The Canada Revenue Agency is close to releasing a revised wash transaction policy for goods and services tax (GST) and harmonized sales tax (HST). A "wash transaction" occurs when a supply that is taxable at 5% or 12% or 13% is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant who would have been entitled to claim a full input tax credit (ITC) if the tax had been correctly applied. In other words, the supplier makes an error in not charging the correct amount of GST/HST when the recipient is entitled to a full input tax credit. As a result, the Government of Canada is not deprived of tax revenues as a result of the error.
Finance Minister Flaherty's written statement on March 26, 2010 concerning the proposed changes to the goods and services tax (GST) definition for "financial services" does not provide sufficient clarification for affected businesses. He said:
"The proposed changes contained in the Notice of Ways and Means Motion tabled in the House of Commons on March 22, 2010 are designed to confirm our long-standing policy intent and restore the situation that existed prior to court decisions. We are not imposing new taxes."
There are three big problems wit this statement:
1) The Notice of Ways and Mean Motion tabled in the House of Commons on March 22, 2010 retroactively changes the definition of "financial services" in subsection 123(1) of the Excise Tax Act(Canada). The changes are retroactive to January 1, 1991 and Canada Revenue Agency officials have stated that the changes will be used in audits; and
2) The Tax Court of Canada has considered the existing definition and has issued its decisions interpreting the law against the Canada Reveneu Agency and in favour of the taxpayer. It is inconsistent to say that the Department of Finance is responding to Court decisions that were decided against the Canada Revenue Agency and that the proposed amendemnts that are intended to improve the Canada Revenue Agency's chances of success in other and future cases are not changes to the law; and
3) The proof will be in the actions of the Canada Revenue Agency and not in a Statement by the Minister of Finance. The real problem will arise when an auditor assesses a financial service business in the future for non-collection of GST on supplies of financial services or when the Canada Revenue Agency issues a ruling that a particular supply is GST taxable in circumstances where (a) a ruling was provided to the taxpayer prior to the changes in which the CRA took a different position, (b) taxpayers follow the Tax Court of Canada decisions, (c) taxpayers follow the Canada Revenue Agency's pre-amendment administrative statements (e.g., policy P-239), or taxpayers exercised due diligence and did not collect GST (and HST) based on a reasonable interpretation of "arranging for".
There is some misinformation about whether HST will apply to imports into the new HST provinces (Ontario and British Columbia) after July 1, 2010. I hope I can clear up some of the confusion.
23. In this Part, unless otherwise defined for the purposes of Part IX of the Excise Tax Act, the term “non-commercial imported goods" means imported goods, other than goods imported into Canada for sale or for any commercial, industrial, occupational, institutional or other like use.
24. Unless otherwise provided in this Part, the importation into Canada of non-commercial imported goods by, or for, a consumer that is a resident (including a “seasonal resident" as defined for the purposes of the Seasonal Residents’ Remission Order, 1991) of the Province will be subject to the PVAT in respect of the Province in accordance with the rules generally applicable to the importation of goods into Canada under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province.
25. Canada will neither assess nor collect under this agreement any product-specific tax, levy or mark-up imposed by the Province in respect of the importation of goods subject to a specific tax collection agreement between Canada and the Province.
26. The PVAT in respect of the Province will not be applicable to the importation into Canada of any goods other than non-commercial imported goods in accordance with the rules under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province.
27. Goods, other than non-commercial imported goods, which are imported into Canada for consumption or use, or for supply in whole or in part, otherwise than in the course of commercial activities, in the Province by a person, will be subject to self-assessment of the PVAT in respect of the Province by the person in accordance with the rules under Part IX of the Excise Tax Act, and any other special rules under that Part developed for purposes of the PVAT in respect of the Province. PVAT in respect of the Province will also apply through the self-assessment provisions under Division IV of that Part.
28. The Province will assess and collect, at the time of vehicle registration in the Province, any PVAT in respect of the Province payable in respect of motor vehicles imported into Canada as non-commercial imported goods.
Rule 1. HST (called PVAT in the CITCA-O) is payable in respect of non-commercial imports of goods and will be collected by the Canada Border Services Agency (CBSA) at the border. For example, if an individual purchases a kindle from amazon.com for personal use, HST will be applicable. Generally speaking, if the importer does not have an import number (the RM extension on a business number), the CBSA will consider the importer to be bringing in non-commercial imports. Also, if the importer appears to be an individual and the "ship to" address is residential, the CBSA will consider the importer to be bringing in non-commercial imports. Please note that goods and services tax ("GST") will also be applicable.
