TEI-Department of Finance liaison meeting agenda: excise tax issues.

December 8, 1999

On December 8, 1999, Tax Executives Institute held its annual liaison meeting with the Canadian Department of Finance on pending commodity and excise tax issues. The written agenda for the meeting was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Glen S. Pye of Nortel Networks Corporation. Marlie R.M. Burtt, the Institute's Vice President-Region I, coordinated preparations for the liaison meeting.

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on several pending commodity and excise tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 8, 1999, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Marlie R.M. Burtt, TEI's Vice President for Canadian Affairs, at [phone] or Glen S. Pye, chair of the Institute's Canadian Commodity Tax Committee, at [phone].

Background

Tax Executives Institute is an international organization of more than 5,000 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 52 chapters located in Canada, the United States, and Europe.

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.

Questions

1. Some taxpayers are having difficulty with the deemed financial institution rules and the resultant restriction of input tax credits. Although section 149 of the Excise Tax Act excludes interest and dividends from related corporations from the deeming provision, the exclusion is not extended to related partnerships. Will the Department of Finance consider expanding the exclusion to include interest and dividends received from related partnerships?

2. A corporation resident in Canada is a GST registrant and acts as Importer of Record for goods. The importer does not take ownership of the goods, but provides services in respect of the goods as part of its normal commercial activities. Is the importer entitled to claim back the GST paid on importation as an input tax credit, in the following circumstances:

(a) The importer provides a service of warehousing the imported goods in Canada.

(b) The importer further manufactures the imported goods and then exports them from Canada to a related party.

(c) The importer breaks the shipment into smaller parcels and then ships the goods to customers located both inside and outside of Canada.

3. Please clarify the Department of Finance's interpretation of the words "rendered to" in section 7 of Part V of Schedule VI. Is a service "rendered to" the contracting party or to the person making use of the service? The technical notes describe a supply made to a non-resident corporation but rendered to one of its employees in Canada as excluded from zero-rating. Is the rationale that the employee is considered part of the non-resident corporation -- and therefore the contracting party -- or does the example have a broader application? For example, if a Canadian GST- registered corporation provides a help desk service to a non-resident corporation, are the services rendered (i) to the non-resident corporation or (ii) to the unrelated persons (i.e., the customers of the non-resident) who may call in for assistance?

4. A Canadian resident corporation that is a GST registrant, provides managed computer operations services (also referred to as computer outsourcing services) to its customers from a location in Canada. One customer is a non-resident corporation and is not required to register for the GST. This customer has a specific piece of equipment for which it wishes to retain title. This equipment -- together with other computer equipment owned by the provider of the managed operations services -- will be used to provide the outsourcing service. If the customer ships the equipment to the GST-registered corporation, is the service to the non-resident corporation zero- rated under section 7 of Part V of Schedule VI? Or will it be excluded because the service is in respect of tangible personal property situated in Canada at the time that the service is performed? If the service is excluded from zero-rating, is section 179 of the Excise Tax Act available to relieve the supply from tax? If tax cannot be relieved under either provision, is this the correct policy result to ensure that the Canadian provider can compete effectively on a global basis?

5. The Quebec Revenue Department has recently ruled that a service of hosting a website is considered to be a telecommunications service for purposes of the Excise Tax Act and the Quebec Sales Tax Act. The interpretation is based on the definition of "telecommunications services" under section 123(1)(b) of the ETA, which refers to the "making available for [such] emission, transmission or reception telecommunications facilities of a person who carries on the business of supplying services referred to in paragraph (a)." The term "telecommunications facility" is also defined under section 123(1) as "any facility, apparatus or other thing (including any wire, cable, radio, optical or other electromagnetic system, or any similar technical system, or any part thereof) that is used or is capable of being used for telecommunications."

The Quebec Revenue Department treats a server as a telecommunications facility and thus hosting a website on a server is a telecommunications service under section 123(1)(b) of the ETA. Such an interpretation may have a negative effect on Canadian telecommunications companies doing business with non-resident clients. A telecommunications service supplied to a non-resident that is not carrying on the business of supplying such services is generally not zero-rated under Schedule VI, Part V, Section 22.1, while certain other services (e.g., an advertising service) are generally zero-rated.

TEI believes that the service of hosting a website is more akin to a service that is provided by means of telecommunications -- and not a telecommunications service. To delineate between the two, what the supplier is bound to provide and what the recipient of the service wants to receive should be analysed. In the example given above, the recipient wants to receive the hosting or advertising of its business and not communications services.

Furthermore, Quebec's interpretation may lead to anomalous results, depending on who is providing the website hosting service. Section 123(1)(b) of the ETA (which defines "telecommunications service") refers only to a person (i.e., the supplier) who is in the business of supplying services referred to in section 123(1)(a). Thus, a website hosting service provider -- that is not in the business of supplying telecommunications services -- should be considered providing a service other than a telecommunications service. Its services should be zero-rated when provided to a non-resident person that does not carry on a business of supplying telecommunications services.

Does the Department of Finance agree with this interpretation?

6. Both Internet access and website hosting fees are currently treated as telecommunications services. In light of all of the changes in the telecommunications industry (including Internet, broadbanding, E-commerce, etc.), will the Department of Finance review its GST policies in this area? Broadening the zero-rating provisions in respect of telecommunications services will avoid putting Canadian suppliers of these services at a competitive disadvantage vis-a-vis their foreign counterparts.

