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Revenue Canada questions & answers: December 10 and 11, 1996.

On December 10 and 11, 1996, a delegation of members from TEIs Commodity Tax Committee, led by TEI President James R. Murray and committee chair Pierre M. Bocti, met with representatives of Revenue Canada and the Department of Finance to discuss excise and commodity tax matters. The agendas for the meetings were separate, but substantially overlapping owing to the focus on issues arising from legislation harmonizing GST and the Atlantic provincial sales taxes.

The answers and comments reprinted below for questions numbered roman numeral I through V are taken solely from the meeting with Revenue Canada. The responses to items in questions VI and VII were reviewed by both Revenue Canada and the Department of Finance. There were no significant differences in the responses received from the two agencies. In lieu of reprinting responses from both ministries, only the responses from Revenue Canada are reproduced. Answers appear in italic type. Ricardo N. Horton of General Electric Canada Inc. and Munir Suleman of the Bank of Nova Scotia contributed substantially to the development of the agendas.

I. Section 252.41 -- NonResident Rebates for Installation Services

A. A number of issues arise where tangible personal property (TPP) is supplied on an installed basis by a non-resident, unregistered supplier (U.S. Co.) to a registered Canadian resident company (Customer). This is particularly true where the non-resident supplier (or its nonresident, non-registered third-party subcontractor) is itself the recipient of a taxable supply in Canada of a service of installing TPP in real property. In other words, U.S. Co. (or its U.S. subcontractor) is the recipient of a taxable supply of installation services from install Co., a registered Canadian resident, and Customer, a registered Canadian resident, receives the installed goods from U.S. Co., a non-registered non-resident. Under such circumstances, subsection 252.41(1) permits the non-resident supplier (U.S. Co.) to apply for a rebate of Goods and Services Tax (GST) from the government for the GST related to the installation service. Alternatively, under subsection 252.41(2), U.S. Co. can submit the application directly to Install Co.

1. a) Must the price to the Canadian Customer from U.S. Co. be stated on lump-sum basis in order for the rebate to be granted under subsection 252.41(2)? b) Alternatively, will subsection 252.41(2) apply where the non-resident supplier identifies a separate invoice price for the TPP and the installation service? c) If a lump-sum price is a prerequisite, how is the Canadian registrant supplying the installation service (Install Co.) to U.S. Co. to ascertain the status of the order between U.S. Co. and Customer in order to determine whether tax applies or whether U.S. Co. is eligible for the rebate for the installation service?

a) Can be stated on lump-sum basis.

b) Can be stated on separate selling price basis.

c) Not applicable since lump-sum is not a prerequisite.

2. In order for TPP to be considered installed "In Real Property," must the TPP be installed in a building or upon land as defined in section 123 of the Excise Tax Act (hereinafter "the Act")? In other words, must the TPP become real property?

"In Real Property" vs. "Becomes Real Property" was an issue for Revenue Canada (RC). RC's answers were based on "In Real Property."

3. Please advise whether U.S. Co.'s eligibility for the rebate depends on whether (1) U.S. Co. supplies the TPP and the Canadian registrant supplies the installation or (2) the Canadian registrant supplies the TPP on an installed basis.

1) Yes -- rebates available if qualified.

2) Direct shipment 179(2) can be used.

B. Please confirm in the following cases whether U.S. Co. is eligible for the non-resident rebate. Assume in each case that the non-registered, non-resident supplier is selling to the Canadian GST registrant on the basis of a lump-sum supplied and installed price (except as noted in case 5 below).

1. U.S. Co. is a computer manufacturer that sells a mainframe computer to a Canadian-resident registrant Customer Co. U.S. Co. hires the following Canadian-resident registrants to provide services in connection with installation of the mainframe computer:

a) Registrant S will wire the computer to Customer's main power supply.

Not in itself.

b) Registrant T will install air conditioning in the room where the computer is housed.

Not in itself.

2. U.S. Co. manufactures lathes in the United States. In connection with the sale of a lathe to Customer, U.S. Co. hires the following Canadian-resident GST registrants to perform the indicated services related to the installation:

a) Registrant U will wire the lathe to Customer's main power supply.

Not in itself.

b) Registrant Y will install a ventilating system around the lathe in order to permit fumes to exhaust properly

Not in itself.

