Pending excise tax issues: December 6, 2005.

On December 6, 2005, Tax Executives Institute held its annual liaison meeting with officials of the Canada Revenue Agency on pending excise tax issues. Reprinted below is the agenda for the meeting, which was prepared under the aegis of TEFs Canadian Commodity Tax Committee, whose chair is Natalie St-Pierre of BCE Inc.

Tax Executives Institute welcomes the opportunity to present the following comments and questions on income tax issues, which will be discussed with representatives of the Canada Revenue Agency (hereinafter "CRA" or "the Agency") during TEI's December 6, 2005, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call 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.

A. CRA Presentation

B. Administrative Issues

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

C. Questions for Discussion & Written Responses

1. New importer rules & brokerage fees

Question 13 from the December 2003's liaison meeting agenda presented the following scenario in respect of section 178.8 of the Excise Tax Act (ETA):

   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.

Company A's name appears as the importer of record, and is not a licensed broker. Assume the transaction occurred after October 3, 2003, and there is no written agreement as described in subsection 178.8(3). *

CRA's answer to question 13 from the December 2003's liaison meeting agenda was that Customer B would be considered the "constructive importer" of the goods. Additionally, Customer B would be able to claim an ITC for the Division III tax paid by Company A on importation ($700.00) as long as Company A's reimbursement invoice to Customer B had the associated import documentation, whether or not Company A appeared as the importer of record.

Part I

Now assume that Company A pays its broker a brokerage fee (e.g., $100 plus $7 GST), any applicable duty (e.g., $150), and the Division III GST (e.g., $700), for a total of $957. As in the 2003 question, Company A would then seek reimbursement of the Division III tax ($700) it paid by invoicing Customer B and attaching the import documentation.

(a) Has CRA's answer to original question changed?

(b) Can Company A claim an input tax credit (ITC) for the $7.00 brokerage charge? If not, please explain why not.

(c) If Company A cannot claim an ITC for the $7.00 brokerage charge, can Customer B claim the $7.00 GST recovery if Company A invoices Customer B the $107.00 (GST included) and attaches the broker's documentation?

Part II

Now assume that Company A invoices Customer B for the cost of the brokerage fee (GST excluded) and duty, and does so using the same invoice seeking reimbursement of the Division III tax. Customer B agrees to pay for the brokerage and duty charge at cost:

Division III tax paid
in respect of import documentation   $700.00
Brokerage fee                        $100.00
Duty                                 $150.00
Subtotal                             $950.00

(d) Is the request for reimbursement of the brokerage fee and the duty considered a supply? If considered a supply, is it part of the consideration of the original supply of the goods (and thus considered to be made outside Canada)?

(e) Will Company A have to invoice Customer B the Division II tax on the brokerage or the duty or both?

(f) Does Division II tax apply on the amount of Division III tax invoiced for reimbursement regardless if the brokerage fee or the duty (or both) are considered a supply?

(g) Has a prescribed form for written agreements been issued in regard to section 178.8(3) of the ETA?

2. Multi-employer plans--GST rebate under section 261.01 of the ETA

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 of Finance issued a notice of proposed amendments indicating that these changes would not be pursued. The notice also indicated that a revision to revision to CRA's technical information bulletin B-032R, Registered Pension Plans (TIB-032R), would be sufficient to address this issue. Please provide an update on the status of refund claims and this issue in general.

Additionally, we believe that multi-employer plans with related employers may be significantly penalized compared with 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). Would CRA allow employers who are members of a multi-employer plan to claim their share of ITC based on TIB-032R?

3. Electronic records

Section 2 of the Input Tax Credit Information (GST/ HST) Regulations defines supporting documentation as "any record contained in a computerized or electronic retrieval or data storage system," and GST/HST Memorandum 15.2, Computerized Records (June 2005), contains the requirements under the ETA for computerized business records. Please confirm that paper invoices are not required for inter-company transactions where electronic records are maintained and contain sufficient information to allow determination of the amount of tax to be paid or collected, or the amount to be refunded, rebated or deducted from net tax.

4. Supply of goods by way of sale

Example No. 10 in GST/HST Policy Statement P-051R2, Carrying on Business in Canada, describes a supply of goods by way of sale scenario and concludes that the non-resident supplier is not carrying on business in Canada. For purposes of this question, assume that there is a GST-registered service company (ServiceCo) between the registrant shipping the goods and the customer of the non-resident supplier (assume one customer). The non-resident supplier was not and is not currently registered for GST.

ServiceCo will provide a commercial service (such as electroplating) to the goods of the non-resident, non-GST registered supplier in Canada, and then ship those "serviced" goods to the customer of the non-resident supplier in Canada.

