Newfoundland/Labrador Has Cancelled HST Rate Increase

On December 14, 2015, the Government of Newfoundland/Labrador officially cancelled the proposed HST rate increase - the Department of Finance has issued a press release.  The 8% PVAT portion was scheduled to increase to 10% (based on an April 2015 announcement by the previous government). The combined rate will stay at 13% (rather than going up to 15%)  That is not going to happen now - because the new provincial government has decided to cancel the increase after the November 30th election.

The Government of Newfoundland/Labrador has asked the Government of Canada to accommodate the cancellation. On December 15, 2015, the Canada Revenue Agency issued a Fact Sheet cancelling the HST rate increase.

It is very important for businesses to know that the HST rate increase has been cancelled. There was uncertainty.  Businesses have been busy getting their systems ready to collect the higher rate of HST.  In light of the cancellation of the HST rate increase, the transition rules designed to determine which tax rate to charge/pay are no longer applicable.

HOWEVER, a few tax changes will still take place on January 1, 2016.  For example, the proposed new municipal rebate (25% stating January 1, 2016, 57.14% starting January 1, 2017) will not be impacted by the cancellation of the HST rate increase and the transitional rules for the municipal rebate rate increase will continue to apply. In addition, new remittance rates for the streamlined accounting methods affecting eligible public service bodies (i.e., municipalities) begin after December 31, 2015.

For more information ,please contact Cyndee Todgham Cherniak at cyndee@lexsage.com.

Canada Proposes To Exempt Hospital Parking Fees From GST/HST

On January 24, 2014, Canada's Department of Finance released legislative proposals and explanatory notes relating to the Excise Tax Act (Canada) (the "HST legislation") that would exempt hospital parking fees paid by patients and visitors from goods and services tax (GST) / harmonized sales tax (HST). Comments on the legislative proposals may be submitted until February 24, 2014.

This is welcome news because patients and visitors to hospitals have more important issues to worry about. This is a compassionate decision by the Government of Canada to not impose GST/HST on parking fees paid by patients and visitors.

The question for the consultations is whether there are unforeseen consequences of this proposal.  Would making hospital parking exempt create an undue administrative burden for parking lot operators due to the inability to claim input tax credits?  Is there a better solution - Should hospital parking be zero-rated?

Businesses Cannot Receive GST/HST Amounts Twice: Department of Finance Issues Amendments

On January 17, 2014, the Department of Finance released proposed amendments to the Excise Tax Act (Canada) in order to clarify that a GST/HST registrant cannot claim input tax credits (ITCs) in circumstances when the person has received a refund/credit/rebate of the GST/HST from a supplier. For example, if an Ontario business buys a computer from Best Buy for $1000 + $130 (HST) and returns the computer and receives a credit for $1130 from Best Buy, the Ontario business cannot claim an ITC for the $130 and recover it twice.

Also, non resident importers who must pay GST/HST at the border cannot claim input tax credits where the amount of GST/HST paid at the border is recovered (e.g., by way of a tax adjustment note) from a  supplier outside Canada.

The amendments are a reaction to the Tax Court of Canada decision in Quinco Financial Inc. v. R. (known in GST/HST circles as The Brick case).

The amendments, when passed into law, will be deemed to have retroactive effect.

Interested parties are invited to provide comments on the draft legislative proposals by February 17, 2014. If the proposed amendments have unintended consequences in respect of legitimate activities, it is important to provide comments.

Proposed Law: GST/HST Auditors Can Share Information About Foreign Bribery

On July 12, 2013, Canada's Department of Finance released for public comment proposed changes to the Income Tax Act, Excise Tax Act and Excise Act, 2001. I would like to focus on the proposed charges to the Excise Tax Act (also known as the "GST/HST Legislation").

Section 16 proposes an amendment to section 295 of the Excise Tax Act to add subsection 5.04 and reads in part:

"An official may provide to a law enforcement officer of an appropriate police organization

(a) confidential information, if the official has reasonable grounds to believe that the information will afford evidence of an act or omission in or outside Canada that if committed in Canada would be

(i) an offence under any of

(A) section 3 of the Corruption of Foreign Public Officials Act,

(B) sections 119 to 121, 123 to 125 and 426 of the Criminal Code,

(C) section 465 of the Criminal Code as it relates to an offence described in clause (B), and

(D) sections 144, 264, 271, 279, 279,02, 281, and 331.1, paragraphs 334(a) and 248(1)(e) and sections 349, 435 and 462.31 of the Criminal Code.

Normally, an auditor must keep confidential information received during the course of an audit,  in other words, if he/she suspects that the financial records of a company disclose evidence of bribery activities, the auditor cannot give that information to the RCMP. 

With the new books and records provisions in the Corruption of Foreign Public Officials Act, this proposed amendment has some logic.  I have previously commented that the auditors' ability to disclose would limit prosecutions of bribery activities that came to light in the course of an audit.

This proposed amendment means that companies that engage in such illegal bribery activities run a risk of discovery even when the GST/HST auditors show up.  Any time a GST/HST auditor asks for financial information, the company will have to worry about the secret being found out. 

The solution is to not engage in illegal bribery activities. Another solution is to conduct internal investigations and make sure there are no bribery activities.  Correct and disclose problems if they are found. The heat is being turned up.

If You Use Zapper Software, You May Shocked By New GST/HST AMPs

The March 21, 2013 Federal Budget in Canada announced new administrative monetary penalties (AMPs) and criminal offences under the Excise Tax Act (Canada) for:

(1) the use of  Electronic Suppression of Sales (ESS) software;

(2) the possession or acquisition of ESS software; and/or

(3) the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software.

ESS software is also known as "zapper" software because it hides sales transactions, thereby allowing vendors to under-state sales and evade payment of GST/HST and income taxes. This has been a hot audit topic for a number of years and the Department of Finance is giving the Canada Revenue Agency (CRA) new tools to rid Canada of zapper software.

The AMPS penalties will shock the vendors who use ESS software or possess or acquire ESS software.  Vendors who use ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction.  Vendors who possess or acquire ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction.  These two AMPs penalties go hand-in-hand because a vendor who acquires or possesses ESS software is also likely to use it.  Both AMPs penalties can be imposed against the same vendor.  Also, if the CRA issues a first level AMPs penalty, it will also require the ESS software to be removed from the computer.  If ESS software is subsequently discovered in a new audit, it is likely second level AMPs will be imposed.  It may be possible that the CRA will interpret the AMPs penalties on a per transaction basis because the penalties may be imposed on a per infraction basis.

Businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale will receive higher voltage AMPs.  The AMPS penalty for a first infraction is $10,000 and $100,000 for any subsequent infraction.  This AMPs penalty aims to end the supply of ESS software in Canada.

There is a limited due diligence defense available for vendors who acquire and possess ESS software and businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale.  The due diligence defence will generally require a person to show that exercised the degree of care, diligence and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have used in comparable circumstances.  There may be cases where the person has attempted to ensure that they do not have ESS software and it has been installed on their computers. There may be a bug in a computer program that disrupts the sales records, but it was not intended.

In addition to the AMPs penalties, businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale may also be subject to criminal sanctions.  The potential fines are as low as $10,000 (in addition to the AMPs penalties) and as high as $1,000,000 and/or imprisonment of up to 5 years or both.

These new AMPs penalties and criminal sanctions will take effect January 1, 2014.  Given the time before implementation, it may be prudent to spend money on an IT check-up (it will likely cost less than a first level AMP).

Candian Sales Tax Rates Chart (As at April 1, 2013)

Canadian Sales Tax Rates Chart
As at March 1, 2013

 

Province/Territory

Provincial Sales Tax

GST/HST Rate

GST Included in PST Tax Base

Combined Rate

British Columbia

7%

5%

No

12%

Alberta

Nil

5%

N/A

5%

Saskatchewan

5%

5%

No

10%

Manitoba

7%

5%

No

12%

Ontario

N/A

13%

N/A

13%

Quebec

N/A

14.975%

N/A

14.975%

New Brunswick

N/A

13%

N/A

13%

Nova Scotia

N/A

15%

N/A

15%

Newfoundland/Labrador

N/A

13%

N/A

13%

Prince Edward Island

N/A

14%

No

14%

Northwest Territories

Nil

5%

N/A

5%

Yukon

Nil

5%

N/A

5%

Nunavut

Nil

5%

N/A

5%


 

Why Are There So Many Tax Changes Coming Into Effect April 1?

There are many tax changes coming into effect on April 1 of each year.  Is it an April Fool's joke? No - the Government of Canada's year end is March 31 (the fiscal year runs April 1 - March 31).  The same holds true for the provinces. Tax changes are often implemented to start at the beginning of the government's new fiscal year.

This is why British Columbia de-harmonization occurs on April 1, 2013 and it is no longer an HST participating province.  Prince Edward Island becomes an HST participating province on April 1, 2013. The Government of Quebec must start to pay HST on its purchases starting on April 1, 2013 (did not start on the January 1, 2013 harmonization date). Many of the measures in the 2013 Budget take effect either budget day or April 1.

This is why so many government budgets are released in the month of March every year. Even the provinces implement many changes to taxes on April 1.  For example, the government of Ontario (via Ontario Tire Stewardship) is implementing increases (and decreases) on April 1, 2013. Ontario Electronics Stewardship Fees change on May 1, 2013 (for something a little different).

What Happens If I Do Not Respond To A GST/HST Requirement For Information?

A GST/HST Requirement For Information (called RFIs) is a demand by the Canada Revenue Agency ("CRA") for information or documents issued pursuant to section 289 of the Excise Tax Act (Canada) ("ETA"). Subsection 289(1) of the ETA provides that:

Despite any other provision of this Part, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of ... this Part, including the collection of any amount payable or remittable under this Part by any person, by notice served personally or by registered or certified mail, require that any person provide the Minister, within any reasonable time that is stipulated in the notice, with

(a) any information or additional information, including a return under this Part; or

(b) any document.

Simply put, the CRA has the authority under the ETA to request persons (including third party advisors, such as lawyers and accountants) to provide identified information and/ or documents to the CRA.

Where a Requirement For Information is sent to you for your own information, the CRA is not required to take any formal steps before sending the Requirement For Information.  Where the CRA sends a Requirement for Information to a third person (e.g., a lawyer) for the information of another person (e.g., a former or existing client), the CRA must obtain a judicial authorization prior to imposing on the third person (e.g., lawyer) the Requirement for Information obligation.  Subsection 289(2) of the ETA provides:

The Minister shall not impose on any person (in this section referred to as a “third party”) a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection [289(3) of the ETA].

Continue Reading...

Can a GST/HST Registrant File a Notice of Objection On-line?

The Canada Revenue Agency has started to "go electronic" and developed an e-filing system for GST/HST registrants to file GST/HST returns on-line and other documents.  However, it is important to note that as of March 1, 2013, the "My Account" and "My Business Account" does not permit notices of objection to be filed on-line.  To be more correct, the Excise Tax Act does not allow registrants to file notices of objection on-line. However, there are many other things that you can do using the electronic system and a list is available on-line.

Section 301 of the Excise Tax Act requires that notices of objection be filed in "the prescribed form and manner".  The prescribed form is a GST Form 159. The prescribed manner is by mail and the CRA location depends upon the postal code of the registrant.

What this means is that a notice of objection may be considered to be invalid if filed on-line. The CRA has discretion to accept or not accept the notice of objection if it is not filed in the prescribed form and in the prescribed manner.  It is better to anticipate the CRA will take advantage of a registrant's error.

British Columbia Residents and Businesses May Have to Self-Assess BC PST on Goods Brought Into the Province

In November 2012, the British Columbia Ministry of Finance issued Bulletin PST-013 "Tangible Personal Property (Goods) Brought Into British Columbia". On February 7, 2013, the British Columbia Ministry of Finance reissued Bulletin PST-013 "Tangible Personal Property (Goods) Brought Into British Columbia".

Self-assessment on goods brought into British Columbia was an issue under the previous social services tax regime - and it is back again with PST.  Individuals who bought goods outside British Columbia were required to self-assess BCSST when they imported the goods into British Columbia (even if the importation was in their luggage or vehicle).  Similarly, individuals from Alberta/Washington State (elsewhere) with chalets in the beautiful British Columbia mountains were required to self-assess BCSST.  These rules return with the implementation of the new and improved BC PST on April 1, 2013.

