Pending Canadian excise tax issues.
Tax Executives Institute welcomes the opportunity to present the following comments and questions on several pending commodity and excise tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 14, 1994, liaison meeting. If you have any questions about these comments, please do not hesitate to call either C. Graham Kennedy, TEI's Vice President for Canadian Affairs, at (604) 661-8549 or Pierre M. Bocti, chair of the Institute's Canadian Commodity Tax Committee, at (905) 206-3399.
Tax Executives Institute is an international organization of approximately 5,000 professionals who are responsible - in an executive, administrative, or managerial capacity - for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,800 of the leading corporations in Canada and the United States.
Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.
II. Replacement of GST
Since before the elections in October 1993, the tax issue singularly consuming taxpayers, the media, and tax policymakers in every branch of government is the examination and debate over reform of, or replacements for, the GST. TEI is vitally interested in contributing to that debate, having submitted specific comments on the GST to the Standing Committee on Finance of the House of Commons and providing copies of TEI's comparative study of value-added tax systems around the world to interested government officials, tax practitioners, and taxpayers with an interest in tax policy and administration. In addition, we have written letters to all of the provincial ministers of revenue urging them to consider implementing retail sales tax systems that "piggyback" off of, and are fully harmonized with, the GST (or its replacement). [Editor's Note: TEI's comments to the Standing Committee on Finance were reprinted in the May-June 1994 issue of The Tax Executive and a sample of the letters it submitted to the provincial finance ministers was reprinted in the November-December 1994 issue.)
Recently, the process for debating of alternatives to the GST - a process that began with considerable deliberation and constructive dialogue - has acquired a "flavour of the month" quality, as the search for an administrable replacement tax has degenerated into a search for a palliative. Thus, the "10-percent solution" became the "11-percent solution" (which may soon be the "12-percent solution"). Another "solution" being bandied about involves abolishing both the GST and provincial sales tax (PST) systems and replacing the lost revenue through substantial increases in personal income tax rates. While we recognize the political imperative that underlies the art of taxation (in Jean Baptiste Colbert's words, plucking the greatest amount of the goose's feathers with the least amount of hissing), we believe the process for examining the alternatives to GST should be returned to a higher plane. In the hope of restoring the discussion to a higher level, we request your comments on the following:
(a) How are the economic and revenue effects of the various alternatives being calculated? Do the models take into account the administrative and compliance costs to both taxpayers and the government, including transition costs?
(b) Is there a formal consultation process within the Department (and with Revenue Canada) for evaluating the alternatives, especially to determine whether the tax is administrable (i.e., the proposed system is one that taxpayers may comply with and the government may audit on a cost-efficient basis)? Who is involved and what steps are being followed in that process?
(c) Will Finance consider establishing an advisory committee of stakeholders from business, tax practitioners, academic experts, and knowledgeable members of the taxpaying public, whose role would be to assist in the evaluation of the proposed alternatives? If so, the Institute would be pleased to participate in such a committee.
Finally, at the risk of seemingly pushing to the front of the line at the ice-cream counter to get a taste of the latest flavour, what can you tell us about the status of a replacement for GST?
III. Adjustments Between
Vendors and Purchasers
Under section 232, where a price adjustment is made between two registrants, the addition of GST to the price adjustment is optional because GST charged by one party may be claimed as an input tax credit (ITC) by the other. Some price adjustments are deducted directly from the face of the invoice while others are made subsequently through the issuance of credit or debit notes. In many cases, the price adjustment relates to volume discounts on purchases. As a matter of administrative convenience, section 232 is sensible because the fisc is unaffected by the decision not to charge GST and both parties to the adjusted transaction avoid needless administrative costs involved in processing the tax adjustment.
Revenue Canada has taken the position in certain circumstances (e.g., for cooperative advertising, price rebates on volume purchases) that adjustments between vendors and purchasers should be treated as taxable supplies rather than price adjustments between the parties. Invoice adjustments for cooperative advertising are colloquially understood to be made for advertising services to be performed by the retailer of goods. In actuality, the adjustment is a price adjustment because no legal requirement exists compelling the retailer to perform advertising relating to the purchased goods. Would the Department be willing to treat an adjustment for cooperative advertising (or price rebates on volume purchases) between two registrants as a price adjustment with the addition of GST optional? The compliance and administrative burdens to purchasers, vendors, and Revenue Canada would be reduced without any effect on the total GST revenues collected.