Rule 2. There are exceptions to Rule 1. If an imported good is a non-taxable supply, an exempt supply or a zero-rated supply, HST will not be applicable. The import documentation (the B3 Customs Coding Form) will have to indicate the proper code in order to be relieved of HST.
Rule 3. Commercial importations of goods will not be subject to HST. That is, if a business imports goods, the CBSA will not impose HST at the border. The CBSA will still collect the GST.
Rule 4. In addition to Rule 3, Commercial importations of goods by businesses for consumption or use, or for supply in whole or in part, otherwise than in the course of commercial activities, in the Province by a person will be subject to HST and the importer will be required to self-assess any applicable HST on its GST/HST return. Depending on the place of supply rules, the HST rate applicable to the relevant province will apply.
Rule 5. Businesses that are residents in an HST province that are not engaged in commercial activities or import services and/or intangible property for consumption or use or supply in whole or in part otherwise than in commercial activities (meaning in exempt activities) will be required to self-assess applicable HST on imported taxable supplies of services and/or intangible property.
If you require additional guidance, please refer to the old GST/HST Technical Information Bulletin for the Maritime HST provinces (Nova Scotia, New Brunswick & Newfoundland/Labrador) TIB-081 "Application of HST to Imports"Note: when reading TIB-081, please remember that the place of supply rules are changing and TIB-081 will have to be updated.
Please be mindful of the CBSA's D-Memo D13-3-13 "Post-Importation Payments or Fees: Subsequent Proceeds" which takes the position that certain management and administrative fees and amounts paid by the importer to the exporter (or subsidiary to parent) after importation must be added to the price paid or payable. This could result in additional GST and HST being payable in respect of imported taxable supplies or property and/services. You will also have to be careful to ensure that some services that are added to the price payable for goods (and reported on a B2 Adjustment) are not duplicated in a self-assessment of GST/HST on a GST/HST return.
On February 25, 2010, the Department of Finance released a News Release about what will be the HST place of supply rules after regulations are promulgated. Interestingly, the Department of Finance is going to create a separate rule for customs brokerage services. "Customs brokerage services" are currently understood to mean:
"a service of arranging for the release of imported goods, or fulfilling, in respect of the importation, (whether before, at the time of or after the release) any accounting,, reporting or information requirements imposed under the Customs Act or the Customs Tariff Act or any requirements under either of those Acts to remit any amount."
Since I wrote on March 17, 2010 about the HST rules for imports, I thought I should share the funny little place of supply rules for customs brokers services.
In the February 25, 2010 News Release, the Department of Finance wrote:
Under the current rules, the place of supply of a service of arranging for the release of imported goods, or fulfilling, in respect of the importation, (whether before, at the time of or after the release) any accounting,, reporting or information requirements imposed under the Customs Act or the Customs Tariff Act or any requirements under either of those Acts to remit any amount is in a province if the goods are situated in that province at the time of their release.
It is proposed that this rule continue to apply in respect of commercial goods. However, in the case of non-commercial goods, generally if the provincial component of HST for a participating province is imposedin respect of the importation of the goods, the supply of the customs brokerage service will be regarded as made in that participating province.
The above rules will not apply to the supply of any service provided in relation to an objection, appeal, re-determination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing. These types of services will continue to be subject to the place of supply rules for services described in other parts of this document.
The changes to the Excise Tax Act or the Regulations still have to be made public and must undergo the applicable legislative steps to become law.
Rule #1: If the importation is commercial goods (for which HST is not collected), the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson Airport, the Ontario HST would apply. If the goods are released at the Vancouver Port, then British Columbia HST will apply.
However, if goods are placed in a bonded warehouse in Montreal, HST would not be applicable to the brokerage charges.
Rule #2: If the customs brokerage services relate to an objection, appeal, re-determination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing (called herein "post-importation customs brokerage services"), Rule #1 does not apply. The general place of supply rules for services would be applicable.
The 5 main place of supply rules for services are applied in the following order:
(a) If the recipient's address or the address most closely connected with the supply in in the HST Zone, the applicable HST rate would be applied to the post-importation customs brokerage services;
(b) If the recipient does not have a Canadian address, the post-importation customs brokerage services will be considered to be supplied in the province in which the greatest proportion of the services is performed. For example, if the customs broker is located in Ontario and a customs broker in Ontario completes the B2 adjustments/appeals, then Ontario HST would apply.
(c) If 2 applies and the post-importation customs brokerage services are performed equally in two or more particular HST provinces, the HST province with the highest HST rate would be considered to be the place of supply.
