Revenue Canada liaison meeting on excise tax issues.
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 Customs, Excise and Taxation during TEI's December 13, 1994, liaison meeting. If you have any questions in advance of that meeting, 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.
I. Electronic Data
To reduce costs and maintain international competitiveness, businesses are rapidly embracing many new information technologies. In particular, electronic data interchange (EDI) systems permit companies to compress many activities formerly carried out in several departments and multiple steps into one or two functions and a single transaction. Eliminating several steps of human intervention produces substantial labor cost savings to both EDI trading parties (the taxpayer and the other commercial party to an EDI exchange). In addition, EDI technology permits companies to establish systems that reduce or eliminate a substantial amount of paper documents that generally flow in commercial transactions, resulting in further cost savings from reduced record storage and retrieval costs.(1)
Revenue Canada has, so far, not publicly committed to updating its information and record-retention requirements to permit taxpayers and the government alike to keep pace with the technological changes. Without that crucial revision, taxpayers will not achieve the cost savings available from EDI, since they may be required to maintain (or even create) duplicate records in a paper format solely for tax purposes. Businesses are concerned that at some point in the future a Revenue Canada auditor may deny input tax credits because a record otherwise unnecessary for managing the taxpayer's business either is not retained for tax purposes or, more likely, is retained in a format that the auditor is unfamiliar with or uncomfortable accepting for audit purposes.
Taxpayers urgently require guidance regarding their EDI-related recordkeeping duties. In addition, the government must begin to train its auditors in respect of EDI technology in order to conduct proper audits of taxpayer EDI records. We urge Revenue Canada to establish an on-going consultation process with the business community (as well as its governmental counterparts in the United States) to permit the technological changes that are already underway to be incorporated into the tax compliance and governmental audit functions.(2) As part of the process, Revenue Canada should consider updating the Input Tax Credit Information Regulations, the Credit Note Information Regulations, and several Technical Information Bulletins. In any event, Revenue Canada should issue immediate guidance to GST registrants concerning the form and substance of information required to be maintained to claim input tax credits in the context of EDI transactions.
II. Alternative Valuation of
Has Customs made any progress in determining an alternate valuation method for software imported into Canada? A discussion paper was released some time ago with a view to applying the GST only on the value of the media rather than the value of both the media and the embedded software code.
III. GST on Supplies
Assume the following set of facts. Company A and Company B enter into an agreement pursuant to which Company A, in 1994, will sell to Company B certain computer hardware and software for $5 million (the "old equipment"). During 1995, 1996, and 1997, Company B will use the old equipment to develop new techniques to be used in the treatment of diseases. As further consideration for the old equipment, during the same three-year period Company A will be permitted to incorporate new investigative techniques into future products (i.e., the new techniques may be embedded as new software code into computer hardware and be marketed on a combined basis as a new product). In return for use of the investigative techniques, Company A also promises to provide a credit to Company B - the amount of which will be computed on the actual sales dollar volume of the subsequently developed products during 1998 and 1999. As a result of this arrangement, Company A will acquire and use Company B's investigative techniques during a period (1995-1997) where the value of the investigative techniques will be contingent on the future sales volume of undeveloped products. In addition, within five years from the final determination of the value of Company B's credit, Company B may apply the value of the credit in partial payment toward the purchase of new Company A equipment. (For example, assuming Company B earns a $1 million credit value, it may purchase $10 million of equipment for $9 million in additional cash or notes.)
How does Revenue Canada view the use of the investigative techniques by Company A in return for credits applicable to the purchase of future equipment? Are the future credits considered a taxable or nontaxable supply? How does the GST apply? Is this transaction viewed as a barter arrangement? In the, event the new equipment is purchased by B, is the GST calculated on the $10 million or $9 million?
IV. Input Tax Credits
The input tax credit (ITC) information regulation outlines the conditions for GST registrants to claim an ITC on suppliers' invoices. One condition for claiming ITC in respect of items valued in excess of $150 is that the supporting sales documentation must set forth the "recipient's" name, the name under which the "recipient" does business, or the name of the "recipient's" duly authorized agent.
Assuming that all other conditions of the ITC regulation are satisfied, may the various recipients in the following situations claim ITC where the invoice from the supplier is addressed to -
(a) the recipient's trade name, where the trade name is registered in the province in which the recipient resides?
(b) the legal entity of the recipient and the remittance instructions include a third-party's name to which payment is to be directed (e.g., Revenue Canada or a Bank) on behalf of the supplier?
(c) the manager of a commercial building who, while not a legal agent or representative for the building's owner, operates and maintains the building on behalf of the owner under a management contract? (In essence, the property manager collects rents and pays the expenses related to the operation and maintenance of the building on behalf of the owner. Hence, the taxable services are rendered beneficially for the owner of the building but the invoice is in the name of the property manager.)
(d) the manager of a commercial building on behalf of the actual owner where the property manager is, in addition to performing the management duties, a legal agent or representative of the owner by virtue of an explicit principal/agent agreement between the parties?
(e) the legal owner of a building, but the invoice is directed "in care of" or "C/O" the property manager, whose address may or may not coincide with the address of the building for which the services were rendered or goods provided?