IV. GST on Commissions
Paid to Nonresidents
The Department has announced its position relating to the application of GST to fees invoiced to nonresidents for commissions related to the subsequent sale of goods by the nonresident. The commissions paid to the Canadian company by the nonresident relate either to goods that will be exported to a nonresident customer (in which case the commission is paid by the nonresident for locating vendors) or to sales that will be made outside of Canada (in which case the commission is paid for locating customers). In either case, there is no consumption, use, or enjoyment of the service in Canada by the nonresident. We believe that the announced position deserves scrutiny. When will the related papers to support the announcement be released?
V. GST on Imported Goods
Under a Postponed
At TEI's May 1994 Canadian Tax Conference in Hull, speakers discussed a procedure to permit GST registrants to apply refundable GST credit amounts against payroll source deduction account liabilities - an arrangement facilitating cash-flow management by both taxpayers and the government. For some taxpayers, far greater amounts are paid to Customs for GST levied on the duty-paid value of importations than for payroll source deductions. Hence, we recommend that Finance consider the following proposal to permit "offsets" of GST payable on import values by reporting the liability amount on GST returns in lieu of paying the tax amounts separately to Customs. A similar customs offset arrangement is employed in the value-added tax system in the United Kingdom.
Under the proposal, registrants who report GST on a monthly basis and who consistently receive refunds of GST (those registrants who receive refunds on, say, 90 percent of the GST returns filed) would be permitted to apply to operate under a system whereby GST due on import entries would be collected on the basis of a "postponed accounting" method. Subject to approval of their participation by Revenue Canada, the participating GST registrant would not pay GST due to Customs at the time of importation. Rather, the GST due on the importation amount would be self-assessed and the amount reported as a liability for the period on the monthly GST return. At the same time, amounts eligible for recovery as input tax credits (ITC) on importations would be claimed in the monthly GST return.
An offset reporting system would substantially aid large exporters (and likely the government) in managing their cash flows. The current system requires both the government and taxpayers to collect, pay, monitor, and reconcile two different payables and receivables. While the burden of monitoring and reconciling various tax liabilities may increase slightly under the proposal, we believe the benefit of eliminating the payment and collection steps will far outweigh any added costs. Indeed, the proposal is simpler administratively for large registrants than the current procedure permitting offsets of payroll source deductions with GST refunds. Furthermore, we do not believe the proposal would require changes to the current system used by Excise for reporting GST.(1) In addition, customs brokers would not be involved in carrying GST amounts paid on their clients' behalf.
We invite the Department's comments on the proposal. What legal or administrative difficulties are envisioned that the Department would like to see addressed?
VI. Restricted Input
When it was introduced, the GST was lauded as beneficial to industry (particularly exported goods and services) because, it was said, all taxes on inputs would be removed. Increasingly, though, there has been an erosion in the tax relief for inputs through the development of stringent policies restricting various input tax credits (ITCs). For example, companies are now required to pay non-recoverable GST on many routine costs, including pension costs and costs incurred to issue or dispose of shares pursuant to a reorganization.
More recently, amendments to section 141.01 require that registrants apply a "first order" test. Under that provision, GST paid on supplies incurred for use in commercial activity will not be recoverable as an ITC if the first use of those supplies is the production or making of exempt supplies. For example, the costs associated with raising capital funds to develop a new mine, add new manufacturing capacity, or expand a business generally are subject to GST and no longer qualify for ITC relief.
This recent policy trend not only increases the amount of GST payable, but it imposes additional burdens on taxpayers to analyze hundreds of routine business transactions and to modify their information and record-keeping systems to account for the change in taxable status. Please explain the rationale underlying this policy trend and its seeming divergence from the original spirit of GST. In adopting more restrictive policies, to what extent does the Department weigh the negative effects of higher administrative and tax costs with the ability of Canadian exporters to compete effectively with foreign competitors?
