The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

It is unusual for the Canada Revenue Agency (CRA) to seek public comments on a difficult harmonized sales tax ("HST") topic.  Take advantage of the opportunity to shape their future policy.

On September 9, 2011, the CRA released DRAFT GST/HST Notice 266 "Harmonized Sale Tax - Self-assessment of the provincial part of HST in respect of property and services brought into a participating province".  The deadline for filing comments is October 31, 2011.  This document is 77 pages in length, so it will take time to review and find what will not work in practice.

Financial services providers, financial institutions, multi-jurisdictional charities & non-profit organizations, universities & colleges with campuses in more than one province, long term care home providers operating in more than one province, residential real estate management companies operating in more than one province, doctors and medical professionals or management companies operating in more than one province and other exempt businesses would be affected by this draft policy.  Non-resident companies also should be mindful of the draft policy if they are active in Canada and make exempt supplies.

In addition, even though the HST provinces should realize that they import supplies, they may not think of the HST consequences.  Ontario, Nova Scotia, New Brunswick, Newfoundland/Labrador and British Columbia (until they stop being a participating province) should also consider how the policy will affect them.

While the policy is in draft, it will be applied going back to July 1, 2010.  Also, while it is draft now, it will be finalized in the future.  The CRA auditors will consider this policy to be an assessment road map.  Please take the time to make sure it reflects a workable solution.

While it is self-serving for me to say this: Ask a sales tax lawyer for help in reviewing the draft policy and writing your comments.  This is your chance to improve your future and you can save money in the long run if you fix the problems before the policy is engraved in stone.

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Robert H. Jackson once wrote that:

"The United States has a system of taxation by confession. That a people so numerous, scattered and individualistic annually assesses itself with a tax liability, often in highly burdensome amounts, is a reassuring sign of the stability and vitality of our system of self-government. What surprised me in once trying to help administer these laws was not to discover examples of recalcitrance, fraud or self-serving mistakes in reporting, but to discover that such derelictions were so few. It will be a sad day for the revenues if the good will of the people toward their taxing system is frittered away in efforts to accomplish by taxation moral reforms that cannot be accomplished by direct legislation. But the evil that can come from this statute will probably soon make itself manifest to Congress. The evil of a judicial decision impairing the legitimate taxing power by extreme constitutional interpretations might not be transient. Even though this statute approaches the fair limits of constitutionality, I join the decision of the Court.”

United States v. Kahriger, 354 U.S. 22 (1953)

I think of this passage when I ponder some of the new and very complex rules relating to financial services, financial institutions, "arranging for" and pensions under the Excise Tax Act (Canada). As the insightful Justice Jackson has pointed out, the voluntary reporting regime is undermined when good companies who want to comply cannot.

The words of Justice Jackson may be repeated in Canada and in the context of sales taxes because the GST/HST regime involves self-reporting.  I am just saying ...

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On February 9, 2011, the Canada Revenue Agency released the revised version of Technical Information Bulletin TIB-105R (February 2011) "Changes to the Definition of Financial Services". This TIB-105R sets out the legislative changes relating to the definition of "financial services" in the Excise Tax Act (Canada) that were made to respond two two recent (2009) Tax Court of Canada decisions, which addressed the scope of the definition of "financial service".  The legislative amendments were set out in Bill C-9, the Jobs and Economic Growth Act, which received Royal Assent on July 12, 2010.

The TIB provides information on the CRA's current interpretation of the term “arranging for” in the definition of “financial service”.

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On January 28, 2011, the Department of Finance released the long awaited harmonized sales tax (HST) rules relating to the calculation of the provincial component (known as the provincial value-added tax or PVAT) of the HST.  In what will be known as the January 28, 2011 Release, the Department of Finance provides a backgrounder, proposed amendments to the Excise Tax Act (which will have to be passed by the House of Commons and Senate) and proposed changes to regulations (which can be promulgated by the governor in Council).

These rules were initially announced in Department of Finance news releases dated May 19, 2010 and June 30, 2010.  The January 28, 2011 Release is said to incorporate modifications and changes as a result of consultations with the affected financial services industry.  A number of issues raised in the consultations require further research, analysis and stakeholder consultations, which will take place until March 31, 2011.

The HST rules for financial institutions remain very complicated.  It is not possible to summarize the 130 pages of new laws and regulations in this blog post.  Suffice it to say, each financial institution in Canada or engaged in business in Canada will need to take a look at the January 28, 2011 Release.  Many commodity tax specialists spent the week-end trying to get their heads around this new package.

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This is so exciting (NOT) - It is August 2010 and this means that some businesses that are in a net refund position (that is, their input tax credits exceed their GST/HST collected) may be filing their GST/HST returns for the month of July 2010.  The businesses that would file their GST/HST returns early would most likely be monthly filers.  Some examples are builders of multi-unit residential complexes, persons who made a large purchase of equipment in July 2010 due to the recoverability of HST, exporters and exempt entities.