The registrant has legal title to the goods initially, but transfers legal title to the goods to the non-resident supplier when the goods are received at ServiceCo's plant in Canada.

After performing the commercial service on the non-resident's goods, ServiceCo will ship the goods to the customer of the non-resident supplier in Canada. ServiceCo will invoice the non-resident for the supply of service.

Legal title to the goods will pass from the non-resident supplier to the customer of the non-resident supplier when the goods are shipped from ServiceCo.

(a) Would Division II tax normally apply on the sale from the registrant to the non-resident supplier for the goods shipped to ServiceCo?

(b) Does subsection 179(2) of the ETA apply?

(c) If the registrant receives a certificate from the non-resident, non-GST-registered supplier reiterating these facts, and ServiceCo provides a properly completed consignee drop shipment certificate to the registrant, have the requirements of subsection 179(2) been met (so that the registrant does not need to invoice the non-resident, non-GST-registered supplier for the Division II tax for the supply of goods)?

(d) Would Division II tax apply to the supply of service from ServiceCo to the non-resident supplier for the service work since the service is performed in Canada?

(e) Could subsection 179(2) of ETA apply to the transaction in (d) as well?

(f) If ServiceCo receives a certificate from the non-resident, non-GST-registered supplier reiterating these facts, and the customer of the non-resident provides a properly completed, consignee drop shipment certificate to ServiceCo, have the requirements of subsection 179(2) been met (so that ServiceCo does not need to invoice the non-resident, non-GST-registered supplier for the Division II tax for the supply of goods)?

(g) Please confirm that the non-resident, non-GST-registered supplier is not considered to be carrying on business in Canada, although the non-resident supplier acquires and transfers legal title to the goods in Canada and also has a service performed on the goods in Canada during the time they hold title to the goods?

5. Lease of tangible personal property

Example No. 2 in GST/HST Policy Statement P-051R2, Carrying on Business in Canada, describes a lease of tangible personal property scenario and concludes that the non-resident lessor is not carrying on business in Canada. The non-resident lessor was not and is not currently registered for GST.

Part I

For purposes of this question, assume that for an additional fee, the non-resident lessor will also supply an optional, ongoing maintenance service (both parts and labor) in relation to the leased goods. The maintenance service will start and end on the same dates specified for the lease. The lease agreement identifies the rental amount and the maintenance fee separately.

The lessee opts for the additional maintenance service. The lessee will still be responsible for maintaining the leased goods, but is paying an additional fee to the lessor to supply this service.

The non-resident, non-GST-registered lessor subcontracts the maintenance service to a Canadian GST-registered supplier (MainCo) and the maintenance service will be performed in Canada as needed.

(a) Does supply of the maintenance service by the nonresident lessor change the conclusion of the original example that the non-resident lessor is not carrying on business in Canada (noting that the supply of maintenance service started the same day and at the same location--outside Canada--as the lease started)?

(b) Please confirm that the lessee who imported the lessor's equipment (and presumably would have paid Division III tax on importation of the lease goods) is eligible to recover the Division III tax as an ITC assuming standard documentation requirements are met and the lessee is using the imported goods in its wholly commercial activity.

(c) Please confirm that the supply of maintenance service is considered to be made outside Canada because the maintenance service began when the goods were geographically outside Canada (cf. GST/ HST Policy Statement P-219, Place of Supply (HST) for National Equipment Maintenance Contracts).

(d) If the supply of maintenance service is considered to be provided inside Canada, please confirm that the underlying lease supply of tangible personal property would still be considered as being made outside Canada.

(e) Please confirm that MainCo is required to invoice Division II tax on its supply of maintenance service (labor and parts) to the non-resident lessor because the services are performed and the repair parts used in leased tangible personal property located in Canada? Are repairs under an ongoing supply of maintenance service usually not considered to be emergency repairs?

(f) Can MainCo use the subsection 179(2) or subsection 179(4) of the Excise Tax Act (ETA) assuming standard documentation would be provided, so that it would not be required to invoice the Division II tax on the supply of maintenance service to the lessor? Even though a non-resident owns the leased goods, does CRA believe there is or is not any physical possession of the property to be delivered to the non-resident lessor?

Part II

GST/HST Policy Statement P-219 states, "Where the service contract is contingent upon the lease of equipment, the supply is usually considered to be a single supply of tangible personal property."

(g) Would the answers to (a) through (f) change if the lessee were required under the terms of the lease to acquire the supply of maintenance service from the lessor?

(h) Would the answers to (a) through (f) change if the lessor had one price for both the lease of equipment and maintenance of the equipment (i.e., a full service lease)?