(c) Registrant W will install the foundation upon which the lathe rests.

Not in itself.

3. U.S. Co. purchases a lathe in Canada from a Canadian manufacturer. U.S. Co. avails itself of the drop-shipment rules of subsection 179(2) to deliver the purchased lathe to Customer. In connection with the sale of the lathe, U.S. Co. hires the following Canadian-resident registrants to perform the indicated services related to the installation:

a) Registrant X will wire the lathe to Customer's main power supply.

Not in itself.

b) Registrant Y will install a ventilating system around the lathe in order to permit fumes to exhaust properly.

Not in itself.

(c) Registrant Z will install the foundation for the lathe.

Not in itself.

4. A transmitter is purchased in Canada by U.S. Co. who is selling the transmitter to Customer in Canada. The installation of the transmitter, the cost of which is included in the price, will also be performed by the Canadian supplier for U.S. Co. The transmitter will be attached to a communications tower owned by Customer.

Subsection 179(2) should apply.

5. Same facts as listed in case 4 except that the Canadian supplier of the transmitter separately states the sale price for the transmitting equipment and the installation service on the invoice to, and contract with, U.S. Co.

Same as B4.

Summary -- Non-Resident Rebates for Installation Services.

Revenue Canada has taken the position that Section 252.41 of the ETA applies only to a prime contractor who provides the entire installation service for the non-resident unregistered supplier. The non-resident unregistered supplier will subsequently supply the entire installation service to the Canadian resident company.

The position is based on RC's understanding of the term "installation service" which RC takes to mean the entire installation service. In reality, although there may be a prime contractor who does arrange for the majority of the installation service (i.e., subcontracts various services from subcontractors), there can be and often is separate contracts between the non-resident unregistered supplier and other Canadian GST-registered contractors (hereinafter referred to as specific contractors") who do a specific part of the installation. It may be that the prime contractor is unwilling to take the risk of liability for certain aspects of the installation (e.g., containment wall in a nuclear rector) and therefore the non-resident unregistered supplier has a contract with a "specific contractor" in addition to the primer contractor.

RC's position states that the supply by these "specific contractors" are not eligible under section 252.41 because this service is not the entire installation service.

TEI believes that this was not the intent of section 252.41. RC indicated that it would review the position and discuss the issue with the Department of Finance.

II. Amalgamations

A. Will Revenue Canada permit a supplier company, following an amalgamation with another company, to exhaust its supply of invoices with the preprinted GST registration number of a predecessor company? Will the input tax credits (ITC) claimed by the supplier's customers be jeopardized by the use of such invoices?

RC will allow existing forms with the former GST number of the predecessor corporation to be used until the existing stock is depleted. The customers of the newly amalgamated company (same name as the aforementioned predecessor corporation) will not be denied input tax credits even though the former GST number of the predecessor corporation is on the form and not the new GST number of the newly amalgamated corporation.

B. Since the GST numbers on old election forms are technically invalid as of the amalgamation date, will the amalgamated company be required to complete new election forms pursuant to sections 150 and 156?

The amalgamated company is deemed to be a new company. S150 and S156 elections will flow through to the new amalgamated company provided the requirements of the respective sections are still met. A new S156 form should be completed but does not need to be filed with RC. RC will update the S150 election form so a new form does not have to be filed.

C. Predecessor corporations that cease to exist upon amalgamation also likely filed elections pursuant to sections 150 and 156. Should the prior elections be revoked by giving notice to Revenue or does Revenue consider the elections terminated by operation of law?

A S150 revocation is required to be filed with RC even if the corporation is no longer in existence. A S156 revocation is required to be completed even if the corporation is no longer in existence but is not required to be sent to RC.

D. Where one of the predecessor corporations is deemed a financial institution pursuant to a section 150 election filed with another corporation that is not a participant in the amalgamation, and where none of the other participants in the amalgamation is a financial institution (deemed or otherwise), will the amalgamated company be deemed a financial institution?

The newly amalgamated company is considered a listed financial institution even though one of the predecessor companies was a financial institution only due to having filed a S150 election with another corporation that is not part of the aforementioned amalgamation. The predecessor corporation (i.e., the deemed financial institution per S151) is required to file a S150 revocation before the aforementioned amalgamation took place in order for the newly amalgamated company not to be deemed a financial institution.

