TEI-Revenue Canada liaison meeting: excise tax questions.

December 1, 1998

On December 1, 1998, TEI held its annual liaison meeting with representatives of Revenue Canada on pending excise tax issues. The Institute's agenda for the meeting is reprinted below. The agenda was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Munir A. Suleman of The Bank of Nova Scotia. Pierre M. Bocti of Hewlett-Packard (Canada) Ltd., the Institute's Vice President-Region I, coordinated 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 Revenue Canada during TEI's December 1, 1998, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Pierre M. Bocti, TEI's Vice President for Canadian Affairs, at [phone] or Munir A. Suleman, chair of the Institute's Canadian Commodity Tax Committee, at [phone].

1. Assume the following facts. Company Z contracts with a third-party placement firm (TPPF), a GST registrant that carries on commercial activities, for temporary personnel who will perform clerical or administrative duties for Z either during peak business periods or as substitutes for Z's vacationing employees. The contract specifies that the work is generally performed at a location in Canada (Location L) for an agreed upon labour rate (e.g., $20.00 per hour, plus applicable taxes). In addition, the contract states that Z will pay any supplemental travel and living expenses (other than the daily commuting expenses to L) for TPPF's employees.

Z asks X, a non-registrant individual employee of TPPF, to travel temporarily to a different location where X will incur travel and living expenses. X will receive a T4 slip from TPPF. Z is considering three options in respect of its obligation to pay X's temporary travel and living expenses:

1. X is to submit expense receipts (hotel charges, rental car, gasoline, meals, etc.) directly to Z for which Z will issue a reimbursement cheque directly to X.

2. Z will pay X directly under the expense account reimbursement procedures that Z's employees regularly use and a cheque will be issued directly to X.

3. X submits travel and living expenses to its employer, TPPF, that in turn bills these amounts to Z.

The advantage of options 1 and 2 is to accelerate reimbursement to X (who is working temporarily at Z's premises rather than at TPPF's premises). It also eliminates the administrative procedure of processing X's expenses through TPPF initially for subsequent re-invoicing to Z. In order to evaluate the pros and cons of the three options, please answer the following questions:

1. Under option 1, can Z recover the GST on X's expenses?

2. Under option 2, can Z, in accordance with GST Memorandum 400-1-2, recover the GST on X's expenses processed through an expense account that is normally used by employees of Z?

3. If the answer to 1 and 2 is no, please advise whether the following alternative will enable Z to recover the GST on X's expenses:

   * TPPF processes X's expenses through TPPF's regular employee expense
   account reimbursement procedures;

   * TPPF, in accordance with GST Memorandum 400-1-2, claims back the GST on
   X's expenses;

   * TPPF invoices Z for the value of the expenses (on a net-of-GST-recovery
   basis), plus Division II GST;

   * Z claims the Division II GST paid to TPPF as an input tax credit (ITC) on
   X's net expenses.

2. Section 5, Part V, Schedule VI provides a zero rating for the services of a "sales representative" to a non-resident provided certain conditions are met. One condition is that the supply of goods for which the sales representative is providing service for the non-resident must be made outside Canada. Assume the following facts. A firm (Servco) provides the services of a "sales representative" to a non-resident (NR) as defined in section 123 of the Excise Tax Act (ETA). The supplies that NR makes are of goods and Servco is not an agent of the NR. In addition, NR's sales are made directly to NR's Canadian customers, i.e., Servco does not take title to the goods for resale to Canadian customers. NR requests that Servco act as the importer of record for NR's goods. (Note that Servco is not a licensed custom's broker). As a result, Servco is required under section 218 of the ETA to pay Division III tax on importation of NR's goods into Canada because Servco is the person liable for Customs duties under the Customs Act.

NR believes that Servco can claim the ITC for the Division III GST paid by Servco on importation of the NR's goods because Servco is providing a zero-rated service of a "sales representative" to a non-resident in relation to those goods. Servco, on the other hand, does not believe it is permitted to claim an ITC for the Division III GST paid by Servco on importation of the NR's goods because Servco is not using those goods in Servco's own commercial activity. In other words, even though the sale of goods is attributable to the "sales representative" service provided by Servco to NR, Servco does not believe it is using the goods in the course of providing its services of a sales representative.

Questions:

1. Can Servco claim an ITC for the Division III GST paid by Servco on importation of the NR's goods where NR sells the goods directly to NR's Canadian customers without a re-supply (i.e., purchase and resale) through Servco?

2. As long as Servco supplies the services of a sales representative to NR and NR is a non-resident making supplies outside Canada, please confirm that, regardless of whether NR is a GST registrant, Servco's providing services of a sales representative is zero rated under Section 5, Part V, Schedule VI of the ETA.

3. In some cases, Servco may not be able to determine whether NR made its supply inside or outside Canada. For example, NR may be a GST registrant and the original terms of sale reflect that the NR is selling the goods FOB USA plant. Subsequent to Servco's sales representative performing its service, NR and the ultimate customer change the terms of sale to FOB Canadian destination. Under such facts, does Servco's supply remain zero rated? At the time Servco supplies its sales representative service, it has a good faith belief that NR's sale would be made outside Canada.