Part III

Rather than using MainCo to do the work required for the maintenance service, assume that the non-resident lessor will send its own people into Canada to perform the maintenance service. Would this be similar to Example 10 in CRA's view--in that the supply of maintenance service would be considered ancillary to the leasing of goods--and hence the non-resident lessor would still be considered as not carrying on business in Canada?

6. Training provided to non-residents

Part I

In TEI December 1997's liaison meeting, question 29 of the agenda contained an example captioned "training provided to non-residents." The question is summarized as follows: A GST registered individual contracts with a non-GST-registered U.S. entity to provide "team building" courses. The individual invoices the U.S. entity. This individual trains employees of the Canadian subsidiary of the U.S. entity in Canada, as well as training employees of the U.S. entity in Canada.

CRA's answer to this question indicated that, with respect to both types of employees, the GST registered individual needs to invoice the GST to the U.S. entity because the training was done in Canada. Thus the supply was excluded in accordance with subsection 7(a. 1) of Part V of Schedule VI of the ETA. This conclusion was the same regardless of whose employees (U.S. entity or Canadian subsidiary) were being trained. CRA also commented that section 18 of Part V of Schedule VI of the ETA would not likely apply.

(a) Has CRA's answer to this question changed?

(b) If the entity providing the "team building" training was a GST-registered non-individual (i.e., the individual providing the training is an employee of the entity), would the above answers change?

(c) In the case where a GST registered individual or a GST registered entity invoices the U.S. entity, and the training services were provided in the United States (i.e., a GST registered individual or an employee of a GST registered entity travels to the United States and provides the training), would the supply be considered as made outside Canada whether or not the employees were employees of the Canadian subsidiary or the U.S. entity?

Part II

Assume a non-GST-registered non-resident sold some equipment to a customer in Canada for shipment to Canada. The international commerce term (Incoterm) was FOB New York, title passing from the non-resident to its customer in the U.S. The customer was the importer of record. The non-resident has no other activities in Canada. Pursuant to the terms of the sale of the equipment, the non-resident was required to provide one day of training to the Canadian customer's employees on the use of the purchased equipment. The cost of the training was included in the cost of the equipment (there was no separately stated charge).

The non-resident contracted with a GST-registered Canadian firm (TrainCo) to do the training. TrainCo provided the training to Canadian-resident employees of the nonresident's customer at the non-resident customer's facility in Canada. These employees received a certificate stating that they had completed the training.

(a) Can TrainCo's supply of training be zero-rated under section 18 of Part V of Schedule VI of the ETA, even though the supply is made to residents and not non-residents?

(b) Notwithstanding the answer to (a), would CRA view this training as related to administering examinations in respect of courses leading to certificates, diplomas, licenses, or similar documents, and thus not susceptible to being zero-rated under section 18 of Part V of Schedule VI of the ETA?

(c) Would CRA view the invoice from TrainCo to the non-resident for training provided in Canada to Canadian residents as not qualifying for zero rating under section 7 of Part V of Schedule VI of the ETA, and thus the supply subject to GST?

7. Branch registration

CanadianCo has a corporate head office in Quebec and operates a number of autonomous divisions with their own management and accounting systems across Canada. CanadianCo has just acquired a business in British Columbia, which it plans to operate as a division. All of the books and records of this business will be retained in British Columbia.

Can the British Columbia division apply directly to CRA for its separate GT branch registration rather than through Revenue Quebec (none of the division employees speak French)? Can the division file its GST returns directly with CRA?

D. Excise Tax Aci (Non-GST) Questions for Discussion & Responses in Writing

8. Claims for refund for diesel fuel used to generate electricity

At the most recent Canadian Institute of Chartered Accountants Tax Symposium in Ottawa, CRA indicated that Fuel Excise Tax (FET) applications for refund/deduction of excise taxes (N15 claims) on diesel fuel used for generation of electricity was currently under review. How will any changes affect diesel fuel used for purposes of crew comfort? Can CRA provide a timeline for the new policy, including a projected effective date? Is CRA planning to consult with industry regarding any proposed changes to the policy? Will CRA accept end user claims for these purposes? Under what conditions may an end user seek FET refunds for these purposes?

9. Documentation required for FET exemptions

What is CRA's policy with respect to Ships Stores Declaration and Clearance Certificates (Customs Form K36A)? An airline typically submits a Custom stamped copy to the manufacturer or directly to CRA in order to receive a refund of the FET on fuel that is used for international fights (aviation fuel used for international flights is exempt under subsection 68.17(1) of the ETA). Would K36A forms that are neither stamped nor signed by a Customs official be acceptable documentation to CRA for purpose of the exemption? Under what conditions may an airline or vessel seek FET refunds directly with CRA?