III. Transactions on the Internet

Assume that a registrant logs on to the Internet and navigates to the World Wide Web site of a software vendor. The customer-registrant provides a credit card number to the software vendor on an order form on the web site. When the customer-registrant completes the form, it is permitted to download software from the vendor via the Internet. The customer makes a contemporaneous note of the vendor's GST number, which is displayed on the web site, and the price of the software with and without the GST. The customer does not receive an invoice from the software supplier, but the price term is clearly a GST-inclusive price. The only documents the registrant possesses are the credit card statement (with GST included in the price) and its contemporaneous note of the supplier's registration number and the price terms. On these facts, is the registrant permitted to claim an ITC for the GST paid?

Even though there is a credit card statement, the supplier's registration number and the price terms are not, by themselves, sufficient to claim an input tax credit, the claim may be valid provided that the missing information has been downloaded from the web site (or obtained otherwise electronically), provided the supplementary data can clearly be related to the supply in respect of which an input tax credit (ITO is claimed. The current general regulatory, legislative, and administrative situation in respect of computerized records can be described as follows:

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."

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

Subsection 169(5) of the ETA provides that the Minister has the discretionary power to exempt a particular registrant, a specified class of registrants or all registrants from the general input tax credit documentary requirements under subsection 165(4) of the ETA. In order to make an exemption, the Minister must be satisfied that there are or will be sufficient evidence to establish the particulars of a supply or importation of a particular class or type, and the tax paid or payable in respect of the supply or importation. As well, the Minister may specify the terms anti conditions for the application of these exemptions.

The Minister's Power under subsection 169(5) of the ETA in respect of a particular registrant may be delegated to the appropriate level at the Taxation Services Office. This allows the TSO to determine, during the verification process, whether a particular registrant is capable of establishing the particulars of the supply and the tax paid or payable in respect of the supply in circumstances where the registrant is unable to meet the documentary requirements under subsection 169(4) of the ETA. Consequently, several exemptions have been approved for application to all registrants, including computerized records. Specifically, many registrants rely on electronic systems to maintain their financial records where no traditional paper documentation issued in respect of a supply.

In cases where the physical documentation issued by a supplier's electronic or computerized system meets the statutory and regulatory requirements, such supporting documentation must be obtained by the registrant prior to the filing of a return in which an input tax credit is claimed.

However, where the registrant is unable to meet these requirements before filing a return, or if the documents fail to satisfy the requirements under subsection 169(4) of the ETA, the Minister may exempt registrants from the requirements. The exemption will apply where a registrant maintains proper computerized books and records which capture the following information:

1. The supplier's name or trading name and address (or that of the supplier's duly authorized agent or representative);

2. The supplier's registration number;

3. When the GST or HST in respect of the supply was paid or became payable and the amount of GST or HST paid or payable;

4. The name or trade name and address of the recipient of the supply (or that of his or her duly authorized agent or representative); and

5. The nature of the supply.

IV. Technical Amendments Announced April 23, 1996

A. Assume Company A owns and leases an asset to Company B. A sells both the asset and its right to receive the income from the lease to Company C, but B is not notified or otherwise affected by the sale. In connection with the sale, A grants C a power of attorney to deposit cheques from B in the name of A. C receives the full amount of lease payment including the GST, which C remits to the government. In view of the addition of the term "intermediary" in section 2 of the "Input Credits Information" regulation, will Company B still be permitted to claim ITCs on the GST included in its lease payments?

Yes, Company B may claim ITCs. It has always been Revenue Canada's position that Company B could claim ITCs in such a situation.

B. Section 6.1 and 6.2 of Part V of Schedule VI of the Act provide a zero-rating for specified services performed for certain unregistered nonresidents. Are there any requirements that the unregistered, non-resident recipient must satisfy in order to obtain the zero-rating? Specifically, must the unregistered, non-resident recipient be engaged in the business of transporting property or passengers? Or may an unregistered, nonresident lessor of the equipment specified in those sections qualify for the zero-rating?

There are no such requirements. The zero-rating will apply to any lessor if the conditions outlined in the provisions are met.

