New Finance Canada Statement Does Not Solve GST Dilemma

Posted on March 27, 2010 by Cyndee Todgham Cherniak

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".

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