Tax Executives Institute - Revenue Canada liaison meeting on excise and commodity tax issues; December 13, 1994.

On December 13, 1994, Tax Executives Institute held its annual liaison meeting with representatives of Revenue Conado--Customs, Excise, and Taxation on a variety of excise and commodity tax issues (including those relating to the Goods and Services Tax). (Separate meetings were held with Revenue Canada on income tax issues, and with the Deportment of Finance on both commodity and income tax issues). TEI's Revenue Canada liaison meeting on commodity tax issues was coordinated by Pierre M. Bocti of Hewlett-Packard (Canada) Ltd., chair of TEI's Canadian Commodity Tax Committee, and C. Graham Kennedy of MacMillan Bloedel Limited, the Institute's Vice President-Region I (Canada). Participating in the meeting were TEI'.s President Linda B. Burke, Executive Director Michael J. Murphy, and members of the Commodity Tax Committee and Institute staff. The agenda for the liaison meeting is reprinted in the January-February 1995 issue of The Tax Executive (beginning on page 67), and Revenue Canada's written responses to the questions posed in the agenda are reprinted below.

I. Electronic Data Interchange (EDI) Systems

Section 2 of the Input Tax Credit Information Regulations (the "Regulations") defines "supporting documentation" as "the form in which information prescribed by section 3 is contained." Section 3 enumerates the required information to be contained in the documentation supporting ITC claims. Pursuant to paragraph 2(g) of the Regulations, "supporting documentation" includes "any record contained in a computerized or electronic retrieval or data storage system." EDI systems are covered by the definition of "supporting documentation" of the Regulations.

The prescribed information is not required to be contained in a single document. Where the information related to an ITC claim is distributed between EDI systems and other supporting documentation, the registrant has obtained the documentary requirements for claiming an ITC, provided that the documents refer to one another.

As for the Credit Note Information Regulations, the Regulations cover information requirements and do not apply to the form in which the information must be contained.

II. Alternate Valuation of Imported Software

Excise/GST, in close consultation with Customs and the Department of Finance, has developed a new administrative approach to assessing the GST on imported custom software supplied under a signed/specific license agreement. There is no change in the treatment of other types of imported software packages. The new policy is explained in Technical Information Bulletin B-037R, Imported Computer software dated November 1, 1994, and in Customs MemOrandum D13-11-6, Determining Value For Duty of Computer Software dated November 23, 1994.

Effective December 1, 1994, the Department will treat the software component of imported licensed custom software as intangible personal property, which will be taxed in one of two ways:

* if the nonresident supplier is registered for the GST and the supply is deemed by subparagraph 142(1)(c)(i) to be made in Canada, the tax will be collected by the supplier; or

* if the nonresident supplier is not registered for the GST, the Canadian licensee may be required to self-assess the tax under Division IV if the software is not for use exclusively in commercial activities.

In each of these situations, the GST at the time of importation will be collected on the value of the carrier medium only.

III. GST on Supplies

The promise of credit by A to B in return for permission to use new investigative techniques developed by B is only one transaction among many that are envisaged in the agreement. Given the fact that those transactions are linked to each other and follow a sequence of events it would be easier to understand the tax consequences of one transaction if one could see the tax consequences of all the transactions from the beginning to the end of the sequence of events.

The agreement entered into between A and B contains several elements: sale of old equipment, payment of $5 million, granting of a right to use new technology (referred to as "supply of new technology"), and granting of a conditional right to the reduction of consideration for future purchases (referred to as "supply of credits"). It is the Department's view that each of those elements, except for the $5 million payment, would constitute a separate supply. If they are separate supplies, when do the supplies occur? Are they all taxable supplies? Some of the supplies would take the form of barter. If they are taxable, how do we determine the value of consideration and the time of tax liability for each supply?

When do the supplies occur (i.e., time of supply)? Pursuant to section 133 of the Act, an agreement to provide any property or a service is treated as a supply of the property at the time the agreement is entered into. Paragraph 133(b) further states that the actual provision of the property or service under the agreement would become part of the original supply (i.e., agreement) and not a separate supply. All three supplies (sale of old equipment, the supply of new technology, and the supply of credits) would be deemed to have been made at the time the agreement is entered into in 1994.

Since the supply of credits is dependent upon the future sales (i.e., a condition), one could argue that an agreement to provide the credits would not exist until such time those sales occur (i.e., the condition is satisfied). However, B (the recipient or potential recipient of the supply) has agreed to pay the consideration (i.e., supply of new technology) prior to the condition's being satisfied. This is an indication that the parties have agreed on each other's obligations to make supplies at the time the agreement is entered into in 1994.