4. What evidence must Servco produce to establish that the service is entitled to zero rating when Servco cannot determine whether NR's supplies will be made outside Canada?

3. Company A and Company B are amalgamated on January 1, 1998. The amalgamated company retains the name of one of its predecessors -- Company A. Assume that Companies A, B, and their amalgamated successor were, and remain, in a fully commercial activity (i.e., permitted to claim 100 percent of ITCs). As a result of an internal audit following the amalgamation, the company discovers on March 15, 1998, that Company B inadvertently failed to claim ITCs on its October 1997 GST return for which proper documentation exists.

1. Can the amalgamated company claim the omitted ITCs on its March 1998 GST return that relate to Company B's commercial activity in October 1997? In answering the question, bear in mind that the name of the recipient on the supplier invoices in October 1997 is Company B rather than the name of the amalgamated claiming the ITC in 1998, Company A.

2. If the answer to question 1 is no, what mechanisms are available for Company B (or its successor, newly amalgamated Company A) to recover ITCs that were legally claimable by B in October 1997?

4. An individual is transferred to Canada from Canco's parent, a company resident in the United States under an arrangement whereby the individual is paid by a related, GST-registered third party that invoices Canco for the individual's services. In other words, while the individual is in Canada and performing services in Canada, Canco is invoiced the full cost of the individual's salary and benefits, plus the applicable GST. Under the arrangement, Canco remits the withholding amounts for the individual's Canadian income tax, Canada Pension Plan, etc. Canco also issues the individual a T4 for Canadian income tax purposes. Since the individual receives a T4 from Canco, please confirm that, for purposes of the ETA, the individual is classified as an employee. Moreover, please confirm that under GST Memorandum 400-1-2 any of the individual's expenses that are properly documented on an employee expense account form are eligible for GST recovery.

5. Company C provides employment for students from a local university on a four-month rotational basis. Student S receives a T4 from C, but is not entitled to other benefits such as life insurance, pension plan contributions, or medical or dental insurance plan coverage. S occasionally travels on business trips authorized by C and incurs travel and living expenses that are reimbursed by C. Assuming S's expenses are properly documented, please confirm that C can recover the GST on S's travel and living expenses pursuant to GST Memorandum 400-1-2.

6. Assume that a vital piece of equipment used by GST registrant (R), engaged 100 percent in a commercial activity, experiences a break down. The equipment is out of warranty, damaged beyond repair, and must be replaced as soon as possible to keep R's business operating. The manufacturer of the equipment (M), a company located in the United 'States, does not stock the equipment and cannot manufacture replacement equipment in less than three months. Such a delay, however, would cripple R's business. Hence, M agrees to lend R a used piece of similar equipment for three months until new equipment can be manufactured and delivered. M does not charge R for the use of the equipment while it is "on-loan." R will be the importer of the "on-loan" equipment and will pay the requisite Division III tax.

1. May R claim an ITC for the Division III tax R pays even though M will not invoice R any separate consideration for the use of the lent equipment?

2. If M is the importer of record and pays the Division III tax, can M employ section 180 of the ETA to pass the GST on to R? Can R, in turn, claim the Division III tax as an ITC even though M will not, invoice R for any consideration on the use of the lent equipment? Assume that all documentation requirements under section 180 are satisfied. There is no formal contract or lease agreement governing the arrangement for the lent equipment.

3. In this transaction, will M be considered to be carrying on business in Canada for GST purposes? M would have equipment physically located in Canada that is used on a regular and continuous basis. On the other hand, M does not receive any consideration in respect of the use of the on-loan equipment. M does not ordinarily engage in the practice of lending equipment to its customers.

7. A firm, F, engaged 100 percent in commercial activity, provides free items (e.g., pens with F's name and telephone number inscribed) that would, if sold, constitute a taxable supply. Assume the items are given to an unrelated financial institution as defined in section 149 of the ETA, which sets them out on tables for use by its customers. The ownership of the pens remains with F rather than the financial institution. F will not invoice the financial institution for these pens and there is no written agreement between F and the financial institution addressing the use of the free items. Please confirm the following:

1. When F purchases the pens in order to give them away, it can claim ITC for the GST charged by the pen supplier. Assume the ITC documentation requirements are satisfied.

2. When F gives the pens free to the unrelated financial institution, which in turn provides the pens for customer use, please confirm that the financial institution is not required to self assess GST since the pens were not acquired for use in a commercial or noncommercial activity.