(d) If 3 applies but a single HST province cannot be identified (same 13% rate in more than one province), the post-importation customs brokerage services will be subject to 13% HST.
(e) If the recipient does not have a Canadian address and the customs brokerage service is not performed primarily in an HST province or the HST Zone, then HST would not apply to the post-importation customs brokerage services.
Rule #3: If the importation relates to non-commercial goods, whether HST applies to the customs brokerage service will depend on whether the goods are subject to HST under the place of supply rules for goods.
On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier (Seller) must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient (Buyer) must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.
The proposed place of supply rule for real property is relatively straight-forward. With respect to the place of supply rule for real property, the Department of Finance did not make any changes to the current rule applicable in Nova Scotia, New Brunswick, & Newfoundland and Labrador.
A supply of real property will be considered to be made in the province in which the real property is situated. If the real property being supplied is located in British Columbia, HST will be applicable at the rate of 12%. If the real property being supplied is located in Ontario, Nova Scotia, New Brunswick or Newfoundland and Labrador, HST will be applicable at the rate of 13%. If the real property being supplied is located in Quebec, Prince Edward Island, Manitoba, Saskatchewan, Alberta or one of the three territories, HST will not be applicable. However, GST would be applicable at the rate of 5%.
The Department of Finance provides the following example:
A sale of a warehouse situated in Sarnia, Ontario will be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component).
Some other examples would be:
A sale of timber lands situated in British Columbia will be subject to HST at a rate of 12 per cent (a 5 per cent federal component and an 7 per cent British Columbia component).
A sale of vacant land situated in Goderich, Ontario will be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component).
A sale of a resource property (the land component) in Alberta, will not be subject to HST, but will be subject to GST.
In addition, the supply of an interest in real property is considered to be a supply of real property and the HST place of supply rules for real property would apply. For example, an option to purchase real property would be considered to be real property. If a recipient pays an amount for the right to purchase a leased factory in 10 years, the payment would subject to HST if the factory is located in the HST Zone (British Columbia, Ontario, Nova Scotia, New Brunswick or Newfoundland and Labrador.
The lease of real property is also considered to be a supply of real property. For example, a lease of office space in Toronto, Ontario will be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component).
If a company in Ontario leases a commercial office building in British Columbia, the supply of real property will be considered to be made in British Columbia. As a result, HST would be imposed at a rate of 12 per cent (a 5 per cent federal component and an 7 per cent British Columbia component) despite the fact the company is incorporated under the laws of Ontario. The key fact is that the real property that is being leased is located in British Columbia.
There will be situations where a person owns real property in more than one Canadian province and transfers all or some of its assets to another person. For example, a large Canadian company with real property assets in Ontario and Quebec sells all of the assets of its business. In this case, it is proposed that the place of supply rules will deem there to have been separate supplies of real property in Ontario and Quebec. The transfer of the real property located in Ontario would be subject to HST at a rate of 13 per cent (a 5 per cent federal component and an 8 per cent Ontario component). The transfer of the real property located in Quebec would be subject to GST at a rate of 5 per cent and would not be subject to HST (would be subject to QST).
Conversely, a payment made to break a real property lease would be considered to be a supply of real property and would be subject to HST if the real property is located in the HST Zone.
Warning: On April 30, 2010 the Department of Finance released draft place of supply rules regulations that supersede/override the information in this post. Please do not rely on the information in this post.
Harmonized Sales Tax (“HST") will become a reality in Ontario and British Columbia on July 1, 2010. And some businesses are required to start collecting HST as of May 1, 2010.
Businesses in the HST Zone - Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador - will have to use the newly released place of supply rules, some of which are different from the existing place of supply rules (for Nova Scotia, New Brunswick and Newfoundland/Labrador). The applicable HST rates are:
Ontario: 13% (5% GST and 8% provincial HST component)
British Columbia: 12% (5% GST and 7% provincial HST component)
Nova Scotia: 13% (5% GST and 8% provincial HST component)
New Brunswick: 13% (5% GST and 8% provincial HST component)
Newfoundland/Labrador: 13% (5% GST and 8% provincial HST component)
In addition, some businesses outside the HST Zone will be required to charge, collect, and remit HST to the Federal Government in accordance with the place of supply rules when the place of supply is within the HST Zone.
On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.
The HST place of supply rules for services have evolved from the existing rules to reflect the addition of the larger economic provinces of Ontario and British Columbia to the HST Zone.
The first question to ask when applying the HST place of supply rules is: What is being supplied or sold? Is it property (tangible personal property, real property or intangible property) or a service? If the supplier is supplying or providing a service, then the HST place of supply rules for services should be used.