Are they all taxable supplies? Assuming that no special rules apply to the transactions (e.g., A is not supplying capital personal property, i.e., old equipment, which immediately before the sale is used otherwise than primarily in A's commercial activities), all of the supplies would be treated as taxable supplies. In the case of the supply of credits, we have assumed that they do not carry a right to be paid money (i.e., a debt security) or have any cash surrender value but can only be applied against the purchase of new equipment.

How do we determine the value of consideration and the time of tax liability?

(i) Sale of old equipment by A to B. Under the agreement, the consideration for the sale of equipment is expressed partly in money ($5 million) and partly by way of a supply of property (i.e., supply of new technology developed by B). As to the value of consideration that has been expressed in money (i.e., $5 million), the tax would become payable on the earlier of (i) the day that amount is paid or becomes due or, (ii) under paragraph 168(3)(a) of the Act, at the latest, the last day of the calendar month following the month in which ownership or possession of the equipment is transferred to B.

As for the other part of the consideration (i.e., the supply of new technology developed by B) of which the value may not be ascertainable at the time the tax is deemed to become payable under paragraph 168(3)(a), the tax would not become payable until the value is ascertainable. Given the linkages that exist between the transactions, the time the value is ascertainable would be the time the value of credits are determined (see our discussion below).

(ii) Supply of new technology B to A. The supply of new technology is made by B as further consideration for the sale of equipment by N. Therefore, one must determine whether any part of the value of the equipment supplied by A is attributable to the supply of technology by B. For example. if the fair market value (FMV) of the equipment exceeds $5 million. that excess value would be treated as part consideration for the supply of technology by B.

The other part of the consideration for the supply of new technology is the promise made by A to provide a credit to B that could be applied later as a partial payment toward the purchase of new equipment from A. What would be the FMV of the promise at the time the agreement is entered into in 1994? Most likely, the value would be nil. In the case of a supply of intangible property (i.e., supply of a right to use new technology), there are no overriding rules such as paragraph 168(3)(a) to deem the tax to become payable or subsection 168(6) to defer the valuation of consideration to the time value is ascertainable. Consequently, no tax liability would arise for that part of the consideration that is expressed in property (i.e., supply of credits).

(iii) Supply of credits by A to B. The consideration for the supply of credits by A to B is the supply of new technology by B to A. Similar to the arguments presented in (ii) above, the FMV of the right to use new technology at the time the right is supplied in 1994 would most likely be nil since the techniques have not yet been developed. Accordingly, no tax liability would arise for the supply of credits by A to B.

(iv) Sale of new equipment by A to B. If B uses the credits earned as a partial payment toward the purchase of new equipment from A, what would be the consideration for the sale of new equipment? As noted earlier, the credits are rights earned by B. The redemption of the credits would be a surrender of those rights for the purpose of purchasing new equipment. Therefore, value of the credits redeemed by B at the time of purchase would be treated as part consideration for the sale of new equipment by A.

It is important to note that neither the sale of new equipment nor the surrender of credits was part of the agreement entered into in 1994. Thus, the FMV of the credits surrendered would be determined at the time the sale of new equipment is made and not any earlier. For example, if B purchases $10 million of equipment, in the year 2003, for $9 million cash and by using $1 million of credits, the total value of consideration would still be $10 million. If the sale of equipment is subject to 7% GST, the tax would be calculated on $10 million and not $9 million.

(v) Use of credits b; B to purchase new equipment from A. As noted before, the use of credits would be a supply (i.e., surrender of a right) made by B to A and, if we follow the example in (iv) above, the tax would be payable by A and be collectible by B on $1 million at the time the credits are used to purchase the new equipment in the year 2003.

IV. Input Tax Credit

With reference to the questions posed in the agenda--

In (a), the recipient would be considered as correctly identified. The trade name under which a recipient operates is considered as sufficient identification.

In (b), the recipient would be considered as correctly identified. The legal entity name of the recipient is considered as sufficient identification. The recipient may indicate that payment is payable at the address of a third party.

In (c), the recipient will be the person who has the liability to pay for the expenses. ITCs may be claimed by the building manager for the supplies acquired by the building manager for supplying management services and for which the manager is the recipient.

In (d), the owner would be considered as the recipient of the supplies acquired pursuant to an agency agreement where the owner is the principal. The supplies acquired otherwise than pursuant to the agency agreement would be examined in the light of the general rules.

In the case of (e), the name of the owner of the building to the care of the manager indicates, prima facie, that the owner is the recipient of the supply.