8. A GST registered firm (GRF) establishes and maintains a series of call centres across Canada. Employees at the call centres provide technical information and answers to customer inquiries about GRF products. The cost of operating the call centres is part of the normal overhead cost of GRF's commercial activity. After establishing the call-centre infrastructure (e.g., the employees, the telecommunications network, and information distribution and database centres), GRF decides to market its call-centre services to others, whether GST registrants or non-registrants and whether resident or non-resident in Canada. Non-resident firm (NRF) decides to employ GRF's call-centre services. NRF provides technical information about NRF's products that GRF employees learn in order to respond to inquiries about NRF's products. A separate, incoming toll-free phone number is assigned for servicing NRF's products. Once the system is operational, NRF's customers, who are located in the United States and Canada, may call and obtain technical advice about NRF products from GRF's employees. GRF invoices NRF for this call-centre service.

Please confirm that:

1. GRF's service to NRF is zero rated under Section 7, Part V, Schedule VI of the ETA even though the personnel providing information and advice about NRF's products are located in Canada.

2. GRF's call-centre service is zero rated regardless of whether NRF is registered for GST.

3. It is irrelevant for purposes of zero rating the service that some of the NRF's customers phone the call centre from locations within Canada.

9. A GST registrant (R), which is engaged 100 percent in commercial activity geographically located in Canada, owns, maintains, and operates a computer facility that supports its regular business activities. The computer facility has excess capacity, which a non-resident firm (NRF) desires to use in order to test the readiness of NRF's software for its year 2000 implementation. NRF proposes the following:

   NRF will send its software to R either by physical media or electronically.
   R will either manually load or electronically accept NRF's software on its
   computer. At all times, all rights to the software belong to NRF. In order
   to test NRF's software, NRF will send test data to R either by physical
   media or electronically. R will invoice NRF only for the number of minutes
   that the NRF uses R's computer facility, i.e., for the time involved in
   loading the software and test data, executing the software test, and
   preparing a report of the results. The transaction is purely time sharing
   in nature and does not involve the leasing or renting of computers between
   NRF and R. When the software testing is completed, the software and test
   data will be returned to NRF or destroyed.

Please confirm the following:

1. The time sharing service is not a telecommunication service (as defined in section 123 of the ETA).

2. The time sharing service from R to NRF is a zero-rated service under Section 7, Part V, Schedule VI of the ETA.

10. Company X (a GST registrant) transfers goods to a warehouse located in Canada owned by Company Y (also a GST registrant). All of Company X's goods are stored in Company Y's warehouse until Company X ships the goods to its customers in the United States. (All of Company X's goods are shipped to the United States.) Company X retains title to the goods while they are in Y's warehouse. Company Y invoices Company X for the warehousing service and adds GST on which Company X claims an ITC. When a customer orders goods, Company X arranges for and pays a common carrier to deliver the goods to the non-registered U.S. customer.

Assume that the relative value of the goods is $80 and the value of the warehouse service is $20. Company X invoices its customer for the goods. If Company X invoices the customer a lump-sum value for the goods, $100, the supply is a zero-rated export. If, however, Company X invoices the customer two separate amounts, $80 for the goods and $20 for the warehousing service, there is a concern that the separately identified warehousing service on Company X's invoice may be considered a taxable supply because the service is performed in Canada. Please confirm that, even though Company X invoices the customer two separate amounts -- $80 for the goods and $20 for the warehousing service -- both the goods and the warehousing service are zero rated.

11. Based on the diagram at the right, can Company D and Company G (both resident Canadian corporations) file a section 156 election? If they cannot, please explain.

12. A firm has a call centre or on-line help service to which customers can dial a toll-free phone number and obtain technical advice. The firm is a U.S. corporation with no assets, bank account, or inventory in Canada. In addition, all the firm's employees (including the customer-service representatives who respond to telephone inquiries) are located outside Canada. Customers who purchase the firm's products, whether directly from the firm or indirectly from retailers or wholesalers, pay a separate fee for the on-line help service. Where a customer (i.e., the recipient) physically present in Canada calls for advice from a telephone in Canada, is the firm's service considered to be a performed "in whole or in part" in Canada? Is the firm considered to be making a supply in Canada and thereby required to register for GST purposes?

13. U.S. Firm is an unregistered non-resident that sells products in Canada to GST-registered customers that use the goods fully in a commercial activity. The terms of sale are FOB USA; hence, according to Policy Paper 78 the supplies are made outside of Canada. U.S. Firm is designated as the importer of record and engages a licensed customs broker to clear its goods through customs. U.S. Firm currently receives an invoice from its broker that sets forth the broker's fee and the Division III tax paid by the broker on importation. U.S. Firm elects under section 180 of the ETA to flow through the Division III tax to the Canadian customer. U.S. Firm supplies the documentation necessary to support the amount of GST paid on importation enabling the Canadian customer to claim an ITC. The Canadian customer and U.S. Firm agree that the GST should be stated on the invoice.

