Pending excise tax issues: December 3, 2002. (Canada Customs and Revenue Agency).

On December 3, 2002, 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, prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Martina Krummen of Air 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 3, 2002, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Glenn G. Wickerson, TEI's Vice President for Canadian Affairs, at 403.233.1135, or Martina Krummen, chair of the Institute's Canadian Commodity Tax Committee, at 514.856.6675.

Customs

1. Consider the following example: A National Customs Ruling (NCR) is issued to a client on a particular product. The client believes the ruling is in error, but because it is not currently importing this product, the client does not protest the ruling. At a later point, the client begins importing the product, but does not follow the NCR. A Compliance Officer discovers the issue on audit and issues a re-assessment and imposes an Administrative Monetary Penalty System (AMPS) penalty.

Must the client submit two appeals--one for the tariff classification and one for the AMPS penalty? If so, are both appeals submitted to the regional office? Will the regional offices with a Deputy Minister-Appeals have the authority to consider the AMPS appeal? If the NCR is found to be in error, will the AMPS penalty still stand?

2. Effective May 1, 2002, the electricity market in Ontario opened and the Independent Market Operator (IMO) was authorized to administer the competitive market for sales and purchases of wholesale electricity and ancillary services in the Province. The IMO was established as a separate entity by the Energy Competition Act of 1998 to administer the market rules and perform market surveillance and dispute resolution. All market participants, including the IMO, must have a license from the Ontario Energy Board (OEB).

The IMO is not required to administer contracts for energy "wheeled" through Canada where the agreement stipulates that the energy purchased by a Canadian company from a non-resident company is for resale to another non-resident company (a "pass-through purchase"). The IMO must, however, be notified of any pass-through purchases where energy is "wheeled" through Canada.

Consider the following example:

Can Co. purchases energy from New York Co. for resale to Michigan Co. as a pass-through purchase. The energy purchased by Can Co. is physically "wheeled" through Canada before it can be "wheeled" to its American destination, Michigan Co. (Flow A).

[ILLUSTRATION OMITTED]

Must Can Co. prepare the B3 import document for the purchase of energy from New York Co. that is "wheeled" through Canada (see subsection 144.01 of the Excise Tax Act) and the export documentation relating to the sale to Michigan Co. for the energy "wheeled" from Canada to the United States?

3. During TEI's December 6, 2000, meeting with CCRA, an issue arose concerning the imposition of interest on the Goods and Services Tax (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 in a February 14, 2001 letter]. The issue was also discussed at last year's liaison meeting with CCRA. During this year's meeting, TEI requests a status report on this issue.

4. At a recent meeting of the Canadian Society of Customs Brokers in Toronto, John Gillan, Regional Director, Customs, Verification and Services, noted that CCRA is contemplating moving its Customs Appeals offices (currently located in Toronto and Hamilton) to London. Please confirm whether this is correct. If so, must taxpayers who want to meet with CCRA Appeals personnel travel to London?

Goods and Services Taxes (GST)

5. If a financial institution that does not carry on exclusively commercial activities makes a voluntary disclosure with respect to Division IV tax (i.e., for imported taxable supplies) and the disclosure goes beyond the two-year period in which input tax credits (ITCs) are permitted, there is apparently no mechanism to enable the financial institution to claim the ITCs. That is, the claim for ITCs is provided in Net Taxes (i.e., in Division II tax) and there is a rule restricting the period in which ITCs are claimed. Such a process seems unfair. During the meeting, we invite CCRA's comments on this issue.

6. In GST/HST Technical Information Bulletin B090, under the section "Place of Supply," a statement is made that services will be considered to be performed--and therefore a supply made in Canada--if "the supply involves doing something to or with a recipient's equipment by accessing it from a remote location, and the recipient's equipment is located in Canada." Although the type of service described in the Bulletin is very narrow, this interpretation seems to be a clear move away from the historical view of looking at where the service provider was physically located when the service was performed. TEI is concerned that this interpretation will be applied to other types of services performed outside Canada in respect of customers located in the country.