In (f), we are unable to determine without additional facts who is the recipient of the supply. The fact that the invoice is addressed to the bank by the supplier does not mean that the bank is the recipient of the supply, i.e., the person liable to pay consideration to the supplier of the supply in respect of which an ITC is claimed.

In (g), we are again unable to determine without additional facts who is the recipient of the supply. If the party assumed the liability for the payments due before foreclosure, and is still liable, the fact that the supplier invoices the bank will not modify the fact that the party is the recipient of the supply.

V. Input Tax Credits on Volume Discounts

There has been no change in the Act with respect to the eligibility to claim "input tax credits" (more accurately referred to as adjustments to tax) related to volume discounts. The amendment referred to relates to the treatment accorded manufacturer rebates. Specifically, section 181.1 of the Act establishes the conditions for application of tax when a manufacturer's rebate is paid. For the rules of this section to apply, the following conditions must be satisfied:

(1) the rebate must be paid in respect of a taxable supply, other than a zero- rated supply, of property or service supplied by a registrant;

(2) the supply must be made in Canada;

(3) a particular person must acquire the property in question from the person providing the rebate, or from another person;

(4) the rebate cannot qualify as an adjustment, refund, or credit of tax under section 232; and

(5) the person providing the rebate must provide written indication that a portion of the rebate is an amount . . . [?].

As noted in the question, the last of these conditions was introduced effective January 1, 1993. However, as already stated and further illustrated in the conditions for the application of section 181.1, even in the absence of the fifth condition, this section does not apply to volume discounts.

A reduction in the consideration previously used to calculate GST payable occurs as a result of surpassing a certain volume of purchases and a volume discount (sometimes referred to as a "rebate") is paid. Such a discount would be included under the provisions of section 232 as an adjustment of tax. As a result, the provisions of section 181.1 would not apply and input tax credits would be available by virtue of this section.

In fact, reducing one's net tax by virtue of a volume discount is only possible where the conditions of subsection 232(2) have been met and the rules in subsection 232(3) have been followed. Specifically, without an adjustment to the tax charged or collected pursuant to subsection 232(2) and the subsequent issuance of a GST credit/debit note (including prescribed information) pursuant to paragraph 232(3)(a), a person is not permitted to reduce their net tax (equivalent to claiming an input tax credit as referred to in the question).

VI. Selling Business Assets

(a) Our understanding of your question is that you wish to know which date is significant for the purpose of filing the election form GST 44 pursuant to the preamble of subsection 167(1.1) of the Act. This subsection states in part that the recipient must file the election within the relevant reporting period in which tax would have become payable.

Subsection 168(1) sets out the general rule on when tax is payable with respect to a taxable supply. Tax is payable by the recipient on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due.

Subsection 152(1) establishes the time at which the consideration for a taxable supply becomes due. In general, the time at which consideration for a supply becomes due is the earliest of certain dates including the day on which, under a written agreement, the recipient is required to pay consideration or part thereof to the supplier for the supply.

Generally, if the closing date is the date, identified in the agreement, when the ownership and possession of the property is transferred and when the consideration is paid or required to be paid, then the closing date would be considered to be the date when tax is payable. Consequently, in the above case, the recipient would be required to file the election form (GST 44) during the first reporting period that includes the closing date of September 1, 1994.

(b) We assume the question refers to a situation in which the property is transferred and the consideration becomes due on one date, i.e., September 1, 1994, while the effective date of the agreement is an earlier date, i.e., June 1, 1994. The rules described in tat above would apply and therefore the recipient would be required to file the election during the first reporting period that includes the closing date of September 1, 1994.

(c) The party responsible for reporting the GST and claiming the ITCs on transactions occurring in the interim period would be determined by the facts of the particular case. The actual circumstances and the agreement would have to be reviewed in that situation.

VII. Responsibility for Late Filing of GST Election

Subsection 167(1.1) of the Act requires that the recipient must file the joint election within the relevant reporting period or as the Minister may determine on application of the recipient. Where the recipient did not file the GST 44 election form, the supplier would generally still be responsible under subsection 221(1) for collecting and remitting the GST. However, depending on the facts of the particular situation, the Department may accept the late filing of the GST 44 election form. For example, unusual circumstances beyond the registrants control such as a fire or a serious illness or accident.

VIII. Projection of Audit Sample Errors

A recipient's obligation to pay tax in respect of a taxable supply made in Canada is not discharged by the fact that the supplier has incorrectly charged the tax. Where there are no contractual or common law restrictions to prevent the issuance of amended or additional invoices, the supplier could charge the recipient for additional amounts of GST. However, the recipient is only liable to pay additional amounts that are in respect of the taxable supplies that it has acquired. The total amount payable by the recipient must equal 7% of the value of the consideration for the supplies. The supplier, as agent of the Crown, cannot collect more than 7% GST in respect to the taxable supplies.