Some businesses who use imported goods for their own use (and the goods are not exempted) must self-assess BC PST with respect to importations of goods that occur after April 1, 2013.  Under the previous BCSST regime, this was a problem for many businesses.  Often there was documentation issues with respect to inter-provincial transactions because inter-Canada transactions do not require reporting to border officer (as is the case with importations from outside of Canada).

For example, I have a client in the Ontario who has a small branch operation in British Columbia. They load information on laptops in Ontario and train the BC employees on the systems in Ontario.  The employees return to British Columbia with their new computers after the training.  They will need to monitor these transfers as BC PST will be payable.

Another example would be the BC resident who travels to Ontario (or another Canadian province) for a vacation and buys artwork or clothing or other personal items.  Another example is a BC resident who buys a motor home or vehicle or boat in Alberta (or other province) and drives home to British Columbia.  These individuals will be required to self-assess BC PST whether they bring the goods to BC themselves or have the goods shipped to be delivered in BC.

Bulletin PST-013 "Tangible Personal Property (Goods) Brought Into British Columbia contains useful information for individuals about some of the applicable exemptions. However, there are no statutory references or references to the regulations because the publication was prepared prior to the finalizing of the laws.

British Columbia Issues Revised Bulletin for Registering for New BC PST

In December 2012, the British Columbia Ministry of Finance issued Bulletin PST-001 "Registering to Collect Provincial Sales Tax".  On February 26, 2013, the British Columbia Ministry of Finance issued a revised Bulletin PST-001 "Registering to Collect Provincial Sales Tax". Since the British Columbia PST starts on April 1, 2013, businesses need to turn their minds to whether they must register for BC PST purposes. There isn't much time left to you have your number on time and inputted into your compliance systems.

Businesses inside and outside British Columbia that were registered under the old and defunct social services tax regime cannot use their old BCSST number.  They must re-apply for and obtain a new PST registration number.  New businesses that have come into existence after harmonization (and those that existed prior to harmonization) will no longer be permitted to use their GST/HST number with respect to provincial sales tax (they will still use the number to collect and remit GST). These businesses in British Columbia need to register for and obtain a BC PST number.

Many non-resident businesses are also required to obtain a BC PST registration number.  I will leave it to another post to discuss the far-reaching nature of the registration and collection requirements in the new BC legislation.

Registration is possible on-line, in person or by fax.  The on-line registration process appears to be simple.  Please let us know if you have used the electronic registration method and how soon did you get your number.

We would be pleased to speak with non-residents of British Columbia concerning the new registration rules.  The British Columbia government closed gaps in the law (real and perceived) in order to ensure a greater tax base of registered businesses.

Finally the New BC PST Rules: The British Columbia Sales Tax Regulations Signed Into Law

We have been waiting patiently to report on the new (and improved) British Columbia provincial sales tax (de-harmonization) rules.  We are finally able to notify our readers of the regulations.

On February 28, 2013, the Administrator (on behalf of the Lieutentant Governor in Council of the Province of British Columbia) signed the Provincial Sales Tax Regulation and the Provincial Sales Tax Exemption and Refund Regulations. Since the BC PST comes into effect on April 1, 2013, businesses in British Columbia have one month the read the new PST rules and implement them in their systems. This will be quite a feat - especially where the rules are not the same as the previous version of the PST called the social services tax.

These new BC PST rules are the meat and potatoes of the new provincial sales tax.  There is also the Provincial Sales Tax Act (that received Royal Assent in May 2012) and Bill 2 - 2013 "Provincial Sales Tax Transitional Provisions and Amendments Act, 2013" (tabled February 13, 2013 and subject to change before becoming law).

The new BS PST is redesigned to permit changes in the PST without  the support of opposition parties.  Regulations are promulgated by the Lieutenant Governor in Council (the BC Cabinet) and do not need to be tabled in the Legislature for a vote.  As a result, the regulations can be changed by the governing party (with no public or legislative debate) to pursue their tax policy objectives.

Previously, the core rules were in the Act and the complimentary rules were in the regulations. 

Please refer back to The HST Blog for posts on the new BC PST rules.

Informal Tax Court of Canada Procedure & Limitation Because of Amount Assessed

I wanted to find something to share with you when I read the case name - Pink Elephant Inc. v. The Queen (Tax Court of Canada decision issued August 31, 2011).  This case deals with income tax deductions for catering services purchased by a training course provider. 

What is applicable to both income tax and GST/HST taxpayers with small amounts at issue is the rules relating to the use of the Tax Court of Canada Informal Procedures (no lawyers necessary).  In this case, the taxpayer appealed a number of CRA assessments on a single notice of appeal relating to a number of taxation years.  We know that there was a preliminary matter raised with which that the Tax Court had deal.  Judge Webb wrote in the decision:

The Appellant had also raised the issue of the limitation on amounts in dispute in an appeal under the Informal Procedure. Section 2.1, subsection 18(1) and section 18.1 of the Tax Court of Canada Act provide as follows:

2.1 For the purposes of this Act, "the aggregate of all amounts" means the total of all amounts assessed or determined by the Minister of National Revenue under the Income Tax Act, but does not include any amount of interest or any amount of loss determined by that Minister.

18. (1) The provisions of sections 18.1 to 18.28 apply in respect of appeals under the Income Tax Act where a taxpayer has so elected in the taxpayer’s notice of appeal or at such later time as may be provided in the rules of Court, and

(a) the aggregate of all amounts in issue is equal to or less than $12,000; or

(b) the amount of the loss that is determined under subsection 152(1.1) of that Act and that is in issue is equal to or less than $24,000.

18.1 Every judgment that allows an appeal referred to in subsection 18(1) shall be deemed to include a statement that the aggregate of all amounts in issue not be reduced by more than $12,000 or that the amount of the loss in issue not be increased by more than $24,000, as the case may be.

[16] Counsel for the Appellant stated that the amount of income tax reassessed under the Act for 2006 that was in issue was less than $12,000 and that the amount of income tax reassessed under the Act for 2007 that was in issue was less than $12,000 but the aggregate total for both years that was in issue was more than $12,000. No penalties were assessed under the Act.

[17] In Maier v. The Queen, [1994] T.C.J. No. 1260, Justice Garon (as he then was) held that the aggregate of all amounts in dispute means the aggregate amounts in dispute under a particular assessment (or reassessment) and not under a Notice of Appeal. When a Notice of Appeal relates to more than one assessment (or reassessment) the issue is not whether the total amounts in dispute under the Notice of Appeal exceed $12,000 but whether the total amounts in issue in relation to any particular assessment or reassessment exceeds $12,000. Therefore, the limitation of $12,000, if applicable, will apply to each assessment (or reassessment) that is the subject of the appeal. In this case, since the amount of taxes reassessed under the Act for each reassessment that is in issue (as there was one reassessment for 2006 and a separate reassessment for 2007) is less than $12,000, the limitation will not apply.

Hopefully this will help small taxpayers with small assessments know when they can use the Informal Procedure.

Canada Revenue Agency Auditors Concerned About Registrants Overclaiming Input Tax Credits

Based on personal experience and not any official report from the Canada Revenue Agency ("CRA"), it is obvious to sales tax professionals that the CRA are concerned about goods and services tax ("GST") and harmonized sales tax ("HST") registrants over claiming input tax credits.

On a GST/HST return for a reporting period, the registrant must report the amount of GST/HST collected during the reporting period on its taxable sales.  However the registrant remits "net tax" after adding amounts it must add and deducting amounts it may deduct.  One of the most important category of deductions from GST/HST collected is input tax credits being claimed.  The more input tax credits, the less GST/HST that must be remitted (and in some cases, the larger the refund cheque).

The most obvious concern to CRA auditors is that GST/HST registrants claim false input tax credits when they file their GST/HST returns.  False claims are when a person did not actually purchase a business input and are making up a deduction.

One of the most common audit issues if failure to maintain records relating to input tax credits that meet the documentary requirements of subsection 196(4) of the Excise Tax Act (Canada) and the Input Tax Credit Information (GST/HST) Regulations.  The CRA will reject input tax credits when the documents to support the claims are not available or if the documents do not contain all the relevant information (e.g., the GST/HST number of the supplier).

Another common audit issue is that the input tax credit is claimed too early (and, therefore, in the incorrect reporting period.  For example, a business files monthly returns.  A business buys a building on March 2nd.  If the registration claims the input tax credit for that building purchase in the February GST/HST return, the input tax credit will be denied and moved to March.

The last two areas of concern are often a source of frustration for businesses.  Honest business owners can get caught.  They are not the bad guys who are essentially stealing money by making false claims.  They are often busy and do not have the best record-keeping systems or do not have the time to chase down a supplier for information after the goods/services are provided and the money has been paid.  They do not pour over every detail on a piece of paper because hey know what transaction transpired.

What Will Happen If The "Yes" Vote Wins In British Columbia?

The most important document to study will be the "hard-to-read" Comprehensive Integrated Tax Coordination Agreement between British Columbia and the Government of Canada signed in November 2009 (called the CITCA by tax geeks).  The second most important document to read is the amendment letter to the CITCA signed in March 2010.  A review of the original Memorandum of Understanding may also be helpful. There will be other relevant documents that will be made public voluntarily and through access to information requests to the Government of Canada and the Government of British Columbia.  These documents will need to be reviewed carefully to determine the best plan to move forward.

What exactly will happen will happen in response to a "Yes" vote is yet to be determined.  What we know is that many will not like the plan.  The elimination of the Harmonized Sales Tax ("HST") in British Columbia will not happened immediately on August 26, 2011 if the "Yes" (anti-HST) vote is the successful side.  People celebrating at bars and restaurants will see HST on their bills after the announcement.

Businesses will need time to adjust.  This would be fair to the businesses who are, in reality, the tax collectors from the public.  The businesses will need to know what to do and the mechanisms to collect another tax (even if it is the British Columbia social services tax) will have to be put in place.  Businesses throughout Canada and not just British Columbia will need to adjust their record-keeping systems.  As with HST implementation, a change will involve a lot more work than just changing a tax rate in the computer.

Businesses inside and outside British Columbia will also need to register to collect the replacement tax.  The government will need to launch a new education campaign to communicate the obligations on businesses.  Also with the "To Do List', the government will need its own "To Do List", which will include setting a time line, passing legislation, education of the public (and duck as the tomatoes are thrown), hire people in the Consumer Taxation Branch, train the new employees, prepare policies and bulletins, talk with the Federal Government about repayment, enforcement and other process matters, etc.

If the "Yes" vote wins, GST registrants in British Columbia will still be required to charge, collect and remit HST when they sell to an HST province.  They will still be obligated under the Excise Tax Act (Canada) and regulations thereto to file a GST/HST returns in the future.  The HST Place of Supply Rules will still apply to certain transactions.  So, HST will not be elimniated fully under any change plan.

The rules relating to claiming refunds, rebates and credits under the HST tax system will need to be clarified for B.C. businesses.  There is a possibility that there may be a deadline set for amounts a business or consumer is entitled to receive from the Government of Canada.

If the HST is going to be eliminated, businesses who are registered for GST/HST purposes and entitled to claim input tax credits will take the opportunity to purchase goods and services before the change.  Those businesses that will have to pay unrecoverable provincial sales tax after the change may decide to undertake the expenditures at a time when they can recover HST by way of an input tax credit.  Businesses will take prudent steps to save money while the change occurs. 

Consumers, on the other hand, may delay purchases until after the change occurs when they are purchasing an exempt good, real property, intangible property or services that are not subject to provincial sales tax.  This will most negatively affect the real estate market and the service sector.  There will be transition rules for the change that will need to be developed and communicated.

Consumers outside the province of British Columbia may delay purchases of goods from British Columbia until after the change (or at least after the date of the announcement of the plan for the replacement tax).  The place of supply rules may change and give rise to opportunities to save sales tax.

In the meantime, the Government of British Columbia will undoubtedly talk about repayment of the monies received from the Government of Canada to implement the HST.  There will be talk of new taxes that were not in place in British Columbia before July 1, 2010.  As sure as night follows day, if the "yes" vote is the majority, the blame game will start.

We will continue to watch and report on this developing story - if it develops into a story.  Nothing much will happen if the "No" vote is the majority.

Amounts Paid To Canada Border Services Agency As Ascertained Forfeiture May Include GST

In the recent case of 208539 Alberta Ltd. v. The Queen, Justice D'Arcy of the Tax Court of Canada held that an importer of record may be entitled to claim an input tax credit (ITC) for GST imposed as a result of an ascertained forfeiture.  An ascertained forfeiture occurs when the Canada Border Services Agency (CBSA) issues a penalty with respect to imported goods after importation.  The CBSA is no longer in a position to seize the goods and charge a penalty to release the goods.  As a result, the CBSA sends the importer of record an assessment of a penalty.