7. Subsection 136.1(1) of the Excise Tax Act was enacted to treat each leasing period as a separate supply to ensure that either GST or HST was imposed, based on the physical location of the leased good at the beginning of the "leasing interval." The subsection not only addressed the movement of leased goods between provinces but also provided for all the Canadian tax changes between harmonized and non-harmonized provinces. For example, if a motor vehicle leased under an annual agreement calling for monthly billings was initially provided to the lessee in Halifax, HST would apply on the monthly lease billings. If the lessee later moved the leased vehicle to Prince Edward Island (PEI) and registered it there, then the GST and PEI Provincial Sales Tax (PST) would apply on any subsequent monthly billings.

Proposed subsection 136.1(1.1) would amend the ETA to deem the exercise of an option to purchase tangible personal property under a lease to occur at the time and place at which the person begins to have possession as a purchaser, effective as of April 1, 1997. The exercise of an option to purchase would thus be a separate supply.

In proposing subsection 136.1(1.1), the Department of Finance asserts that the "standard periodic payments" under a lease and the "exercising of an option to purchase" under a lease are to be considered individually. In other words, the "exercising of an option to purchase" under a lease is not considered to be part of the lease payments. To this end, the Department has proposed a "deeming rule" under subsection 136.1(1.1), where the place of supply must again be ascertained at the "exercising of an option to purchase."

For leased goods initially made available in Canada, the determination of another place of supply is important because the lessor must ascertain whether GST or HST applies. For leased goods initially made available outside Canada, the issue becomes more complicated. In those cases, the "standard periodic lease" payments were not initially subject to GST/HST, but exercising the purchase option will now cause the lessor to have made a supply in Canada. Division II tax will thus apply if the lessor is registered for GST purposes.

Determining a place of supply for mobile goods (e.g., railcars, unlicensed vehicles, etc.) is difficult to ascertain at a specific point in time. The lessor does not normally take physical possession of a leased good for subsequent sale to the lessee.

In addition, if the lessor is not GST registered, then the subsequent supply of the "initially-leased" goods now physically located in Canada and purchased under an option may require the unregistered lessor to register for GST purposes. The lessor is apparently making supplies in Canada, even though the lessor's only presence in Canada is the "initially-leased goods" that were made available outside Canada.

Please answer the following questions:

(a) Is the "exercising of an option to purchase" under a lease a supply similar to the "standard periodic payments," and if not, why?

(b) If exercising an option to purchase is the same as a "standard periodic payment," why was subsection 136.1(1.1) enacted?

(c) If subsection 136.1(1.1) is not modified, must the GST-registered lessor (whether or not a nonresident) invoice Division II tax if the place of supply is determined to be in Canada, even if the initial place of supply was outside Canada?

(d) If subsection 136.1(1.1) is not modified, is the non-resident, non-GST registered lessor now making supplies in Canada when the option is exercised -- i.e., when the lessor sells its initially leased goods in Canada? Must the lessor register under the ETA because he is now making supplies in Canada (assuming sales of more than $30,000) even if the initial place of supply was outside Canada?

8. Subsection 148.(1) of the Excise Tax Act states:

For the purposes of this Part, a person is a small supplier ... if

(a) the total of all amounts each of which is the value of the consideration ... made inside or outside Canada by the person or associate

does not exceed the total of

(b) $30,000 or ...

The term "associate" used in the preceding paragraph is defined in subsection 148.(4), as follows:

   In this section [148], "associate" of a particular person at any time means
   another person who is associated at that time with the particular person.

The ETA also defines the terms "Associated Persons" in section 127, which presumably applies to all sections of Part IX.

For firms resident in Canada, it is understandable why the total value of all considerations made inside or outside Canada (including another person who is associated at that time with the particular person) should be aggregated. For firms not resident in Canada, however, it may be inappropriate to combine the total value of all considerations made inside or outside Canada as part of the small supplier threshold.

(a) Does the word "associated" in section 148.(4) relate to section 127 of the ETA? What is the meaning of the phrase "another person who is associated at that time with the particular person"?

(b) In the ease of a non-resident, isn't the appropriate measure the sales made in Canada and not the non-resident's worldwide sales? Any other interpretation causes non-resident firms with less than $30,000 in Canadian sales to be excluded from the small supplier threshold if their worldwide income is more than $30,000. What is the rationale for the Department's position that the appropriate measure is worldwide sales? Would the Department consider amending section 148 to provide that a non-resident's sales made outside Canada would not be included in the small supplier calculation?

9. The use of corporate procurement cards and travel and entertainment cards by taxpayers continues to grow. We understand that the Department of Finance will soon issue a policy on the use of corporate procurement cards. In the interim, we have the following questions:

(a) Some VAT countries have determined that VAT shown separately on a statement to a holder of a corporate procurement card is sufficient documentation for VAT recovery purposes. Will the Department consider a similar approach for GST recovery purposes?

(b) When claiming the 6/106 factor on purchases on travel and entertainment cards, joint and several liability is required. Is this requirement still necessary in today's environment where there is a proliferation of new purchasing and credit arrangements?

(c) Will the Department consider the use of pre-approved factors for extracting ITCs on purchases made with corporate procurement cards? If a pre-approved factor is not acceptable, what other measures are under consideration to simplify compliance and realize the accounting efficiencies associated with using such cards?

10. TEI understands that Andrew Marsland of the Department of Finance is the Chair of the Electronic Commerce Sub-Group of the OECD's Working Party No. 9. During the meeting, we would appreciate an update on the Department's involvement with the OECD relating to electronic commerce commodity tax issues.

11. Officials from the Department of Finance have stated that Ontario officials believe that there is no pressure from the business community to harmonize the Retail Sales Tax with the GST. Our understanding is that Ontario has received a number of submissions encouraging the Province to consider harmonization. Since Ontario is a key component in the plan to achieve a harmonized national sales tax, can the Department suggest ways in which TEI can better communicate its position with Ontario?

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, 1999, liaison meeting.