Pending excise tax issues; December 5, 2001. (Canadian Department of Finance).
Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on several pending commodity and excise tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 5, 2001, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Alan Wheable, TEI's Vice President for Canadian Affairs, at 416.982.8003, or Martina Krummen, chair of the Institute's Canadian Commodity Tax Committee, at 514.856.6675.
Tax Executives Institute is an international organization of more than 5,300 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,800 of the leading corporations with 53 chapters in Canada, the United States, and Europe.
Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.
1. Is the Department of Finance considering implementing any changes to the zero-rating provisions for intangible personal property or services to take into account issues arising from the increased use of electronic commerce? Examples of issues possibly requiring attention are:
(i) Intangible Personal Property. While intellectual property receives a zero-rating under section 10, Part V of Schedule VI of the Excise Tax Act (ETA), similar provisions do not exist for other intangible personal property. Because the place of supply rules (outlined in section 142.(1)(c) of the ETA) tax intangible personal property if it can be used "in whole or in part" in Canada, the potential exists for taxing supplies that have very limited use in Canada. GST-registered suppliers are thus placed at a competitive disadvantage vis-a-vis non-registrants providing similar global solutions. The provision also serves as a trap, placing registrants unfamiliar with the restricted application of section 10 into unintentional noncompliance. Expanding section 10 to apply to all intangible personal property would permit GST-registrants to compete more effectively on a global basis. We invite your comments.
(ii) Telecommunication Services. Currently, section 22.1 restricts the zero-rating provision for telecommunication services to supplies that are made to a person carrying on the business of supplying telecommunication services. Because products characterized as telecommunication services are growing exponentially, this narrow exemption puts GST-registered suppliers at a disadvantage when providing telecommunication services to persons located outside of Canada.
For example, CCRA considers website hosting and Internet access to be telecommunication services. Most customers using these services are not in the business of supplying telecommunication services, and the present inability to zero-rate these services makes GST-registered suppliers uncompetitive in a global marketplace. One solution would be to restrict the types of services that are considered to be telecommunication services (the correct result, we believe, especially for website hosting). A long-term solution would also incorporate a broadening of the zero-rating provision to apply to all non-registered non-residents (similar to section 10).
(iii) Services. Certain issues arise in respect of section 7, Part V of Schedule VI of the ETA, which attempts to zero-rate certain services made to non-residents. Because the words "rendered to" in paragraph (a.1) are interpreted to refer to the party who takes advantage of the service being provided -- rather than the party who has contracted for the service -- the provision has the (perhaps unintended) effect of putting GST-registered suppliers at a competitive disadvantage when marketing their services to global customers.
For example, a GST-registered supplier establishes a centre in Canada that provides electronic information in response to requests received. The supplier contracts with a nonresident to provide this information to the non-registrant's customers (the services provided are not considered to be professional, advisory, or consulting services). The persons that request information are not the non-registrant's employees, but may be its customers or potential customers. Most parties to whom information is provided are located outside of Canada, but if any of the parties requesting information is located in Canada, the services will be "rendered to" the latter party and therefore fall outside of the zero-rating provision.
Canadian-based centres serve a global clientele. The inability to use the zero-rating provisions in situations where some requestors (who are not the contracting party) are situated in Canada makes the Canadian-based centre less attractive than one situated outside the country.
To put Canadian suppliers on an equal footing with their foreign competitors, the wording of section 7 should be amended to add the word "recipient" after "individual" (i.e., "a service that is rendered to an individual recipient while that individual is in Canada").
2. During the liaison meeting, please provide an update on the Department's efforts to develop an international electronic commerce policy.
3. TEI is a strong supporter of using the most efficient method of tax administration. The various sales tax systems in Canada contribute to an inefficient administration. Please provide an update on the harmonization of these sales tax regimes. What can TEI do to assist in this harmonization?
4. During last year's liaison meeting, TEI asked the following question:
A non-resident, GST-registered seller makes a sale FOB outside Canada, collecting no GST on the sale. The seller utilizes his business expertise to arrange transportation and importation of the goods into Canada on behalf of the customer. GST is incurred at the time the goods clear Customs by the seller. Is the seller entitled to an ITC?
The Department responded:
At the present time, the seller is not eligible to take an ITC.... Finance would like to arrange a further meeting with some TEI members to discuss this issue before they reach any conclusions.
The Department subsequently met with some TEI members (as well as other associations) concerning this issue and various options and solutions were discussed. During the meeting, please provide an update on this issue, including --
(i) whether the Department's response to the question has changed; and
(ii) whether the Department has discussed this issue with CCRA.
5. During last year's liaison meeting with CCRA, TEI described the following fact pattern:
An unregistered, non-resident ("Company U.S.") owns and leases truck cabs and trailers (hereinafter also referred to as units) to both Canadian and U.S. persons. The lessee is also an unregistered non-resident. All leases are made available in the United States initially, but the units cross the border into Canada during the course of the lease. Under the terms of the lease agreement itself, the lessee is responsible to pay for any repairs during the course of the lease.
The question focused on section 6, Part V of Schedule VI of the ETA. When a unit requires emergency repairs in Canada, a repair shop usually does the repairs. That repair shop may or may not also be in the business of leasing units. The repairer usually bills the lessor who, under the terms of the lease, flows those invoices to the lessee (i.e., the lessee reimburses the lessor with no markup). In its response, CCRA stated that a repair shop -- even a shop that leases units as a distinguishable business -- must invoice GST on the repairs to the lessor because the repairer is not itself using the unit in its business of transporting passengers or property. The repairs are also not zero-rated under section 2, Part V of Schedule VI, because that section refers only to ships, aircraft, and railways.