VII. Election for
Under section 156 of the Excise Tax Act, a member of a controlled group may elect to transfer goods or services to another member of the group without the imposition of the Goods and Services Tax (GST). That election is unavailable, however, where a section 150 election has been made with another controlled group member that is a listed financial institution. When that restriction against section 156 "nil consideration" elections applies, GST must be calculated and paid on transfers to other members of the group, with the member receiving and paying for the goods eligible to claim a corresponding input tax credit (ITC). The restriction on the availability of section 156 elections increases compliance costs for affected taxpayers and administrative costs for the government alike because many intercompany charges are not taxable supplies (e.g., transfers of cash). Hence, GST may not be easily computed and added to the intercompany transfers occurring within a defined fiscal period, requiring taxpayers to devote considerable time and effort to determine whether the various charges are subject to GST.
The restriction against section 156 elections presumably was added as an anti-abuse provision to prevent financial institutions from obtaining GST-free goods or services (since they may not claim ITCs) through the subterfuge of purchasing them through a non-financial member of the group with a subsequent transfer of the goods to the financial institution. As an alternative to the present cumbersome system, would the Department consider a self-assessment provision similar to the provision in section 218 for importations other than goods?
VIII. Section 156 Election - Canadian
We understand that GST-registered Canadian branches of foreign companies are not entitled to file the section 156 election for nil consideration on supplies provided to or received from other related Canadian companies. Has the Department considered introducing legislation to remove this restriction?
IX. Customer's Nonpayment
Where a vendor grants customary trade-credit terms, properly invoices a customer for GST, and then remits the GST to the government on the presumption that its customers will pay the invoice in due course, what recourse does a vendor have to recoup GST that the customer refuses to pay to the vendor (i.e., where the customer short pays the invoice by exactly the amount of GST)? If the vendor, after due efforts, fails to collect the GST, may the vendor reduce the otherwise payable GST amount? Assuming the vendor may reduce GST otherwise payable, the vendor obviously should provide Revenue Canada with specifics regarding the transaction and customer to facilitate Revenue Canada's efforts to recover the tax.
X. Taxable Supply of an
Interest in Commercial
Please comment on the GST implications in the following circumstances:
(a) A GST registrant sells its commercial property space lease back to the lessor (another registrant) in advance of the expiration of the lease term. Please confirm that this transaction is considered a sale of real property under section 221(2) of the Excise Tax Act, requiring the landlord to self-assess GST.
(b) A GST registrant, a lessee of commercial real property, assigns the lease to another company (also a registrant). Please confirm that this transaction is considered a sale of real property under subsection 221(2), requiring the new lessee to self-assess GST.
XI. Exported Services
In the course of its business of providing services (other than advisory, consulting, or professional services) in Canada to offshore customers, a Canadian registrant company consumes various goods and services within Canada. Under the current interpretation of section 2, Part V, Schedule VI of the Excise Tax Act, the charges to the offshore customer are not considered to be for the consumption, use, or enjoyment of the offshore customer and, hence, are subject to GST. The offshore company, however, has no means of recovering the GST charges as credits against its collected taxes because it undertakes no commercial activity in Canada. Moreover, nonresident, customers have no desire to register for GST and comply with its attendant burdens simply to file rebate claims. Indeed, upon seeing a GST charge levied on the services, nonresident companies may seek another, non-Canadian supplier. To maintain competitiveness for foreign customers, Canadian service companies may, to the extent they are able, relocate operations to another country where the GST would not be chargeable.
The treatment of services rendered to offshore customers seems unduly restrictive. That the policy is also anti-competitive is illustrated by contrasting the result obtained where a Canadian registrant supplies goods rather than services to the offshore company. In that case, taxable inputs paid and consumed in Canada are eligible for input tax credits and the output (goods) would be zero-rated. Has the Department considered broadening the interpretation of "consumption, use, or enjoyment" to address this problem, particularly when the nonresident clearly receives and enjoys the benefit of the services outside of Canada? Alternatively, will the Department consider amending the administration of the GST in such manner that the imposition of GST will be transparent to the nonresident benefitting from the services, i.e., by eliminating the need for the nonresident to file a claim for refund of GST by, say, treating the transaction as though it were a wash transaction?
Tax Executives Institute appreciates this opportunity to present its comments on pending commodity tax issues. We look forward to discussing our views with you during the Institute's December 14, 1994, liaison meeting.
(1) Additional self-assessed GST on the imported goods could be reported in field 105 of the current GST return; eligible ITCs could be claimed in field 108 of the GST return.
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|Title Annotation:||Tax Executives Institute's Canadian Commodity Tax Committee|
|Date:||Jan 1, 1995|
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