(f) a bank with custodial control of the account of the actual recipient of the taxable goods or service, where that control is exercised pursuant to a cash-management arrangement between the bank and its customer who is the recipient of the goods or services (and who is involved 100 percent in commercial activity)? (Stated differently, the bank is controlling the account at the direction of its customer, rather than pursuant to the exercise of authority that may arise from bankruptcy, receivership, or foreclosure on the debts of the recipient.)
(g) a bank where, subsequent to the receipt of the goods or services, the actual recipient (who is 100 percent involved in a commercial activity) loses the property or accounts to the bank as a result of foreclosure against the recipient?
V. Notional Input Tax
Credits on Volume
The law with respect to input tax credits related to volume rebates was clarified, effective January 1993, to specify that GST must either be charged as an extra sum or clearly indicated as included in the total price. A question exists about the applicable rules before 1993. Some contingent-fee sales tax consultants are advising their clients to compute and claim a notional GST input tax credit on volume rebates paid in 1991 and 1992, even where the GST was neither separately and specifically charged nor indicated as an included amount. Will Revenue Canada honor claims for refund or permit claims for notional amounts of ITC in respect of volume rebates paid during 1991 and 1992, even though, based on an examination of the invoice alone, the status of GST is unclear?
VI. Selling Business Assets
A company is selling business assets that qualify for the election under subsection 167(1). The sales contracts are signed on a particular date, say, June 1, 1994, but the closing of the sale is deferred until a subsequent date, say, September 1, 1994, to permit the normal due diligence process to be completed.
(a) Which date is considered to be the date of the transaction?
(b) If September 1, 1994, is considered to be the transaction date, what is the result or effect under subsection 167(1) where the closing is retroactive to the original signing of the documents? The purchaser may have already filed GST return in respect of the period that covers the earlier date and, as a result, the election form to be filed under section 167(1) may be considered untimely filed. Please comment.
(c) Again, if the September closing date is considered the transaction date for subsection 167(1) purposes and the contract is retroactive to the signing of the documents, who should report the GST and claim the ITCs on the transactions that took place between the closing and the date of signature?
VII. Responsibility for
Late Filing of GST
Where business assets are sold, the requirement to file the GST election under subsection 167(1) is occasionally overlooked and may not be timely filed with the GST return for the relevant reporting period, even where the seller may have advised the purchaser of the required time for filing the election. Since both parties execute the election form generally at the time of sale, is the vendor responsible for late filing of the GST election even though it may have practically no control over the filing?
VIII. Projection of Audit
Increasingly, GST audits have employed statistical methods involving the selection of audit samples and the projection of the results of the audited sample to the entire set of transactions. In such cases, may the vendor who was assessed go to the customers that were part of the sample of audited transactions (from whom an improper amount of GST was initially collected) and charge them for the proper amount of GST? In the event the customer pays the additional GST, will the customer be able to claim an ITC in respect of the GST billed by the vendor?
IX. Proof of Nonresidence
Where vendors deal with nonresident customers, Revenue Canada has established guidelines for vendors in respect of written documentation to establish the fact of the customer's nonresidence and non-registration for GST. For purposes of sections 179 and 180 of the Act, will Revenue Canada accept the same or similar documentation from a customer who is nonresident and not registered for GST?
X. Schedule VI, Part V,
Section 2: Zero Rates
Assume the following set of facts. Company B is a nonresident, non-registered company that owns a railroad car. A GST-registered Canadian railway company, Company A, comes into possession of Company B's railroad car in the ordinary course of A's business. While the railroad car is in possession of Company A, the car breaks down and the Canadian railway company (A) performs the repairs without notifying Company B. The Canadian railway (Company A) invoices Company B for the cost of the repairs. Does this transaction fall under the provisions of Schedule VI, Part V section 2, as a zero-rated supply?
XI. Imposition of GST Upon
A nonresident GST registrant (Company M) sells GST taxable goods on the basis of a price that is "FOB Canadian site" to a Canadian-based customer (Company N). Company N (a hospital) is considered the importer of record and pays GST under Division III of the Excise Tax Act. Is Company M required to charge Division II tax? Or, irrespective of the place of title transfer, where Company N is the importer of record is the supply deemed to occur outside Canada?
XII. Entitlement to Input
A non-registered, nonresident company ships goods directly to a Canadian customer. A Canadian subsidiary of the seller acts as importer of record and pays the GST. In return for clearing the goods, the Canadian subsidiary receives a fee. Is the Canadian company entitled to an ITC in respect of the GST paid?
XIII. Wash Transactions
The draft policy in respect of "wash transactions" specifies that only transactions where the registered vendor fails to collect GST from a registered recipient who is fully entitled to claim input tax credits will be entitled to the relief accorded wash transactions. Should not this policy apply to all transactions where there is no net revenue loss to the government? For example, assume a registered company fails to self-assess GST on an acquisition of real property. The company, however, would have been entitled to a full ITC in the same accounting period. Since the original release regarding the policy for "wash transactions" was premised on the rationale of "no net tax loss to the government," the situation described should qualify for relief. Please comment.