10. Fuel used for heating

The ETA exempts diesel fuel that is intended for, and is actually used as, heating oil. The vendor is typically unaware of whether it is actually used as heating oil by an end-user or diverted to taxable use. Please confirm that CRA would assess the diverter and not the vendor where it is discovered on audit that heating oil was not used for heating purposes, given that subsection 23(9.1) of the ETA states that the purchaser is liable for tax on tax exempt fuel diverted to a taxable use after purchase.

E. Canada Border Services Agency (CBSA) Question

11. Interest on GST

During TEI's 2000 liaison meeting with CRA, an issue arose concerning the imposition of interest on GST when goods are imported into Canada and the importer subsequently realizes that additional GST is payable. CRA suggested that TEI raise the issue with the Director of the Trade Incentives Program, which TEI did in a letter dated February 14, 2001. The issue was also discussed at the two subsequent liaison meetings with CRA. After the 2002 liaison meeting, a follow up letter was sent. At the 2004 meeting, the CBSA representative said that the issue was nearing resolution, and a decision would be made in the near future. Please provide an update on this issue.

Conclusion

Tax Executives Institute appreciates this opportunity to present its comments and questions for discussion. Additionally, we have attached an appendix containing several supplemental questions which we do not propose discussing during the meeting, but which we would appreciate being addressed by CRA at some point.

We look forward to discussing our views with you during our December 6, 2005, liaison meeting.

APPENDIX

Supplemental Questions

1. Zero-rated supplies and foreign carriers

What is sufficient documentation for purposes of sections 2 and 2.1 of Schedule VI of Part V (Exports) of Schedule VI (Zero-Rated Supplies)? There is guidance on the general zero-rating provisions for exports under section 1, but no memorandum or written advice specifically addresses unregistered foreign carriers. Furthermore, what is CRA's definition of "to or from Canada" in the context of transporting passengers or property? Would it encompass a passenger bus tour or cruise vessel that begins a tour outside Canada, enters Canada, refuels, stops multiple times, then departs and ends its tour outside Canada? Additionally, if a non-registrant were to refuel its corporate jet in Canada, would the zero-rating provision apply, and if not, would the non-resident be eligible to file for a rebate?

2. ITC for GST paid in error

A blanket purchase order is created by a Canadian recipient, and issued to a GST registrant (SupplyCo). All transactions take place without using invoices and payments are generated based on the receipt of goods. The GST registration number of SupplyCo is retained on file by the recipient. Terms of delivery are primarily at a destination in Canada, but delivery can also occur outside Canada. Based on the predominant delivery situation being in Canada, the account is set up to electronically pay GST upon receipt of the goods. The recipient is the importer of record and pays Division III tax in both delivery scenarios, and is otherwise entitled to a full GST ITC. According to section 225(1) of the ETA, the seller would have to remit the amount collected on account of tax. To the extent that the recipient claims an ITC for all transactions, including GST paid in error for deliveries outside Canada, is the recipient entitled to an ITC, or any other adjustment to its net tax, with respect to the Division II tax?

3. Erroneously paid or claimed amounts

A fully commercial recipient (eligible for 100 percent-ITCs) receives the following two invoices from two different suppliers. Assume all standard documentation requirements (including the respective GST numbers) are contained on the supplier's invoices.

Supplier A
Base amount     $100.00
GST             $  6.00
Total Invoice   $106.00

Supplier B
Base amount     $100.00
GST             $  8.00
Total Invoice   $108.00

Both suppliers have used the incorrect percentage for the calculation of the GST. Even though an incorrect rate was used, can the recipient claim an ITC, or a rebate for tax paid in error, for the $6.00 and $8.00 respectively?

A third supplier invoiced properly for a supply made available in Quebec and had included all the standard documentation invoice requirements.

Base amount     $100.00
GST             $  7.00
QST             $  8.03
Total Invoice   $115.03

The accounts payable department processed the accounting incorrectly and recovered $7.00 in QST and $8.03 in GST (reversing the amounts). How will CRA assess the recipient for the amount of ITC claimed in error? Will CRA disallow the amount erroneously claimed ($1.03) or the full amount claimed ($8.03)?

4. Carrying on business

Example No. 10 in GST/HST Policy Statement P-051R2, Carrying on Business in Canada, describes a supply of goods by way of sale scenario and concluded that the non-resident supplier was not carrying on business in Canada (this example was referred to in question 4, above). Assuming that the non-resident supplier was not and is not currently GST registered, this example appears to be a typical drop shipment example to which subsection 179(2) of the ETA could apply. Legal title to the goods passes in Canada from the registrant to the non-resident and then to the non-resident's customers.