Based on this answer, the nonresident, non-GST registered lessor would be invoiced for the repair cost (e.g., $20,000) plus GST ($1,400), but would be unable to recover the tax. The lessor would then seek reimbursement of that amount from the lessee per the terms of the lease. Since the lessee is a non-resident, non-registered person, the GST would not be recoverable.
Even if the lessee were a GST-registered, 100-percent commercial person, the lessee cannot claim the GST in the lessor's reimbursement request because the repairer has addressed its invoice to the lessor -- not the lessee (presumably thus failing the standard documentary requirements). Normally, there is no principal/agent relationship between the lessor and lessee for these repairs; the only agreement is the lease agreement.
During our liaison meeting, please advise whether this interpretation is the intended result. Has the Department received any comments from trucking, transportation, or other organizations (including GST-registered lessees) concerning this issue? Are there any plans to modify section 2 or 6, Part V of Schedule VI of the ETA to permit zero-rating of such emergency repair services to non-registered lessors of these units?
6. A Canadian registrant corporation furnishes a service in Canada to a non-resident, non-registrant corporation; the service is a flying course provided to non-resident individuals, ultimately leading to a pilot's license recognized by the U.S. Federal Aviation Administration and includes training in a flight simulator owned by the Canadian registrant corporation. We understand that the supply of this service is zero-rated under section 18, Part V of Schedule VI of the ETA.
Consider, however, a situation where a non-resident, non-registered corporation provides the training itself and requires only the use of a flight simulator from the Canadian registrant. The Canadian corporation makes a supply of the flight simulator to the non-resident corporation, but does not provide any trainers. Unlike the supply of instruction services, however, the supply of the simulator is apparently taxable at 7 or 15 percent.
Consistent with the zero-rated status of the supply of an instruction service to non-resident individuals, the supply of tangible personal property to non-resident individuals in this example should also be zero-rated. What is the Department's reaction to this issue?
7. Canada imposes a vehicle weight tax under the ETA, premised on the theory that heavier vehicles are less energy efficient. That theory, however, may not be sound. For example, some loaded minivans can be more fuel efficient than a sub-compact car with one person in it. Safety features (e.g., airbags and reinforced structures) added to the vehicles or the production of alternative fuel vehicles (e.g., hybrid gasoline/electric vehicles) could not have been contemplated when the statute was enacted in 1976.
Administratively, the law is difficult to apply because of its ambiguous language. The lack of a definition for the term "weight" creates confusion because there are four different measures of weight used by the automotive industry: (i) individual weight of the car, (ii) shipping weight; (iii) curb weight; and (iv) inertia weight. The terms "automobile" and "passenger vehicle" are also undefined in portions of the ETA. Where they are defined, they make reference to a use test by the individual consumer that is impossible to apply to a tax imposed on the manufacturer or importer of a vehicle. The legislation also fails to give clear direction concerning the proper tax treatment of a large portion of vehicles (e.g., sport utility vehicles, minivans, and extended-cab pick-up trucks) being produced today. Is guidance pending to clarify these terms? Are there plans to modify or even eliminate the tax?
8. Subsection 231(1) of the ETA provides a deduction with respect to a bad debt written off by a supplier. The deduction is contingent on the supplier having reported the tax collectible on the supply in its return and remitting the tax. If an election under subsection 177(1.1) is made, the agent of the supplier remits the tax and subsection 231(1) currently does not apply.
TEI suggests that relief should be granted where the agent is merely a collection agent and is remitting the tax on behalf of the actual supplier. Please advise whether the Department would consider permitting the actual supplier to deduct the tax related to a bad debt, even if the tax were remitted by the supplier's agent.
9. For a variety of business reasons, GST registrants often undertake business reorganizations, either acquiring assets or internally transferring activities or assets from one corporate unit to another. These transactions are often significant in value.
Several provisions of the ETA address these reorganization transactions:
* Section 221(2) provides that, in respect of the acquisition of commercial real property, no tax is due if the property is acquired for use in commercial activities;
* Section 167.1 provides for the tax-free transfer if there is a transfer of: (i) a business by the supplier, and (ii) 90 percent or more of the assets necessary for the purchaser to carry on the business; and
* Section 156 permits an election to treat the transfer of assets as made for nil consideration where both the supplier and the purchaser qualify as members of a closely related group. (The election is predicated on registration status and meeting certain ownership and commercial activities tests.)
These provisions, however, may not apply to many corporate reorganizations because --
* The assets sold at arm's length do not constitute the sale of a business;
* It is difficult to determine whether the purchaser is acquiring 90 percent or more of the assets necessary to carry on the business; or
* Assets transferred through a new company within a closely related group do not constitute a business.
The inability to use the relief provisions results in compliance costs for both the CCRA and GST registrants, as well as significant cashflow issues. Solutions to the problems include --
* Simplifying and expanding the rules for tax-free transfers of business assets;
* Modifying the closely related group election to address the use of a new company;
* Broadening section 221(2) to include significant asset transfers when in the course of commercial activities; and
* Introducing specific GST rules aimed at divisive reorganizations.
Is the Department considering implementing these or other changes to the reorganization rules?
Tax Executives Institute appreciates this opportunity to present its comments on pending excise and commodity tax issues. We look forward to discussing our views with you during the Institute's December 5, 2001, liaison meeting.
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|Date:||Jan 1, 2002|
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