July 2010 has now ended (months seem to come and go so much more quickly).  Businesses will be working on their records and filing their GST/HST returns (many must now file electronically).

The first GST/HST return must include HST collected during the transition period - please do not forget.  All HST must be remitted to the Receiver General of Canada - do not send it to the ontario Ministry of Finance.

When calculating input tax credits, please include all GST/HST paid or payable before August 1, 2010.  If you are a large business, do not offset the recaptured ITCs against the ITCs collected number - it has its own line on the GST/HST return.

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On June 30, 2010, the Ontario Ministry of Revenue released Tax Tip #15 "Vendor Permits" and informed all persons with vendor permits (registrations for Ontario retail sales tax purposes) that their vendor permits were being canceled on June 30, 2010.

The Ministry of Revenue states:

"On June 30, 2010, all current RST vendor accounts will be closed by the Ontario Ministry of Revenue. Vendors should not destroy their permits which should be kept along with other business records as required. For details on how long records should be kept see tax information bulletin Retention/Destruction of Books and Records on [the Ministry] website."

However, certain insurance providers are still in the retail sales tax system.  The Ministry indicates that they must re-register:

On July 1, 2010 all businesses primarily engaged in insurance activities will be automatically re-registered and a new vendor permit number will be issued. Tax return filing frequencies that are currently in place for RST returns will be maintained after June 30, 2010.

A door is closing and a new one is opening - HST.  This is a logistical step in the transition.

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As many businesses in Ontario know, there was damage in downtown Toronto that resulted from the actions of a few protesters during the week-end of July 26-27.  Here are a few tips about the pre- and post- harmonized sales tax (HST) world.

• If a window is purchased in the pre-HST period at a retailer of glass, then goods and services tax (GST) and Ontario retail sales tax (ORST) will apply.
• If a window is purchased on an installed basis during the pre-HST period, GST will apply, but ORST will not apply.  ORST will be incorporated into the cost of the installed window as it will be a cost of the supplier of the installed window.
• If a window is purchased pre-HST or installed pre-HST, then the ORST cost (whether paid to the retailer or indirectly to the installer), the ORST is not recoverable.
• If the window is purchased or installed post-HST (on or after July 1, 2010), then GST and HST would apply.
• If a clean-up crew is hired to remove painted slogans in the pre-HST period, GST would apply, but ORST will not apply.
• If a clean-up crew is hired to remove painted slogans in the post-HST period, GST and HST will  apply.
• If the retailer is a store and engaged in commercial activities, they would be entitled to claim a full input tax credit to recover any GST/HST.
• If the business is a bank, it is unlikely that the bank may claim an input tax credit and recover GST/HST paid to repair the damage.
• If an insurance company enters into the contract with the window installer, it is unlikely that the insurance company will be entitled to recover the GST/HST because the sale of insurance policies is an exempt financial service. [Note: have the business buy the window and claim the in input tax credit]
• If the Ontario provincial police buy a new car pre-HST, GST may not apply if the OPP are on the list of Ontario government departments (the federal government cannot charge tax of the provincial government).
• If the Ontario provincial police buy a new police car post-HST, they must pay GST and HST.  The current rules do not provide rebates for provincial government departments.
• If the Toronto police buy a new car pre-HST, they must pay GST and ORST, but would get a 100% rebate of the GST portion (not the ORST portion).
• If the Toronto police buy a new car post-HST, they must pay GST and HST and will be entitled to claim the municipal PSB rebate to recover a large portion (not all) of the GST/HST paid.

I do not intend to suggest that businesses should wait. I am merely highlighting the different results caused by the tax reform.

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On May 19, 2010, the federal Department of Finance released "Financial Institution Rules for the Harmonized Sales Tax (HST)", which is a rather long and complicated document. The good news is that only financial institutions (including de minimis financial institutions) must figure out how this document changes their way of doing business and imposes new obligations.  The bad news is that financial institutions may charge higher service fees to cover their compliance costs / assessment risks.

The released document provides information on changes to rules for selected financial institutions (also known as SLFIs).  The changes include changes to the test for determining whether an entity is an SLFI.  As a result, it will be important for entities to apply the new test to see whether they are still SLFIs and whether they are now considered to be a SLFI.  The release states:

British Columbia and Ontario's decision to join the HST, effective July 1, 2010, will significantly increase the number of FIs that are SLFIs. For example, a bank with branches in Ontario and Manitoba and in no other provinces would become an SLFI only as a result of Ontario harmonization.

This statement suggests that some entities (were not considered to be SLFI before and are considered to be a SLFI now) now have a lot of work to do to prepare before July 1, 2010.

The released document also provides information to financial institutions about the "special attribution method" (friendly name "SAM") that they are required to use.  This complicated formula will likely appear in the coming weeks in regulations and, therefore, will not be subject to scrutiny by opposition MPs and the Canadian Senate.