V. Audit Issues

A. On occasion, suppliers will erroneously collect and remit GST on zero-rated supplies, for supplies made outside Canada, and for supplies covered under a section 156 election. Business customers that erroneously pay the GST will retain sufficient documentation and, in the ordinary course of preparing their GST return, claim ITCs for the amount of GST paid. Even though the government has lost no revenue from the transaction, auditors reviewing the business customers' GST returns are disallowing the ITC and assessing interest and penalties as well. Please comment on Revenue Canada's policy in respect of these types of transactions. What steps can the taxpayer who erroneously paid the GST undertake to obtain relief?

If purchaser claims ITCs on purchases where supplier has erroneously charged GST on zero-rated supplies, the purchaser will not be eligible to claim ITC. This amount could be eligible for offset during audit. These transactions are not eligible for ITC because it is not tax charged in error because tax should have never been charged in the first place. Although on ITC is not provided for under current regulations, if you have understandings from both parties to the transaction that no tax adjustment will be made (i.e., the supplier will not claim back from RC the GST collected incorrectly). Revenue Canada may consider these facts in evaluating whether an assessment will be raised.

B. When the GST was introduced, Revenue Canada announced a policy of administrative tolerance and generally refrained from assessing penalties and interest on inadvertent taxpayers errors. The policy minimized disputes while taxpayers gained familiarity with the complexities of the GST and implemented administrative and information systems to comply. With five years experience under the GST regime, Revenue has seemingly shifted its stance on the assumption that the tax is now fully implemented. A number of legal entities, however, have been audited. Hence, although unexamined taxpayers may have made good faith interpretations of the GST, errors that would have been brought to light on audit in the first several years of the GST may remain undetected. For example, assume that two legal entities filed a section 156 election in good faith on January 1, 1991, under a mistaken interpretation that they were eligible for such election. Assuming no loss in revenue to the government, what would Revenue's policy be in respect of interest and penalties on such taxpayers? More broadly, will Revenue Canada provide administrative tolerance for taxpayers undergoing their first GST audit similar to that permitted generally to taxpayers within the first several years of implementation of the tax?

Businesses that are only having their GST audited now for the first time do not benefit from the administrative tolerance that was available during the first year of the GST Such transactions will however continue to be considered under the fairness provisions.

C. The Technical Bill set forth a number of other important changes to the Act. In particular, new rules governing the limitations period for assessments against large taxpayers were introduced. Has Revenue Canada drafted any guidelines concerning the application or implementation of section 296?

The ministerial discretion in section 296 will be administered as a "shall" and not as a "may" provision, as drafted. This was confirmed by Finance at an earlier meeting.

D. In respect of Notices of Objection under section 301, taxpayers must set forth every conceivable legal basis to support their tax calculation and claims because any argument or legal basis for a reduction in tax that is omitted is deemed waived. Should not auditors at the time of assessment, be compelled similarly to disclose all possible bases for their assessment against the taxpayer?

Revenue Canada agreed that there is room for improvement at the field audit level in terms of "closing the file" and that the auditors can be expected to provide more detailed reasons to support their assessing practices in the future.

Technical Information Center

E. In view of the burdens imposed upon large taxpayers by the revised limitation periods, will Revenue Canada, as it has on income tax matters, expand its customer service initiative to address the needs of its larger, complex taxpayers for timely guidance? For example, taxpayers can often call national experts in Ottawa to obtain guidance on technical income tax interpretations and administrative issues. We believe that a similar mechanism should be available to address commodity and excise tax issues and invite Revenue's comments on the efficacy of establishing a similar informal process.

Revenue Canada is of the view that it currently has a similar advisory group as in the case of income tax and that all queries sent to Ottawa will be responded to by Ottawa and not the district Offices. Revenue is also in the process of setting up 6 "Centres of Excellence" which should assist taxpayers in a more efficient manner. Each Centre will have a person from the Policy and Legislation group to work with taxpayers and the staff at the Centre. In addition, questions on Financial institutions should be sent to John Sitka (613-952-9248), on General Operations and Border Issues to Ivan Bostasic (613-954-7959), on Public Service & Government Bodies to Adrian Venne (613-954-7656), and all others to Jim Daman (613-954-4291). It was also made very clear that any issues relating to GST or HST in Quebec would have to go through Revenue Quebec since it is an agent of Ottawa. Ottawa will not deal or respond to issues relating to Quebec.