U.S. Firm is evaluating its importation practices and wishes to know whether its Canadian broker may invoice the Canadian customer the GST paid under Division III (together with supporting documentation) and invoice U.S. Firm solely for the broker's fee. U.S. Firm believes that its Canadian customer can pay the broker's invoice for GST and claim an ITC, for that amount since the customer is using the goods in a commercial activity. Please confirm that, where the customs broker (engaged by U.S. Firm) invoices the Canadian customer for the GST payable under Division III on goods that will be used by the Canadian customer 100 percent in its commercial activity, the customer can claim an ITC even though U.S. Firm is the importer of record and even though there is no contractual agreement between the broker and the Canadian customer.

14. Company A (a Canadian GST registrant) provides computer time-sharing services to Canadian Customer X. Company A subcontracts the time-sharing services to a non-GST-registered related party (USCO) located in the United States. The computer is located in the United States and owned by USCO. For purposes of this question, computer time-sharing services are defined to be the amount of time (generally measured in minutes) that Customer X signs on and uses USCO's computer and software programs. Passwords are employed to enable Customer X to access and use USCO's programs.

Customer X has locations inside and outside Canada. Customer X requests that Company A invoice X directly for all time-sharing services provided on a worldwide basis. For example, Customer X's U.K. operations employ A's time-sharing services (on USCO's computer) and the service charge is included on the invoice from A to X.

For locations inside Canada, Customer X dials a phone number in Canada which then (through a series of telecommunications networks) automatically connects to the computer physically located in the United States. Customer X pays all telecommunications charges related to the initial call. Company A pays the telecommunications charges associated with routing Customer X's phone connection to the computer in the United States. (A portion of Company A's price per minute to Customer X is directly related to the per-minute telephone access charges that A incurs). Company A invoices Customer X for the time-sharing charges. Since the customer's call is initiated inside Canada, Company A includes GST on the invoice for the time-sharing charges to Customer X.

For locations outside Canada (e.g., a U.K. subsidiary or division of Customer X), Customer X has two options. In the first option, Customer X can dial a phone number inside Canada (from the location outside Canada) which then (through a series of telecommunications networks) automatically connects to the computer physically located in the United States. Customer X pays all foreign telecommunications charges in relation to the initial call from the foreign country to the Canadian number. Company A pays all the Canadian telecommunications charges for connecting Customer X to the U.S. computer. Alternatively, and more frequently, Customer X can dial a phone number in the country of X's residence. The call is usually made to a related party of Company A (also in the same country), which then (through a series of telecommunications networks) automatically connects the call to the computer physically located in the United States. Customer X pays all the telecommunications charges in relation to the initial call in the foreign country. Company A's related party pays all the telecommunications expenses in connecting Customer X to the computer in the United States.

Company A's invoices to Customer X reflect separately itemized amounts for the time-sharing services depending on whether the calls (and time-sharing services) are initiated in Canada or the calls (and time-sharing services) are initiated from outside Canada. Company A believes that GST does not apply to the time-sharing services where the call is initiated from a customer location outside of Canada, irrespective of which of the two options are used. Please confirm.

15. We invite the Revenue Canada representatives to comment on any actions that have been or will be undertaken in respect of the recommendations made in the report issued by the Minister's Advisory Committee on Electronic Commerce. On September 17, 1998, TEI submitted comments the Advisory Committee's report and recommendations. Hence, we also invite questions and comments from Revenue Canada in respect of TEI's comments.

16. Please confirm whether and why Revenue Canada classifies fees charged for Internet access and Web Site Hosting as telecommunications services. The stringent zero-rating provisions for telecommunications services under the ETA place Canadian suppliers of such services at a severe competitive disadvantage vis-a-vis foreign suppliers. To enable Canadian service providers to be more competitive in the global marketplace for telecommunications services, will Revenue Canada consider recommending that the Department of Finance broaden the zero-rating provisions applicable to such services?

17. Is Revenue Canada considering releasing any guidance on the level of activity or physical presence that triggers a requirement of GST registration for "non-residents" making supplies through the Internet to Canadian residents?

18. Does Revenue Canada consider the provision of software to be a supply of tangible personal property, intangible personal property, or a service? The classification is very important for purposes of the place-of-supply rules, as well as the taxpayer's ability to employ sections 179 and 180. Does the manner in which the software is provided (whether on a physical media or electronically) or licensed (whether a boilerplate, adhesion license or a negotiated, signed agreement) affect the classification? Can software be zero rated as intellectual property under Section 10, Part V, Schedule VI? Again, does the manner in which the software is provided or licensed affect the classification?

19. Section 7, Part V, Schedule VI of the Excise Tax Act generally zero rates services provided to nonresident persons except where services are rendered to an individual while the individual is present in Canada. Please confirm that a supply of services performed in Canada for a non-resident corporation (such as product design or development, purchasing, accounting services (including payroll), accounts payable, or customer invoicing) are included in this zero-rating provision.

20. Revenue Canada has announced a Directive that GST audits should be performed on a "one-plus-one" basis, i.e., the current year plus the previous year. Under what circumstances will this Directive be applied? Within the context of GST audits, TEI members see little or no evidence that the Directive is being applied at the field level. Indeed, when questioned, some field auditors deny that a Directive was issued. We invite the Department's comments.