In some cases, the ascertained forfeiture penalty may only include customs duties (or a multiple of the customs duties that would have been payable).  In these cases, the importer of record would not be entitled to claim an input tax credit.

In other cases, the ascertained forfeiture penalty states that an amount is being charged as GST that should have been paid with respect to the importation.  This was the situation in the case at hand.

Judge D'Arcy held that the importer of record was entitled to claim the ITC for the amount that was GST, but not the amount that was penalty or customs duties.

Another interesting aspect of the decision is the discussion on whether the documentary requirements for the ITC had been satisfied.  The CRA was arguing that the documentary requirements in subsection 169(4) of the Excise Tax Act  and Input Tax Credit Information (GST/HST) Regulations was not satisfied.  Judge D'Arcy was correct in holding:

The Appellant satisfied the paragraph 169(4)(a) documentary requirements once it provided the CRA with sufficient information to enable the amount of the input tax credit to be determined. As I noted previously, the First Customs Letter, the Second Customs Letter and Exhibit A2 together evidence the amount of Division III tax that Canada Customs collected from the Appellant ($17,039.93) and the fact that the Division III tax was paid by the Appellant in respect of the imported goods.
 

I would expect that there are a number of importers of record who are engaged in commercial activities who have not claimed their ITCs paid in respect of ascertained forfeitures and detentions penalties.  It will be important to ensure the correct person claims the ITC.  Time limits for claiming the ITC will also be a critical issue.  All that being said, there may be found money - if you have received a notice of ascertained forfeiture or retrieved goods from CBSA detention, it is time to review the documentation.

A Director May Liable For Corporation's GST/HST Debt Even Where Corporation Cannot Be Assessed

The posts of July 18 and July 19, 2011 discussed the recent Tax Court of Canada decision in Siow v. the Queen.  On July 18th, in a blog posting entitled "The CRA Must Prove That A Notice Of Assessment Was Sent", I discussed the finding of the Tax Court that the Canada Revenue Agency (CRA) did not prove that the underlying assessments were actually sent to the corporation in respect of which Siow was the sole director.  on July 19th, in a blog posting entitled "Director's Liability Provisions in GST/HST Law Is Not Restricted To 4 Year Limitation Period", I discussed the finding of the Tax Court that director's liability assessments do not have an end date for a limitation period, except that a director cannot be assessed after 2 years from the date he/she ceases to be a director.

Siow argued that since the Tax Court had held that the underlying assessment against the corporation was invalid, the corporate debt was nil and, therefore, he should not be assessed even though the limitation period for Siow, as a director, was still open.  Siow argued that if the Minister has no rights to proceed against the Corporation for any amount then it must have no rights to proceed against a director of the Corporation assessed under the directors’ liability provisions of the Act; namely section 323 of the Excise Tax Act.

The Tax Court disagreed with Siow.  The Tax Court consider principles of statutory interpretation and held:

The clear wording of [subsection 323(1) of the Excise Tax Act] crystallizes a director’s liability to pay the net tax not remitted by the Corporation “at the time the corporation was required to remit or pay, as the case may be, the amount. . .”

The provision makes no reference to any requirement for assessment or that the amount must be related to an assessed amount. The “amount” referenced is clearly the “amount of net tax as required under subsection 228(2)”, applicable here, which subsection requires a registrant to remit net tax. There is no ambiguity in the textual wording of subsection 323(1).

The Tax Court then looked at subsection 299(2) of the Excise Tax Act, which reads as follows:

Liability under this Part to pay or remit any tax, penalty, interest or other amount is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

The Tax Court held that the result following from subsection 299(2) is that tax may be considered to be owing even if a valid assessment has not been issued.

The Tax Court then looked at the federal Court of Appeal decision in Beaupré v. Canada (2005 FCA 168, 2005 G.T.C. 1420 (FCA), Létourneau J.A.) which confirmed that “The tax debt arises not from the assessment but from the Act: . . .”

The Tax Court reviewed other cases and ultimately held:

To make an assessment against the corporation a precondition to proceeding against a director under subsection 323(2) would render subsection 299(2) meaningless, which would be a ridiculous result. Parliament intended such subsection to have meaning and the Appellate Courts have confirmed its application as the basis for a director’s liability. Clearly, the right of the Minister to proceed against a director is not based on a purely derivative action, as supposed by the Appellant’s counsel in argument, but on the basis that due to sections 323 and 299 of the Act, a director is jointly and severally liable for an unremitted amount, regardless of whether there was an assessment against the corporation.

The facts may have been important in bringing the Tax Court to this conclusion.  Siow had filed the GST/HST returns for the corporation and had had discussions with the CRA.  Siow knew the amounts of the assessments because they were based on GST/HST returns that had been filed and not an arbitrary assessment by the CRA.

In the end, the Tax Court recognized that the effect of the decision in terms of collecting the monies from the director needed to be stated:

Whatever limitations the Minister may have in enforcing collection against a corporation for lack of valid assessment do not limit the Minister in enforcing against a director unless specifically set out in the legislation. The only limitations apparent to me are that the Minister cannot collect more than owed in the first place as subsection 323(6) limits the amount collectable from a director to be the amounts not paid by the corporation, which is clearly a bar against double recovery, itself a principle of natural justice, and the principles of natural justice entitling a director to challenge the underlying amount owing, regardless if assessed against the corporation or not, unless of course a director can successfully argue he or she was assessed more than two years after ceasing to be a director pursuant to the limitation period of subsection 323(5) or has a due diligence defence under subsection 323(4) of the Act, neither of which are applicable here.
 

It will be interesting to watch whether this case will be appealed.

Should Canada's Department of Finance Learn A Lesson From Kansas?

Canadian sales tax practitioners and companies engaged in the financial services industry are well aware of the proposed amendments to the "financial services" definition in December 2009 which were implemented in Canadian law in the 2010 federal budget.

Now for my Kansas lesson.  In May 2009, the State of Kansas implemented a change to its sale and use tax refund statute on limitations reducing the limitation period from 3 years to 1 year.  They are now reversing that decision.  Effective July 1, 2011, the limitation period is returning to 3 years (retroactively - as if the change never happened).  Kansas had made the change to reduce the workload of government workers who process the refund claims (and to save money by not paying refunds).  The unintended result was that people filed their refund claims.

What can the Department of Finance learn from this? There is nothing wrong with returning undoing an amendment that was a mistake in the first place.  Undoing a bad amendment is a good outcome.

The Tax Court of Canada Cannot Increase An Assessment Above The Canada Revenue Agency's Assessment

When a taxpayer appeals an assessment to the Tax Court of Canada, the amount of the assessment can only go down; it cannot go up higher (with the exception of the added interest that accrues after the date of the assessment).  In other words, if the Canada Revenue Agency (CRA) assessed $25,000, the Tax Court cannot undertake a calculation and determine the number should have been $30,000 and then increase the assessment.  The decision of the Tax Court of Canada would have to be to confirm the CRA's $25,000 assessment. 

We are reminded of this in Long Ha v. The Queen (I love the name of this case).  Judge Miller refers to a decision of Judge Thurlow in Harris v The Minister of National Revenue [1964] C.T.C. 562 (Ex.Ct.):
 

On a taxpayer's appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court.

Whether the CRA may issue a second assessment for additional tax will depend on whether the amount at issue is statute-barred.  Often a tax dispute takes more than 4 years to proceed through the objection and appeal process.  The CRA will not be entitled to issue a second assessment unless (1) the limitation period for the assessment has not expired or (2) the error is a misrepresentation attributable to neglect carelessness or willful default or fraud or (3) the taxpayer signed a waiver relating to the period at issue and has not revoked the waiver.

Canada Revenue Agency Provides List of Exempt and Taxable Health Care Service Providers

In the recent Excise and GST/HST News No. 80 (Spring 2011)  (GST/HST News 80) published by the Canada Revenue Agency (CRA), the CRA puts on notice a list of health care professionals that it considers to offer TAXABLE services.  Many of these health care professionals are likely not charging goods and services tax (GST) or harmonized sales tax (HST).  This means, if these categories of health care professionals are audited by the CRA, it is likely that assessments will be issued.  In the HST provinces (Nova Scotia (15%), Ontario, Newfoundland/Labrador, New Brunswick (13%), British Columbia (12%)), the assessments may add up to large amounts.

GST/HST News 80 puts health care professionals on notice. 

The CRA's position is:

General Rule: Any basic health care service rendered to an individual by a health care professional that is specifically identified in Part II of Schedule V to the Excise Tax Act are exempt.  In other words, you find the category of health care service or health care professional in that Schedule by name or description.

According to the CRA, the following services by the following provincially regulated (licensed or otherwise certified) health care professionals rendered to individuals/patients are specifically identified in Part II of Schedule V to the Excise Tax Act are as a general rule exempt:

  • physicians,
  • dentists and orthodontists,
  • registered nurses, registered nursing assistants, licensed or registered practical nurses, registered psychiatric nurses,
  • optometrists,
  • chiropractors,
  • physiotherapists,
  • chiropodists,
  • audiologists,
  • speech-language pathologists,
  • occupational therapists,
  • psychologists,
  • podiatrists,
  • midwives,
  • dieticians,
  • social workers, and
  • dental hygienists.

Exception to General Rule: Any health care service provided by other therapists and health care workers are TAXABLE.  If you cannot find a category of health care professional or health care worker in Part I of Schedule V to the Excise Tax Act, their service re likely taxable.

While these other therapists and workers may be professionals in their fields and they may be certified in  their province or territory, they are not identified in the Part II of Schedule V to the Excise Tax Act. Therefore the Act’s exemptions do not apply to their services even where, for example, the service is similar to a service performed by an identified health care provider, such as a nurse or physiotherapist. Some examples of therapists and other health care workers whose
services are generally considered by the CRA to be taxable for GST/HST purposes are (this is not an exhaustive list):

  • assistants such as physiotherapy and occupational therapy assistants
  • social service workers (this is a separate profession from social workers)
  • laboratory technicians;
  • psychometrists;
  • nursing care aides;
  • polysomnographic technologists;
  • acupuncturists;
  • kinesiologists;
  • massage therapists;
  • naturopaths;
  • reflexologists;
  • homeopaths;
  • reiki therapists;
  • sports therapists;
  • rolfing therapists;
  • traditional Chinese medicine providers;
  • phlebotomists;
  • personal support workers.

Exception to Exception: Certain services provided by an health care professional or health care worker listed above may qualify as exempt when provided to an individual in an exempt health care setting. For example, supplies made by the operator of a nursing home of services rendered by nursing care aides are exempt when they form part of an exempt institutional health care service rendered to a resident of the nursing home. In addition, services similar to those rendered by the providers listed above may be exempt when rendered by an identified exempt health care provider. For instance, if physiotherapists are entitled under the provincial law that regulates physiotherapy services to perform acupuncture on their clients in the course of
providing physiotherapy services, then their physiotherapy services that involve acupuncture would be exempt.

There are many other exceptions to the general rule.  For example, health care services provided by the exempt list of professionals to corporations (not rendered to individuals or patients) are taxable.  Also, certain services (e.g., cosmetic procedures, teeth whitening, etc.) are taxable even when provided by a licensed professional.

GST/HST News 80 has been provided because the CRA auditors need tools when going to audit health care professionals.  There is an increased likelihood that health care professionals will be in the CRA national priority list for audits this year and in the coming years.

If you are not sure whether you are required to charge GST/HST or not, you should contact a GST/HST lawyer or professional. You may also write the CRA for a GST/HST ruling.

Partners and Partnerships: Transfers Are Tricky

Partners and partnerships are different legal entities for goods and services tax (GST) / harmonized sales tax (HST) purposes. Pursuant to subsection 123(1) of the Excise Tax Act (Canada), a partnership is a "person".   This is different than many tax statutes which do not treat partnerships as persons.  As a result of a partnership being a person, a partnership is obligated to register for GST/HST purposes (unless it is a small supplier), charge GST/HST, claim input tax credits and comply with the provisions of the Excise Tax Act (Canada). 

One provision that must be highlighted when one talks of partnerships is section 272.1 of the Excise Tax Act (Canada), which contains specific rules that are applicable to partnerships. It is important to note that the other rules in the legislation are also applicable. 