Please explain why CCRA has moved away from the use of physical performance in determining where services are performed. Also, given the common meaning of the word "perform," TEI suggests that CCRA issue supplemental guidance on what constitutes performance within the borders of Canada.

7. Policy paper P-193R provides four sample rulings. In sample ruling #3, a logging firm is leasing equipment from a GST/HST registered, non-resident person located in Maine. Based on the four statements of fact in this sample ruling, the supply of the equipment is deemed to be made available outside Canada. Thus, Division II tax does not apply on the leasing invoices from the lessor to the logging firm, even though the non-resident is registered for the GST.

(i) Please confirm that the above answer has not changed, i.e., the supply is made outside Canada.

Statement of fact #3 states that the logging firm makes monthly payments to the GST-registered non-resident "in Maine."

(ii) Does the wording "in Maine" mean the payment to the logging firm must be made and paid geographically "in Maine"? For example, if the logging firm makes monthly payments to the registered non-resident and the addressee of that payment is the lessor and the address is geographically "in Maine," it appears that the requirement in statement of fact #3 is clearly met. If, however, the logging firm makes monthly payments to the registered non-resident and the addressee of that payment is the non-resident but the payment is (a) mailed to a post office box geographically located in Canada, or (b) mailed, couriered, or delivered to a company that collects the non-resident's Canadian and foreign accounts receivable in Canada, does this change the place of supply? In other words, given these two possible changes in the original mailing address, is the supply still considered to be made available outside Canada?

Statement of fact #1 provides that the logging firm leases equipment from a registered non-resident in Maine.

(iii) If the lessor is a registered resident in Canada (and the other statements of facts have not changed), please confirm that the supply is made available outside Canada.

8. A firm in Alberta that repairs production equipment sends its employees to remote customer sites in the Province where hands-on repairs are made to the equipment. The cost of these repairs is based on a flat hourly rate plus expenses. Expenses are segregated into two categories. Category one (C1) expenses are for items of a non-meals and entertainment variety (such as car rental, gasoline, hotel accommodation, etc.). The second category (C2) is for meals and entertainment while the employee is at the customer's site location. Assume no mark up is made on the C1 and C2 expenses.

The firm's invoice to its customer has three separate line items:

* One for the base rate (e.g., 10 hours at $100 per hour or $1,000);

* One for C1 expenses net of GST recovery (i.e., GST is recovered initially using actuals or the 6/106th factor). Assume net expenses of $500; and

* One for C2 expenses. Assume that the meals and entertainment cost is $107 ($100 plus $7 in GST) and the customer uses actuals in its GST-recovery calculation. Also assume that the "actual net" cost will be invoiced to the customer.

Subsection 236.(1)(b) of the Excise Tax Act (ETA) refers to subsection 67.1(1) of the Income Tax Act (ITA). The 50-percent reduction in the allowed ITC for food, beverage, and entertainment expenses is met only if subsection 67.1(1) of the ITA applies. Subsection 67.1(2)(c) of the ITA excludes "an amount for which the person is compensated and the amount of compensation is reasonable and specifically identified in writing to the person paying the compensation."

(i) In the above example, what is the appropriate GST ITC amount for the firm and the customer?

(ii) Can the firm claim the full ITC (i.e., $7) on the meals and entertainment cost, assuming the firm qualifies under subsection 67.1(2)(c) of the ITA, or only 50 percent of the ITC ($3.50) on the meals and entertainment cost, assuming the firm does not qualify under subsection 67.1(2)(c) of the ITA?

(iii) If the firm is eligible to claim the full ITC of $7 (making the firm's net cost $100) on the invoice from the firm to the customer for C2 expenses (i.e., $100 plus $7 worth of Division II tax payable by the firm), is the customer able to claim only 50 percent of the Division II GST applicable to the meals and entertainment line item (i.e., $3.50)?

(iv) If the industry practice is to invoice meals and entertainment expense at net cost plus 10 percent, would that have any bearing on the above answers (other than mathematical calculations)? For example, assume the firm could claim the full $7 as an ITC, and it re-invoiced the customer for $110 plus $7.70 in GST. May the customer recover $3.85 (50 percent of $7.70)?

