Pending excise tax issues: December 8, 2004.

On December 8, 2004, Tax Executives Institute held its annual liaison meeting with officials of the Canadian Department of Finance on pending excise tax issues. Reprinted below if the 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.

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 Department of Finance (Finance) during TEI's December 8, 2004, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either David M. Penney, TEI's Vice President for Canadian Affairs, at 905.644.3122, or Sherrie Ann Pollock, chair of the Institute's Canadian Commodity Tax Committee, at 416.955.7373.

Background

Tax Executives Institute is an international organization of more than 5,400 professionals who are responsible--in an executive, administrative, or managerial capacity--for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,800 of the leading corporations with more than 50 chapters in Canada, the United States, Europe, and Asia.

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

1. Input Tax Credit Recovery Formulae--Financial Institutions

We understand Finance is reviewing the rules governing claims for input tax credits (ITCs) relating to inputs used both in exempt and taxable activities (i.e., ITC recovery formulae).

(a) What concerns prompted this review, and what circumstances gave

rise to the concerns?

(b) What is the timeframe for completion of the review? Will the financial services industry be consulted?

(c) Please comment on the anticipated outcome of the review.

2. Tax Court Decision in .State Farm

We understand Finance is reviewing the decision in State Farm Mutual Auto Insurance Co. v. The Queen, [2003] GSTC 35 (TCC), in respect of cross-border charges. (State Farm dealt with whether the goods and services tax (GST) applied to expenses of State Farm's U.S. headquarters allocated to State Farm's regional office in Canada; the Tax Court of Canada vacated the Canada Revenue Agency's (CRA's) assessments made under section 220 of the Excise Tax Act (ETA).)

(a) What is Finance's view regarding the application of section 220 of the ETA (relating supplies between branches) to financial services in light of this decision?

(b) Are any changes to policy statements or legislation contemplated?

3. Barter Transactions

Barter transactions have gained popularity and importance in business. The parties involved in these transactions may not always recognize the commodity tax implications and these transactions are often on the list of items subject to review by tax auditors because of their nature.

During an audit, these transactions may cause unnecessary work for taxpayers that, we believe, is not justified, particularly in circumstances where the parties involved are GST-registered and are entitled to claim full ITCs.

To facilitate the audit and administration of these transactions, we suggest that an election be provided for the parties involved to obviate charging each other GST. We invite your comments on this issue.

4. Gst Harmonization 

Have there been any discussions toward harmonizing provincial sales taxes with the GST system?

5. Broadening the Zero-rating Provisions

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

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

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

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

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

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

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

6. Section 168

Section 168 of the ETA outlines when GST/HST is payable. In particular, subsection 168(3) contemplates conditional sale/instalment sale agreements:

(3) Notwithstanding subsections (1) and (2), where all or any part of the consideration for a taxable supply has not been paid or become due on or before the last day of the calendar month immediately following the first calendar month in which

(a) where the supply is of tangible personal property by way of sale, other than a supply described in paragraph (b) or (c), the ownership or possession of the property is transferred to the recipient,

(b) where the supply is of tangible personal property by way of sale under which the supplier delivers the property to the recipient on approval, consignment, sale-or-return basis or other similar terms, the recipient acquires ownership of the property or makes a supply of it to any person, other than the supplier, or

(c) where the supply is under an agreement in writing for the construction, renovation or alteration of, or repair to,

(i) any real property, or

(ii) any ship or other marine vessel, and it may reasonably be expected that the construction, renovation, alteration or repair will require more than three months to complete,

the construction, renovation, alteration or repair is substantially completed,

tax under this Division in respect of the supply, calculated on the value of that consideration or part, as the case may be, is payable on that day.

CRA Publication G300-06-11, Override Rule (GST 300-6-11) Reprint, provides the following illustration in paragraph 8 dealing with a conditional sale/instalment contract:

8. Conditional sales (sales where possession of property is transferred but ownership passes only after certain conditions are fulfilled, for example on full payment of the purchase price by the recipient), and instalment sales, (sales where the ownership of the property transfers immediately, but the property is paid for in instalments), are both "sales" for the purposes of the override rule. To illustrate, a supplier delivers a television on June 15, 1992, on a conditional sales basis. The recipient agrees to pay the supplier $50 per month for the television for 12 months for a total of $600. Ownership of the television will pass to the recipient after the final payment is made. On June 15, 1992, the recipient pays $50 and pays the same amount on July 15, 1992. Tax will be payable on each of these amounts as they are paid or become due. At the end of July, (the end of the month following the month in which delivery occurred), $500 is still owing on the television. Tax will become payable on the $500 at the end of July.

While we understand the need for an override rule to ensure that there is no undue delay in the remittance of GST where consideration for a supply is paid over a period of time, we question the rationale behind the timing of the taxation of conditional sale/instalment contracts. If a conditional sale/instalment sale is considered a "sale," GST/HST should be due either at the time the sale occurs or at the time the conditional sale agreement is entered into. From a practical standpoint, the GST/HST payable at the time will be recorded when the sale is recorded, e.g., in the example above, June 15, 1992--since computer systems will have a difficult time recording tax on one payment in June and then subsequently recording the balance of the tax due in July. In addition, we understand that, given the timing of the remittance of the GST/HST, full ITCs (assuming a wholly commercial activity) may not be available until the entire amount of GST/HST has become due. We invite your comments on this issue.

7. Reorganization Transactions

TEI has raised concerns in past years about the need to modify the GST laws with respect to reorganization transactions undertaken for various business reasons. We have submitted certain solutions, such as:

* Simplifying and expanding the rules for tax-free transfers of business assets;

* Modifying the closely-related group election to address the use of a new company;

Broadening subsection 221(2) to include significant asset transfers when in the course of commercial activities; and

* Introducing specific GST rules aimed at divisive reorganizations (butterfly transactions).

The inability to use the current relief provisions causes undue compliance costs both for CRA and GST registrants, as well as significant cashflow issues. Are changes to the reorganization rules being considered?

Conclusion

Tax Executives Institute appreciates this opportunity to present its comments on pending excise and commodity tax issues. We look forward to discussing our views with you during the Institute's December 8, 2004, liaison meeting.