Subsection 272.1(3) is very important for GST/HST planning for partners and partnerships.  I often see tax structures where partner of a partnership receives consideration from the partnership and does not collect GST/HST.  This is often incorrect and a sign that a GST/HST professional has not been involved in the tax planning.

Subsection 272.1(3) of the Excise Tax Act addresses when a partner is considered to make supplies to a partnership and provides as follows:

Where a person who is or agrees to become a member of a partnership supplies property or a service to the partnership otherwise than in the course of the partnership’s activities

(a) where the property or service is acquired by the partnership for consumption, use or supply exclusively in the course of commercial activities of the partnership, any amount that the partnership agrees to pay to or credit the person in respect of the property or service is deemed to be consideration for the supply that becomes due at the time the amount is paid or credited; and

(b) in any other case, the supply is deemed to have been made for consideration that becomes due at the time the supply is made equal to the fair market value at that time of the property or service acquired by the partnership determined as if the person were not a member of the partnership and were dealing at arm’s length with the partnership.

What this means is that partners are required to charge, collect and remit GST/HST in respect of supplies of property or a service to the partnership otherwise than in the course of the partnership’s activities. Partners are not required to charge, collect and remit GST/HST in respect of supplies property or a service to the partnership that are provided in the in the course of the partnership’s activities.

What is "otherwise than in the course of partnership activities" is the point of contention between the Canada Revenue Agency (CRA) and partners/partnerships.  The concept is not defined in the Excise Tax Act (Canada). Advisors must look at a number of administrative statements and Q&As to understand what will be the CRA's position concerning planned activities.  If a taxpayer would like certainty, they may apply for a GST/HST ruling.

The following example may help:  I am a GST/HST lawyer.  If I was to become a partner of a partnership (or my firm) and if I was to provide GST/HST advice to the partnership, I would be required to charge, collect and remit GST/HST in respect of the consideration I received for that advice.  The CRA would take the position that my GST/HST advice was not provided "in the course of partnership activities" because I provide GST/HST advice to others outside of my partnership activities.

It is beyond the scope of this blog post to provide a complete answer to all questions relating to partnerships and partners.  Tax planning must be reviewed on a case-by-case basis. 

I should note that have seen CRA auditors assess directors of corporations who are members of a partnership under the director's liability provisions in situations where the partner (corporation) does not collect GST/HST when required and the corporate partner does not pay the GST/HST liability.  The directors do not consider that the activities of the partnership or the tax structuring could get them into GST/HST trouble.

Amalgamations and GST/HST

Amalgamations are the combining of one or more corporation to form a new entity.  For example, Corporation A and Corporation B can amalgamate under corporate laws to form Corporation AB.  The assets and liabilities are transferred to the newly amalgamated entity.  The question arises whether there are GST/HST consequences.

The answer is found, in part, in paragraph 271(c) of the Excise Tax Act (Canada), which provides that:

Where two or more corporations (each of which is referred to in this section as a “predecessor”) are merged or amalgamated to form one corporation (in this section referred to as the “new corporation”), ... for the purposes of this Part, the transfer of any property by a predecessor to the new corporation as a consequence of the merger or amalgamation shall be deemed not to be a supply.

The rest of the answer is overlooked by many advisors.  Paragraph 271(a) of the Excise Tax Act (Canada) provides that for some purposes the new corporation is deemed to be a separate person form each of the predecessor corporations. Paragraph 271(b) of the Excise Tax Act (Canada) provides that for the purposes of applying certain prescribed provisions, the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation. The list of prescribed provisions is contained in the Amalgamation and Winding-up Continuation (GST/HST) Regulations. The list includes

  1. Section 120
  2. Definition “builder” in subsection 123(1)
  3. Section 134
  4. Section 148
  5. Section 148.1
  6. Subsection 149(1)
  7. Section 150
  8. Section 156
  9. Section 160
  10. Section 166
  11. Section 181.1
  12. Section 182
  13. Subsections 183(2) and (4) to (8)
  14. Subsections 184(2) to (7)
  15. Subsection 186(1)
  16. Section 194
  17. Section 219
  18. Section 222
  19. Subsection 223(2)
  20. Section 224
  21. Section 225
  22. Section 227
  23. Section 228
  24. Section 229
  25. Section 230
  26. Section 230.1
  27. Section 232
  28. Section 233
  29. Section 237
  30. Section 238
  31. Section 261
  32. Section 263
  33. Section 263.1
  34. Section 264
  35. Section 265
  36. Section 266
  37. Section 273
  38. Section 274
  39. Divisions VIII and IX of PART IX

Two additional provisions that are affected by an amalgamation are sections 231 and 249 of the Excise Tax Act.

It is beyond the scope of this short blog article to address each of these provisions in detail. I would like to highlight that the past GST/HST liabilities (and entitlements) continue in the new corporation.  for this reason, it is important to undertake due diligence of GST/HST accounts before agreeing to an amalgamation because the new corporation may end up saddled with old GST/HST debts and the new directors may ultimately be assessed if the GST/HST debts cannot be recovered from the new corporation.

There is another important issue that is overlooked - registration numbers.  Often, the advisors forget to notify the government authorities (including the Canada Revenue Agency (CRA) for GST/HST purposes) about the amalgamation and continue with one of the registration numbers of a predecessor corporation.  This is wrong.  Technically, the the new corporation needs to obtain a new GST/HST registration number.  It is possible to ask the CRA if one of the GST/HST numbers of a predecessor entity may be continued and the other registration numbers canceled.

An amalgamation is an event for GST/HST purposes that has consequences.  For more information, please contact Cyndee Todgham Cherniak at 316-760-8999.

A GST/HST Joint Venture Election Allows One Co-Venturer To Account For GST/HST

Section 273 of the Excise Tax Act (Canada) authorizes one participant in certain types of joint venture (called the "operator") to account for GST/HST on her behalf and on behalf of the other co-venturers.  For example, if A (25%), B (25%), C (25%) & D (25%) enter into a joint venture, they can appoint A as the operator and A charges, collects, and remits GST/HST and files GST/HST returns on behalf of the joint venture. A also claims input tax credits, refunds, rebates and other GST/HST relief in respect of the activities of the joint venture (to the extent permitted). If the joint venture election is not in place, A, B, C, and D would each have to charge, collect and remit 25% of the GST/HST, take 25% of the input tax credits and other relief, and file separate GST/HST returns.

The bad news is that not all joint ventures are entitled to take advantage of this election option.  Only oil and gas exploration joint ventures and prescribed joint ventures can benefit at this time.  That being said, the list of prescribed joint ventures was recently amended (after 20 years) and the Department of Finance is willing to consider making additions in the future.  The list of prescribed joint ventures is set out in the Joint Venture GST/HST Regulations:

  • the construction of real property, including feasibility studies, design work, development activities and the tendering of bids, where undertaken in furtherance of a joint venture for the construction of real property;
  • the exercise of the rights or privileges, or the performance of the duties or obligations, of ownership of an interest in real property, including related construction or development activities, the purpose of which is to derive revenue from the property by way of sale, lease, licence or similar arrangement;
  • the marketing by the operator of a joint venture, under any agreement between the operator and a co-venturer, of all or part of the co-venturer’s share of the output of the joint venture provided that the output arises from an activity conducted under the agreement referred to in subsection 273(1) of the Act;
  • the transportation of natural gas liquids by means of a pipeline that operates as a common carrier of natural gas liquids;
  • the operation of a facility that is used to generate electricity;
  • the operation of a transmission line that is used to transmit electrical power;
  • the processing of output (in this paragraph referred to as the “refinement”) that arises from the exploration or exploitation of a timber resource, including any jointly conducted exploration or exploitation activity of which the output is processed under the agreement referred to in subsection 273(1) of the Act in respect of the refinement and the marketing of the processed or unprocessed output that arises from that activity;
  • the production of a fertilizer and its marketing;
  • the disposal of waste, including the collection and transportation of waste that is in furtherance of that disposal;
  • the exercise of rights or privileges, or the performance of duties or obligations, of ownership of an interest in an animal for the purposes of deriving revenue from prizewinning, stud service fees or sale;
  • the maintenance of a road, other than maintenance that is an exempt supply;
  • the operation and maintenance of the North Warning System;
  • the operation of a farming business within the meaning of the Income Tax Act;
  • the production of liquid methanol from natural gas;
  • the generation and recording of seismic data; and
  • the operation of a lumber, plywood, shake and shingle, pulp, paper or similar wood processing facility.

With respect to commercial real estate, there are certain restrictions in the activities that are prescribed above.

There are a number of rules that must be followed.  Some of the most important (but not all the rules) are:

1. There MUST be a written joint venture agreement;

2. The co-venturers MUST complete the joint venture election forms (GST Form 21 and GST Form 355); and

3. The parties to the joint venture are jointly and severally liable for all GST/HST obligations of the joint venture.

The structuring of joint ventures can be complicated and meeting the requirements of the Canada Revenue Agency requires strategic planning.  There are great benefits, but also pitfalls.

People Are Careful When Writing A Confession, Why So Little Care When Completing A HST Voluntary Disclosure Form?

I honestly do not know the answer to this question.  I am baffled when a client comes to me after they have completed and sent to the Canada Revenue Agency ("CRA") their voluntary disclosure form in which they admit to a mistake in their harmonized sales tax (HST) compliance. They have already confessed their errors.  Then, when they see the HST assessment, the do not agree with the number and have a list of reasons.

I have been asked on many occasions to help correct the CRA auditor's misunderstanding of the facts - the same facts provided by the client in writing to the CRA in the voluntary disclosure form.  I cannot count the number of times a client has said to me "I did not mean to write that", "I should have been more careful in what I wrote", "I did not verify that information and it is in fact wrong", "I did not think about that", and "I just wrote something quickly".  I am asked to "fix this" ---  and, I have my work cut out for me.

Voluntary disclosures are similar to a "confession", albeit a voluntary disclosure is not often relaying criminal activities.  However, it is possible that a person will write information in a voluntary disclosure that could be used in a criminal investigation under the Excise Tax Act.  If you would seek the help of a lawyer when writing a confession, then seek the help of a lawyer when completing a voluntary disclosure form.  If you would take time to investigate facts and write, edit, review, redraft and reconsider the writing of a confession, then take time when completing a voluntary disclosure form. If you would take time to understand the consequences of writing a confession, then take time to understand the consequences of completing a voluntary disclosure.  If you would not want to cause a misunderstanding when writing a confession, then avoid misunderstandings when completing a voluntary disclosure form.

If you do not understand the law, you may miss opportunities to raise good facts that may be used to your benefit --- your actions have not all been bad have they?  You may not convey the important information and facts that support defences (such as the due diligence defence).  You may miss opportunities to support lower penalties.  You may miss opportunities to limit interest if there has been an officially induced error. 

Did you know that the CRA audits to "net tax" or do you even know what I mean by that?  You may be able to identify amounts that the CRA owes you and when you calculate "net tax" for the period in which you owe GST/HST, you may be able to subtract amounts you can show the government owes you.  There is a lot more to consider than "getting things off your chest".

Now that I have said my piece - here is the voluntary disclosure form.  The CRA calls this form "VOLUNTARY DISCLOSURES PROGRAM (VDP): TAXPAYER AGREEMENT", do not let the name fool you or cause you to be complacent.

 

Words of U.S. Supreme Court Justice Robert H. Jackson

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 ...

Send Documents to the CRA Using a Traceable Method

When you send a GST/HST return, file a refund application or file a notice of objection or appeal, you need evidence for two reasons:

1) To prove that you completed the document; and

2) To prove that you sent the document on or before a statutory deadline or the date requested by the Canada Revenue Agency (CRA).

You may be the unlucky person whose document is lost by Canada Post or the courier during transit or by the CRA after delivery.

First, you should determine if you must use a specific method of transmission of the document.  The requirement of a specific method of transmission would be in the applicable provisions of the Excise Tax Act (Canada) and/or applicable regulations.  Sometimes there is a specific method of transmission (e.g., by first class mail, by registered mail, etc.) required in the statutory provision and, in these circumstances, you must do as told. 

Second, you should make sure you know about any statutory limitation periods (that is, the deadline for filing the document).

Taxpayers are often asked to send documents to the CRA auditor or appeals officer during the course of an audit. There are no rules applicable to the method of sending these documents. Often the CRA give a deadline for sending the documents to the auditor and the auditor may finalize an assessment if the documents requested as not delivered on time.