(a) Would the Division II tax normally apply on the sale from the registrant to the non-resident supplier for the goods since the delivery was made in Canada?

(b) Please confirm that subsection 179(2) of the ETA could apply.

(c) Will the requirements of subsection 179(2) be met if the registrant receives a certificate from the non-resident, non-GST-registered supplier reiterating the facts, and the supplier's customers provide properly completed consignee drop shipment certificates to the registrant, so that the registrant does not need to invoice the supplier the Division II tax?

(d) Even though the supplier acquires legal title to the goods in Canada and passes legal title to its customers in Canada, will the original conclusion to this example--that the non-resident, non-GST registered supplier is not carrying on business in Canada--remain the same?

5. Non-resident and carrying on business

A non-resident supplies goods by way of sale on a worldwide basis, including into Canada. The non-resident solicits orders for the supply of goods in Canada through its sales representatives, who are not resident in Canada, but who make regular trips to Canada to solicit sales for the non-resident. The contract for the supply of goods is concluded outside of Canada, and payment for the goods is made outside of Canada. The non-resident has no bank accounts in Canada. The goods are manufactured outside of Canada. The non-resident contracts the services of a Canadian resident to provide Canada customs clearance of goods and arrange delivery to Canadian customers. Delivery of the goods to the Canadian customers occurs in Canada. Under these circumstances, is the non-resident carrying on business in Canada?

6. Non-resident and carrying on business

A non-resident supplies services to a Canadian registrant on a regular basis, and charges the Canadian registrant monthly for these services. The non-resident provides its sales representatives to solicit Canadian sales in Canada for the Canadian registrant. The non-resident provides customer service staff outside of Canada to take orders both verbally and through written purchase orders, as well as handle customer complaints from Canadian customers on behalf of the Canadian registrant.

The non-resident also processes the bills of lading that are electronically sent to the Canadian registrant's warehouse in Canada, where the Canadian registrant then arranges delivery of the goods to the Canadian customers. The non-resident processes invoices to the Canadian customers on behalf of the Canadian registrant and makes all corrections to billings as required. Invoices have all the appropriate Canadian taxes on them as specified in Canadian regulations. The non-resident mails the invoices to the Canadian registrant's Canadian customers.

The goods being sold are manufactured in Canada by the Canadian registrant and the inventory of goods is in Canada at the Canadian registrants premises. The non-resident does not have employees residing in Canada, nor does the nonresident have a bank account in Canada. The non-resident does not have a location in Canada. The non-resident has no ownership interest in the goods being sold; they are only providing the services as outlined above.

(a) Is the non-resident carrying in business in Canada?

(b) Would the answer differ if the non-resident and the Canadian registrant were related parties?

(c) Does the number of trips or the amount of time spent in Canada by the non-resident's representatives affect whether or not it is carrying on business in Canada?

7. Zero-rated legal services

A non-GST-registered, non-resident U.S. entity (USA Co.) has a Canadian GST-registered subsidiary. The Canadian subsidiary is a wholly commercial activity but is generally not in the business of providing legal services. The subsidiary does have employees who are licensed attorneys.

A former employee of the subsidiary brings a lawsuit against the subsidiary claiming wrongful termination. USA Co. asks the subsidiary to obtain a legal opinion from a Canadian law firm regarding the lawsuit; USA Co. will pay for the opinion and the subsidiary contracts with a Canadian law firm to provide it.

The law firm invoices the subsidiary for the cost of the legal services plus GST, because the work is provided in Canada to a Canadian resident. The subsidiary pays the invoice (e.g., $1000 plus GST of $70). The subsidiary then charges USA Co. for the cost (net of GST $1000, no mark up).

In regards to the GST application to the above transaction, please confirm that:

(a) The law firm is required to invoice the Canadian subsidiary the GST for the legal opinion.

(b) The Canadian subsidiary is eligible to recover the GST assuming standard documentation because it is the recipient of the supply and will be using that supply in the course of its commercial activity when it charges USA Co. for the cost.

(c) The GST is not required to be invoiced to USA Co. (assume no mark up) given that the supply is within the zero-rated provision of section 23 of Schedule VI, Part V.

(d) If an administrative fee for processing and payment for the legal opinion was added as a separate charge on the subsidiary's invoice to USA Co., the GST does not apply to this administrative fee, given that the supply is within the zero-rated provision of section 7 of Schedule VI, Part V and does not affect the application of GST to the legal supply itself.

(e) The fact that the subsidiary is not a law firm and does not normally provide legal services does not negate the subsidiary's ability to acquire legal services (i.e., pay the law firm's invoice and recover the GST) and then invoice for the same legal services to USA CO (i.e. invoice without GST).