9. A GST-registered, resident firm is planning to locate a manufacturing operation in a jurisdiction in Ontario. Several levels of government (i.e., federal, provincial, and municipal) will provide certain benefits for locating in this jurisdiction. Assume that all three levels of government are registered for GST purposes. The governments will extend a "tax-free" holiday to the firm (i.e., the firm is not required to pay corporate federal and provincial income tax, Provincial Sales Tax (PST), and municipal property taxes) for a number of years, provided a certain number of jobs are created and the plant is operational for a certain number of years. There is no physical invoicing for these "tax-free" holidays.

Please confirm that no supply is made and thus there is no requirement for the firm to remit any GST in relation to any corporate federal and provincial tax, and any PST and municipal property tax that otherwise would have been payable.

In addition, assume these three levels of government provide cash incentives to the firm (e.g., federal--$100,000; provincial--$50,000; and municipal--$10,000). Are these payments considered supplies for purposes of the ETA? If so, are they considered taxable supplies at 7 percent or 0 percent? What are the GST consequences of such taxable supplies to the firm and the three levels of government? Would the answer change if the firm chose to locate in Newfoundland, rather than Ontario?

10. (a) A Canadian GST-registered leasing company ("Lessor") enters into a lease with another Canadian GST-registered company ("Lessee"). The equipment is sourced from a non-resident by the Lessee and the non-resident, non-GST registered supplier sells the goods to the Lessor. The Lessee imports the goods into Canada and pays Division III tax as the importer of record. The lease begins once the equipment is physically in Canada after it clears Customs; thus, the Lessor charges the Lessee Division II tax on the lease payments. Please confirm that the Lessee is entitled to a full ITC for both the Division II and Division III GST paid, assuming the requirements of section 169 of the ETA are met.

(b) A non-resident, GST-registered supplier sells goods to its Canadian GST-registered customer. The goods are sold FOB Toronto and the Canadian customer is listed as the importer of record. Since the goods were sold FOB Toronto, TEI believes that the supply is deemed to be made in Canada and, accordingly, Division II tax is required to be charged by the supplier to the customer. In addition, since the customer is listed as the importer of record, Division III tax is paid by the Canadian customer.

Please confirm that (i) Division II tax applies on the supply, and (ii) if so, the Canadian customer may claim a full ITC for both Division II and Division III tax, assuming that all the requirements of section 169 of the ETA have been met.

11. A non-resident software vendor who is not registered for GST purposes sells a license to use its software to a GST-registered entity (CANCO) (assume CANCO is 100 percent involved in commercial activity). The software vendor has no employees, no place of business, and no physical assets in Canada (except the software). The software can be physically sent by disc to the vendor's customer in Canada, but is normally sent electronically and physically located on the customer's computer in Canada. The vendor owns the software at all times but provides a license for its use.

The vendor may also provide the customer with an optional maintenance upgrade package that allows the customer to receive any software updates and the right to call the vendor with any user problems. The upgrades are sent electronically to the customer and overwrite the existing software to the upgraded version.

Please confirm whether the vendor is required to register for GST purposes, given that the software it owns is physically located on a computer in Canada. Would the answer change if, in addition to the supply of software, the vendor supplies the maintenance upgrade package?

12. TEI would like to follow up on concerns that have arisen over the last year regarding the "carrying on business concept" and certain interpretations that CCRA seems to be taking on the subject.

(a) Consider the following example:

   A non-resident corporation of Canada (Non-resident
   Co.) is incorporated outside of Canada and
   has not been continued in Canada. All of the
   officers and directors of Non-resident Co. are resident
   outside of Canada (i.e., the central management
   and control of Non-resident Co. is located
   outside of Canada).

   Non-resident Co. is engaged in the business of
   leasing tangible personal property. This business
   is carried on through offices located outside Canada.
   There are no employees or agents of Non-resident
   Co. who reside in Canada.