In all cases where you must send documents to the CRA, you should pick a method that gives you proof of transmission.  For example, when you send a document by registered mail, you can ask for a "return receipt", which is a document from Canada Post showing proof of delivery by Canada Post to the CRA. Also, you will have also received a document showing proof of delivery to Canada Post of the envelop to be sent by registered mail and both the envelop and the receipt are date stamped.  This is really good proof that you delivered the document to be sent on a particular day.

I have experienced situations where Canada Post's rules cause a document that I wish to send to the CRA to be rejected (e.g., envelop is too big or that the document weighs too much).  In these cases, if the Excise Tax Act or regulations requires that I send the document by registered mail, I send a letter and partial document by registered mail and send the entire document by courier.  I note in the letter to be sent by registered mail that I have attempted to follow the requirement to send the document by registered mail as required by the statute and that Canada Post has rejected the document.  I indicate the letter is being sent in accordance with the requirement and that I am sending the complete document by courier.  I give the courier tracking number in the letter.  This demonstrates that the courier package was sent prior to the letter, which was sent within the rules.  I maintain evidence of both documents that I have sent on or before the statutory deadline.

The recent case of Liao v. The Queen is a good example as to why evidence is important.  In this case, a taxpayer sent a GST refund application by regular mail.  When the taxpayer followed up with the CRA, the taxpayer learned that they had not received the refund application and the taxpayer sent another copy of the refund application.  The second copy was sent after the limitation period had expired and the CRA rejected the application as out-of-time.  The Tax Court of Canada accepted that the taxpayer had sent the first copy and that first copy was sent within the statutory limitation period.  The taxpayer was lucky that the Tax Court of Canada accepted the testimony.  The relevant deeming provisions in the Excise Tax Act indicate that anything sent by first class mail is deemed to have been received by the CRA on the day it was mailed.  Ordinary mail is considered to be first class mail.  A deeming rule causes something to be accepted as a true fact even if it may not be accurate.

In the end, evidence is key.  Liao would have been in a stronger position if it could be proved that the refund was sent on the first occasion.  Likely, the CRA would have accepted that the refund application was lost and the case would not have made it to the Tax Court of Canada.  Liao would have been saved from the stress and the cost of an appeal if it had verifiable evidence of the first transmission within the limitation period.

The last tip that I would like to give you is that you should scan your proof on transmission because it is easier to find it in your computer records when needed. Also keep the originals in a safe place.  I like to use purple coloured file folders for all important documents in a file.

Department of Finance Releases Modified HST Rules For Financial Institutions

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.

 

If GST/HST Registrant Buys Real Property, The Registrant Should Not Pay GST/HST to Vendor

I was recently called by a person who purchased a hotel property from a vendor.  The buyer paid GST/HST to the vendor.  The Canada Revenue Agency (CRA) has denied the input tax credit on the basis that GST/HST was not payable and, therefore, the GST/HST was paid in error.  The CRA has said that since the error was not discovered until after 2 years after the payment, they will not give a refund of tax paid in error.  This real property is used in commercial activities and the Government of Canada gets its GST/HST on accommodations, food sales, etc.

Here is the starting point of the analysis - Subsection 221(1) of the Excise Tax Act provides that every person who makes a taxable supply in Canada must collect GST/HST payable by the recipient in respect of the supply. BUT, paragraph 221(2) of the Excise Tax Act sets out important relief:

"A supplier (other than a prescribed supplier) who makes a taxable supply of real property by way of sale is not required to collect tax under Division II payable by the recipient in respect of the supply where ...  (b) the recipient is registered [for GST/HST purposes] and, in the case of a recipient who is an individual, the property is neither a residential complex nor supplied as a cemetery plot or place of burial, entombment or deposit of human remains or ashes."

What means that the supplier is not required to collect GST/HST when the buyer is registered for GST/HST purposes and purchases certain real property.

This blog post to is intended to help buyers not get themselves into the same mess.

The problem faced by this person should be fixed.  Since solutions are unique, you will have to continue to read The HST Blog to learn how.  When I hear of unfairness like this, I am inspired to help.

My Train Conversation About What Is The Excise Tax Act

Yesterday, I took the Via1 train from Toronto to Ottawa to watch the Senators Game. I met interesting people on the train.  I met a man and his wife (close to retirement age - but not quite).  They asked what I did for a living and I said that I was a GST/HST lawyer.

We had an interesting discussion that I wanted to share with you. The man had never looked at a law before and he thought that the Excise Tax Act (also known as the GST/HST Rule Book) was (or should be) a list of all things and services under the sun in alphabetical order and that each thing/service had a rule saying whether it was subject to GST/HST.  The woman thought the Excise Tax Act was more like the Book of Oracles where each good and service had a rule as to whether it was subject to GST/HST. Both ideas of what the law should be was a guide for users.

Both thought that the Excise Tax Act was simple to read and held all the answers in an easy format. "That would be really nice" I responded before telling them that the Excise Tax Act was complicated to read.  I went on the Internet and read them the self-supply rules.  They looked at me and said "Really, are you making this stuff up?".  I said no - unfortunately.

This was a very pleasant and sometimes funny conversation that I had on the train.  I learned a valuable lesson that those who do not know as much about GST/HST as I do have different expectations.  The public's expectations that the tax laws are easy for people to follow are genuine and hopeful (but not realistic).

Many clients ask for a simple and short answer - this is in part based they also expect that the answers are easy to find and give (some want to save money too and others think lawyers make tax answers more complicated than necessary).  There is a disconnect and no easy answer. 

Based one my conversation on the train, I am more aware of what is the disconnect between expectations and reality.  Maybe the drafters of the Excise Tax Act, regulations, administrative statements should take a train ride, listen to people and ask themselves what they can do to make it simpler.

Sale of a Business or Part of a Business

One of the questions that is most often reviewed by business lawyers and accountants is whether a seller of a business is making "a sale of a business or part of a business".  The reason is that a lot of GST/HST may be at stake.  The other reason is that a section 167 election may be available to provide relief to the purchaser (and remove the collection and remittance obligation from the seller).  While many think the test is easy to apply, there are many complicated twists and turns in the analysis.

In December 2010, the Canada Revenue Agency (CRA) released GST Memorandum Series 14.4 "Sale of a Business or Part of a Business" as administrative guidance.  This 11 page document will help in the application of section 167 of the Excise Tax Act (Canada). 

However, since there may be a lot on money at stake if you do not interpret the rules properly, you may wish to refer questions to a commodity tax/sales tax specialist if you are still unclear after reading this CRA administrative guidance.  This is my due diligence tip...

Please Do Not Throw Your Notice of Assessment in a Drawer & Forget About It

It is bad enough to receive a notice of assessment from the Canada Revenue Agency (CRA) or the Ontario Ministry of Revenue or the Canada Border Services Agency (CBSA) or some other tax authority.  You clearly did not want to be in a position that you have to pay an amount of money (especially large assessments) to the government.  However, ignoring the notice of assessment is not the right option to choose concerning what to do next. 

If you do not agree with the amount stated on the notice of assessment as the amount (or the imposition of a penalty amount or the interest calculation) or the basis for the assessment or do not know why you received the assessment and want to have the taxing authority make a correction, you usually must file a notice of objection/notice of appeal/request for redetermination or take a positive step to request further consideration of the matter.  In almost every taxing statute, there are statutory time periods (also called "limitation periods") which are often 30 or 90 or 180 days depending on the tax at issue and the legal route to resolve the dispute.  If you throw the notice of assessment in a drawer, you may miss the filing deadline and lose your opportunity to file a notice of objection, appeal or request for a redetermination. This would be bad for you.

Some tax statutes allow for you to ask the head of the taxing authority or a court or tribunal for an extension of time to file the notice of objection, appeal or request for a redetermination.  However, usually you must make the request within the statutory time period for the objection/appeal/redetermination.  For example, if you have a 90 day period to file a notice of objection, you must ask for your extension of time before the 90 day period expires.  You must explain the reason for needing an extension of time - and saying that you forgot about the notice of assessment is not a good excuse.  You must also demonstrate that you intended to file an objection/appeal/redetermination - and saying that you threw the notice of assessment in a drawer shows that you planned to ignore it.

Pulling the notice of assessment out of the drawer one week or one day before the statutory objection/appeal/redetermination deadline is problematic as you will have to find someone to help you file your objection/appeal/redetermination under extreme stress and you will forget important facts and potentially winning arguments.  You will reduce your likelihood of success when you do not leave yourself and your advisors enough time to do a good job.

Finally, I hear from many clients who pull the notice of objection out of the drawer years after the limitation period for filing an objection/appeal/redetermination has expired.  At that point in time, they are being pursued by the collections department of the taxing authority and the amount of interest after time can double the liability.  At some time, it will catch up with you.  When you are pursued by collections officers or receive a director's liability assessment for the original assessment amount plus interest compounded daily at 6% or more, you will wish that you did not thrown the original assessment in a drawer.  At that stage, there is even less a professional can do to correct any mistakes made by the auditor.

A "Waiver" Is NOT a Hand Gesture to a Canada Revenue Agency Auditor to Say "Goodbye"

A waiver is a document that a Canada Revenue Agency (CRA) auditor asks you to sign that allow the auditor to continue an audit and potentially assess tax, penalties and interests for mistakes made further back in time than what is allowed by the GST/HST laws.  Once you sign a waiver, you have extended what is called a "limitation period".  If the statutory limitation period is four years, the CRA auditor cannot normally assess amounts prior to the start date of the four year period (counting back from the date of the assessment) unless the taxpayer makes a misrepresentation attributable to neglect, carelessness or willful default or signs a waiver.

Often, the auditor asks the taxpayer to sign a waiver in the form of GST Form 189. This allows the auditor to continue to dig for the mistakes and the ultimate assessment may be higher.  On the other hand, it also allows the discussions to continue and takes the "rush" out of auditor's job (meaning the auditor can take the time to issue the correct assessment).  I have seen situations where an auditor says he/she will issue an assessment for $1,000,000 (which immediately becomes a debt due to Canada unless a waiver is signed) or will continue discussions to potentially resolve the issues.

Sometimes it is a difficult decision whether to sign the waiver and give up certain legal rights.  Depending on the circumstances and facts, I have recommended to some taxpayers that they not sign the waiver.  In other circumstances, I have recommended that the taxpayer sign the waiver and ultimately the results of the audit were better for the taxpayer.

In many cases, I have helped the taxpayer restrict the scope of the waiver.  A blanket waiver (just signing) may not be the best approach and the CRA auditor is not going to limit his/her assessment options by helping the taxpayer place restrictions on him/her.  A waiver, like any written agreement, can be tailored to suit the needs of the parties involved.

In every case, it is worth having a discussion with a professional whether the waiver should or should not be signed.

what some taxpayers do not realize is that a waiver can be revoked by filing a GST Form 146. Whether this form should be signed and how to document the revocation are also subjects for discussion with a professional.

Cascading Taxes: When Is HST Payable In Addition To/Including Another Tax?

A tax on a tax is called a "cascading tax".  Cascading taxes are common in today's world.  As a general rule, most new taxes and levies can result in cascading tax (HST charged on top of the new tax) unless the provincial government asks the federal cabinet to list the new tax in a regulation.

Goods and services tax (GST) and harmonized sales tax (if applicable) (HST) is calculated on the consideration payable for a supply of property or services.  Subsection 154(2) of the Excise Tax Act (Canada) provides that "the consideration for a supply of property or a service includes:

(a) any tax, duty or fee imposed under an Act of Parliament [that means federal laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property or service [other than GST/HST];

(b) any provincial levy [intended to cover provincial laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the consumption or use of the property or service, other than a prescribed provincial levy that is payable by the recipient [that means it is in a regulation]; and

(c) any other amount that is collectible by the supplier under an Act of the legislature of any province and that is equal to, or is collectible on account of or in lieu of, a provincial levy, except where the amount is payable by the recipient and the provincial levy is a prescribed levy."

The term "provincial levy" is defined to mean "a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of the property  or a service."  What is most significant about this definition is that unless the levy is imposed pursuant to an Act of the legislature of the province, GST/HST would not be payable on the tax-included price. It is always necessary to go to the source of the taxation/fee/levy.

The Taxes, Duties and Fees (GST/HST) Regulations contain a negative list of provincial levies that are excluded from the GST/HST calculation.  If the provincial law is not in the list, then the provincial levy is included in the price for the purposes of calculating GST/HST.