If eligible, the recipient may claim input tax credits for the GST charged by the supplier as a result of the audit, to the extent that they were not claimed previously. It should be noted that input tax credits may only be claimed once the documentary requirements have been met.

Where the transactions were assessed on a tax-included basis, the supplier cannot charge the recipient for additional GST amounts as the transactions were treated as if the GST was included in the amounts paid or payable by the recipient.

IX. Proof of Non-Residence and Non-Registration

In order for the drop-shipment provisions contained in section 179, and the flow-through provisions contained in section 180. to apply, GST-registered suppliers should retain satisfactory evidence on file indicating that their customers are nonresidents and not registered for GST purpose Appendix B of GST Memorandum 300-3-5 (Exports) list documentation, to be kept on file, that generally will be acceptable to the Department of National Revenue certification that the persons to whom the supplies are being made are not residents of Canada and not registered for GST purposes. Although the documentation listed in the memorandum is in respect of the zero-rating provisions contained in Schedule VI, Part V to the Act, this documentation would also be acceptable for purposes of sections 179 and 180. However, it should be noted that the Department will also consider other forms of documentation as proof of non-residence and non-registered status.

X. Schedule VI, Part V, Section 2 of the Excise Tax Act Zero-Rates

It is not clear from the information provided if Company B is a railway company or another firm, such as leasing company. If Company B is a railway company, the repairs supplied by the Canadian railway company to Company B could qualify for zero-rating under Schedule VI, Part V paragraph 2(a).

On the other hand, if Company B is a leasing company, the repairs would not qualify for zero-rating under Schedule VI, Part V, section 2 because the leasing company would not be in the business of transporting passengers or property to or from Canada by railway. However, if the supply is for an "emergency repair service," the repairs may qualify for zero-rating under Schedule VI, Part V, section 6 when supplied to a leasing company.

XI. Title Transfer Point and GST

As Company A is supplying goods to Company B "FOB site in Canada," the supplies are deemed to be made in Canada under the provisions of paragraph 142(1)(a) of the Excise Tax Act (Act). As the recipient of taxable supplies made in Canada, subsection 165(1) of the Act requires Company B to pay Division II tax equal to 7% of the value of the consideration for the supplies. Subsection 221(1) of the Act requires Company A to collect the tax from Company B. The fact that Company B was the importer of record and paid tax under Division III to Canada Customs is not relevant when determining whether tax applies under Division II.

Providing Company B is a GST registrant, subsection 169(1) of the Act provides that it would be eligible to claim input tax credits equal to the fraction of the tax paid or payable (under both Division II and Division III) that represents the extent to which the goods are for consumption, use or supply in the company's commercial activities.

In order to properly determine the place of supply of the tangible personal property (TPP), we must look at where the TPP is, or is to be, delivered or made available to the recipient, not where title transfers. The Department has developed an administrative policy on the meaning of the phrase "delivered or made available" for purposes of the place of supply rules for TPP (Policy statement P-078 Meaning of the Phrase Delivered or Made Available in (or Outside) Canada to the Recipient).

For purposes of paragraphs 142(1)(a) and 142(2)(a), the phrase "delivered or made available" has the same meaning as that assigned to the concept of"delivery" under the law of the sale of goods:

* "Delivered" refers to those situations where delivery of the TPP under the applicable law of the sale of goods is effected by actual delivery. In other words, delivery of the TPP may be effected by a transfer of the actual physical custody of the TPP from the seller to the buyer.

* "Made available" refers to those situations where delivery of the TPP under the applicable law of the sale of goods is effected by constructive delivery (i.e., actual physical possession of the TPP is not transferred to the recipient of the supply).

In any given case, the place where the TPP is delivered or made available may be determined by reference to the place where the TPP is considered to have been delivered under the law of the sale of goods applicable in that case.

Generally, the place where the TPP is delivered or made available can be determined by reference to the terms of the contract. In common law provinces, the law of the sale of goods is primarily contained in the appropriate Sale of Goods Act. In the province of Quebec, the obligation of the seller to deliver the TPP to the buyer is contained in the Civil Code rather than in a Sale of Goods Act.

In those cases where the contract between the parties is governed by the United Nations Convention on Contracts for the International Sale of Goods (Convention), the place where the TPP is delivered or made available will have to be determined in accordance with the rules relating to delivery contained in the Convention, rather than in accordance with the domestic law of any province.