   Non-resident Co. has not in the past concluded
   any contracts, manufactured or produced property,
   delivered tangible personal property, or provided
   any services in Canada. Non-resident Co. does
   not have a branch, office, or permanent establishment
   in Canada. It does not operate a bank or
   similar account in Canada, is not listed in any
   directory or publication available in Canada (other
   than directories or publications available via
   the Internet), and does not maintain inventory in
   Canada.

   Non-resident Co. has not previously entered into
   any leases with a Canadian resident company or
   in respect of leased assets that are situated or
   used in Canada.

   Non-resident Co. is not currently registered for
   GST. It is assumed that immediately prior to entering
   into the transactions noted below, Non-resident
   Co. is not carrying on business in Canada.

   A Canadian corporation (Can Co.) is contemplating
   a sale-leaseback transaction with Non-resident
   Co. Can Co. is a corporation incorporated
   under Canadian law. It is a resident of Canada
   and a GST registrant.

   Can Co. and Non-resident Co. will enter into two
   sets of agreements relating to equipment, which
   is currently used by Can Co. in its business. Under
   the first set of agreements (the "Sale Agreement"),
   Can Co. will sell the equipment to Nonresident
   Co. The equipment will be physically situated
   in Canada at the time of sale (i.e., the equipment
   will be delivered in Canada). Can Co. will
   retain physical possession of the equipment following
   the sale to Non-resident Co.

   Immediately after entering into the Sale Agreement,
   Can Co. and Non-resident Co. will enter
   into a lease agreement (the "Lease Agreement"),
   pursuant to which Non-resident Co. will lease the
   equipment to Can Co. The equipment will be physically
   situated in Canada at the time the lease is
   entered into (i.e., the equipment will be made
   available in Canada). The Lease Agreement will
   be executed by Non-resident Co. outside of Canada.
   Under the Lease Agreement, the equipment
   will be leased on a triple net basis, such that Can
   Co. will be responsible for all service, maintenance,
   and insurance of the equipment. Can Co.
   will make all payments under the Lease Agreement
   to Non-resident Co. in U.S. dollars to a bank
   account located outside of Canada.

If it is assumed that Non-resident Co. is not carrying on business in Canada and is not registered, TEI suggests that the two transactions will be taxed, as follows:

* The sale of the equipment by Can Co. to Non-resident Co. will not be subject to GST as a result of the application of subsections 179(4) and 179(2) of the ETA. These sections apply because a registrant (Can Co.) will transfer ownership of the equipment to an unregistered non-resident (Non-resident Co.) and will retain physical possession of the equipment for its use under an agreement for a supply of the equipment by lease made by Non-resident Co. to Can Co.

* The lease of the equipment will not be subject to GST pursuant to subsection 143(1) because an unregistered non-resident (Non-resident Co.) who is not carrying on business in Canada will supply the equipment.

Please confirm that in the above example Non-resident Co. will not be carrying on business in Canada. In particular, please confirm that Non-resident Co. will not be carrying on business in Canada merely because it accepts delivery of the equipment in Canada under the Contract of Sale and makes the equipment available in Canada under the Lease Agreement.

CCRA seems to be taking the position that because the equipment is situated in Canada, the non-resident may be considered to be carrying on business in Canada. Presumably, this is based partly on the fact CCRA views the "profit generating apparatus" to be the operation of the equipment. Since the equipment is situated in Canada, CCRA would take the position that the "profit generating apparatus" is in Canada. If so, TEI suggests that the "profit generating apparatus" from the non-resident's perspective is the financing operation and the assets used by the non-resident in its financing business (as opposed to the piece of equipment leased in Canada). In addition, even if the "profit generating apparatus" were deemed to be in Canada, this is only one factor to be considered.

If it were CCRA's position that the non-resident is carrying on business in Canada, the Non-resident would be required to register and collect the GST. Such a position would basically render the drop shipment rules futile and inapplicable.