Ontario has a very short list including the following:

  • the Land Transfer Tax Act, R.S.O. 1990, c. L.6,
  • Chapter 760 of the City of Toronto Municipal Code, made under Part X of the City of Toronto Act, 2006, S.O. 2006, c. 11, Sched. A, if the tax, duty or fee would have applied to that transfer under that chapter as it read on February 1, 2008

The Taxes, Duties and Fees (GST/HST) Regulations also prescribe in the list "a tax imposed by the legislature of a province, under an Act referred to in the definition of "general sales tax rate", which includes subsection 2(1) of the Retail Sales Tax Act (Ontario). This exclusion is more complicated, but has been generally applied to exclude Ontario retail sales tax from the calculation of GST.

Now that Ontario has harmonized and is not using the Retail Sales Tax Act to impose taxes representing significant revenue, any new provincial levy may be included in the GST/HST calculation as it would not be listed by the Taxes, Duties and Fees (GST/HST) Regulations.  I say "may" because the other requirements in section 154 of the Excise Tax Act would have to be met. To be excluded from the GST/HST calculation, new taxes must fall within a listed Act in the manner it is identified or the provincial government must ask the Government of Canada (specifically federal cabinet) to change the regulation.

It seems as if in most situations, suppliers assume (and act as if) the tax/fee is included in the calculation of GST/HST because it is the safe thing to do.  However, questions are not asked if this is correct.   For every provincial levy or charge that we might be inclined to include for the purposes of calculating GST/HST, we must ask questions before including the fee in the calculation:

  • Is the tax/fee imposed pursuant to a law of Canada?
  • Is the tax/fee imposed pursuant to an Act of the legislature of a province?
  • Is the tax/fee imposed by a regulation or a rule and there isn't a charging provision in an Act of the legislature (I an thinking carefully about the ecotaxes)?
  • Is the tax/fee imposed under a municipal by-law?
  • On what is the tax/fee imposed?
  • Is a recipient of a supply responsible for paying the tax/fee under the law imposing the tax/fee?
  • Is the supplier of the supply required to collect the tax/fee?

I have serious questions whether the Toronto plastic bag fee is subject to HST.  I have serious questions whether GST/HST should have been charged on top of the ecotaxes.  I have questions whether certain destination marketing fees are subject to GST/HST.  I think that consumers are paying GST/HST on top of many taxes and fees when the GST/HST laws do not require GST/HST to be charged.

The unfortunate reality is that the implementation of HST has incentivized Ontario and British Columbia to cause prices to increase so that they get more HST revenues.  It is in the interest of the government for retailers and suppliers to make mistakes and overcharge consumers.  It is no longer in the interest of Ontario and British Columbia to list new provincial levies in the Taxes, Duties and Fees (GST/HST) Regulations.  It is no longer in the interests of the leaders to keep prices down for consumers.

For this reason, it is more important than ever for businesses and retailers to understand the law and force the governments to follow the law.  It is more important than ever before that provincial levies are imposed in a transparent manner.  It is more important than ever for the people to make it known that there is a cascading tax and the government is accountable to them and needs to request the new tax to be listed.

Continue Reading...

B.C. Anti-HST Group Files Court Challenge

On July 5, 2010, an group led by Bill Vander Zalm filed a judicial review with the Supreme Court of British Columbia to challenge the Liberal Government's actions to implement the HST.  The two main orders sought are:

1. An order in the nature of certiorari quashing the Order of the Lieutenant Governor in Council No. 661, dated November 30, 2009, and approval given therein to the Minister of Finance to enter into the Comprehensive Integrated Tax Coordination Agreement with the Government of Canada; and

2. A declaration that the Comprehensive Integrated Tax Coordination Agreement between the Government of Canada and the Government of British Columbia dated November 30, 2009 is of no force or effect and a nullity.

In simple terms, the orders, if granted by the Supreme Court of British Columbia, would undo/remove certain procedural steps that have led to the HST implementation and could cause all HST house of cards to fall.

I have read a copy of the Petition to the Court and find that it raises serious procedural issues.  The most interesting points are raised in paragraphs 10-11, 16 & 18 of the Petition:

10. On November 30, 2009, the Lieutenant Governor in Council, by Order in Council 691 made pursuant to s. 4 of the Ministry of Intergovernmental Relations Act, R.S.B.C. 1996, c. 303, purported to give authority to the Minister of Finance to enter into the Comprehensive Integrated Tax Coordination Agreement with the Government of Canada (the "CITC Agreement").

11. In the CITC Agreement, the Government of British Columbia agreed, subject to the requisite legislative approvals, to the imposition and implementation of PVAT in British Columbia.  The CITC Agreement purports to authorize the Government of Canada to introduce the necessary legislative amendments to include British Columbia as a participating province under Part IX of the Excise Tax Act. The parties agreed that the PVAT would be implemented in British Columbia on July 1, 2010.

16. The British Columbia Legislature did not purport, in the Consumption tax Rebate and transition Act, to ratify the CITC Agreement, authorize the Minister of Finance to enter into the CITC Agreement or otherwise approve the PVAT for British Columbia.

18. The British Columbia has not ratified the British Columbia CITC Agreement.

In simple terms, the B.C. Liberal Government did not take the formal procedural steps required to approve the cornerstone CITC Agreement. 

In addition, the B.C. Liberal Government did not that the legally and constitutionally required steps. Part 3 of the Petition sets out the laws that were not followed.  This is the part of the case that will be fascinating for legal historians and constitutional law observers.  The case will look into the well known principle of law associated with the Boston Tea Party  - "No taxation without representation".

What is argued to be a fatal flaw of the HST implementation in British Columbia is "[t]he CITC Agreement did not originate in the [B.C.] Legislature, and has not been ratified or approved by the Legislature..."  Taxation of the people was not done properly.

The questions raised in the Petition are important ones for the people of British Columbia and businesses.  While businesses may be concerned that Mr. Vander Zalm may be correct and their input tax credits may be taken away, my humble view is that the case has been brought quickly and the answer will be provided relatively quickly [even though Mr. Joseph Arvay, Q.C. has voiced hope that the case will be head by August 1, 2010, judicial proceedings take time and appeals lengthen the process].  Businesses will be better off if the judicial review decision is quick - rather than having the issue raised and determined 10 years from now after a large assessment of a single taxpayer.  If 10 years of tax collection and filing GST/HST returns is reversed 10 years from now, the retroactive uncertainty and ramifications will be worse for businesses.

The implementation of HST in British Columbia is major tax reform that was rushed to meet the July 1, 2010 date.  If the Mr. Vander Zalm is correct (and I think he is raising very important points and he is knowledgeable in government procedures), he is doing the right thing for the citizens of British Columbia by asking for a judicial review of the government's procedural steps and constitutional and legal authority to implement the HST. 

Will ORST Refunds Be Another TFSA Miscommunication?

Many businesses may be entitled to a refund of Ontario retails tax (ORST) paid in respect of goods and/or "taxable services" paid for before July 1, 2010 where the goods and/or "taxable services" are provided after July 1, 2010. 

The best examples I can give are annual subscriptions/licenses of computer software and leases of goods (however, there are other situations).  Please review your invoices to see if you paid an annual or other periodic amount of ORST before July 1, 2010 and set aside those invoices that relate, in part, to the period after July 1, 2010.

As a matter of law, it may be that the Canada Revenue Agency expects to receive harmonized sales tax (HST) for the portion o the supply that occurs after July 1, 2010. The HST transition rules may require an allocation between the pre-HST period and the post-HST period.  It also may be that as a matter of law, you were required to pay ORST on the full invoice at the time it was paid and things changed. You may entitled to receive a refund of ORST paid pre-HST in respect of the post-HST period.  I know that this may sound silly, but tax changes sometimes have silly effects/results.

I have reviewed the Canada Revenue Agency web-site for some guidance on this issue and have found nothing (so far).  I have also reviewed the Ontario Ministry of Revenue web-site for some guidance on this issue and have found nothing (so far).  It is for this reason that I am saying that the HST may be a source of confusion, like tax free savings accounts.  It would be helpful for businesses to be told clearly what is expected of them.

I will give an example in order to clarify: 

For example, some businesses and MUSH sector entities may an annual license for computer software in May 2010 and paid Ontario retail sales tax in addition to GST and the lump sum annual lease price.  In this example, computer software was licensed for a year for $120,000 and GST would have been $6000 and ORST would have been $9600. However, the ORST portion would be in respect of software that could be used post HST and, therefore, the purchaser must pay HST is respect of the period after June 30, 2010.  10 of 12 months would be subject to HST instead of ORST.  As a result, the purchaser would have to self-assess and remit HST on $100,000 = $8,000.  The business would be entitled to a refund of ORST from the Ministry of Revenue in the amount of $8000.

The self-assessment would occur on the GST/HST return for the first reporting period after July 1, 2010.  There is a line on the GST/HST return for self-assessed GST/HST.

The refund application would not be filed with the CRA, but, rather would be filed with the Ontario Ministry of Revenue. Here is the general refund application form - it is difficult to find on the Ontario Ministry of Revenue web-site.

This may sound silly - robbing Peter in order to pay Peter (and Paul). Some businesses for some purchases may pay both HST and ORST and will have to wait to get the ORST back.  These same businesses have audit risk under both the ORST and HST tax regimes.  The business has paid the correct amount of tax initially and then has a problem and can be assessed for failing to ensuring the tax was paid to the right person. 

You will not be able to say that ultimately Ontario received its money because technically under the HST regime, the HST goes into a pot of money and that money is allocated according to formulas, which are not based on the place of supply.  The formulas do not allow for a matching of HST to a particular province.

In a more perfect tax system, there would be a joint CRA and Ontario Ministry of Finance form that would allow a business to identify payments of ORST in the pre-HST period that cover the post-HST period.  In a more perfect tax system, the governments would ask for a copy of the invoice and make the corrections for you.  In a more perfect tax system the governments would waive interest and penalties when there is not intention to underpay sales taxes.  It should be easy for businesses to comply with sales tax laws, but sometimes it is not simple or easy.

On June 30, 2010 The Ontario Ministry of Revenue Cancels Ontario Retail Sales Vendor Permits

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.

Service Providers That Make Presentations May Have to Rethink Venue

There are many types of service providers who make presentations to audiences.  Sometimes the audience is the public (e.g., business people who want to learn how to benefit from Facebook). Sometimes the audience is employees a a particular company (e.g., a law firm brings in a marketing guru t talk about business and sales plans, a nursing home operator brings in service providers to lecture bout ways to improve delivery of services, a bank brings in a security expert to talk to employees in a lecture hall, etc.).

The general HST place of supply rules may not apply to these types of transactions.  There is a special HST place of supply rule for services in connection with a location specific event. 

Section 28 of the New Harmonized Value-added Tax System Regulations provides:

"A supply of a service in relation to a performance, athletic or competitive event, festival, ceremony, conference, or similar event is made  in a province if the service is to be performed primarily at the location of the event in the province."

This means that if a service provider makes supplies of such services, they would charge HST at the rate of 13% if the event is held in Ontario (assuming the  50%"primarily" test is satisfied). if a service provider makes supplies of such services, they would charge HST at the rate of 12% if the event is held in British Columbia (assuming the  50%"primarily" test is satisfied). Similarly, if a service provider makes supplies of such services, they would not charge HST (but would charge GST) if the event is held in Alberta, Quebec, Saskatchewan, Manitoba or PEI.

The "primarily" test would be most often applicable if the person providing the service is from a different province than the province in which the event occurs.  If an Alberta-based marketing guru gives a presentation in Ontario, it is possible that HST would not apply to his/her speakers fee.  Based on my own experience giving presentations, it takes a significant amount of time to prepare the presentation and a short amount of time to deliver a presentation.  Based on my experience, out-of-HST province service providers may be able to demonstrate that HST is not applicable on a case-by-case basis.  that being said, if a service provider does not charge HST in relation to services provided in an HST province, they should maintain documentation regarding that decision.

I will predict that border cities (that is, cities on the border between an HST province and a non-HST province) will see a decrease in conferences.  Many conferences previously held in places like Ottawa will move to alternatives, such as Gatineau, Quebec.

Finally, MUSH sector and exempt businesses will consider venues for corporate events and internal training.  if an entity cannot claim full input tax credits and recover HST, if may be less expensive to hold events outside HST provinces.  That being said, the travel costs and costs associated with being away from the office might outweigh the HST costs.  That being said, if Paradise Island, Nassau, Bahamas offers great deals, we may see more winter/spring events outside HST provinces.  That being said, the Canada Revenue Agency might take a close look at taxable employee benefits.