It is important to note that the transfer of title may or may not occur at the same place where the TPP is delivered or made available for purposes of paragraphs 142(1)(a) and 142(2)(a). For example, pursuant to a conditional sales contract the recipient may receive actual or constructive delivery of the TPP outside of Canada, even though the transfer of title only occurs at a much later date in Canada, after another condition under the contract is fulfilled.

XII. Entitlement of ITC

The agenda posed the following situation: A non-registered, nonresident company ships goods directly to a Canadian customer. A Canadian subsidiary acts as importer of record and pays GST. In turn, for clearing the goods, the Canadian subsidiary receives a fee. Is the Canadian company entitled to an ITC?

The answer is no. To claim an ITC in respect of Division III tax, the claimant must be the actual importer of the related goods. Depending on the facts of the situation, the actual importer of the goods could be either the nonresident parent company or the Canadian customer. It would have to be determined whether the nonresident parent company imported the good for supply to the Canadian customer or whether the Canadian customer caused the importation to occur. In any case, the subsidiary who acted as the importer of record and whose role limits itself to clearing the goods would not be considered as the actual importer of the goods. In identifying the actual importer, the facts of any particular case should be examined on their own merit.

The Canadian subsidiary cannot claim an ITC pursuant to subsection 169(2) of the Excise Tax Act as the Canadian subsidiary would have to be the actual importer to claim the Division III tax on the imported goods. Also, the service of clearing the goods is not a "commercial service" as defined in the Act. The Department requires a direct and functional link between a service and a good for the service to be considered as a commercial service in respect of the good. The clearing of the goods is not considered as a commercial service in respect of the goods that are cleared.

The flow-through provisions of section 180 are not applicable since the property was not supplied to the Canadian subsidiary by the nonresident and the registrant is not supplying a commercial service to the nonresident. Also, for section 180 to apply, Division III taxes have to be paid by the nonresident, which cannot be determined from the facts in the question.

XIII. Wash Transactions

The wash transaction policy applies where a supplier does not properly charge tax to a recipient who would have been entitled to claim a full input tax credit had the tax been properly applied. In such situations, penalty and interest may be reduced to 4% of the tax not properly charged.

This policy, as announced by the Department of Finance, was not intended to apply to all circumstances where there is no net loss of revenues for the government. Technical Information Bulletin B-074 entitled "Guidelines for the Reduction of Penalty and Interest in Wash Transaction Situations" has recently been released. This bulletin, which was developed in consultation with the Department of Finance, provides for the conditions and circumstances under which the reduction of penalty and interest will be considered by the Department.

With respect to the failure to self-assess on the acquisition of real property, where there are no revenue implications discretion may be exercised if there are unusual circumstances. The Department will not automatically allow administrative tolerance just because there are no revenue implications. As it is now several years since the implementation of the GST, most registrants involved in real property transactions or their legal representatives should be aware of a recipient's obligation to self-assess and file a return. Even if the transaction occurred in 1991, presumably the recipient would have subsequently become aware of its obligations and the situation could have been rectified through a voluntary disclosure.

Where discretion is exercised during the audit process, the input tax credit offsets the tax payable as if the ITC was originally claimed and the return accounting for the tax payable was filed on time. Subsection 296(5) of the Excise Tax Act ensures that the ITC, which is refundable to the person as net tax and applied to the tax payable, is deemed to be paid to the person. Furthermore, the tax payable which is offset by the ITC is deemed to be paid by the person. As such, no penalty and interest will be payable. It should be noted that discretion will not be given where the person has already claimed an ITC in respect of the acquisition of real property but did not pay any tax.

XIV. Assessments on Putative Wash Transactions

Pursuant to section 232 of the Excise Tax Act, where a supplier makes an adjustment (i.e., to correct a pricing error) and reduces, refunds or credits the tax payable in respect of the supply, the supplier is required to issue a GST credit note containing prescribed information unless the recipient issues a debit note (also containing the same prescribed information). Once tax has been adjusted pursuant to subsection 232(1) or 232(2), the legislation provides an option with respect to deciding whether a credit or debit note will be issued. However, the supplier's obligation to issue a credit note is not extinguished until and unless the recipient has issued a debit note.

Where a unilateral adjustment is made, the Department may, pursuant to section 296 of the ETA, assess either the supplier or the recipient depending on the facts of the particular situation. For example, where a supplier makes an adjustment and issues a credit note, the recipient will be assessed if the amount was not added in determining its net tax (i.e., assuming that an input tax credit had been claimed for the original amount). However, if the supplier makes an adjustment and does not issue a credit note and there is no evidence that the recipient issued a debit note, the supplier will be assessed.