(b) Assume the piece of equipment in question is an aircraft and Non-resident Co. and Can Co. mutually agree to act conservatively. As a result, the aircraft is flown over international waters or the United States on a ferry flight to conclude the transaction. The transaction is concluded while the aircraft is in the air over the chosen location and the flight log clearly demonstrates this fact. From a legal and GST perspective, the transfer of ownership and possession is clearly made outside Canada. Can Co. now has to re-import the aircraft into Canada and pay the GST upon importation because the aircraft does not qualify as returned Canadian goods.

From a Customs perspective, Can Co. has engendered numerous problems. CCRA apparently believes that because the aircraft did not land in a foreign destination, there is no "foreign point" from which the aircraft can be imported into Canada. In other words, in order to reimport the aircraft, it must have landed in a foreign destination. Because this position does not reflect the commercial and legal reality, TEI invites a discussion of the issue.

13. A GST-registered, Canadian resident entity (CANCO), 100 percent engaged in a commercial activity, owns locomotives that periodically must be repaired. These locomotives travel across Canada and the United States and the repairs are usually done in the United States. Occasionally, however, these repairs are performed in Canada. Material and labor are expended to make the repairs.

CANCO has entered into a long-term maintenance contract for repair parts and repair labor with a nonresident, non GST-registered person (USACO). USACO has locomotive repair shops in the United States, but not in Canada. Prices for the repair parts and repair labor per hour are predetermined in the contract in Canadian dollars. There is a transfer of title of the repair parts from USACO to CANCO when USACO invoices CANCO for those parts. Parts and labor are invoiced separately.

The locomotives sometimes need repair while in Canada. Because USACO does not have repair facilities in the country, it subcontracts the work to Canadian shops, one of which is CANCO. If CANCO is requested to repair a locomotive that is in Canada and belongs to CANCO, the agreement calls for CANCO to invoice the parts to USACO but not the labor. There is a transfer of title of parts from CANCO to USACO--the first title transfer. These repaired locomotives are not necessarily exported. When USACO invoices CANCO for the repair parts (which CANCO provided to USACO initially), however, there is another transfer of title-the second title transfer. In other words, when CANCO repairs its own locomotives, title to the repair parts initially belongs to CANCO, then to USACO, and then back to CANCO again. (1)

Must CANCO invoice the GST to USACO when it sells the repair parts to USACO? TEI suggests that section 179(4)--specifically, note (b)(iii) of the ETA--applies. Please confirm. If CANCO were required to invoice USACO for the labor to remove the old parts and insert the new parts, would such a supply fall under section 179(2) or 179(4), or neither?

14. Company S is a Canadian resident and is registered for GST purposes. It employs a GST specialist, who is provided with a T4 for Canadian income tax purposes. Company S has a related party (Company T), but this company is not considered related for ETA purposes (so neither section 150 nor 156 apply). Company S and Company T are separate legal entities.

The controllers at both companies have arranged for the individual to be "seconded" to Company T for one year. Although the individual will remain Company S's employee, in all other respects the individual will be treated as a full-time employee of Company T. The individual will be subject to the day-to-day direction of an employee of Company T.

Company T will reimburse Company S the individual's compensation, including base salary, bonus, employee benefits, statutory remittances, as well as out-of-pocket expenses incurred by the individual in support of Company T's business. The reimbursement of the individual's out-of-pocket expenses is subject to approval by Company T. Company S will invoice Company T quarterly. Each invoice will show in detail the amount spent on compensation (including a breakdown of base salary, bonus, employee benefit contributions and statutory remittances associated therewith), as well as the itemized, out-of-pocket expenses reimbursed.

Is the reimbursement invoice from Company S to Company T for the employee's time and expenses subject to GST? In other words, is the secondment arrangement considered a supply between Company S and Company T? What documentary evidence would be required to support the conclusion? See R-11848-7, GST/HST Application Ruling (December 22, 1998), HQR # 0001141.

15. A GST-registered party (Company C) has a rented facility situated in Ottawa, Ontario. Company C has received several orders from a non-resident, non GST-registered person (Company R) to test goods that belong to Company R and were purchased in Canada from an unrelated supplier. Company R asks the unrelated supplier to deliver the goods to Ottawa to Company C's testing facility before the goods are shipped outside Canada.