The New Harmonized Value-Added Tax System Regulations Contain a Surprise - An Anti-Avoidance Rule

The June 9, 2010 Canada Gazette (Part II,  Vol 144, No. 12) contained the New Harmonized Value-Added Tax System Regulations SOR/2010-117. Part 2 (section 34-37 contain the HST anti-avoidance rules.  These rules are in addition to the general anti-avoidance rule in section 274 of the Excise Tax Act (Canada) and the Ministerial discretion in subsection 2(18) and section 6 of the Retail Sales Tax Act (Ontario).

In short, related parties (parties operating at non-arms length) may see their tax planning challenged by the Canada Revenue Agency and additional assessments of harmonized sales tax (HST) levied where the Minister believes there is a tax benefit flowing from a transaction with no bona fide business purpose.  The HST anti-avoidance rules do not appear to apply to arm's length parties.

First, the time frames - the HST anti-avoidance rules apply to transactions that occurred after March 26, 2009 (the date of Ontario's HST budget announcement). In particular, Part 5 of the Regulations provide:

  • Section 35 applies to any agreement varied,
    altered or terminated on or after March 26,
    2009 and to any new agreement entered into on
    or after that day.
  • Section 36 applies to any agreement varied,
    altered or terminated on or after April 6,
    2010 and to any new agreement entered into on
    or after that day.
  • Section 37 applies to any transaction made
    on or after March 26, 2009.

My first reaction is - poor souls in British Columbia.  The drafters of the Regulations are mistaken and must believe that the B.C. HST announcement occurred at the same time as Ontario and not on July 23, 2009.

Next, what appears to be covered:

  • Non-arm's length transactions entered into between March 26, 2009 and July 1, 2010 that are altered or varied or terminated
  • Non-arm's length transactions entered into after a tax rate change announcement that are altered or varied or terminated
  • Non-arm's length transactions or series of transactions would in the absence of this section result, directly or indirectly, in a tax benefit to one or more of the persons involved in the transaction or series of transactions it may not reasonably be considered that the transaction, or the series of transactions, has been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit, arising from a harmonization event, for one or more of the persons involved in the transaction or series of transactions.

I would like to highlight something that is written in the Regulatory Impact Statement (at the end of the Regulation) after reading the part under "Consultations"

The Regulations are designed to reflect previous HST announcements of proposed rules by Ontario and British Columbia on October 14, 2009 and by the Government of Canada on February 25, 2010.

I must have missed the anti-avoidance rules announcement.

Finally, after re-reading the Regulatory Impact Statement regarding the anti-avoidance provisions, businesses that have expanded into another province after March 26, 2009 may find their business activities under a CRA microscope and will have to prove their legitimate business purpose to an auditor:

The Regulations also set out rules to prevent persons from improperly taking advantage of a change in the new harmonized value-added tax system under the Excise Tax Act. Such changes include the addition of a province to the system, a change to the tax rate of a participating province or a change to a rebate of the provincial component of the HST.

The anti-avoidance rules in these Regulations apply where persons not dealing at arm’s length with each other enter into transactions to obtain a tax benefit as a result of a change in the new harmonized value-added tax system and not primarily for bona fide purposes other than to obtain the tax benefit. In these circumstances, the Regulations allow the Minister of National Revenue to assess the participants in the transactions in order to deny the tax benefit. Generally, the aim of the harmonization anti avoidance rules is to prevent persons not dealing at arm’s length from attempting to avoid the HST simply to obtain a tax benefit and for no bona fide purpose.

Here are the HST anti-avoidance rules (which are long and difficult to read):

Continue Reading...

We Now Have Place of Supply Regulations And More

In the June 9, 2010 Canada Gazette, the final HST place of supply regulations are published as SOR/2010-117 - now called "New Harmonized Value-added Tax System Regulations". Also included in the regulations are the HST anti-avoidance rules (Part 2), the HST transition rules (part 3), repeal of Place of Supply (GST/HST Regulations (Part 4) and application rules (Part 5).

It is about time that the nuts and bolts of the HST law is being made available to businesses in harmonized provinces. However, much is still missing, such as the real property rules and transition rules for builders of residential complexes. 

The HST is Coming, The HST is Coming

Kevin Marron has written a helpful article about harmonized sales tax in "The Canadian Lawyer" magazine entitled "The HST is Coming, The HST is Coming".  I am not just saying it is a good article because I am quoted in the article.  My good friend, Terry Barnett, is also quoted.

Please note that I will be giving a presentation on HST for lawyers with David Schlessinger of KPMG LLP on June 23, 2010, which is being presented by the Law Society of Upper Canada.  Last I heard, over 283 people have signed up to listen.

Graphic Designers in Ontario/BC Have HST Characterisation of Supply Questions

Graphic Designers have experienced Ontario retail sales tax issues for the last 4-5 years as auditors have taken the position that their services are actually "taxable services".  As a result of the confusion, the Association of Registered Graphic Designers (Ontario) consulted with the Ontario Ministry of Finance and prepared materials for members.  A number of charts/continuums were prepared by the Association to provide to the Ontario Ministry of Finance to demonstrate that there are many different types of graphic design services.  The Association's tools set out information for 8 categories of graphic designers (categories for the purposes of communication with Ontario):

  • exhibit graphic design
  • environmental/architecture graphic design
  • editorial graphic design
  • identity graphic design/branding
  • web design/new media
  • package graphic design
  • advertising graphic design
  • corporate communication/promotional material graphic design

After the creation of these documents, the Ontario Ministry of Revenue released RST Guide 520 "Graphic Designers", in which Ontario recognized and provided guidance regarding the Ontario retail sales tax consequences for various categories of graphic design services.

British Columbia issued SST Bulletin 128 for graphic designers in British Columbia (before the Ontario Guide).

With harmonized sales tax (HST), graphic designers will continue to have serious characterization issues.  The HST place of supply rules are based upon (divided into categories) based on the characterization of the supply.  FOR HST PURPOSES, THERE ARE MANY DIFFERENT PLACE OF SUPPLY RULES THAT MAY APPLY FOR GRAPHIC DESIGNERS BASED ON WHAT TYPE OF GRAPHIC DESIGNER SERVICES/DELIVERABLES THEY PROVIDE.

Some graphic designers would apply the general HST place of supply rules for services.  Some graphic designers would apply the HST place of supply rules for services in respect of real property.  Some graphic designers would apply the HST place of supply rules for services in respect of tangible personal property. Some graphic designers would apply the HST place of supply rules for services in respect of photographic -related goods.  Some graphic designers would apply the HST place of supply rules for computer-related services.  Some graphic designers would apply the HST place of supply rules for intangible property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of real property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of tangible personal property. Some graphic designers may apply a combination of HST place of supply rules.

Any graphic designer in Ontario who does not charge the 13% HST rate in Ontario will have to justify not charging the 8% HST portion.  The same holds true for graphic designers in British Columbia if they do not charge the 7% HST portion.  Yes, both graphic designers in Ontario and British Colombia may compete with U.S.-based graphic designers who are not charging HST. That is another issue altogether. 

Graphic designers who sell only to businesses/clients/consumers in their province will not have place of supply issues as they will charge their provincial are on all invoices.  The graphic designers who have businesses/clients/consumers in more than one province will have to characterize their services/deliverables and apply the correct place of supply rule.  I would be pleased to help.

As at June 5, 2010 the Final HST Place of Supply Rules Have Not Been Promulgated

I have been watching the Department of Finance web-site and, to date, the final version of the HST Place of Supply Rules Regulations have not been promulgated.  We are 25 days away from the implementation date for HST in Ontario and British Columbia and we do not have the final version of the applicable rules.  How is this easier for businesses?  Businesses are the ones who will be assessed by Canada Revenue Agency auditors for mistakes.  It will be an penalty on businesses.

On April 30, 2010, the Department of Finance issued draft Regulations in Respect of the Place of Supply of Property and Services for public comment.

On June 3, 2010, the Canada Revenue Agency reissued its Technical Information Bulletin 103 (June 2010) on "Place of Supply Rules for Determining Whether a Supply is Made in a Province".

Update on Bill C-9 Changes to the "Financial Services" Defition

On Thursday, May 13, 2010, the House of Commons Finance Committee agreed to report Bill C-9 to the House of Commons without amendment, and the Bill was presented, as such, to the House of Commons on the following day, Friday, May 14, 2010.

At the request of the opposition members of the Finance Committee, the Committee took a separate vote on, inter alia, clause 55 (which contains the GST amendments at issue ). All of the Conservative members of the Committee present (5) voted in favour of clause 55 without amendment, and all of the opposition members who voted (5) voted against that clause. The chair (Conservative) cast the deciding affirmative vote. One Liberal member, who was recorded as present for the meeting, apparently did not vote.

After Bill C-9 passes third reading in the house of Commons, Bill C-9 will head to the Senate. Stay tuned ....

 

 

 

Canada's Department of Finance Has Released Financial Institution Rules for the Harmonized Sales Tax (HST)

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
  •  

 

Regulations Are Coming - How Soon - Very Soon

The federal HST implementing legislation does something unusual --- it permits a wide range of matters to be determined in the future by way of regulation.  This means that the Department of Finance (with input from other government departments and agencies) will write the regulations and the Governor-in-Council (a.k.a. the ruling Cabinet) will promulgate the rules.

To date (May 19, 2010), no HST regulations (relating to Ontario and British Columbia harmonization) have been promulgated.  We are told to expect three (3) sets of regulations soon.  The first (likely the HST place of supply rules) will be promulgated  (so we are told) by the end of May 2010.  Two other sets of regulations should be promulgated around mid-June 2010.  The regulations may include new penalties - so we are told.

Practitioners expect that the Department of Finance will post the regulations on their website www.fin.gc.ca. It may take up to 10 days for the regulations to be published in the Canada Gazette.

Yes, we are running out of time.  Yes, the rules will apply to more provinces than just Ontario and British Columbia. Yes, businesses need to know the rules in order to prepare for HST. Yes, consumers want to know the rules.  Yes, businesses will want to undertake transactions before July 1, 2010.  Yes, the fact the regulations have not yet been promulgated is a problem. Yes, we should expect problems with the regulations because they regulations will not be subject to the scrutiny of opposition parties and the Senate. Yes, there will be a degree of trial and error.

What Are The HST Place of Supply Rules For Services

Businesses in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will have to use the newly released harmonized sales tax (HST) 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: 15% (5% GST and 10% provincial HST component starting July 1)
• 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 Canada’s 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 an administrative document containing its proposed 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. The Canada Revenue Agency subsequently issued, 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.


On April 30, 2010, the Department of Finance released Draft Regulations in relation to Place of Supply for Property and Services.


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), then the general place of supply rules for services will apply. There are 5 general place of supply rules for services, which must be applied in the following order. Rule 1, 2 and 5 are the fundamental rules. Rules 3 and Rule 4 are tie-breaker rules
 

Continue Reading...

HST Place of Supply Rules for Litigators and Those Who Provide Litigation Services (Revised)

The harmonized sales tax (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.

Section 26 of the Draft Regulations in respect of Place of Supply for Property and Services released on April 30, 2010 sets out the proposed specific place of supply rules for services in relation to litigation:

"A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province, or in the nature of an appeal from a decision of a court or other tribunal established under the laws of a province, is made in that province."

More simply put, the rules are:


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.
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 place of supply rules will apply to services in connection with litigation that is under the jurisdiction of a Court or other Tribunal established under the laws of Canada (rather than the laws of a province).


Rule #3: The general rules for services will not apply to litigation services rendered after the commencement of litigation. If the services are in connection with litigation that is under the jurisdiction of a court in an HST province (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador) or is in the nature of an appeal from a decision of a court or other Tribunal established under the laws of an HST province, then HST applies.


If litigation has commenced (e.g., there is an initiating document such as a statement of claim) and Rule 3 applies, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province, the supply 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 (e.g., there is an initiating document such as a statement of claim), a supply of a service rendered in connection with criminal, civil or administrative litigation filed with a court under the laws of a non-HST province (e.g., Alberta), the supply 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.
 