XV. Recovery of Unclaimed ITC

Pursuant to subsection 245(1) of the Excise Tax Act, the reporting period of a person who is neither a listed financial institution nor a registrant is the calendar month.

A non-registrant person who is not a listed financial institution and who has not claimed an input tax credit for a previous reporting period at which time it was a registrant, may file a return for a particular calendar month and in that return calculate its net tax. Provided the input tax credits are claimed within the four-year period, a net tax refund may be claimed by the person.

Pursuant to the Department's revised policy, "Adjustments to GST Returns," as a general rule, written requests to adjust a return to claim missed input tax credits will not be accepted without a corresponding increase in tax liability for the same reporting period. Given that the legislation provides that the person in the above situation may still claim the input tax credit in a return, a written request to amend a previously filed return will not normally be accepted.

It should be noted that the Act does not provide for a rebate for the tax that was properly payable by the registrant.

XVI. Imported Services

The Department's position is that the deeming provisions of subsection 186(1) of the Excise Tax Act are for purposes of determining an input tax credit only and do not extend to section 217. Therefore, in this situation, the holding company is required to self-assess the tax on the imported services under Division IV and then apply the normal input tax credit rules to those expenses which meet the conditions for the deeming provisions of subsection 186(1).

However, by virtue of section 318, the Minister has the authority to set-off refund amounts against amounts of tax payable. Generally, if specifically requested, the Minister will perform such a set-off provided the GST 59 on which tax payable is self-assessed is filed together with a return in which a net tax refund is claimed.

XVII. First-Order Test

In the situation described in the agenda, section 141.01 should be read in conjunction with subsection 185(1). Subsection 185(1) was amended at the same time section 141.01 was introduced, to clarify how it applies when read together with new subsection 141.01(2). Specifically, subsection 185(1) now provides that the extent to which properties and services are acquired or imported for consumption, use or supply in the course of making supplies of certain financial services is to be determined in accordance with new subsection 141.01(2). To that same extent, those properties and services are then deemed by section 185 to have been acquired or imported for consumption, use or supply in the course of commercial activities. Thus, provided the company is not a financial institution, input tax credits are available with respect to the costs incurred in raising the requisite capital for expansion to the extent that the expanded operations constitute, or are part of, a commercial activity.

XVIII. Mitigation or Abatement of Penalties

The intent of the amendment to the Excise Tax Act to provide for the waiver or cancellation of penalty is stipulated in the explanatory notes accompanying the legislation. The Department of Finance indicated that Revenue Canada would issue guidelines identifying the circumstances and conditions under which penalty would be reduced, waived or canceled. These guidelines were developed in consultation with the Department of Finance.

GST Memorandum 500-3-2-1 entitled "Cancellation or Waiver of Penalties and Interest," published on March 14, 1994, provides for the circumstances and conditions under which penalty and interest will be waived or canceled where a person is prevented from complying with the legislation due to extraordinary circumstances that are beyond the person's control.

Technical Information Bulletin B-074 entitled "Guidelines for the Reduction of Penalty and Interest in Wash Transaction Situations" was published on November 28, 1994. This bulletin provides for the conditions and circumstances under which the reduction of penalty and interest will be considered by the Department.

It should be noted that GST Memorandum 500-3-4 entitled "Voluntary Disclosure" also provides that in certain circumstances the Department may exercise discretion to waive penalty to encourage voluntary disclosures.

At present, the Department is not contemplating the automatic waiver of penalty at the time of a registrant's first audit. There was a clear message of intended tax policy by the Department of Finance in the announcements dealing with the Fairness Package and the "wash transaction" initiative. In general, to ensure that there is no erosion of the multi-stage nature of the GST, penalty and interest are imposed subject to the exceptions previously mentioned.

XIX. Audit Techniques Employed by Quebec

Under an agreement with the federal government, Ministere du Revenu du Quebec (MRQ) has responsibility for the administration of the GST in the Province of Quebec and the terms of the agreement specify that MRQ will work within the national norms and standards. The federal administration has the final statement on interpretation issues. MRQ participates in the work planning process in which audit objectives and programs are established, audit directives issued nationally include MRQ and quarterly meetings are held between HQ Audit and MRQ Audit to discuss/resolve technical issues. Further, MRQ audit results are provided to HQ audit.

XX. GST Audits

(a) The most common errors detected during audits are, as follows:

* GST collected but not remitted

* GST not remitted on self supply of real property Accounting and calculation errors GST not collected on taxable sales

* ITCs denied--expenses related to exempt activities

* ITCs denied--insufficient supporting documents

* Inter-company transactions--GST not collected/ITC denied

* ITCs denied--personal expenses and club memberships

* Sales misclassified as exempt or zero-rated

* PSB rebates denied--ineligible/GST not paid/duplicate claim

b) In 1993-1994, the Department completed 80.317 audits resulting in $723 Million of additional tax assessed.