VI. Issues Arising from Harmonization

A. Certain taxpayers have filed elections under sections 150 and 156 of the Excise Tax Act (hereinafter "the Act"). Will elections filed under these (or any other) provisions automatically extend to the HST? In other words, in respect of elections under sections 150 and 156, will supplies between the two parties to the election follow the same rules under HST as under GST?

Section 150/156 Elections:

a) Yes -- Section 150 & 156 will automatically extend to the HST

b) Yes -- Section 150 & 156 elections will follow the same rules with the following exception:

For the entity that is a selected listed FI in a S150 election (not the deemed listed FI), and therefore uses the attribution method, the provincial component of the HST must be added in the formula.

B. Under HST, what does it mean for the recipient of goods to "arrange for shipment of the goods"? For example, where a recipient uses its own fleet of trucks or pays a freight carrier to pick up the goods in a non-participating province, does either act constitute "arranging for the shipment of goods"? Where the recipient of goods arranges for a freight carrier to pick up the goods (because, for example, as a high-volume shipper the recipient obtains better discounts than the vendor from the carrier) and the carrier invoices the vendor who in turn invoices the recipient, does HST apply? If HST does not apply, what documentation should the vendor retain to satisfy an auditor that HST did not apply to the freight charges?

The "Place of Supply" rules presently contemplated by Finance are under review. As presently proposed where a recipient which arranges for a common carrier to pick-up goods, the place of supply of the goods would be the province of origin. If the vendor arranges for a common carrier to deliver the goods, the place of supply would be the province of destination.

C Will an election under section 167 of the Act apply to exempt a sale of a business from HST after April 1, 1997?

Yes, section 167 of the Act will apply for purposes of the HST after April 1, 1997. Still subject to importation rules (self-assessment rules) and change of use rules.

D. Where real estate is sold in the participating provinces from one registrant to another, will the self-assessment provisions of the Act apply under HST? In other words, will the cash outlay for HST on the transaction be nil?

Yes, rules will be the same.

E. Businesses often enter leases for a supply of highly mobile equipment (e.g., rail cars or other transportation equipment). The equipment may be used by the lessee in either participating or non-participating provinces. How will HST apply in respect of the lease payments (whether for annual, quarterly, or monthly lease intervals) where the geographic location of the equipment at the start of the lease interval is unknown?

Department of Finance suggested the concept of "Originally Located" (i.e., where was the leased equipment originally located). Department of Finance suggested that the term "originally located" be included in future contracts for existing contracts; suggest Revenue Canada develop a policy hinging on certain facts such as:

a) where recipient is established;

b) where item is stored or maintained; and

c) where the billing address of recipient is.

If the leased equipment was licensed in a province, that would be the determining factor. TEI suggested that a clear policy was needed to indicate when GST or HST was to be charged.

[Note: When the Dept. of Finance reviewed this question, the words "originally located" were changed to . ordinarily located."]

F. Will the grandfathering provision of subsection 340(6) of the Act apply to transactions subject to HST after April 1, 1997?

The GST portion of the HST will still be grandfathered. The provincial portion of the HST will however not be grandfathered and an 8 percent rate will be applicable on the lease payment (also refer to answer on question III E above regarding usual location of the equipment).

G. Under the PST, customer returns (excluding exchanges for similar merchandise) that generate cash refunds (including the sales tax) result in corresponding offsets for business taxpayers against the PST payable. Will the existing PST policy for customer merchandise returns in exchange for cash be continued through July 1997? Since there will likely be no PST collected or remitted during the interim period from April through July, please advise how taxpayers should file refund claims in respect of returned goods.

Although this is a matter for the participating provinces, Finance expects that each province will accept refund claims from the vendor when the vendor is no longer filing a PST return and has credited a customer for the PST originally charged on returned goods.

Newfoundland has indicated it will accept claims filed in the form of a letter while New Brunswick has indicated that it will accept "requests from business."

Vendors will not be able to offset refundable PST against HST payable.

H. Please advise which of the following "Invoice Line Formats" will be acceptable for purposes of describing the HST on an invoice and as support for claiming an input tax credit (ITC):

GST R#123456789 HST R#123456789 GST/HST #123456789 HST 15% (GST #123456789)

Will the above descriptions be acceptable if the "#" sign is omitted? Must the HST rate be identified on the invoice? May the HST rate be identified on the invoice?