The next question is whether one of the specific place of supply rules applies or the general place of supply rules for services. Determine whether any of the following types of services are being provided and, if so, go to the specific place of supply rule:
personal services (e.g., a hair cut)
services in relation to real property (e.g., constructing a house);
services in relation to intangible property (e.g., designing a trade mark)
computer-related services and Internet access;
telecommunication services;
premium rate telephone services;
services in relation to a location specific event (e.g., participation in a conference);
passenger transportation services;
services supplied on board conveyances;
baggage charges;
services of child supervision;
services related to a ticket, voucher or reservation;
freight transportation services;
postage and delivery services;
customs brokerage services;
air navigation services;
repairs, maintenance, cleaning, alterations and other services relating to goods;
service of a trustee in respect of a trust governed by an RRSP, RRIF or RESP.
If the supplier is not providing any of the above listed specific services (and note the devil may be in the details or the unpublished legislation or regulations), then the general place of supply rules for services will apply. There are 4 general place of supply rules for services, which must be applied in the following order. Rule #1 and Rule # 2 are the fundamental rules. Rules #3 and Rule #4 are tie-breaker rules.
Rule #1: If a supply of a service is made and, in the normal course of business, the supplier obtains a particular address of the recipient that is
(a) a home or business address in Canada of the recipient,
(b) where the supplier obtains more than one home or business address in Canada of the recipient, the home or business address that is most closely connected with the supply, or
(c) where the supplier does not obtain a home or business address in Canada of the recipient, another Canadian address that is most closely connected with the supply,
the supply will be regarded as made in the province in which the particular address is situated.
NOTE: The Canada Revenue Agency (CRA) has indicated that it will release additional guidance on how they plan to interpret the "most closely connected with the supply" requirement. The CRA plans on establishing a hierarchy of criteria to apply. The hierarchical criteria will be released in due course. However, we have been informed that the first criteria to apply are not the place of the billing address.
Rule # 2: If, in the normal course of business, an address in Canada of the recipient is not obtained by the supplier of a service, the supply will be regarded as having been made in a participating province if the part of the service that is performed in Canada is performed primarily in the participating provinces. In such instances, the supply will be regarded as made in the participating province in which the greatest proportion of the service is performed.
Rule #3: If (a) Rule #2 applies (i.e., no address in Canada of the recipient is obtained and the service that is performed in Canada is performed primarily in the participating provinces), and (b) a single participating province cannot be determined as being the participating province in which the greatest proportion of the service is performed because the service is performed equally in two or more particular participating provinces, then the supply will be regarded as made in the particular participating province for which the rate of the provincial component of HST is highest.
Rule #4: If Rule 3 applies, but a single participating province still cannot be determined to be the place of supply because the particular rate of the provincial component of the HST in two or more of the particular participating provinces is the same, the supplier will be required to charge HST by applying that particular rate. In other words, if 3 applies, but a single HST province cannot be identified (same 13% rate in more than one province), the services will be subject to 13% HST.
The application of the HST place of supply rules in any given situation may be a complicated legal task.
Last week at the Canadian Institute of Chartered Accountants Commodity Tax Symposium West in Calgary, a representative of Ontario stated to the audience that Ontario planned to conduct retail sales tax audits of most businesses in the next two years.
Pursuant to the Retail Sales Tax Act (Ontario), the normal audit period is four years. The audit period may be extended where there has been a misrepresentation attributable to neglect, carelessness or wilful default.
This is important to know because after the implementation of the harmonized sales tax (HST) on July 1, 2010, the Ontario Government will want to make sure that it has received all the retail sales tax required under the law as it was prior to HST. Just because we are moving to the HST, retail sales tax liabilities will continue. Auditors will continue to visit businesses (some would say plague businesses - but that is not very nice).
Businesses are now playing audit roulette. Will the auditor find the retail sales tax problems/mistakes that the business has been ignoring?
Businesses have three primary choices:
1. Continue to play audit roulette by continuing to ignore legacy retail sales tax problems;
2. Conduct an internal audit or control audit with a sales tax lawyer, accountant or consultant, identify the existing problems, and make a voluntary disclosure to report the mistakes to the Ministry of Revenue (come clean so to speak); and
3. Conduct an internal audit or control audit with a sales tax lawyer, accountant or consultant, identify the existing problems/mistakes and improved the processes and retroactively solve the problems to reduce exposure. For example, if a business sells goods that will be incorporated into goods for resale or will be resold by the purchaser, the business may ensure its purchase exemption certificates are in order. Another example would be that if a business should have collected tax on a transaction, they may send an invoice to the customer and remit the tax to the Ontario Government. Another example would be that if a business imported goods and failed to report and pay retail sales tax in respect of the importation, they may do so before an auditor knows on the door.