Company C does not have any employees in Canada; all labor work is contracted to local suppliers. Company C incurs the usual expenses of rent, heat, hydro, phones, etc., on which it pays GST and claims an ITC. Company C tests the goods and produces reports for Company R on each good. Once passed, Company C hires a transportation company to export the goods to Company R.

On Company C's invoice to Company R, can the invoice be issued without GST because this transaction falls under subsection 179(3)(a)(iii) of the ETA?

16. For several years, TEI has raised concerns about documentation issues and claims for ITCs in respect of procurement card purchases. In last year's response to this question, CCRA noted that the policy would be submitted for final approval in the near future. TEI now understands that a new policy relating to procurement cards will most likely be released before the end of the year. The latest release will apparently be substantially unchanged from the prior draft. During the liaison meeting, we request a status report on this project.

CCRA has specialists who interface between that agency and industry on issues that affect compliance with legislation or policy. Given that the new policy may not be easy, economical, or readily implemented, would CCRA consider appointing a specialist to help develop a workable policy?

17. Question No. 16 in last year's liaison agenda discussed the voluntary disclosure program set forth in Information Circular 00-1 (June 12, 2000) and its requirement that information being disclosed must include information that is at least one year past due. In its response to that question, CCRA was aware that those reporting GST/HST on a monthly basis considered this requirement unfair. CCRA also stated it was "reviewing recommendations and considering amendments to this voluntary disclosure condition." Please provide an update of this review and what, if any, amendments are under consideration.

18. A GST-registered, Canadian resident corporation (Corp 1) and a related GST-registered, Canadian resident corporation (Corp 2), both of which are involved 100 percent in a commercial activity, are planning to restructure their affairs on December 31, 2002. Corp 1 and Corp 2 will enter into a partnership agreement whereby Corp 1 will receive a 99.9-percent ownership interest and Corp 2 will receive a .1-percent interest. Assume a legal partnership will be formed, not a joint venture. Corp 1 will contribute all of its (100-percent commercial) businesses to the new partnership (NEWPA). Corp 2 will contribute cash.

Corp 1's legal department drafts the required documents for NEWPA and files the appropriate documents for establishing the partnership legally in a Canadian province. NEWPA applies for and receives confirmation that it is legally registered as a partnership on November 15, 2002. NEWPA will not make any taxable supplies until 2003.

Please confirm that:

(i) The partnership is considered a "person" for purposes of the ETA and thus must separately register for GST purposes if the partnership has commercial activity (over the small supplier threshold).

(ii) Although NEWPA will not make any taxable supplies until 2003, NEWPA can apply for GST registration after November 15, 2002, under subsection 141.1(3) of the ETA. (This section provides that to the extent a person does anything (other than make a supply), "in connection with the acquisition, establishment, disposition, or termination of a commercial activity of the person, the person shall be deemed to have done that thing in the course of commercial activities of the person." Such a person may register for GST purposes.) Since NEWPA is being established to acquire the business assets of Corp 1, NEWPA can register for GST purposes.

(iii) Assuming NEWPA registers for GST, Corp i and NEWPA may file a section 167 election for the businesses that are being contributed to NEWPA in return for the partnership interest. Section 167 requires only that the supplier and the recipient be registered for GST purposes and has no stipulations of the legal status of the participants.

(iv) If the partnership is dissolved in the future and the same businesses are transferred back to Corp 1 in the same fashion, another section 167 election may be filed to permit the transfer to take place without paying any GST.

19. An election under subsection 156(2) of the ETA (which deems a taxable supply to be made for no consideration) generally requires that an electing party be a "specified member" of a qualifying group. The term "specified member" is defined under subsection 156(1) as a corporation or a partnership (a) that is a member of the group; (b) that is not a party to an election under subsection 150(1); and (c) "all or substantially all of the property of which (other than financial instruments) was last manufactured, produced, acquired or imported by the person for consumption, use or supply exclusively in the course of commercial activities of the person or, if the person has no property (other than financial instruments), all or substantially all of the supplies made by which are taxable supplies." Under this definition, a new corporation with no assets and not yet commencing operations would be ineligible to make the election.