All four methods of disclosing a registrant's HST number are acceptable. The only requirement is that the nine digit number must be disclosed. A registrant is not required to show the HST rate on an invoice; however, you must disclose the total tax payable in respect of the supply in a manner that clearly indicates the amount of that total. If this manner of disclosure is not adopted, the invoice must show the total of the rates at which tax is payable in respect of the supply and where the invoice relates to both taxable and non-taxable supplies, the supplies to which tax at those rates applies.

1. The rules in respect of the taxability of services, particularly whether the services are deemed to be performed within or without the provinces participating in the HST, will likely be complex to comply with and administer. In this respect, would Finance support a Revenue Canada policy of administrative tolerance to abate interest and penalties on service transactions subject to HST, especially where both parties to a transaction are registrants?

In accordance with the "wash transaction" policy, where a registered supplier has not properly charged the HST on taxable supplies and the purchaser would have been able to claim a full input tax credit, the Department will consider waiving or canceling the amount of the corresponding penalty and interest that is more than 4 percent of the HST that the supplier did not properly charge. If a purchaser should claim an ITC for an amount paid in error as the provincial component of the HST, there will be no penalty and interest consequences. This is based on the new assessment provisions of the Excise Tax Act (ETA) which generally require the Minister to offset the amount of the unentitled ITC claimed in this case by the amount of the corresponding unclaimed rebate of tax paid in error. Finally, it should be noted that the complexity of the ETA is generally not considered in the application of penalty and interest.

J. In the case of barter transactions between registrants where one party is within a participating HST province and one is located in a non-participating province, will any portion of the value of the transaction be subject to the provincial component (or, indeed, any part) of the HST when delivery occurs in a participating province?

If the barter transaction is done under section 153(3), no HST will apply. Otherwise, the barter transaction will be considered as two separate supplies and HST will apply if the supply is into a harmonized province. If the supply is out of the harmonized block, HST will not apply.

K Will the Department support the introduction of a short-cut calculation of HST similar to the "6/106" factor employed for GST?

A person who is an employer, partnership, charity or public institution may calculate the deemed tax paid in respect of the reimbursement paid to an individual who is:

-- where the person is an employer, an employee of the employer;

-- where the person is a partnership, a member of the partnership; or

-- where the person is a charity or public institution, a volunteer who gives services to the charity or public institution by applying a factor of 14/114ths to the total amount reimbursed for expenses (including gratuities) incurred in participating provinces by the individual for supplies of property or services consumed or used in relation to the activities of the person where all or substantially all of those supplies for which the reimbursement is paid are subject to 15 percent HST, and the individual has paid the tax payable in respect of those supplies.

Furthermore, where a person reimburses an individual for expenses incurred for supplies of property or services consumed or used in relation to the activities of the person, and those supplies, for which the individual has paid the tax, include 7 percent GST taxable supplies and 15 percent HST taxable supplies, the person may choose to calculate the deemed tax paid on the reimbursed amount to be equal to the aggregate of

-- 6/106ths of the amount reimbursed for supplies made in Canada (but outside the participating provinces) where all or substantially all of those supplies are subject to 7 percent; and

-- 14/114ths of the amount reimbursed for supplies made in participating provinces where all or substantially all of those supplies are subject to 15 percent HST.

Consequently, where a person has satisfied the above conditions, the person may be entitled to an input tax credit or rebate in respect of the deemed tax paid using the factor approach provided that all other ETA requirements have been satisfied.

Also note that the calculation method chosen must be used consistently by the person within each category of expense reimbursed (e.g., airfare, hotel accommodation, food, beverages and entertainment, etc.) throughout the person's fiscal year. Therefore, where the factor approach is used to calculate an input tax credit or rebate claim for one category of expense reimbursed to one individual, the person must use the same method of calculation during the fiscal year for that category of expense reimbursed to all other individuals.

Lastly, where the reimbursement paid to the individual is in respect of tax paid for food, beverages and entertainment, the 50 percent recapture rule set forth in subsection 236(1) of the Excise Tax Act may apply when using the 6/106ths or the 14/114ths factor to calculate the person's input tax credit entitlement (note that the recapture rule does not apply to a charity or public institution claiming an input tax credit on food, beverages, and entertainment).