An unanswered 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. 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
 

Canada's Department of Finance Has Released Draft HST Place of Supply Rules Regulations

On April 30, 2010, Canada's Department of Finance released "Draft Regulations in respect of the Place of Supply of Property and Services".  Section 33 states that the Place of Supply (GST/HST) Regulations are to be repealed and replaced by the Regulations in respect of the Place of Supply of Property and Services.  Even though these regulations have been released in draft form, the will apply to supplies made (a) on or after May 1, 2010 and (b) after February 25, 2010 and before May 1, 2010 unless any part of the consideration for the supply becomes due or is paid before May 1, 2010.

It is very important to note that the place of supply rules have changed slightly in certain cases.  For example. the place of supply rules for services in connection with litigation have changed from:

February 25, 2010 version: "A supply of a service rendered in connection with criminal. civil or administrative litigation in a particular province will be regarded as being made in that province.

to:

April 30, 2010 version: A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province or in the nature of an appeal from a decision of a court of other tribunal established under the laws of a province, is made in that province.

The HST Blog raised concerns about the draft place of supply rule for litigation services and may have influenced the change.

There are other changes to the draft regulations that will be discussed in future blog posts. Please note that draft regulations trump administrative announcements.

Great Article About What Is Unconstitutional Provincial Indirect Taxation

Benjamin Alarie and Finn Poschmann have written a very good opinion article in today's Financial Post newspaper entitled "Ontario's quiet taxes through regulation". In this article, they correctly point out that under Canada's Constitution, a province's powers to impose taxes are broad and limited.  They write:

"Canada's constitution and the case law that surrounds it define the relative jurisdiction and powers of the federal government and the provinces. In matters of taxation, government authority is extensive, and legislatures may enact laws imposing a wide range of taxes.

Despite these broad powers, governments are limited in what they may do without legislative approval. They may use regulation, which is not approved by a legislature, to set fees to recover the costs of goods or services they provide to the people being charged the fee. They may not, however, use regulation to impose taxes that fund the general activities of government."


Read more: http://www.financialpost.com/opinion/story.html?id=2940982#ixzz0lw205pO8

The focus of the article is Regulation 66/10, which directs the Ontario Energy Board to assess a special levy on the Independent Electricity System Operator and distributors in respect of and in proportion to the amount of electricity they distribute.  As a result, the discussion is focused on this particular levy (not HST).

That being said, the authors have made the following important points that may arise in HST debates soon or in the case of a big assessment in the future:

  • From the perspective of the Constitution Act, 1867, taxes are either direct or indirect; in Canadian law, a direct tax is paid by the person on whom a charge is levied, and an indirect tax is passed on to others, as with most sales taxes. Under subsection 92(2) of the Constitution, provinces have the jurisdiction to impose direct taxes but not indirect taxes.
  • In no case ...does a province have the constitutional ability to impose a tax -- direct or indirect --through regulation alone.
  • In the event of a successful constitutional challenge that showed the levy to be a tax, however, the province would be under an unambiguous legal obligation to return the revenues.
  • The province could impose retroactive tax legislation allowing it to keep the revenue.

The article is worth reading and saving --- in the event of an audit and assessment.

Effective Communication Will Be The Key To A Successful HST Compliance Program

After a business realizes that harmonized sales tax (HST) is coming and that changes are required to systems and documentation, the business must figure out what is necessary to ensure compliance.  The government publications help, but do not give enough information to make sure that businesses know what they must do to comply.

It is not sufficient for the Ontario Ministry of Revenue to announce that HST is 13%, HST is payable and collectible where GST is payable and collectible (except if a point of sale rebate is permitted), the implementation day is July 1, 2010, there are transition rules and place of supply rules and most businesses should stop charging Ontario retail sales tax on July 1.  What is missing is effective communication on what steps businesses should take to prepare.  This trial and error approach is costly for businesses - Businesses should try to comply and government will tell them where the mistakes were made by assessing GST/HST, interest and/or penalties.

The onus (and I do not mean legal onus or burden of proof) is on suppliers (sellers/retailers) and recipients (buyers/[purchasers) to figure out the legal requirements and be perfect in their implementation of the law (to the extend it is currently passed) and administrative statements (to the extent they are written and accurately reflect the written or unwritten law) and place of supply rules (which have not been passed by way of law or promulgated by way of regulation yet).  In other words, the communication from government to businesses is insufficient to ensure compliance.

In addition, businesses must effectively communicate within the organization in order to ensure compliance.  Someone must do their best to understand the HST rules and communicate the rules within the organization so that the proper system changes are made.  If the tax department/Chief Financial Officer does not discuss HST implementation with the sales department, the sales persons might not know what is subject to HST and what is not.  The sales persons may not understand when an invoice should include HST and when HST is not payable.  The sales persons might not know that they must charge HST on sales made in May and June if delivery occurs after July 1, 2010.

In addition, the computerized systems cannot change themselves.  Usually there is the information technology (IT) guru within an organization that must write computer source code or undertake configurations to ensure that HST is charged on invoices.  If there is not effective communication with the IT guru about what changes need to be made to electronic documents and computerized systems to record HST, the computers may be of little help in fulfilling their important role(s).

In addition, the IT guru may have to make adjustments to accounting systems so that the record keeping/ accounting programs track the GST and HST properly.  The computer system will be a useful tool to ensure GST and HST collected is added / reported correctly when GST/HST Returns must be completed and filed electronically (or in paper format).  The computer system will be a central tool in recording and reporting input tax credits, rebates, refund and restricted input tax credits.  If the IT guru does not receive clear instructions, he/she might not make all the necessary changes.

Effective compliance often includes an internal audit or monitoring of the systems to ensure that accurate information is communicated.  If no one has this role / function within their job description, the job might not be performed.

If problems are discovered, effective communication is necessary to make new and further adjustments to the system.  For example, if a September 1, 2010 invoice to the Government of Ontario did not include GST and HST (because prior to HST implementation neither taxes were charged), whoever discovers the problem will need to communicate the mistake internally within the organization so that the sales people, the IT guru, human resources, the tax department or CFO and others make the necessary changes.  Someone will also need to contact the Government of Ontario and send the invoice for the GST/HST or amended invoice including GST/HST.

Finally, I have to point out that effective communication extends to lawyers, accountants, customs brokers and other service providers.  A business will get incorrect/incomplete answers to questions if there is ineffective communication to outside service providers.  If you are going to rely on a service provider's help, you need to communicate all the relevant facts and instructions - otherwise the advice or services that you expect to be provided to you may not be provided.

Nova Scotia Announces It Will Increase HST Rate by 2% For July 1, 2010

On April 6, 2010, the New Democratic Party in Nova Scotia has announced that it will increase the provincial component HST rate by 2% by July 1, 2010 (when Ontario and British Columbia harmonize). This will result in Nova Scotia having a combined GST/HST rate of 5% + 10% = 15% (the highest in Canada). The Nova Scotia NDP government expects this will mean $214.8 million in much-needed revenue this year.

In that same article, CBCnews reports that the increase in the HST rate is intended to bring the Nova Scotia budget into a balanced state within 4 years. At least, this is what the politicians are telling the electorate and consumers who will be paying more on almost everything.

Nova Scotia joined the HST Zone in 1997 and the consumers have adjusted to the HST regime. That being said, with Ontario and British Columbia joining the HST Zone on July 1, 2010, the Department of Finance has announced new place of supply rules for all in the HST Zone (and outside the HST Zone). We continue to wait for the HST place of supply rules to be announced in a legislative format (i.e., regulations or a Bill). The updated place of supply rules are game changers for services and intangible property and there are notable changes for real property and goods. Nova Scotia, therefore, will be adjusting to the new rules while increasing the cost of mistakes to 15%.

B.C. NDP Party Hopes to Prevent Passage of HST Legislation

The British Columbia Times Colonist newspaper is reporting that the New Democratic Party (NDP) in British Columbia is planning to use any means available to prevent the passage of Bill 9 - 2010 "The Consumption Tax Rebate and Transition Act" that was tabled in the British Columbia Legislature on March 30, 2010. That being said, the fist vote relating to the Bill passed 47 to 34 due to the number of seats held by Premier Campbell's Liberal Government. So, while the NDP's plans to stop the unpopular HST legislation should be welcomed by the electorate, they should not expect to be saved from HST.

The report indicates that the NDP leader, Carole James, plans to use legislature procedures to have a debate. The NDP plan to table amendments to Bill 9-2010 and take their allotted speaking time in the Legislature. The hope is at least a one month delay,

The Ontario Progressive Conservative Party, lead by Tim Hudak, tried unsuccessfully to delay the passage of the Ontario version of the HST legislation using similar legislative mechanisms.  However, Bill - 218  Ontario Plan for More Jobs and growth Act, 2009" passed in Ontario in December 9, 2009.

The unfortunate reality is that HST is going to be a reality soon - very soon.  The late passage of legislation in British Columbia will not help businesses prepare.  In fact, if the delay tactics successfully take a month or more, HST collection obligations may have already kicked in -- as of May 1, 2010.  Businesses must collect HST on supplies of property and/or services if:

(1) the contract is entered into after April 30, 2010

(2) the property and/or services are to be delivered after July 1, 2010, and

(3) consideration is paid after May 1, 2010

It is also unfortunate that the place of supply rules have been released in administrative statement format only (as of April 1, 2010).  The regulations have not been promulgated by the Federal Government.  As a result, as of April 1, 2010, businesses do not have sufficient information to ensure they are ready as of May 1, 2010 or even July 1, 2010.  Something that should be discussed is a period of leniency by the Canada Revenue Agency regarding enforcement.

British Columbia Starts Process to Pass HST Legislation

On March 30, 2010, the Government of British Columbia tabled Bill 9-2010, which is legislation to implement harmonized sales tax (HST) into B.C. law and wind down the British Columbia social services tax (BCSST) and hotel room tax. The HST implementing legislation is called the Consumption Tax Rebate and Transition Act. The Government of British Columbia also issue a press release at the time the Bill was tabled in the Legislature.

The HST rate for the province of British Columbia will be 12%. HST will come into effect on July 1, 2010.

The Consumption Tax Rebate and Transition Act eliminates the seven-per cent BCSST and introduces HST-related measures designed to mitigate the impacts of the HST on persons in British Columbia.

It is expected that the legislation will be passed in due course. This is a necessary step in the process.

New Finance Canada Statement Does Not Solve GST Dilemma

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".

Federal Legislation to Start HST Implementation Passes

Canada's federal harmonized sales tax (HST) implementing legislation is Bill C-62 "Provincial Choice Tax Framework Act", which received Royal Assent in the House of Commons on December 15, 2009.  The Canadian Senate passed Bill C-62 on December 15, 2009.

Bill C-62 (became Chapter 32 upon Royal Assent) amends the Excise Tax Act (the “Act") to implement, effective July 1, 2010, the new fully harmonized value-added tax framework in Ontario and British Columbia. It also facilitates the new framework to accommodate any province's decision to have the provincial component of the harmonized value-added tax under the Act apply in that province by achieving a common understanding with Canada in respect of such a new framework.

It is important to note that the federal implementing legislation does not contain the place of supply rules, which will be implemented by way of regulation, instead of by way of legislation. This means that the House of Commons and Senate do not approve the place of supply rules. The place of supply rules regulations will become law upon promulgation of the Governor-in-Council (that is Cabinet). This may prove to be problematic and is a reason to watch the Canada Gazette carefully.

Ontario Has Passed HST Implmenting Legislation

The "Jaws" theme is playing in the background ....

In December 2009, the formal steps were taken to pass the harmonized sales tax ("HST") implementing legislation in the Ontario Legislature.

Ontario proposed in the 2009 Budget that, effective July 1, 2010, Ontario’s retail sales tax (RST) will be replaced with the HST. The HST will have a combined sales tax rate of 13 per cent (combining the existing five per cent federal goods and services tax (GST) and an eight per cent Ontario component). The HST will be administered by the Canada Revenue Agency. All businesses currently registered for GST will automatically be registered for the Ontario HST on July 1, 2010. 

On December 9, 2009, the Ontario Legislature, Bill 218 "Ontario Tax Plan for More Jobs and Growth Act, 2009" passed third reading and is law. passage occurred despite attempts by the official opposition, the Ontario Progressive Conservative Party, Opposition Leader Tim Hudak and HST Critic Lisa MacLeod to stop the bill.

Bill 218 implements the "Comprehensive Integrated Tax Coordination Agreement" between Ontario and the Federal Government and the original Memorandum of Agreement Concerning a Canada-Ontario Comprehensive Integrated Tax Co-ordination Agreement" between Ontario and the Federal Government, which started the HST plans in motion.