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TEI-Canadian Department of Finance liaison meeting: excise tax issues.

December 2, 1998

On December 2, 1998, TEI held its annual liaison meeting with representatives of the Canadian Department of Finance on pending excise tax issues. The Institute's agenda for the meeting is reprinted below. The agenda was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Munir A. Suleman of The Bank of Nova Scotia. Pierre M. Bocti of Hewlett-Packard (Canada) Ltd., the Institute's Vice President-Region I, coordinated the liaison meeting.

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 2, 1998, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Pierre M. Bocti, TEI's Vice President for Canadian Affairs, at (905) 206-3399 or Munir A. Suleman, chair of the Institute's Canadian Commodity Tax Committee, at (416) 866-4698.

1. Background

Tax Executives Institute is an international organization of more than 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 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.

2. We understand that Revenue Canada presently classifies charges related to Internet access and Web Site Hosting as telecommunications services. This seems inconsistent with the Technical Notes supplied by the Department of Finance on the definition of "telecommunications service." Classifying such services as telecommunications services places Canadian suppliers at a competitive disadvantage vis-a-vis non-residents supplying similar services because the zero-rating provisions for telecommunication services are overly stringent. Will the Department of Finance consider broadening the zero-rating provisions for telecommunications services in order to make Canadian service providers more competitive in the global marketplace?

3. The Minister of Revenue's Advisory Committee recently issued a report that addresses a number of tax policy and administrative issues arising from electronic commerce. TEI and other interested professional associations submitted comments on the report. In a number of instances, the report recommends that Revenue Canada work with or make recommendations to the Department of Finance in respect of the tax policy implications of electronic commerce. We invite the Department to discuss whether any projects are under way in respect of either studying the effects of electronic commerce on tax policy or recommending changes to the Excise Tax Act (ETA).

4. Is the Department of Finance currently considering any recommendations to amend the "closely related" rules of the ETA in order to permit corporations with two or more equal owners to elect under section 150 for services rendered by the subsidiary to its parent corporations?

5. The legislation authorizing and implementing the Canada Customs and Revenue Agency includes a provision that would authorize the agency, in return for a fee, to collect provincial sales tax on behalf of the non-harmonized provinces. Is this proposal in the implementing legislation a signal that the Government will no longer pursue the goal of establishing a harmonized national sales tax? We invite the Department's comments and a discussion of whether taxpayers and professional associations supporting a harmonized national sales tax should continue their efforts to achieve such a goal.

6. We invite the Department to comment and discuss the projects currently on its agenda. In particular, we understand that work is underway in respect of revising the section 156 election, providing revised guidance on barter transactions and the treatment of surety bonds, and, perhaps, issuing a new tax return for financial institutions. We invite the Department to provide a status report on these projects.

7. The Quebec Government introduced changes to Quebec's Consumer Protection Act effective July 1, 1998, that prohibit certain advertising practices in respect of sales taxes. Pursuant to that legislation, Quebec's Consumer Protection Branch and Revenue Quebec have provided examples of prohibited and acceptable references to sales taxes in advertising. For example, the following references are prohibited:

* No GST and QST

* No sales tax

* No taxes

* Tax-free

* Tax-free sales

* Tax credit granted on purchases of $100 or more

* Scratch and reduce the sales tax by the % indicated.

Did the Department of Finance or any other federal government ministry consult with the Quebec Government in the development of this legislation? Does the Department of Finance (in conjunction with any other federal government ministry) anticipate introducing similar legislation whether on a national basis or, especially, in respect of the harmonized provinces? Is the Department aware of, or consulting with, any other provincial governments in respect of similar legislation?

8. Under section 236 of the ETA, where a registrant is the recipient of, or pays an allowance in respect of, a supply of food, beverages, or entertainment and subsection 67.1 of the Income Tax Act applies, 50 percent of the amount that is the input tax credit (ITC) claimed in a return must be recaptured. Some tax practitioners have approached TEI members (who work for GST-registered companies involved 100 percent in a commercial activity and eligible for full ITCs) suggesting that the companies may claim 100 percent ITCs instead of 50 percent ITCs on reimbursement of employee food, beverage, and entertainment expenses (hereinafter referred to as meals and entertainment expenses (M&EE)). The outside practitioners aver that, in order for section 236 to apply, the registrant must be the recipient of, or pay an allowance. Since the word "reimbursement" is not used in the statute, the practitioners argue that ITC on reimbursed employee M&EE is not subject to recapture. In addition, Revenue Canada's Policy Paper No. 75 seemingly supports the position that a reimbursement is not the same as an allowance.

Section 169 provides the general legislative basis for a registrant to claim ITCs. Section 175 provides the legislative basis for a registrant to claim ITCs on payment of reimbursement to an employee. When an employee incurs M&EE, the practitioners suggest that the employee rather than the employer is the recipient of the supply and the employee is liable to pay the GST. Moreover, section 175 does not deem the supply of M&EE (made initially to the employee) to be made to the employer. The practitioners are of the view that, since the statute does not include a deeming rule, the employer is not a recipient and, hence, section 236 does not apply. If a deeming provision were present in the statute, they argue, the employer would be the recipient and the section 236 recapture provision would apply.

At the CICA's September 1998 Commodity Tax Symposium, a representative from Revenue Canada stated that current law supports the reduction in ITC by 50 percent. Is the Department of Finance aware of the position espoused by these practitioners? Has the Department been asked to review (or has it reviewed) the aforementioned sections of the ETA to determine whether they support the position advanced? We invite a discussion of the Department's views on this issue.

9. A number of taxpayers, industry groups, and professional associations (including TEI) have requested clarification of the documentation requirements for ITC where corporate procurement cards are employed. The burgeoning use of these cards is driven, in part, by the elimination of purchase orders and individual invoice payment for high-volume, low-dollar value transactions. Revenue Canada has so far demonstrated little flexibility in respect of the documentation requirements for purchase transactions, including those generated through procurement cards. For example, Policy Paper 184, which summarizes the criteria for use of the 6/106 formula method for claiming ITC in respect of reimbursement of the registrant employees' business expenses, requires that there be joint and several liability of the employee and the employer corporation for the credit-card balance. This requirement does not pose a problem where the employee uses a personal credit card. In the case of procurement cards, however, few (perhaps no) companies require the employee to accept personal liability in respect of payment of a delinquent account. Revenue Canada's stringent view thereby precludes the use of the 6/106 formula calculation. As a result, procurement-card users must retain copies of invoices to support the GST paid on each transaction, thereby diminishing the benefits of the procurement card. We understand that Revenue Canada is working on a Policy Statement addressing the GST and Income Tax implications of procurement cards. Has Revenue Canada approached the Department of Finance requesting legislation to ameliorate current ITC documentation requirements in order to permit ministerial discretion under section 169(5) of the ETA? We invite the Department's views and comments on the use of procurement cards and whether it supports the introduction of legislation that will permit companies to avail themselves of the full benefits of the purchasing and payment efficiencies that procurement cards afford.

10. Conclusion

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 2, 1998, liaison meeting.
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Title Annotation:Tax Executives Institute
Publication:Tax Executive
Geographic Code:1CANA
Date:Nov 1, 1998
Previous Article:Revenue Canada's guidelines for treaty-based waivers of Regulation 105 withholding.
Next Article:TEI-Revenue Canada liaison meeting: excise tax questions.

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