elected to be the JV operator. Company C (a resident, GST-registered subsidiary of Company A) will manage and operate the JV. May Company D elect to be the operator and file the GST for the JV, even though Company C actually manages the JV and has all the supporting documentation, i.e., Company C has actually managed the JV, issued all related invoices, and paid the supplier invoices for expenses incurred by the JV?

16. A TEI member in the United States--a non-resident in Canada that is registered for GST purposes--was recently contacted by CCRA concerning increasing its security requirements for the U.S.-based company. Please answer the following questions:

(i) How often does CCRA review the security requirements for non-resident GST registrants?

(ii) What factors are used to determine whether a review of non-resident registrant security requirements is warranted?

(iii) If CCRA withholds tax refunds to secure its requirements, is interest credited to the non-resident registrant?

17. A facility (server) is being used in the United States to provide teleconferencing between cities within Canada. The U.S. company is a non-resident, is not registered for GST purposes, does not have a permanent establishment in Canada, and has not supplied any hardware or software to the Canadian users. A Canadian company uses the telephones lines within Canada to connect to the server in the United States, which connects the conference calls within Canada. Please answer the following questions:

(i) Is the U.S. company considered to be carrying on business in Canada?

(ii) Must the U.S. company register for GST purposes?

(iii) Does ETA section 143 (relating to the supply of tangible personal property to non-residents) override section 142 (relating to the supply of tangible personal property within Canada), thereby making the GST inapplicable?

(iv) If this is the supply of a service coming into Canada, must the Canadian company self-assess under Division IV?

18. A vendor is registered under Subdivision d of Division V of the ETA. The vendor fuels an aircraft operated by a non-registered foreign carrier, whose business is to transport passengers or property to and from Canada, and the fuel supplied is in the course of transporting those passengers or property. The fuel is invoiced by the vendor to an intermediary that then invoices the foreign carrier. The intermediary (a) is registered under Subdivision d of Division V, (b) is not a resident of Canada, (c) is not in the business of transporting passengers or property to or from Canada, and (d) does not physically take possession of the fuel.

(i) If the vendor were to invoice the non-registered foreign carrier for the fuel, the transaction would be zero rated under Section 2 of Part V of Schedule VI. Is GST collectible on the transaction between vendor and intermediary?

(ii) Is the transaction between the vendor and intermediary considered to be a supply of fuel or a supply of an account receivable?

19. A GST-registered lessee leases a truck from a GST-registered lessor. The lease agreement states that the responsibility for repairs and maintenance of the vehicle remains with the lessee. The lessee has the truck repaired at a local mechanics repair shop. The GST-registered repair shop in voices the lessee for the repairs, plus GST in the name of the lessee. The lessee, however, experiences financial difficulty and can pay neither the mechanic's invoice nor the lease payments on the truck. The mechanic places a mechanic's lien on the truck. As a remedy under the lease, the lessor repossesses the truck with the intent to sell it to another party. In order to take possession of the truck, the lessor must pay off the mechanic's lien.

(i) It is arguable that both the lessee and the lessor are recipients of the supply of repair services. May the lessor claim back the GST paid on the repair shop's invoice as an ITC, even though the invoice is in the name of the lessee (since the lessor actually paid for the service)?

(ii) If the repair shop adds the lessor's name to the invoice, may the lessor claim the ITC?

(iii) If the repair shop issues a credit note to the lessee and then invoices the lessor for the repairs, will the lessor be eligible to claim the GST paid as an ITC?

20. GST Memorandum (New Series), Ch. 17.16 provides guidance on the eligibility of the GST-registered lessor who may claim an ITC for GST/HST paid on repairs to a leased car relating to an insurance claim. The eligibility depends on the lease agreement, insurance policy, and the repair shop's invoicing procedures. In paragraph 28, the memorandum suggests that if the lease agreement names the lessee as the responsible party for the repairs, then the lessee is the recipient of the supply. The following example found directly after paragraph 31 suggests, however, that another party can be the recipient of the supply:

   The lessor is a registrant in the business of leasing
   cars. A lease agreement between the lessor and the
   lessee requires that the lessee acquire an insurance
   policy for the car, which identifies the lessor
   as the insured. The insurance policy provides that
   the insurer will indemnify the lessor for its loss
   (i.e., the insurer does not provide a repair service).
   The lease agreement also provides that the title to
   the vehicle and any parts replaced during repairs
   remain vested with the lessor. The invoice issued
   for the repairs identifies the lessor as the party
   that acquired the repairs, and therefore the lessor
   is liable to pay for the repairs.