(c) We are uncertain as to what is the One Stop Shop' pilot project for small business' that is referred to in the question. The question appears to be referring to either the "combined audit" project or the "Business Window" concept (which is related to the Business Number initiative).

With respect to the "combined audit" project, Audit has run a formal pilot project to test the combined audit concept where one auditor conducts an audit for Income Tax and GST purposes. The evaluation is still in progress however, it has been determined that auditors had no difficulty in coping with the issues that arise from auditing lower complexity files. The concept will be expanded to higher complexity files in order to determine where efficiencies are no longer feasible.

There was no negative taxpayer reaction. About 50% of the taxpayers audited by the one auditor concept indicated that the process was better than having two audits while the other 50% did not express a view. It is expected that the one auditor concept will be expanded nationally.

Revenue Canada has also introduced a new numbering system for businesses called the Business Number. The Business Number is a government wide initiative announced in the 1994 Budget. This unique identifier, which will be used by new and existing businesses, is designed to replace the many numbers which businesses currently require to deal with government. Initially, the Business Number will replace the different numbers that businesses have for the four major Revenue Canada business accounts: corporate income tax, import/export, payroll deductions and the Goods and Services Tax. The use of the Business Number will be mandatory for the four Revenue Canada programs on January 1, 1997. Businesses can convert to the Business Number when conversion fits their business plans at any time in 1995 or 1996. All new businesses needing one of the four business accounts are assigned a Business Number when they register with Revenue Canada.

The Business Number is being implemented across Canada in phases. In Phase 1, which started in May 1994, Revenue Canada offices in the pilot cities of Sydney, N.S., Moncton, N.B., Kingston, Ontario, St. Catharines, Ontario, North Bay, Ontario, Regina, Saskatchewan, Lethbridge, Alberta and Victoria, B.C. tested the use of what was then called the Single Business Registration Number. Existing businesses, located in the pilot cities, were mailed invitations to convert to the new numbering system. Phase two is the national implementation of the Business Number that is scheduled, by region, over the period February 20 to April 24, 1995. a major service enhancement offered with the national launch of the Business Number is the "Business Window." The Business Window will serve Revenue Canada business clients and provide registration and enquiries facilities for the four programs at a single office and with a single enquiries phone number.

After the Business Number is introduced in each region, new businesses will be issued a Business Number when they require one of the four accounts in the Business Number system. Existing business will be mailed an information package. They will not be converted automatically. These businesses may select the most appropriate time, until December 31, 1996, for their business to convert to the Business Number. As mentioned previously, the Business Number will become mandatory on January 1, 1997, for the four major business accounts in the Business Number system.

XXI. Vendor's Non-Payment of GST

Where a supplier meets the disclosure requirements of subsection 223(1) of the Excise Tax Act and remits the GST to the government, section 224 provides that the supplier may sue the recipient to recover the unpaid amount of tax as if it were a debt payable to the supplier.

Although the recipient remains liable for the GST, the Department will not generally collect the tax directly from the recipient given that the tax is collectible by the supplier. Pursuant to section 225 of the Act, the supplier is required to account for tax collectible whether or not the amount has actually been paid by the recipient. While paragraph 296(1)(b) of the Act does provide the Minister with the discretionary authority to assess the recipient for the GST payable on a transaction, the Department's usual practice is to look to the supplier to fulfill its obligations to charge, collect and remit the tax.

In situations where the recipient is a registrant who is entitled to claim an input tax credit, the refusal to pay the tax may be an indication that there is a disagreement between the parties involved (i.e., deteriorating business relationship or contract dispute). In these situations, it would be inappropriate for the Department to intervene. As such, the supplier may use section 224 of the Act as a means to resolve the dispute.

However, during an audit of a person's books and records, the Department may review the person's obligations for both tax payable and net tax. As such, the Department reserves the right to assess the recipient for the tax payable where warranted. Circumstances that would warrant raising an assessment for tax payable would include situations where the supplier is unsuccessful in collecting the GST and government revenues are at risk. For example, where the recipient does not pay consideration nor tax to the supplier and the supplier subsequently writes those amounts off as a bad debt, revenues are at risk and the Department may assess the recipient for the tax payable. In such cases, the supplier who has clearly been unable to collect the amount from the recipient would have taken a deduction from its net tax. It should be noted that the Excise Tax Act does not provide for an adjustment to a supplier's net tax when the supplier is unable to collect GST and only the amount of tax is outstanding.