In addition, vendors and customers should communicate with each other about audits as the Minister is not entitled to impose a penalty on a vendor who failed to collect tax and assess the buyer for failure to pay tax on the same transaction --- the Minister cannot receive the same tax from both parties.
Audits take up the human resources of company officials and interfere with the operation of the business. Proactive steps by a business does save money, time and aggravation.
Warning: On April 30, 2010 the Department of Finance released draft place of supply rules regulations that supersede/override the information in this post. Please do not rely on the information in this post.
The HST place of supply rules include a specific rules for "services rendered in connection with litigation". These rules apply to lawyers, process servers, transcription service providers, those who provide expert opinions in connection with litigation, etc.
Rule #1: The general place of supply rules for services will apply to criminal, civil or administrative litigation services provided prior to the commencement of such litigation. The general place of supply rule focuses on the billing address of the client and the place where the services are performed.. There is a hierarchy of 4 place of supply rules that are applied in order.
For example, if a person hires a lawyer to discuss whether the facts warrant litigation, the general rules apply. If a person hires a lawyer to sue an opponent and discussions lead to a settlement before a statement of claim is filed with the Court, the general place of supply rules would apply.
Rule #2: The general rules for services will not apply to litigation services rendered after the commencement of litigation. In other words, if there is an initiating document (such as a statement of claim) Rule 2 applies and Rule 1 does not apply.
Rule #3: If litigation has commenced, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province will be regarded as being made in that HST province. In other words, if the litigation is in the Ontario Superior Court of Justice and you have a court file number assigned, HST at the rate of 13% applies.
Rule #4: If litigation has commenced, a supply of a service rendered in connection with criminal, civil or administrative litigation in a non-HST province (e.g., Alberta) will be regarded as being made in that non-HST province. In other words, if the litigation is in Alberta and you have a court file number assigned, HST will not be applicable to the services in connection with the litigation (however GST will be applicable).
Rule #5: If a supply of services in respect of litigation is supplied to a non-resident of Canada, the zero-rating provisions may apply to both the GST and HST component. The HST place of supply rules do not override the zero-rating provisions for exported services and professional services.
The HST place of supply rules do not currently distinguish between federal court litigation and provincial court litigation. As a result, it is not clear whether filing a Tax Court of Canada case in Alberta will save the litigants HST. It is also not clear whether all pre-hearing meetings and the trial must take place in Alberta if the case is filed in Alberta.
It is also not clear whether all cases filed with the Canadian International Trade Tribunal, which is located in Ottawa, will be subject to Ontario HST at 13% even if the affected litigant is located in Alberta. The same confusion will hold true for many other administrative tribunals with all the powers of a superior court of record, such as the CRTC, the Competition Bureau, to name a few. There are a number of federal statutes that create administrative tribunals and a number of federal statutes establish appeal rights only to that federal tribunal that happens to be located in the nation's capital, Ottawa, which is located in the HST Zone. it will be interesting to watch whether access to justice issues are raised by persons (such as individuals) who cannot recover HST costs.
Another question is whether an arbitration is "litigation" under the place of supply rules and, therefore, subject to the specific place of supply rule discussed above that bases the application of HST on the place of the filing. If the Canada Revenue Agency takes the position that an arbitration is caught by the rules, arbitration centres in the HST Zone may not be popular with Canadian parties. Also, business law lawyers and in-house counsel may have to reconsider contractually stipulating that Ontario or British Columbia as the place of arbitration in contracts.
Lawyers should consider whether their clients can save HST based on the place of filing and should start asking the questions as part of their litigation strategy now --- given that litigation filed today will likely continue after HST implementation.
Lawyers and service providers should also recognize that the place of supply rule for pre-filing services is different than post-filing litigation services. Therefore, one file might involve a change in the HST rate. When this happens, it is best to open a new file at the time of the filing of the initiating document.
The Canada Revenue Agency is close to releasing a revised wash transaction policy for goods and services tax (GST) and harmonized sales tax (HST). A "wash transaction" occurs when a supply that is taxable at 5% or 12% or 13% is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant who would have been entitled to claim a full input tax credit (ITC) if the tax had been correctly applied. In other words, the supplier makes an error in not charging the correct amount of GST/HST when the recipient is entitled to a full input tax credit. As a result, the Government of Canada is not deprived of tax revenues as a result of the error.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