   In this example, the lessor is the recipient of repair
   services acquired in the course of its commercial
   activities and is eligible to claim an ITC for the
   GST/HST paid on the repairs to the leased car
   covered by an insurance policy. In this situation
   it is appropriate for the insurer to pay the insurance
   claim on the net-of-GST/HST basis.

In virtually all vehicle leases, the lessee is responsible for the repairs. Therefore, in accordance with paragraph 28 the lessee is the recipient. In addition, most leases require the lessor to be named as an additional insured. The repair invoices may be issued in the lessee's name, the lessor's name, or both. Insurance companies have taken the position that the lessor is always the recipient of the repair and have routinely refused to pay the GST/HST on any repair made to a leased vehicle. Repair companies then turn to the lessor for the payment of the GST/HST, which suggests they also believe the lessor is the recipient. CCRA auditors have taken the position that the lessee is the recipient, based on paragraph 28 of the memorandum, and are currently considering assessing the lessor for ITCs taken in error. Finally, no party to the transaction has access to the lease agreement, insurance policy, and the repair shop's invoicing procedures, which makes this policy impossible to administer. It would appear that either the lessee or the lessor is obliged to pay the GST/HST in circumstances where the insurance company has refused to pay because one party engaged the repair shop to perform the repairs. If either the lessor or lessee is a registrant and if an ITC is taken, then either party may be subject to a denial of the ITC.

(i) Can this policy be modified to address the anomaly reflected in the interpretation of paragraph 28 and the example in paragraph 31, given the industry practice?

(ii) In circumstances where a lessor has claimed an ITC for GST/HST paid in respect of amounts refused by the insurance company and CCRA believes the amounts are the responsibility of the lessee, may the lessor claim the amounts as a tax paid in error?

21. (A) Company A, a GST-registered company, sells manufacturing equipment to GST-registered Company B. As part of the purchase and sale agreement, Company A warrants that the manufacturing equipment will produce 50,000 widgets per day. Company A also warrants that, for one year after the sale, Company A will pay Company B $.50 per widget if the equipment does not produce at least 50,000 widgets per day. In the first month, Company B produces only 25,000 widgets and charges Company A $12,500.

(i) Will CCRA characterize this payment as a supply or a damage payment?

(ii) If CCRA considers this to be a supply, is it a supply of property or a service?

(iii) Will the payment by Company A to Company B be subject to GST?

(B) Company A, a GST-registered entity, sells substantially all of its assets of a food producing operating division to GST-registered Company B. Company B creates a new entity (Newco) to carry on the former business of Company A and rolls the assets into Newco. To facilitate the sale, Company A agrees to certain contract terms, including an indemnification of Company B and related parties in respect of any GST assessments and related interest and penalties incurred in respect of the "business" sold for a period 24 months after the sale (subject to there being no negligence on the part of Company B). In the 20th month, Newco is assessed for GST because it failed to charge the tax on certain food products that it produces. (Company A had never charged GST on the same food products.) Pursuant to the purchase and sale agreement, Company B requests payment from Company A for the amount of the GST assessment, interest, and penalties.

(i) Will CCRA characterize this payment as a supply or a damage payment?

(ii) If CCRA considers this to be a supply, is it a supply of property or a service?

(iii) Will the payment by Company A to Company B be subject to GST?

(C) Company A sells a portfolio of lease assets (the lease stream and the title to the underlying assets) to Company B and guarantees the performance of the portfolio. The purchase and sale agreement states that, if the bad debt write-off exceeds 5 percent of the net book value of the portfolio on an annual basis, Company A will pay Company B the excess amount. In Year 1, the exceeded write-off taken by Company B is $50,000, which is above the 5-percent threshold, pursuant to the purchase and sale agreement, Company B requests reimbursement of the $50,000 from Company A.

(i) Will CCRA characterize this payment as a supply or a damage payment?

(ii) If CCRA considers this to be a supply, is it a supply of property or a service?

(iii) Will the payment by Company A to Company B be subject to GST?

22. Technical Information Bulletin B-068 and Policy P015 provide guidance on "bare trusts." These trusts are often used in real estate transactions whereby the trustee is merely vested with the legal title to the property. The beneficial owners are generally considered to be engaged in the commercial activities relating to the trust property, and thus are required to account for the GST, file GST returns, and comply with the obligations placed on registrants under the ETA.