21. We understand that a District Office has issued a ruling with respect to so-called credit-card interceptors. A credit-card interceptor solicits individuals for a particular credit card, assists the card customer in completing the credit-card application, reviews the application for completeness, and, in some instances, pre-screens the applicant's credit worthiness. The credit card is then issued by a bank client of the interceptor. The District Office ruling concludes that the interceptor's activities are exempt from GST as either financial services or arranging for credit cards. We request confirmation that the ruling correctly reflects the Department's view.

Assume that the interceptor carries on sufficient business to be deemed a financial institution and thereby required to pro-rate its ITCs. Assume further that an interceptor erroneously charged GST and subsequently agrees to refund GST to its bank client. In such a case, should the interceptor refund 100 percent of the GST originally charged? No adjustment is seemingly permitted for the interceptor's reduced ITCs that result from the requirement that the interceptor pro-rate its ITCs. Please confirm.

22. A GST-registered firm (Subco) wishes to purchase insulated copper wire (ICW) that will be used fully in its commercial activity. Subco and its U.S. parent (USPAR) have an arrangement whereby USPAR buys bare copper under a long-term contract at a fixed price for future delivery and sells the bare copper to Subco. Subco places a purchase order with a Canadian GST-registered firm (Supplyco) to supply the ICW. Supplyco is the importer of record and will pay Division III GST tax on importation. Technically, Supplyco will charge Subco for the cost to "roll and size" bare copper into copper wire and for the cost to insulate the copper wire. The cost of the bare copper itself will not be included in Supplyco's invoice. Rather, USPAR will invoice Subco for the value of the bare copper (cost plus mark-up) at a pre-determined price that is not disclosed to Supplyco.

Supplyco in turn will issue a purchase order to a firm in the United States (USCO) to roll and size the bare copper into copper wire and then to insulate the cooper wire. USPAR provides USCO the bare copper free issue (i.e., without a billing). USPAR invoices Subco for the value of the bare copper only. USCO ships the ICW to Supplyco in Canada.

USCO bills Supplyco for the cost to roll and size the bare copper into copper wire and for the cost to insulate the copper wire. On importation, the value for duty must include a value for the bare copper and insulation, which of course forms part of the base for the payment of Division III GST. Please note that the value for duty and therefore the value for Division III tax do not normally involve segregating the value of the bare copper and the value of the service to roll and size the bare copper into copper wire and to insulate the copper wire.

Questions:

1. Can Supplyco claim ITC for the Division III tax for the full value of the GST paid on importation even though the Division III tax is based on the total value of the ICW? Technically, Supplyco does not purchase the actual copper for re-supply and the supply of rolling and sizing into copper wire and for insulating the copper wire are performed physically outside Canada.

2. If the answer to question 1 is no, would the result change if the import documents segregated the value of the copper from the value to roll and size the copper into copper wire and for insulating the copper wire? In other words, will a partial amount of ITCs be allowed?

23. An unregistered non-resident (URNR) purchases goods from a Canadian GST-registered firm (Supplier) and requests that the goods be shipped to another Canadian registrant (Consignee). The Consignee issues a purchase order to URNR and the order is accepted outside Canada. To comply with Canadian-content rules, URNR often issues purchase orders to Canadian firms. All three parties employ section 179(2) of the ETA and complete the appropriate drop-shipment and unregistered nonresident certificates. Completing the certificates enables the Canadian GST-registered supplier to omit the GST from invoices to URNR. This is the only activity that URNR has in Canada. In other words, URNR has no employees, bank accounts, inventory, land, rental facilities, etc., in Canada.

Technically, URNR takes title to goods in Canada for re-supply. That is, URNR buys and resells the goods to the Consignee, albeit for only an instant. Under these facts and circumstances, we do not believe that URNR is carrying on business in Canada. Please confirm that, irrespective of the volume of its activity, URNR is not carrying on business in Canada if this is its only activity in Canada.

24. A Canadian GST registrant (Canco) purchases goods for use fully in a commercial activity. Canco is the importer of record and pays Division III tax on importation with the terms of sale from the non-resident supplier (NRS) being FOB Canadian destination. On the invoice to Canco, NRS charges Division II tax because the terms are FOB Canadian destination and NRS's GST registration number is not on the invoice. (The lack of a GST registration number on the invoice is the only unsatisfied requirement in respect of a claim for ITC). Upon contacting NRS, Canco discovers that NRS has applied for GST registration but has not received the number at the time of the supply to Canco. Notwithstanding the lack of a number, NRS is obligated to invoice, collect, and remit GST. May Canco recover the GST invoiced under Division II tax even though the documentation requirements are not fully satisfied as a result of the omitted GST registration number? If the answer to that question is no, may Canco recover the ITC when NRS receives its GST number and subsequently forwards it to Canto?