In a reorganization, a new subsidiary will often receive assets from its parent or other members of the related group to be used exclusively in taxable activities that commence immediately after the transfer. If the election were not available, the subsidiary would be required to collect GST. Although the tax would be recoverable by the subsidiary, it results in a negative cash flow to the corporate group.

This result defeats the purpose of the election to provide GST/HST relief within the qualifying group. Will CCRA accept the election for the transfer of assets where the subsidiary immediately uses those assets exclusively in commercial activity following the transfer?

To satisfy the requirement, a nominally valued asset could be transferred to the new subsidiary immediately prior to the "main" transfer of assets from members of a qualifying group. There is no apparent time-line in the definition of "specified member" in respect of how long the assets must be used exclusively in commercial activity. Would CCRA characterize this scenario as an avoidance transaction?

Finally, the subsection 156(2) election requires that a closely related group must be comprised of GST-registered residents. Why is the election restricted to Canadian residents and not available to all closely related groups whose members are registered corporations? Further, if a nonresident, GST-registered parent corporation maintains inventory in Canada, would the parent be deemed a resident and therefore qualify for the election?

20. The Canadian Payments Association Board has approved a plan to implement a $25-million ceiling for all paper-based payments to be cleared and settled via the Automated Clearing Settlement System (ACSS). The implementation date for the $25-million threshold is February 3, 2003.

CCRA has advised that it will not accept wire payments and has no plans to amend that policy by February. In addition, CCRA apparently is not prepared to accept two cheques totalling the final payment amount, citing reconciliation problems.

Is CCRA considering alternatives for payments greater than $25 million? How will CCRA resolve this issue?

21. Consider the following example:

Tax Manager is employed by Canada Bigco Inc., a wholly owned subsidiary of US Bigco Corp., a U.S. resident company. Canada Bigco Inc. is a Canadian resident company with sales in excess of $1 billion annually. Canada Bigco Inc. owns 100 percent of Canada Subco Inc., another Canadian resident company. Tax Manager is responsible for all Canadian tax matters for Canada Bigco Inc. and its subsidiaries. After completion of an audit of Canada Subco Inc. that results in a substantial reassessment of GST, CCRA has decided to assess a penalty against Tax Manager under section 285.1 of the ETA (imposing a penalty for "culpable conduct").

Would the provisions of subsection 285.1(15) apply to assess the penalty against Canada Subco Inc., rather than Tax Manager, although Tax Manager is not employed by Canada Subco Inc.? Would the answer change if the penalty resulted from a transaction involving US Bigco Corp.?

22. Other than assessments resulting from clerical errors or lack of documentation to support ITC claims, what are the most common assessment issues?

23. A company pays a combined out-of-town room/ board allowance to its employees for travel in the execution of their duties. Are there any published prescribed limits for determining the application of subsection 236(1) of the ETA to the employer's claim for ITCs for the amounts attributed to the meals portion of the allowance?

24. A Canadian supplier (CoA) sells widgets to a nonresident, GST-registered customer (COB) and ships the goods to the plant of a Canadian registrant (CoC). GST is properly charged on the selling price. The widgets are marked up and resold by CoB to CoC and GST is charged. During processing at CoC, the product fails and CoC expects compensation for returning the goods. The companies decide to bypass the normal credit routine, and CoA (by virtue of implied warranty) issues a cheque/credit note directly to CoC.

Is there any GST implication for not crediting back GST to CoC? Does CCRA require CoA to show proof that CoC paid GST in its purchase from CoB? If so, in what form?

Is there any GST implication if CoA simply exchanges the defective goods for new products directly with CoC?

