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

On March 19, 2013, British Columbia issued revised PST Bulletin 106 "Legal Services", which provides guidance to lawyers about the new provincial sales tax ( BC PST) rules for lawyers and law firms.  Under the new BC PST rules for lawyers, legal services are subject to BC PST at a rate of 7%. This does not give much time to get ready and may cause some concern with respect to transactions not completed before April 1st (this may be a busy week for lawyers).

PST Bulletin 106 "Legal Services" is only three pages in length and provides limited guidance.  That being said, it raises a few red flags for law firms outside of British Columbia.  For example, PST indicates that legal services provided by any law firm with respect to "acting as legal counsel in negotiations, including settling terms of a business purchased in BC", are subject to the new BC PST. This could translate into exposure of lawyers and law firms outside British Columbia who act in a national sale of a business, including assets in British Columbia.  There is an audit risk for failure to register for BC PST purposes and failure to collect BC PST with respect to legal fees.  By the way, the bundling rules in the Provincial Sales Tax Act (British Columbia) add to the value of the risk because the auditors may try to argue tax is payable on the legal fees for the non-BC components of such a national/multi-provincial transaction.

PST Bulletin 106 "Legal Services" contains a short (but broad) list of legal services provided outside British Columbia that are considered to be subject to BC PST.  The list of legal services outside BC that are subject to BC PST includes the following (provided that a specific exemption does not apply):

• legal services that relate to real property situated in BC
• legal services that relate to tangible personal property that is ordinarily situated or brought into BC
• legal services that relate to the ownership, possession or right to use any other property in BC
• legal services that relate to a court or administrative proceeding in BC
• legal services that relate to the incorporation of a company under the Business Corporations Act or Societies Act
• legal services that relate to the registration of an extra-provincial company or society under the Business Corporations Act or Societies Act
• legal services that relate to the interpretation or application of an enactment as defined in the Interpretation Act, or a former or proposed such amendment
• legal services that relate to a contract or covenant (or the contemplation of a contract or a covenant) related to a physical or legal presence, activity or transaction in BC, or the contemplation thereof
• legal services that relate to the interpretation or application of any enactment, or a former or proposed enactment of any jurisdiction, or the analysis or application of any law, if it relates to
  
  • a physical or legal presence in BC
  • any activity or transaction in BC
  • the contemplation of a presence, activity or transaction in BC
• any other matter that relates to BC

Auditors have wide discretion take the position that they may assess a lawyer/law firm outside British Columbia under administrative policy or statutory provisions.  Canadian lawyers and law firms are at risk, as well as U.S. lawyers and law firms and lawyers/law firms outside North America.

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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.

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Yesterdau. I wrote a post entitled "Do You Have A Complaint About The Canada Revenue Agency?" and mentioned the Taxpayers Bill of Rights.  I provided a link to the CRA web-site.  Here are the Rights:

1. You have the right to receive entitlements and to pay no more and no less than what is required by law.

2. You have the right to service in both official languages.

3. You have the right to privacy and confidentiality.

4. You have the right to a formal review and a subsequent appeal.

5. You have the right to be treated professionally, courteously, and fairly.

6. You have the right to complete, accurate, clear, and timely information.

7. You have the right, as an individual, not to pay income tax amounts in dispute before you have had an impartial review.

8. You have the right to have the law applied consistently.

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings.

10. You have the right to have the costs of compliance taken into account when administering tax legislation.

11. You have the right to expect us to be accountable.

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances.

13. You have the right to expect us to publish our service standards and report annually.

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner.

15. You have the right to be represented by a person of your choice.

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Last Week, the Canada Revenue Agency ("CRA") released GST/HST Info Sheet GI-122 "The GST/HST Implications of the Acquisition of Solar Panels Under the micro Feed-In Tariff Program in Ontario" to clarify when a person must register for GST/HST purposes and when input tax credits ("ITCS") will be allowed.  The new Info Sheet follows a period of uncertainty during which auditors would not allow ITC claims (and auditors questioned whether homeowners in the Micro FIT were permitted to register for GST/HST purposes).

Under the Micro Feed-In Tariff Program in Ontario, homeowners may install solar panels on their roof or elsewhere on their property, engage in activity of electricity generation, and engage in the commercial activity of selling the electricity to the Province of Ontario.  The issue is whether the homeowner is renovating used residential property (where no ITCs would be allowed) or purchasing solar panels and other equipment to manufacture energy and sell that energy to the province.

The Info Sheet determines that the homeowner (participating in the Ontario Micro FIT program) must register for GST/HST purposes if he/she receives more that $30,000 per year from the province under the program.  If the homeowner does not make $30,000 under the program, he/she may be a "small supplier" and would not be required to register for GST/HST purposes.  Small suppliers may voluntarily register for GST/HST purposes.

If a homeowner registers for GST/HST purposes, he/she must charge, collect and remit GST/HST on the money received from the Ontario government under the FIT Program.  They also must be careful to charge GST/HST on other taxable supplies (e.g., garage sales, sales of used cars, etc.).