Do bare trusts holding title to any property such as ships, aircraft, and leased assets also qualify for CCRA's policy in TIB--068 and Policy P-015, i.e., to the extent that the bare trust holds only title to these assets and the beneficial owner performs all administrative functions, the bare trust will not be required to register for GST? Does CCRA plan any updates to TIB--068 and Policy P-0157

23. During a recent symposium in Ottawa, CCRA representatives commented on the GST status of non-competition payments. TEI understands that CCRA believes that payments under non-competition arrangements are characterized as services for purposes of the GST. In some respects, however, this supply is more closely related to a supply of rights that seemingly should be characterized as intangible personal property. Please confirm CCRA's position on the characterization of non-competition payments and provide so. (5)

Paragraph 3(b) of the Input Tax Credit (GST/HST) Regulations provides a list of prescribed information, including the registration number assigned under subsection 241(1) of the ETA to the supplier. There are several court cases on this issue (e.g., Nix, Helsi, and Tremblay) with differing results. The validity of the registration number given to a purchaser by the supplier has always been assumed as long as it appeared to be a correct number (i.e., nine digits) without the need for an investigation by the supplier. These court cases cast doubt on that practice.

Please answer the following questions:

(i) What must the purchaser supply to the auditor to substantiate that the vendor has given a valid registration number?

(ii) The current verification method for registration status and number is via telephone [phone]). Because of confidentiality concerns, CCRA will either confirm that a person is a registrant or a particular registration number is valid, but will not match the number with the registrant. How can a supplier prove in audit that this step was taken?

(iii) If the registration number is valid but belongs to a different registrant, how can a supplier get this information?

(iv) Will CCRA release lists of valid numbers for verification purposes?

(v) Will CCRA confirm registration numbers if a corporation sends a list of suppliers' registration numbers each year for verification?

Customs

25. Please provide an update concerning any changes under consideration to address concerns about the Administrative Monetary Penalty System (AMPS).

26. An importer and exporter are unrelated entities and the exporter has issued a blanket certificate to the importer. During the year, CCRA rules that the exporter does not qualify for NAFTA. The importer is unaware of the ruling and continues to use the NAFTA certificate. On audit, CCRA's Customs Verification and Services Division issues an AMPS penalty to the importer for the invalid NAFTA certificate. How can the importer protect itself in this circumstance?

27. CCRA issues a National Customs Ruling (NCR) to an importer. The importer holds a contrary legal opinion, but has not yet challenged the NCR. On his next shipment, the importer relies on the opinion rather than the NCR. Upon audit, CCRA issues an AMPS penalty, as well as an assessment. The importer appeals the decision and wins. Will the AMPS penalty be refunded to the importer and his profile cleared?

28. When an importer has reason to believe that an error has occurred, it is required to correct it within 90 days from that date. The circumstances under which an importer has reason to believe it has made an error must be "evident and transparent." Will CCRA define the terms "evident and transparent" in future guidance?

29. CCRA has issued many AMPS penalties against importers for removing goods from a Customs warehouse prior to their release. Although we understand the basis for the penalty, TEI suggests that the penalty in most cases should be imposed on the carrier, rather than the importer, because it is the carrier that physically removes the goods from the warehouse. Please explain the rationale for assessing the penalty on the importer.

30. A non-registered non-resident (Corporation A) sells goods (valued at $100 under a transfer price agreement) to its Canadian GST-registered subsidiary (Corporation B), which is using the goods fully in its commercial activity and therefore is entitled to a full ITC. Corporation B re-sells the goods in the same condition to its Canadian customer Customer C) at a cost of $130; this selling price may or may not be known to the U.S. parent at the time of shipment. Corporation A ships the goods directly from outside Canada to Customer C's location in Canada; Customer C is the importer of the goods into Canada.

(i) Assuming there are no customs duties, SIMA assessment, or excise duty associated with this importation, what is the "value for duty"--and thus the "value for tax"--that should be placed on the B3 importation documents, i.e., $100 or $130?

(ii) If there is no agreed-to transfer price, either written or oral, between Corporation A and B, does the answer to question (i) change?

31. Contravention C003 (imposing an AMPS penalty for errors in the B3 declaration used to determine customs duties) has been suspended for some time. Does CCRA intend to reinstate the contravention and if so, will there be any modifications?

32. During TEI's December 6, 2000, meeting with CCRA, an issue arose concerning the imposition of interest on the GST when goods are imported into Canada, and the importer subsequently realizes that additional GST is payable. CCRA suggested that TEI raise the issue with the Director of the Trade Incentives Program, which TEI did by letter dated February 14, 2001. The issue was also discussed at the following two liaison meetings with CCRA. After last year's meeting, the attached letter was sent. During the meeting, TEI requests a status report on this issue.

Conclusion

Tax Executives Institute appreciates this opportunity to provide its comments and questions on various commodity and excise tax issues. We look forward to discussing our views with you during our December 2, 2003, liaison meeting.

(1) Assume these costs were not part of the original agreement.