The SAM attribution methods are briefly discussed for:

i. banks

ii. insurance corporations

iii. trust and loan corporations

iv. investment plans and segregated funds

v. other corporations, individuals and trusts

The publication also covers the following topics:

• information requirements
• penalties
• MTFs that are ETFs
• timing of PVAT (provincial HST component) determination under SAM
• compliance rules
• transitional rules for SLFIs re Ontario and BC
• recapture of ITC rules for SLFIs
• SLFI transition installment base
• Imported supplies - non resident trusts
• SLFI rules respecting deemed pension supplies and pension rebate
•  

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On April 15, 2010, the Ontario Ministry of Revenue reminded Ontario businesses in Tax Tip #4 'Insurance Premiums" that the 8% Ontario retail sales tax will continue to apply to the insurance premiums previously subject to Ontario retail sales tax (ORST).

Tax Tip # 4 states, in part:

In the 2009 Ontario Budget, the government announced a comprehensive tax package that includes moving to an HST at a rate of 13 per cent effective July 1, 2010. Generally, insurance premiums are currently exempt from the federal Goods and Services Tax (GST) as financial services and the treatment under HST will be the same as under GST.
Ontario will continue its application of tax at a rate of 8 per cent on the same types of insurance premiums currently taxed under RST.
 

Tax Tip #4 does not provide information on what insurance is currently subject to ORST and what types of insurance are not currently subject to ORST.  The assumption is made (probably incorrectly, that residents of Ontario know what insurance is subject to ORST).

This posting is not going to set to the entire list of what is and what is not subject to ORST.  It will cover some of the highlights. 

ORST applies to premiums paid under certain contracts of insurance, group insurance plans, contributions paid into funded plans, and on benefits paid out of unfunded plans, casualty and property insurance (excluding auto), including amounts paid for:

• A builder's risk policy: If a contractor takes out insurance on a building under construction, the insurance premium is subject to ORST. This type of policy is not the same as a performance or payment bond which is not subject to ORST.

• Mortgage insurance: Mortgage insurance insures the life of an individual and is not insurance on property. If the insured is a resident of Ontario and the policy is group life insurance, ORST must be collected on the premium regardless of where the property is located. If the mortgage insurance is an individual life insurance policy, ORST is not payable on the policy. If a non-resident of Ontario purchases mortgage life insurance relating to property in Ontario, ORST is generally not payable.
   
• Ontario property insurance: Premiums paid on property located in Ontario are taxable even if the purchaser of the policy is not a resident of Ontario.

• Trip cancellation insurance: This insurance is taxable when sold to an Ontario resident.

• Baggage insurance: This insurance coverage is taxable when sold to an Ontario resident.

There are many forms of insurance that are not subject to ORST.  Generally, ORST does not apply in respect premiums for:

• reinsurance contracts;

• contracts of insurance (other than contracts of group insurance or trip cancellation insurance) for the life, health or physical well-being of insured individuals. This can include individual life insurance purchased by a corporation or organization for creditor protection, buy-sell funding agreements, charitable donations, etc., that is payable to the corporation or organization on the death of the insured;

• payments under annuity contracts;

• an amount payable to obtain a surety;

• a contract for the service, maintenance or warranty of tangible personal property;

• property damage insurance in respect of property wholly outside Ontario, or other insurance (but not group insurance) in respect of risk, perils or events wholly outside Ontario;

• trip interruption insurance. This insurance covers benefits and risks incurred totally outside Ontario, and is exempt if calculated and shown as a separate charge on the customer's invoice;

• insurance contracts entered into by individual foreign representatives and officials located in Ontario who are members of diplomatic missions, consular posts and international organizations;

• premiums, assessments or contributions paid under the:
  1. Canada Pension Plan
  2. Crop Insurance Act (Ontario)
  3. Employment Insurance Act (Canada)
  4. Workers Compensation Act;

• a contract of life insurance that includes an individual insured and members of his or her family or any other individual related to the insured by blood or adoption, under a single policy; and

• automobile insurance premiums.

Certain types of insurance are not subject to ORST if a valid purchase exemption certificate is provided.  If one relies on an exemption (as opposed to a purely non-taxable status), they would review the law to ensure that the exemption will continue after July 1, 2010.

Ironically, this non-harmonization of insurance premium helps Ontario businesses (other than insurance companies) because group policies often have agreed monthly or annual rates and, therefore, keeping the tax rate unchanged results in predictability for the remaining term of the policy.  In a discussion with a client last week (exempt business), we discussed how the expense would remain the same and adjustments to their budget for H2 2010 would not require changes regarding the property insurance and the employee group benefits.

Insurance companies, on the other hand, are disadvantaged because they will be paying HST on commercial rents, electricity, custom computer programs, contracted third party insurance appraiser services, etc. and are not able to recover the additional HST by way of input tax credit.  Eventually, costs will increase and those cost increases will be passed on to businesses.

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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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