25. Where a GST-registered Canadian supplier ships goods to a GST-registered Canadian consignee of an unregistered non-resident and the consignee provides a proper drop-shipment certificate, Revenue Canada has advised that the supply of goods to the unregistered non-resident is deemed made outside Canada. In some cases, the Canadian supplier will pay the freight charge for delivering goods from its Canadian plant to the consignee's location and will invoice that amount separately to the unregistered non-resident. While the scope of the drop-shipment certificate is clear -- the goods are deemed sold by the supplier outside Canada and are not subject to GST by virtue of section 179(2) -- the treatment of the freight is not. Is the charge for the Canadian domestic freight subject to GST if it is shown separately on the invoice to the nonresident? If so, please explain the rationale.

26. At the CICA's September 1998 Commodity Tax Symposium, a representative from Revenue Canada outlined the Department's current position on the following fact pattern:

   A GST-registered firm leases a vehicle to a lessee who resides initially in
   the province of Nova Scotia. The lessor invoices harmonized sales tax (HST)
   at 15 percent of the value of the lease payments. Six months after the
   inception of the lease, the lessee moves to New York but retains the
   vehicle rather than incur additional financial costs for prematurely
   terminating the lease. The lessee obtains license plates for the vehicle
   from the State of New York. The lessor continues to invoice the lessee the
   GST at 7 percent for the duration of the lease even though the vehicle is
   now licensed in New York.

Please confirm that GST at 7 percent applies on the lessor's invoice to the lessee even though the vehicle is now used in New York. In addition, please explain the basis for the Department's position. If, instead of New York, the lessee moves to a province in Canada (other than Newfoundland and New Brunswick), please confirm whether GST at 7 percent or HST at 15 percent will apply, assuming that the vehicle is subsequently licensed in a non-participating province.

27. Under section 236 of the ETA, where a registrant is the recipient of, or pays an allowance in respect of, a supply of food, beverages, or entertainment and subsection 67.1 of the Income Tax Act applies, 50 percent of the amount of the ITC claimed in a return must be recaptured. Some tax practitioners have approached TEI members (who work for GST-registered companies involved 100 percent in a commercial activity and eligible for full ITCs) suggesting that the companies may claim 100-percent ITCs instead of 50-percent ITCs on reimbursement of employee food, beverage, and entertainment expenses (hereinafter referred to as meals and entertainment expenses (M&EE)). The outside tax practitioners aver that, in order for section 236 to apply, the registrant must be the recipient of, or pay an allowance. Since the word "reimbursement" is not used in the statute, the practitioners argue that ITC on reimbursed employee M&EE is not subject to recapture. In addition, Revenue Canada's Policy Paper No. 75 seemingly supports the position that a reimbursement is not the same as an allowance.

Section 169 provides the general legislative basis for a registrant to claim ITCs. Section 175 provides the legislative basis for a registrant to claim ITC on payment of a reimbursement to an employee. When an employee incurs M&EE, the practitioners suggest that the employee rather than the employer is the recipient of the supply and the employee is liable to pay the GST. Moreover, they argue, section 175 does not deem the supply of M&EE (made initially to the employee) to be made to the employer. The practitioners are of the view that, since the statute does not include a deeming rule, the employer is not a recipient and, hence, section 236 does not apply. If a deeming provision were present in the statute, they say, the employer would be the recipient and the section 236 recapture provision would apply.

At the CICA's September 1998 Commodity Tax Symposium, a representative from Revenue Canada stated that current law supports the reduction in ITC by 50 percent. Please confirm Revenue Canada's position on this or provide us with an update of any change in position.

28. Generally, once a registrant elects to file GST returns according to fiscal months, the election cannot be changed until a subsequent fiscal year. As a result of unforeseen events, there may be circumstances where a company wishes to change its election and the dates for filing its GST returns. For example, following its acquisition an acquired company may wish to change its filing dates in order to conform with the GST filing periods of the parent company. With similar filing periods, the companies can avail themselves of the subsection 228(7) Offset Taxes election. Please explain under what circumstances, if any, Revenue Canada will permit registrants to change the time for filing their GST returns.

29. A number of taxpayers, industry groups, and professional associations (including TEI) have requested clarification of the documentation requirements for ITC where corporate procurement cards are employed. The burgeoning use of these cards is driven, in part, by the elimination of purchase orders and individual invoice payment for high-volume, low-dollar value transactions. Revenue Canada has so far demonstrated little flexibility in respect of the documentation requirements for purchase transactions, including those generated through procurement cards. For example, Policy Paper 184, which summarizes the criteria for use of the 6/106 formula method for claiming ITC in respect of reimbursement of the registrant employee's business expenses, requires that there be joint and several liability of the employee and the employer corporation for the credit-card balance. The joint and several liability requirement does not pose a problem where the employee uses a personal credit card. In the case of procurement cards, however, few (perhaps no) companies require the employee to accept personal liability for payment of a delinquent account. Revenue Canada's stringent view thereby precludes the use of the 6/106 formula calculation. As a result, procurement-card users must retain copies of invoices to support the GST paid on each transaction thereby substantially diminishing the benefits of a procurement card. We understand that Revenue Canada is working on a Policy Statement on the tax implications of procurement cards. Can you comment on when such a policy will be issued? Until the policy is released, how should registrants claim and support ITC for expenses incurred through the use of a procurement card?