(f) If USA Co., rather than the subsidiary, contracted directly with the Canadian law firm, the law firm would not invoice the GST under the zero-rating provision of section 23 of Schedule VI, Part V.

8. Supply of manufactured goods

A GST-registered Canadian subsidiary manufactures tangible personal property (goods). All of the manufactured goods are sold to its non-GST-registered, non-resident U.S. parent (the first recipient). The terms of delivery for all sales between the subsidiary and the parent are "ex works, seller's premises." Legal title to the goods passes to the U.S. parent at the subsidiary's plant in Canada.

The U.S. parent then sells the same goods immediately to its customers (who are all non-GST-registered, non-resident parties) with the terms of delivery "FOB shipping point." Legal title passes from the parent to the parent's customers in Canada.

At the request of the parent, the subsidiary arranges for a freight transportation carrier to ship the goods directly to the parent's customers in the United States. The carrier invoices the subsidiary. The subsidiary maintains documentary proof of the direct export of the goods. The subsidiary invoices the parent for the value of the goods and, separately, the cost of the transportation service.

Other than the delivery point being in Canada and passage of legal title to the goods in Canada, there will be no other consumption or use of the property before export. There is no further processing, transformation, or alteration of the property before export.

Which section or sections of the ETA apply to the supply from the subsidiary to the parent (the first supply)?

9. Maintenance service

A non-GST-registered, non-resident U.S. entity (OwnerCo) owns a cruise ship. One of the routes the cruise ship follows is from the continental United States, through Canada, to Alaska, and return. OwnerCo contracts with another non-GST-registered, non-resident U.S. entity (Company R) for worldwide maintenance and servicing of the ship's engines. This maintenance and servicing work is not part of a warranty provision.

Company R has several GST-registered suppliers in Canada that have the capability of servicing these engines. There are no maintenance agreements between Company R and these suppliers. When needed, however, Company R issues a purchase order to one of their Canadian suppliers to provide the necessary service.

OwnerCo's cruise ship usually docks in British Columbia and during down times needs one of its engines to be serviced. Company R issues a purchase order to one of its Canadian suppliers to perform the service on the ship.

(a) Initially assume that only labour service is performed, and no repair parts are provided. Does GST apply on the service (labour) that the Canadian supplier provides to Company R? which ETA sections apply to this service?

(b) If a repair part was required to service the engine (in addition to the labour), and the Canadian supplier invoiced the part to Company R, does CRA agree that the GST would also apply to the repair part given that the supply was made in Canada?

(c) Please confirm that if a repair part was required to service the engine (in addition to the labour), and the Canadian supplier invoiced the part to Company R, subsection 179(2) of the ETA would apply although the consignee--OwnerCo, the ultimate owner of the part--is not registered for GST.

(d) If the Canadian supplier performed the same labour service, but the cruise ship was docked in Seattle, Washington, and the supplier traveled there and performed the service, the labour service would be considered to be made outside Canada. Does CRA agree that GST would therefore not be applicable? Additionally, if a part was required to service the engine in Seattle (in addition to the labour), and the Canadian supplier invoiced the part to Company R, does CRA agree that the part would be considered to have been supplied outside Canada and therefore GST would not be applicable?

10. Policy on demurrage

TEI understands that a policy statement is being developed on the topic of demurrage. * When does CRA anticipate the policy statement being released?

11. Division II and III tax on the same supply

A GST-registered supplier (Company A) makes a sale to its customer (Company B--a GST-registered party who is wholly engaged in commercial activity) with the delivery terms "FCA (free carrier) customer's site in Canada," i.e., inside Canada under subsection 142(1) of the ETA. Company A sources the goods from its supplier (USA Co.) outside Canada.

The goods are shipped from USA Co. direct to Company B's Ontario location. Company A invoices, remits, and collects Division II GST on the invoice to Company B since the supply is considered to be made inside Canada for GST purposes according to subsection 142(1).

Company B, however, insists on utilizing its own business expertise to arrange transportation and importation of the goods into Canada. Company B pays Division III GST at the time the goods are imported into Canada.

CRA has indicated during earlier liaison meetings (Question II, subpart 1, from the 1997 liaison meeting, and Question 3 from the 2000 liaison meeting) that Company B was able to claim an ITC for both the Division II GST charged on Company A's invoice and the Division III tax Company B paid on importation, no matter that the Division II and III GST relate to the same supply. Must Company A invoice the Division II GST given that the supply is considered to be made inside Canada?

12. Erroneous importer of record and ITCs

Company A and Company B are non-related, GST-registered, fully commercial entities eligible for 100 percent ITC recovery. Both companies import a significant dollar value and volume of imports using the same Customs broker.