XIV. Assessments on Putative
Increasingly on GST audits, government auditors are devoting substantial efforts to ensure that the GST system is foolproof in respect of "wash" transactions. Specifically, auditors must ensure that both the seller and the purchaser have treated a wash transaction in the same manner. For example, where a purchaser has claimed an input tax credit, the seller should have remitted the GST. Where unilateral adjustments are made by one of the parties to invoices rendered in a taxable transaction (e.g., to correct errors in pricing, quantities delivered versus invoiced, to claim rebates, etc.), a credit or debit note may be issued by one or the other parties. In such cases, section 232 of the Act provides a choice whether to adjust the GST or not. As a result of confusion or miscommunication between the two parties, inconsistent treatment of the GST often results - especially where the price term is GST-inclusive. In such cases, which party is subject to assessment, the issuer of the debit or credit note or the recipient of the note?
XV. Recovery of
A registrant has four years to claim and recover input tax credits erroneously omitted from its return. What procedure should be followed in the following circumstances to claim the ITCs? A company ceases its commercial activity and cancels its registration. Subsequent to cancelling its registration but within the four-year limitation period, an employee discovers that certain ITCs to which the company was properly entitled were not claimed. Should the registrant:
(a) file an amended return for a period during which it was a registrant? or
(b) make a written request to the local GST office for a rebate of the GST paid?
In either case, the registrant has no GST collectible that may be adjusted.
XVI. Imported Services
A GST-registered holding company obtains certain services essential for managing its investment in a related, GST-registered company engaged exclusively in commercial activity. The holding company fails to self-assess GST in respect of the services and also omits to claim an eligible input tax credit for its deemed commercial activity. Is this the correct procedure or should the holding company self-assess the tax and then claim a matching ITC?
XVII. First-Order Test
Revised section 141.01 requires that a "first order" test be applied to supplies before eligibility for input tax credits may be determined. Assume the following facts. A registered company engaged wholly in commercial activity seeks capital in the markets in order to construct a new manufacturing facility, thereby enabling the company to increase its production of goods for export. Under the first order test, the GST paid on costs incurred in raising the requisite capital for expansion would not be recoverable. Seemingly, however, if the capital funding costs were incurred by a registered parent company in order to invest in its related operating subsidiary, the GST paid to raise the capital would be recoverable by virtue of sections 169 and 186.
Please comment on the disparate treatment of GST paid by the operating company as opposed to that paid by a parent holding company in respect of essentially the same activity.
XVIII. Mitigation or
What standards does the government apply when deciding whether to abate or reduce penalties on assessments? Will Revenue Canada apply the same "good faith," "due diligence," or "common sense" standards employed by the Provinces in assessing or waiving penalties? Will Revenue Canada consider applying the rules established by Revenu Quebec and, for example, routinely waive the imposition of penalties upon a taxpayer's first audit (except where a taxpayer has collected the tax and failed to remit it)?
XIX. Audit Techniques
Employed by Quebec
In view of both the relatively high degree of harmonization and the occasional instances of divergence of the Quebec Sales Tax treatment from the GST, what procedures does the federal government employ to ensure that auditors from Revenu Quebec adhere to the audit techniques, policy interpretations, and administrative procedures employed and followed by other federal auditors? What procedures are in place to ensure that the federal government's policies are consistently applied throughout the country both before and following assessments? Under what circumstances may a company with its head office in Quebec consult with federal officials in respect of an assessment of federal GST or a procedure employed by Revenu Quebec in its assessment practice?
XX. GST Audits
Please provide an update on:
(a) The most common errors detected during audits;
(b) Important audit statistics (including the number of audits, audit results, coverage, amounts recovered, etc.); and
(c) The status of the "One Stop Shop" pilot project for small business.
XXI. 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.
XXII. 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.
XXIII. GST on Cafeteria
Company B operates a cafeteria on Company A's premises. For employees required to perform overtime work, Company A provides a coupon worth five dollars that may be exchanged at the cafeteria either for ash or for a meal. If the purchased meal costs less than five dollars, the difference is disbursed to A's employee by the cafeteria cashier (an employee of Company B). At the end of every month, B bills A five dollars for every overtime coupon collected. What are the GST implications of the transactions?
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 13, 1994, liaison meeting.
(1) The cost savings from EDI technology are achieved, however, only to the extent that the records minimally necessary for the EDI transaction set are the only ones required to be maintained. Any records apart from those supporting the electronic exchange - i.e., any records that are unnecessary from a business perspective - constitute a superfluous and redundant burden. In particular, purchase orders, invoices, and some shipping documents are often eliminated from the EDI document trail. In addition, when moving to EDI systems, some companies may rely on their trading partners to maintain information pertinent to the GST transaction audit trail, e.g., the other party's GST registration number. (2) In the United States, TEI is participating with the Internal Revenue Service and the Federation of Tax Administrators (a non-profit association of state revenue department officials) to develop record retention and audit guidelines for EDI transactions.
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|Title Annotation:||Tax Executives Institute's Canadian Commodity Tax Committee|
|Date:||Jan 1, 1995|
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