30. Canco, a company engaged exclusively in commercial activities, purchases a system comprised of hardware and software, from Foreignco, an unregistered non-resident. The system will be physically supplied to Canco in Canada by Dropshipco. Both Canco and Dropshipco are GST-registered residents of Canada. Pursuant to the provisions of paragraph 179(2)(c) of the ETA, Canco (the consignee) provides Dropshipco with the requisite drop-shipment certificate that relieves Dropshipco from the obligation to collect GST from Foreignco on the fair market value of the property supplied in Canada. After Canco takes possession and ownership of the system in Canada, an employee of Foreignco is sent to Canada to program one of the system components. Performing this work requires the Foreignco employee to take physical possession of this particular component (hardware containing software) while in Canada, but outside of Canco's physical premises. After the programming is performed in Canada, the component is returned to Canco's premises where it is permanently installed with the rest of the system.

Does the temporary transfer of physical possession of the component to Foreignco's employee while in Canada result in Canco's incurring a liability to self-assess GST on the fair market value of the unit? This is seemingly the result under Paragraph 3 of Policy Statement P-107 Certificate for Pre-retail Drop-shipments, which states "[i]f the Consignee subsequently transfers physical possession of the property to a person who is not registered for the purposes of the Goods and Services Tax, otherwise than for export, ... the Consignee will be required to account for the Goods and Services Tax on the fair market value of the Property at that time." If that interpretation of Policy Statement P-107 is correct, can the GST liability be avoided by haying one of the parties complete other documentation? There seemingly is no such form, so is there a mechanism through which the self-assessed GST can be recovered by Canco or one of the other parties?

Assume that, instead of the Foreignco employee travelling to Canada to program the component in Canada, Canco exports the component to Foreignco's facilities outside Canada for programming by Foreignco employees. The component is then reimported to Canada. Is Canco relieved of its liability to account for GST on the fair market value of the property under section 179?

31. Will Revenue Canada please comment on whether the new definition of "telecommunication facility" includes services such as call-waiting, call-forwarding, or call-display? These services are generally provided to customers for a fixed monthly price by telephone companies.

32. On March 21, 1997, the Minister of Finance tabled draft regulations and a Notice of Ways and Means Motion concerning the HST and GST (News Release 97-024). The draft regulations reflect changes to the GST and provide implementation rules for the HST. In addition, very specific place-of-supply rules were introduced concerning Internet access. Under the rules, the place of supply of "an access to the Internet" is based on the number of end users accessing the Internet, the ordinary location of the users when accessing the Internet, and, in some cases, on the mailing address of the recipient of the supply. Do these new place-of-supply rules for an access to the Internet apply to access to an Intranet or an Extranet?(1)

33. Anecdotal reports from customs brokers suggest that, across Canada, Customs may apply differing subjective judgments in assessing the risk profile of Canadian importers. Hence, we invite a discussion with Revenue Canada on whether standards might be published that would permit companies to establish that their internal control procedures and compliance with Customs rules are sufficiently rigorous to warrant expeditious clearance. For example, will Revenue Canada consider publishing standard guidelines and procedures for Periodic Verification Reviews? Such guidelines could be similar in scope and effect to the Compliance Assessment Team (CAT) Kit released by the United States Treasury. We believe that such guidelines would enhance nationwide consistency in the treatment of importers.

34. Assume the following facts. A consultant offers his services to a Canadian company and both the consultant and the company are GST registrants. The services are performed equally in Ontario, Quebec, and New Brunswick. In connection with performing the work, the consultant incurs expenses in each of the three provinces. The consultant invoices the company for his services and separately invoices for the expenses without itemizing them by province, i.e., the consultant invoices on a net of GST or HST basis assuming full recovery of the GST or HST. The place of negotiation is Quebec. Does GST or HST apply to the services and expenses? If GST applies to the services, would it also apply to the expenses even if some of the expenses are incurred in New Brunswick? Would the answers change if the place of negotiation is Halifax, Nova Scotia?

35. The owner of a commercial building makes substantial improvements to a portion of a building for a new, GST-registered lessee. The lessee is unable to pay for the improvements at the inception of the lease. As a result, the lessor enters into a financial arrangement whereby the improvements are paid for over a term of 36 months, but the GST on the improvements is invoiced separately and payable immediately. After three months, the lessee declares bankruptcy. At the time of bankruptcy, the lessor has collected three payments under the financial arrangement, but the invoice for the GST on the improvements remains unpaid. Under such circumstances, can the lessor make a calculation under section 231 of the ETA for the uncollected GST on the improvements?