One day, the broker processed 15 entries covering imports into Canada. The broker imported the goods on behalf of Company A. Company A's name appeared as the importer of record on all 15 Canada Customs entries. One of the import entries legitimately belonged to Company B, however, who was using the imported goods entirely in its commercial activity. The U.S. supplier provided documents indicating the wrong purchaser. The true purchaser was Company B. The amount of Division III tax paid on this import was $1,000.

Company A paid the broker, albeit erroneously, for the brokerage, the Division II tax on the brokerage fee, and the Division III tax. when it noticed the error after the goods had been imported, Company A did not claim the Division III tax as an ITC. Instead, Company A issued an invoice to Company B for reimbursement of the Division III GST ($1,000) Company A paid to its broker. Along with the reimbursement invoice to Company B, Company A attached the import documentation related to the import, which erroneously showed Company A as the importer of record.

Company B now has Company A's reimbursement invoice and the associated documents which erroneously shows the name of Company A as being the importer of record.

(a) With Company A's reimbursement invoice and documentation, can Company B recover the amount of Division III GST paid on importation as an ITC even though Company A is named as the importer of record?

(b) Is it a requirement of the Input Tax Credit Information (GST/HST) Regulations that Company B be the named importer of record on the import documents in order for it to legally recover the GST paid on importation when the goods were for use in Company B's commercial activity?

(c) Would the answers in (a) and (b) be any different if Company A and Company B were related?

(d) Would the answers in (a) though (c) be any different if Company A initially recovered the Division III tax as an ITC but subsequently repaid the incorrect ITC claimed once it discovered that the import was not used in Company A's commercial activity?

13. Carrying on business--demo equipment and warranty service

Part I

A non-GST-registered, non-resident U.S. entity (USA Co.) has a Canadian GST-registered subsidiary (SubCo). SubCo only engages in commercial activities. USA Co. sells to SubCo who then resells to its Canadian customers.

In order to promote sales, USA Co. ships some portable demo equipment to SubCo in Canada that SubCo uses to promote sales to its customers. Title to the demo equipment always remains with USA Co.

When a customer orders similar equipment from SubCo, who in turn orders it from USA Co., there is a one-year, back-to-back warranty on the newly acquired goods from the Canadian customer to SubCo and from SubCo to USA Co.

The demo equipment remains in Canada for the duration of the product life cycle but then it usually is returned to USA Co.

(a) If SubCo imports the demo equipment into Canada and pays Division III tax on importation, can SubCo recover the Division III tax it paid (assuming standard documentation), even if SubCo does not and will not own the demo equipment, because SubCo is using the goods in its commercial activity?

(b) Would USA Co. be considered to be carrying on business in Canada if having this demo equipment is its only presence and activity in Canada?

Part II

Six months after the sale, while still under warranty, the equipment fails. SubCo is called, and, in turn, it calls USA Co. USA Co. sends a team of its employees to the Canadian customer's site with associated hardware and software to fix the equipment that belongs to Subco's customer.

The hardware, software, and repair parts are brought into Canada and SubCo clears these items through Customs. Division III tax is paid on the hardware, the appropriate software amount, and the parts. USA Co. does not invoice SubCo for any of these items. Title to the hardware and software always belongs to USA Co. Title to any parts used in the repair is initially held by USA Co., passes then to SubCo, and finally to the customer.

The employees of USA Co. will leave Canada and take their hardware, software, and any unused repair parts back with them once the warranty service is completed.

(c) If SubCo imports the hardware, software, and repair parts into Canada, and pays Division III tax on importation, can SubCo recover the Division III tax paid (assuming standard documentation is provided) even if it does not and will not own the hardware and software (and only temporarily will own any parts used in the repair) because Subco is using the imported items in its commercial activity?

(d) Please confirm that USA Co. would not be considered to be carrying on business in Canada regardless of the fact that it owns demo equipment in Canada and has also has brought in equipment and employees to provide warranty service (given that this warranty work is ancillary to the main equipment sale)?

14. Manufacturing and tooling

A GST-registered manufacturer who has an entirely commercial activity located in Canada sells most of its products to its non-GST-registered, non-resident customers in the United States. The non-GST-registered, non-resident customers are required to provide the tooling to the manufacturer in order for their products to be made. Assume that all the tooling in this question meets the definitions in section 14, Part V of Schedule VI of the ETA.

A GST-registered, Canadian supplier (ToolCo) sells some of the required tooling to the manufacturer's customers in the United States, but delivers the tooling to the manufacturer's site in Canada. ToolCo does not invoice the GST to the manufacturer's customers because the tooling is zero-rated under section 14, Part V of Schedule VI of the ETA.