25. GST is charged on a taxable supply to a nonresident registrant. The customer underpays the invoice by 7 percent, presumably the amount of the GST due on the sale, but no documentation is provided by the purchaser. The seller is obliged under the ETA to remit the tax charged; crediting back the GST is apparently not an option because the sale is a taxable supply to a registrant. If the tax is ultimately not paid, is the seller entitled to recovery of the 7 percent as a bad debt? Are any other options available to the seller?

From the recipient's perspective, if 7/107 is taken as an ITC, the recipient will presumably be assessed at the time of audit. This would appear to result in a windfall for CCRA. Please comment on whether any relief would be provided to the seller.

26. Company A (a Canadian registrant) and Company B (a non-resident non-registrant) each own 50 percent of a bridge that lies on the Canadian/U.S. border. Both companies maintain their share of the bridge and share equally in the maintenance and repair costs.

At the end of every month, the company incurring the higher maintenance and repair costs invoices the other company for 50 percent of the excess cost. For example, at the end of November, Company A paid $100,000 plus GST for repair and maintenance of the bridge and Company B paid $50,000, but no GST. Company A will invoice Company B for $25,000, which is 50 percent of the excess over Company B's costs for November.

Must Company A invoice Company B for the GST applicable on the $25,000 pass-through expense for repairs and maintenance costs performed on the Canadian portion of the bridge?

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 3, 2002, liaison meeting.

Important CPE/CLE Information

Boards of Accountancy. Tax Executives Institute is registered with the National Association of State Boards of Accountancy (NASBA) (Sponsor No. 103086, Exp. 1/01/03). TEI is also registered with the following boards of accountancy:

Illinois (#158-000651, Exp. 12/31/2002); New Jersey (#160, Exp. 12/31/2002); New York (000265, 9/1/99-8/31/02); Ohio (P0087); Pennsylvania (PX613L); Texas (#3512).

Continuing Legal Education. The Institute is registered in the following states as a sponsor of continuing legal education programs:

California--Approved provider status from September 1, 1999 to August 31, 2002. New York--Approved provider status from September 1, 1999 to August 31, 2002. Kentucky--2002 52nd Midyear Conference--11.5 credit hours; 2001 56th Annual Conference--15.5 credit hours; 2001 51st Midyear Conference--19.25 credit hours. Minnesota--2002 52nd Midyear Conference--11.5 credit hours; 2001 56th Annual Conference--12.25 credit hours; 2001 51st Midyear Conference --11.5 credit hours. Ohio--2002 52nd Midyear Conference--14.5 credit hours; 2002 Audits & Appeals Seminar 11.75 credit hours; 2001 56th Annual Conference--15.5 credit hours; 2001 51st Midyear Conference--14.75 credit hours; 2001 Audits & Appeals Seminar--13 credit hours. Oklahoma--2001 56th Annual Conference--18.5 credit hours; 2001 51st Midyear Conference--23 credit hours. Pennsylvania--2002 52nd Midyear Conference--11.5 credit hours; 2001 56th Annual Conference--15.5 credit hours; 2001 51st Midyear Conference--17.5 credit hours. Wisconsin--2001 56th Annual Conference--18.5 credit hours; 2001 Advanced International Tax Course--35 hours. Alabama--2002 52nd Midyear Conference--28.8 credit hours; 2001 56th Annual Conference--15.5 credit hours; 2001 51st Midyear Conference--19.2 credit hours.

Note: TEI provides a continuing professional education form for each registrant at its conferences, courses, and seminars, which should be completed at the conclusion of the program and returned to the TEI Registration Desk for verification and signature. A copy of the form is retained and filed at TEI headquarters.

Tax Executives Institute and TEI Education Fund accord to participants of any race, color, creed, sex, or national ethnic origin all the rights, privileges, programs, and activities generally accorded or made available to participants at their programs, courses, and other activities.

Please note: TEI and TEI Education Fund programs are presented for the benefit of TEI members and others who work in corporate tax departments; private practitioners may not register for the programs.

(1) The delivery of the repair parts is at the physical location of CANCO in Canada. In other words, CANCO retains physical possession of the repair parts it sells to USACO, and CANCO installs these repair parts on the locomotives being repaired.