If a registered homeowner purchases equipment to be used in connection with energy generation, he/she may claim ITCs and recover the GST/HST paid on those purchases.  However, these claims are subject to an audit by the CRA.  As a result, homeowners must be careful to not use the CRA as a personal ATM machine.  In other words, the CRA will scrutinize ITC claims to ensure unrelated home repairs and other personal expenses do not give rise to ITC claims.

For more information, there is a complex / high level opinion given by Torys LLP to the Solar Industries Association that has been posted on the Internet. For even more information, please go to the Solar Industries Association web-site.

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I am asked regularly whether a non-resident person who does not wish to register for GST/HST purposes can get an input tax credit for the goods and services tax ("GST") and harmonized sales tax ("HST") (if charged and) paid at the border.  The answer is "no", the non-resident cannot claim an input tax credit if they do not get into the GST/HST system, post security and file GST/HST returns.

However, other options may be available depending on the facts (which can be arranged to permit recovery).  These options are available in a business transaction and are not available to a non-resident bringing goods to Canada for their own use (e.g. at a cottage in Muskoka). The two main options are:

1) use of a drop shipment certificate; and

2) structuring the importation in a way to permit another person to recover the money.

These options are not available in every situation.  They are complicated to describe and implement.  Often the assistance of a sales tax lawyer or accountant or consultant is requirement to make sure the transactions are structured perfectly.  Since the purpose of the structuring is to get money back from the Canadian government or accomplish tax relief, the Canada Revenue Agency may inquire about the facts to see if all "t"s are crossed and "i"s dotted.

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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.

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When I say "deregistered charities", I am referring to deregistration as a charity and not deregistration for GST/HST purposes.  If a charity that was a registered charity is deregistered as a charity (no longer considered to be a charity by the Canada Revenue Agency (CRA)), that entity will face a number of assessments, including GST/HST, if they do not make changes.

If an entity is deregistered as a charity, it would have to determine if the supplies made by it are exempt or taxable for GST/HST purposes.  Many supplies made by charities are exempt pursuant to Part V.1 of Schedule V to the Excise Tax Act (Canada).  A key pre-condition to the exemption may not be satisfied after deregistration.  If the exemption is no longer available and the entity does not change its invoicing (charging) practices, it may be assessed for failure to collect GST/HST.

If supplies become taxable (when a charity no longer makes exempt supplies), the entity must determine if they may claim input tax credits paid by it on business inputs.  The accountants and book-keepers will have to undertake a careful review.  If the entity does not claim input tax credits, it may lose its opportunity.

If an entity is deregistered as a charity, it would no longer be entitled to claim public service body rebates to recover otherwise unrecoverable GST/HST paid on business inputs.  Charities may claim a public service body rebate of 50% of the GST portion.  Depending on the province(s) in which a charity operates, the charity may claim another rebate for the PVAT (provincial) component.  If the charity is deregistered, a key pre-condition of entitlement will no longer apply.  If the entity does not change the way it completes its GST/HST return, it may be assessed to draw back rebates improperly claimed.

There are many other changes that may be experienced by specific charities.  For example, certain charities take advantage of the election in section 211 of the Excise Tax Act (Canada) and that benefit would no longer be available.  Certain volunteer reimbursements and allowance rules would not longer be available. Certain charities could deregister for GST/HST if they are below the small supplier threshold for charities. 

If the CRA is talking about deregistration of an entity as a charity, that entity needs to address the issues in that discussion.  If they ignore the CRA during the deregistration process and do not take steps to revisit all elements of charging GST/HST and taking advantage of entitlements, there may be costly assessments against the former charity and/or the directors of the charity.

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Non-residents who are doing business in Canada and would like to comply with Canada's Goods and services tax (GST) and harmonized sales (HST) tax laws should review this new gide published by the Canada Revenue Ageny on June 15, 2011. "Doing Business in Canada - GST/HST Information for Non-Residents" is an important document to read.  It is over 38 pages on information that may or may not answer the questions that the non--resident may have about their GTS/HST obligations.

Whether or not a non-resident is actually doing business in Canada is a factual test.  There is no definition of "carrying on business in Canada" in the GST/HST laws.  Pages 7-8 of the CRA's document address the basics and a Canadian sales tax lawyer can help apply the CRA's test in a particular case.

The CRA document addresses many issues, including:

1. Should a non-resident register for GST/HST purposes?

2. How is GST/HST calculated?

3. What are the GTS/HST return filing requirements?

4. What are the place of supply rules for charging HST?

5. How is GST/HST applied on imported goods?

6. How is GST/HST applied on imported services and intangible property?

7. How is GST/HST applied on exported goods, services and intangible property?

8. What are drop shipments and how do the drop shipment rules work?

9. How do non-residents recover GTS/HST by way of a rebate?

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When I read the article in the Vancouver Sun entitled "Entrepreneur says HST cuts red tape", all I could think is this guy is going to be audited by the Canada Revenue Agency (CRA).  Here is a guy trying to help the B.C. Liberal Government win the HST referendum and is putting out his story for the world (and the CRA) to see.  However, either he does not understand the HST rules regarding meals and entertainment expenses or the reporter does not understand the rules.  What has been written might catch the attention of the CRA.