The Department has issued a policy entitled "Assessment of Tax Payable where a Purchaser is Insolvent," which addresses one of the circumstances where a person may be assessed for tax payable.

XXII. Taxable Supply of an Interest in Commercial Real Property

A. A leasehold interest is considered "real property" for GST purposes. The transfer by a lessee of a lease of commercial real property back to the lessor of the property would therefore be considered a supply of real property. Provided the supply of the leasehold interest does not qualify as an exempt supply, the supply would be considered a taxable supply of real property.

The GST consequences will depend on whether the consideration for the supply is paid by the lessor or the lessee. Where it is the lessor that is paying an amount to obtain the property back from the lessee, the supply would be considered a "sale" of real property given that the supply is not being made by way of lease, license, or similar arrangement and there is a transfer of possession of the property under an agreement to transfer ownership of the leasehold interest. The consideration payable by the lessor for the supply would be subject to the GST rules relating to the sale of real property. Accordingly, the self-assessment rules under section 221(2) of the Excise Tax Act will apply to the extent that the consideration relates to the transfer or sale of the interest.

Where it is the lessee that is paying an amount to the lessor to terminate the lease, section 182 of the Excise Tax Act may apply provided the payment made is not consideration for a provision of any property or service under the agreement. Generally, in such cases, the lessor is treated as having made a taxable supply to the lessee and as having collected GST equal to 7/107ths of the amount paid, assuming termination occurred after 1990. The lessee is deemed to have paid the GST and, if a registrant, is entitled to an input tax credit. However, where the lease agreement that is terminated was entered into in writing prior to 1991, the amount is paid after 1992, and the agreement did not contemplate the application of GST to the amount paid or payable upon termination, the lessee would be required to pay the tax calculated on 7/107ths of the amount paid to terminate the lease.

B. The GST consequences relating to the assignment of a lease of commercial real property by a lessee to the assignee will depend on whether the payment is made by the lessee or the assignee. Where the consideration is paid by the assignee, a determination would have to be made as to whether the consideration payable by the assignee is in respect of the assignment of the leasehold interest (i.e., sale) or for the ongoing rights to use the property (i.e., lease). To the extent that the consideration relates to the assignment of the interest, the self-assessment rules of subsection 221(2) of the Excise Tax Act would apply. Policy Statement P-111 dealing with the "Meaning of Sale with respect to Real Property" discusses the issue of assignment of leasehold interests in real property. As set out therein, the determination of whether the consideration is paid for the transfer (i.e., sale) or use (i.e., lease) of the property may depend on the following:

* the nature of the interest being transferred,

* the terms of the agreement or other documentation relating to the transfer, and

* the actual dealings among the parties involved.

Where the consideration is paid by the lessee to the assignee, the consideration would be similar to the treatment in respect of lease inducements as discussed in Technical Information Bulletin TIB-054. Accordingly, where a lessee makes a cash payment to a person as an inducement for that person to enter into an assignment of the lessee's leasehold interest, such payment would be considered a supply of a service of entering into an assignment of a leasehold interest. The assignee, if a registrant, would be required to collect and account for the GST on this supply. The lessee, if a registrant, may claim an input tax credit for the GST paid or payable to the assignee.

XXIII. GST on Cafeteria Meal Vouchers

The agenda posits the situation where Company A gives permission to Company B to operate a cafeteria on its location. When the employees of A are working overtime, A gives them a $5 coupon. They can exchange the coupon at the cafeteria for cash or a meal for which they disburse any excess over $5 or receive the difference if the meal costs less than $5. At the end of the month, B bills a $5 for each coupon received. The agenda asks about the GST implications on those transactions.

As described, the "coupon" provided to the employee can be used as partial payment for a meal at the building's cafeteria, or can be exchanged for cash from same. In view of these facts, the "coupon" is considered money. When Company A gives the coupon to its employee, no tax would apply as the employee would not be considered to have made a supply to the employer by virtue of the definitions of business and service in subsection 123(1). When the employee purchases the meal from the cafeteria, tax would be calculated on the value of the consideration for the taxable supply of the meal, with the coupon treated as consideration expressed in money pursuant to paragraph 153(1)(a). The payment made to Company B by Company A in recognition of the coupons accepted by Company B, would be treated as the payment of money and would not be subject to tax. Such a payment may cause a benefit to accrue to the employee.

Of note, it is assumed that the price being charged to the employee of Company A is the same price as would be charged to any other person purchasing the same meal, without the benefit of the coupon.