L. Certain maritime provincial tax levies (as examples, the New Brunswick tire levy and the Newfoundland can recycling tax) currently interact with the provincial sales tax. How soon will guidance be issued in respect of the manner in which HST and such taxes should be calculated or shown? For example, should the New Brunswick tire levy be shown as $3.00 plus HST of $0.45 or shown as a tax-included amount of $3.45? How should the Newfoundland can recycling fee be shown on invoices?

Provincial levies such as the New Brunswick tire levy, in the participating provinces will be subject to the same tax-inclusive pricing rules as are other goods. The advertised or posted price of the present $3.00 tax exclusive price should be $3.45. The HST component of the price could be shown separately on the invoice.

VII. Specific Harmonization Issues Relating to Retailers

A. Has the Department developed transitional rules in respect of pre-existing contracts for promotional allowances (e.g., co-op advertising or volume rebate agreements)? Where the 7-percent GST is currency levied on a contract, should the 15-percent HST be assumed to apply automatically to invoices rendered after April 1, 1997? The "place of supply" however, may be difficult for the registrant-supplier to ascertain.

It is recognized that the current GST treatment of promotional allowances could result in additional complexity for businesses under a system where some, but not all, provinces have harmonized their sales taxes with the GST As a result, proposed new section 232.1 of the Excise Tax Act as set out in the Notice of Ways and Means Motion tabled on March 21, 1997, would apply where a registrant vendor makes taxable supplies by way of sale of goods and pays, credits or allows a discount to another registrant who acquires the goods, either from that vendor or another person, exclusively for resale in the course of the purchaser's commercial activities. In these circumstances, if the amount were paid, credit or allowed as a discount in return for the promotion of the goods, it would not be regarded as consideration for a supply by the purchaser to the vendor. If the allowance were taken as a discount on, or credit against, the price of any property or a service sold by the vendor to the purchaser, the value of the consideration for the supply of the property or service would be regarded as the price less the discount or credit. Also, the amount Of the discount or credit would be regarded as a reduction in the consideration for the property or service for the purposes of subsection 232(2) of the Act. If the allowance were effected by a payment to, or credit in favor of, the purchaser and not credited against the price of any property or service sold by the vendor to the purchaser, the amount paid or credited would be regarded as a rebate for the purposes of section 181.1 of the Act. It is proposed that this measure apply to supplies for which consideration becomes due after March 31, 1997, or is paid after that day without having become due."

B. Will the Department provide a detailed definition of a "National Catalogue" for purposes of the "tax inclusive pricing" exemption referenced on page 22 of technical paper? Will the Department, for example, prescribe minimum binding requirements (8-1/2 by 11 pages, stapled in the middle), set a minimum number of pages (4, 8, 16, or more?), or require a National Catalogue to be distributed in a certain fashion (national newspaper or magazine inserts, instore displays, direct mail, or some combination)? Alternatively, will the Department permit retailers to self-define its "national," "regional," or local catalogues?

Definition of "National Catalogue" for purposes of HST rules for tax-inclusive pricing still not determined as of January 13, 1997 (provinces still negotiating due to pressure by Retailers).

C. In addition to the questions in respect of "arranging for delivery" discussed under Part III.B above, the application of HST to freight charges for continuous (or periodic) shipments raise a number of issues:

1. What is the HST treatment of shipments:

a. Into the maritime provinces from other parts of Canada?

b. Into the Atlantic provinces from the United States?

c. From the Atlantic provinces to other parts of Canada?

d. From the Atlantic provinces to the United States?

e. Within the Atlantic provinces?