Additionally, some of the manufacturer's customers purchase tooling in the United States and the manufacturer imports this tooling. The manufacturer pays Division III tax on importing the tooling of its customer.

(a) Is ToolCo correct not to invoice the GST on the sale of the tooling to its non-GST-registered, non-resident customers because of the zero-rating provision of section 14, Part V of Schedule VI, even though the tooling was delivered and made available in Canada?

(b) Can the manufacturer claim the Division III tax that was paid on importation of the tooling owned by its customers because it is using the customer's tooling in its commercial activity to produce the customer's products?

(c) Would the manufacturer's customers be considered to be carrying on business in Canada if they own tooling in Canada (assuming this was their only presence and activity in Canada)?

15. Building construction

A GST-registered manufacturer owns land in Ontario on which it plans to build a new building containing a new production line. It intends to move its current production line from its existing facility into this new building. The manufacturer is engaged entirely in commercial activities and accordingly is entitled to 100 percent of the ITCs.

The manufacturer hires a GST-registered contractor (the prime contractor) to erect the building. The prime contractor then subcontracts the various construction elements of the building to GST-registered subcontractors. These subcontractors will provide the materials and labour to construct the foundations, walls, roof, plumbing, wiring, etc.

(a) Is the supply between the manufacturer and the prime contractor for the construction of a building a supply of tangible personal property or real property? If the supply of the building is considered a real property supply, do subsections 221(2) and 228(4) of the ETA apply?

(b) Does CRA view the supply of the construction of the building by the prime contractor to the manufacturer to fall within the definition of real property in section 123 of the ETA?

(c) Are the supplies between the prime contractor and its subcontractors for the various building components supplies of tangible personal property or real property? If these supplies are considered supplies of real property, do subsections 221(2) and 228(4) of the ETA apply?

(d) If CRA views the supplies between the prime contractor and its subcontractors for the various building components supplies of real property, and the subcontractors had invoiced the GST and the prime contractor had recovered the GST (assuming standard documentation was received), would CRA deny the contractor recovery of the ITCs because the GST should not have been invoiced?

(e) If the manufacturer is in financial difficulty and decides to sell the building only (not the land) to a third party lessor who will then lease the building back to the manufacturer under a 40-year lease, is the sale of the building from the manufacturer to the lessor considered the sale of real property, and would subsections 221(2) and 228(4) of the ETA apply?

(f) Is the lessor required to invoice the GST on all subsequent leasing payments from the manufacturer?

16. Damage payments

A seller makes a zero-rated supply by way of sale to a GST registrant; the goods are exported directly to the U.S. on behalf of its customer (A Co.). The goods are processed in the U.S. and imported into Canada by A Co., and are then sold to a Canadian company (B Co.) who further processes the goods. The part produced by B Co. fails, and the original seller is prepared to make a payment for damages to B Co., in order to keep its customer (A Co.), satisfied. Please confirm that the damage payment would not be subject to GST.

Assume that B Co. issues a debit note to the seller for the damage claim, less a scrap allowance, plus GST. If the seller chooses to account for the full amount of the debit note in the interest of administrative expediency, is the seller entitled to an ITC, recognizing that GST was not charged on the original supply which eventually led to the damage claim?

17. Carrying on business and importation

Toymaker Co. is a non-resident of Canada and is not GST registered. Toymaker Co. sells goods to a Canadian retailer who is a GST registrant and is eligible for 100 percent ITCs. Toymaker Co. and the retailer have agreed that Toymaker Co. imports the goods into Canada and that Toymaker Co. is the importer of record. The goods have the delivery terms "FOB Far East Asia." Title to the goods passes at the same location.

Toymaker Co. has a business number with an "RM" suffix only (no "RT," "RC," or "RP" suffix). Toymaker Co. has no other activity in Canada.

Toymaker Co. uses section 180 of the ETA to invoice the retailer for reimbursement of the GST (Division III) tax paid on importation. Toymaker Co. also provides appropriate import documentation. The retailer pays Toymaker Co.'s reimbursement invoice and recovers the applicable Division III GST.

(a) Is Toymaker Co. carrying on business in Canada?

(b) Can the retailer recover the Division III tax under section 180 ETA even though the import documents identify Toymaker Co. as the named importer of record rather than the retailer?

(c) If delivery terms were FOB at a site location in Canada post-importation (delivery occurs in Canada) versus far east Asia (delivery occurs outside Canada), and all other conditions remain the same, would Toymaker Co. be considered as carrying on business in Canada?

* 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."

* The detention of a ship by the freighter beyond the time allowed for loading, unloading, or sailing; or the charge for detaining a ship, freight car, or truck. Merriam-Webster Online Dictionary, 2005.