36. Would Revenue Canada please confirm whether an ITC can be claimed under section 174 of the ETA in respect of a relocation allowance given to an employee by his employer in connection with a move within Canada? The employer is a GST registrant.

37. Companies frequently sponsor events hosted by public-sector bodies whereby a sponsor donates cash or company products or lends employees to provide services on behalf of the public-sector bodies. In return, the public-sector bodies provide a banner at the event site or otherwise incorporate a company's logo into printed program material that acknowledges the company's sponsorship. Under section 135 of the ETA, a cash payment to a public-sector body is not subject to GST It would seem inequitable and contrary to sound policy to subject the value of' contributions in kind or in services to GST. Would Revenue Canada please confirm that GST does not apply when goods and services are donated to a public-sector body?

38. Schedule VI, Part V, Sections 7 and 8, address zero rating of services provided to non-residents. Would Revenue Canada confirm whether advertising and promotion services are zero rated under Section 7?

For purposes of Sections 7 and 8, please confirm that Revenue Canada will accept the certificates described in Policy Paper P-009 as evidence that the recipient is an unregistered non-resident. If such certificates are not provided by the non-resident but a formal contract exists that indicates the foreign address of the non-resident, is that sufficient evidence to establish non-residence? Where there is no formal contract, will a foreign billing address constitute sufficient, evidence to establish the non-resident status of the recipient?

39. Assume the following facts. A retailer enters into an agreement with a distributor. Under the agreement, the retailer undertakes to promote both the sale of products sold by the distributor to the retailer and the distributor's brand name in general. The promotion of the distributor's products and brand name is carried out in one or more of the following methods:

   * the retailer advertises the products or brand name in flyers distributed
   to the public;

   * the retailer exhibits signs or posters in its outlets advertising the
   products or brand name;

   * the retailer broadcasts the products or brand name in radio and
   television commercials; or

   * the retailer offers a promotional sale discounting the regular selling
   price of the distributor's products.

Under the agreement, the distributor grants various allowances for advertising, volume purchases, warehousing, and prompt payment. The allowances are generally provided as discounts from the price of the goods sold to the retailer. For special promotional events, the retailer and the distributor enter into separate agreements for additional one-time advertising. For example, the retailer may decide to publish an advertising flyer promoting the products or brand names of several suppliers. Such separate agreements usually provide for a flat fee payable by each supplier and for which the retailer issues a separate invoice. Our questions are, as follows:

If the promotional activities carried out by the retailer are related in whole or in part to the distributor's brand-name recognition, or to the distributor's products in general, rather than solely to specific and identifiable products supplied by the distributor and resold by the retailer, is the allowance granted to the retailer considered a promotional allowance to which section 232.1 applies?

2. If the allowance granted to the retailer for the promotional activities is a fixed amount (i.e., the allowance does not vary with either the volume of goods purchased or resold), would the answer to question 1 be different?

3. If the allowance granted to the retailer relates in whole or in part to products that have not yet been supplied by the distributor to the retailer, but are reasonably expected to be supplied in the future, would the answer to question 1 or 2 be different?

4. To the extent that section 232.1 applies, in what circumstances does subsection (e) rather than subsection (d) apply? For example, if the retailer issues a separate invoice for promotional activities that do not relate to specific purchases from the distributor (such as where the retailer enters into a separate agreement to provide additional advertising that is not contemplated at the time orders for the goods are placed), does this imply that the amount has not been allowed as a credit or a discount?

40. Assume the following facts. A, a GST-registered non-resident, makes a taxable supply to B, an unregistered non-resident, and hence is required to invoice, collect, and remit Division II tax where the goods are made available in Canada (i.e., delivered FOB Canadian site). B will sell the goods to C, a GST-registered resident, and C, in turn, will sell the goods to D, a GST-registered resident. The Division II tax on the initial invoice from A to B is not recoverable since B is an unregistered non-resident. C will also invoice, collect, and remit Division II Tax on its invoice to D. If B provides C with documentation proving that B paid the Division II tax to A, please confirm whether section 180, in conjunction with section 179(2), will permit C to claim an ITC for the Division II tax invoiced from A to B. In addition, please indicate whether A's invoice to B (which reflects the Division II tax), if provided by B to C, will satisfy the documentation requirements for C to claim ITC.

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 1, 1998, liaison meeting.

(1) Our understanding of an Intranet is that it consists of a private, internal computer network that links employees, departments, and offices within a specific organization. It includes firewalls, hardware, software, routers, and support services. An Intranet permits all parts of a company to access the same databases and application software. An Extranet is a secure, managed network that connects "communities of interest," for example, a direct link between a business and its suppliers, customers, and partners. An Extranet is based on the same protocols as the Internet. Unlike the Internet, however, access to an Extranet is generally restricted to specified users for services, information, applications, and content. The main components of Extranet offerings are mail service, private and public user group discussions, installation of client-side routers, Web-Page hosting services, File Transfer Protocol servers, etc.