The governments of Canada, Nova Scotia, New Brunswick, and Newfoundland and Labrador have agreed to replace their retail sales taxes with a single, harmonized value-added tax (HST). Generally, a supply of a freight transportation service will be regarded as made in a particular participating province if the destination of the freight transportation service is in that province.

a) Freight charges for shipments into Nova Scotia, New Brunswick and Newfoundland and Labrador from other parts of Canada will attract the HST at 15 percent; freight charges for shipments into Prince Edward Island from other parts of Canada will attract GST at 7 percent.

b) Freight charges for shipments into Nova Scotia, New Brunswick and Newfoundland and Labrador, as well as into Prince Edward Island from the United States will be a zero-rated international freight transportation service.

c) Freight charges for shipments from Nova Scotia, New Brunswick, Newfoundland and Labrador and Prince Edward Island to other parts of Canada will attract the GST at 7 percent.

d) Freight charges for shipments from Nova Scotia, New Brunswick, Newfoundland and Labrador and Prince Edward Island to the United States will be a zero-rated international freight transportation service

e) Freight charges between Nova Scotia, New Brunswick, and Newfoundland and Labrador will attract the HST at 15 percent; freight charges for shipments into Prince Edward Island from Nova Scotia, New Brunswick, and Newfoundland and Labrador will attract GST at 7 percent; freight charges from Prince Edward Island into either of Nova Scotia, New Brunswick, and Newfoundland and Labrador will attract the HST at 15 percent.

2. What tax is to be charged in respect of freight where a truck travels a predetermined route stopping at various sites for pick-ups or deliveries and the sites are inside and outside the Atlantic provinces?

New rule found in section 136.3 of ETA which splits up a split run in and outside the harmonized zone (for deliveries within the harmonized zone, HST at 15 percent, for deliveries outside the zone, GST at 7 percent).

3. Are there special tax implications attributable to freight charges for goods in transit at the April 1, 1997, effective date? For example, should HST be collected on a pro-rated basis, such as on the basis of time from initial pick-up to delivery or for miles traveled within or without the Atlantic provinces?

New rule found in section 359(l) of ETA, states that any consideration for a continuous freight transportation service supplied in a participating province and commencing before April 1, 1997, is not subject to the provincial component of HST, provided the consideration becomes due or is paid before August 1, 1997.

The general rule, contained in Schedule IX, Part VI, Section 5, requires that a freight transportation service be considered to be in a province if the destination is in that province. This would mean that for the purposes of subsection 359(1) the final destination would govern even if there were deliveries in other provinces prior to the final delivery unless each delivery was a separate freight arrangement.

Pro-ration will not be required for the freight charges for goods in-transit on April 1, 1997. Subject to the August 1, 1997, override rule for delayed invoicing, HST will not apply to freight charges for movement which were in-transit on April 1, 1997.

D. Assume a retailer sells tangible personal property to a Native Indian for delivery to a reserve. Pursuant to the policy in TIB-39R, no GST applies to the tangible personal property. GST will apply, however, to the delivery charge because the service is deemed consumed by the Native Indian off the reserve. Under HST, assuming the transportation and delivery of the goods occurs entirely within the harmonizing provinces, will the freight charges attract the 15-percent HST?

Yes. HST at 15 percent applies in a similar manner as GST currently does. That is if the service is performed off the reserve, GST applies or in the case of the Harmonized zone, HST will apply.

E. Assume the merchant sells zero-rated tangible personal property (e.g., prescription eyeglasses, basic groceries), will the freight charges (where separately invoiced to the customer) attract the full 15-percent HST where such property is delivered to a recipient within the harmonizing provinces?

A supply of a freight transportation service is regarded to be made in a participating province if the destination of the freight transportation service is in that participating province. As such it will attract tax at 15 percent.

Where a supplier provides goods and undertakes to have the goods delivered to the customer, it is the nature of the contract between the parties which will determine whether there is a single supply of goods or a supply of goods and a separate supply of a freight transportation service. The fact there is a separate charge for the freight transportation component may be a useful indicator but is not determinative.

For instance, if the terms of the contract are f.o.b. the premises of the supplier, it will generally be considered that the supplier makes a separate supply of a freight transportation service, whether or not the supplier indicates a separate charge for the transportation service. If the goods are zero-rated, 15 percent HST will apply to the consideration charged for the freight transportation service or, where a single amount is charged for the goods and the transportation service, that part of the consideration that is for the transportation service. Where the terms of the contract are f.o.b. destination, it will generally be considered that the supplier is making a single supply of goods. If the supplier charges to the recipient, amounts for expenses incurred in making the supply of the goods, such as transportation costs, these amounts, as part of the consideration for the supply of the goods, will attract tax at zero percent.
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Publication:Tax Executive
Date:Sep 1, 1997
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