The Vancouver Sun article states:

• Taneja footed a $429.42 bill for a birthday party of 20 at the Waldorf, then headed with a staff member to meet some friends at 100 Nights, where he spent a further $358.40 on food and booze;
• But HST costs Taneja incurs to do business get refunded, and he supports the harmonized tax as a better alternative to the PST/GST hybrid. Before, businesses could recover the five-per-cent GST, but not the seven percent PST component.

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It has been the Canada Revenue Agency's position for a long time (since 1993) that a bare trust should not register for GST/HST purposes.  Instead, the beneficiary or beneficiaries should register for GST/HST purposes.

This CRA's position is set out Technical Information Bulletin TIB-068 "Bare Trusts". The CRA believes the following:

• a bare trust (also referred to as a naked trust) exists where a person (the trustee) is merely vested with the legal title to property and has no other duty to perform, responsibilities to carry out, or powers to exercise as trustee of the trust property;
• the sole duty of a bare trustee will be to convey legal title to the trust property on demand by and according to the instructions of the beneficial owner(s);
• the bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property;
• someone other than the bare trustee controls the property, carries on the commercial activity that relates to the property, and is the "real owner" of the property;
• the person or persons with the real ownership of the property may be a "beneficiary", or a "settlor" under trust law;

The CRA states the following administrative policy:

Where a trust is viewed by the [CRA] as a bare trust, all powers and responsibilities to manage and/or dispose of the trust property would be reserved to the beneficial owner. As a result, the beneficial owner, rather than the bare trust, would be involved in commercial activities relating to the trust property. Unless the beneficial owner qualifies for small supplier status pursuant to section 148 of the Act, or under one of the exceptions listed in subsection 240(1) of the Act, registration for purposes of the GST would be required. Where there is more than one beneficial owner within the trust arrangement, the small supplier's threshold will be calculated on an individual basis, each beneficial owner being a separate person under the Act, unless the beneficial owners are associated persons for purposes of the Act.

....

[I]n a bare trust situation, since the beneficial owners are considered to be engaged in the commercial activities relating to the trust property, they would be required to account for the GST to the extent of their share of the trust property, to file GST returns, and generally to comply with the obligations placed on registrants under the Act.

Many real estate transactions involve bare trusts.  Those who not aware of the CRA's position likely have made a structuring mistake.  These mistakes may be corrected by way of a voluntary disclosure.

I have been involved in many real estate acquisition transactions and rental activities in which the beneficial owners of real property want to hide their identity from the world at large.  This becomes complicated despite reasonable reasons for hiding.  For example, many years ago, a client knew that the sellers of a desirable piece of real estate would not sell to my client (for all the wrong reasons) and wanted to purchase the property using a bare trust. 

The issue for the CRA is that the bare trust has nothing.  As a result, if GST/HST mistakes are made, it is difficult to assess the GST/HST owed to the government.  Since bare trusts are often used in the context of real property, the property at issue involves greater amounts of GST/HST. 

When a professional looks at the competing interests, the middle ground shows up as a small area.  There are solutions to this problem in many cases if and only if the beneficial owner is not too demanding.  That being said, if the bare trust registers for GST/HST purposes, the CRA may conduct an audit and issue an assessment.  Their policy is clearly stated in TIB-068.  The policy is restated in many other GST/HST memorandum on real property.  "I did not know the law" is not an acceptable excuse.

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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.

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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.

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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.

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When I say "taxable", I am talking about goods and services tax (GST) and harmonized sales tax (HST).  I am not talking about income tax in this blog post when I say "taxable".

The recent Tax Court of Canada decision in Craigmyle v. M.N.R. reminds us that planning is required for a business to claim that a person who is paid by the business is an independent service provider and not an employee (or vice versa).  Generally speaking, in the context of GST/HST, it is better that an individual is an employee because labour of employees is not subject to GST/HST.  An employer does not pay GST/HST to the employee and the employee does not need to register for GST/HST purposes.  During an audit, the assessment exposure/risk does not include the salary accounts in the general ledger.

That being said, a business may decide to look at other legal requirements when deciding how to structure the business (the GST/HST does not operate in a vacuum).  Since an employer has Canada pension plan and employment insurance payment obligations and income tax withholding obligations in regards to employees, the business may choose to retain the services of independent service providers and pay GST/HST on invoices submitted by the independent service providers for their services (if they are registered for GST/HST purposes).  The business must make a business decision.

If the business hires independent service providers, it should to ensure that independent service providers who make taxable sales in excess of $30,000 (the small supplier threshold) register for GST/HST purposes and charge GST/HST.  The business will have to be mindful of its own GST/HST assessment exposure/risk as a purchaser for non-payment of GST/HST.

The Craigmyle case deals with Canada pension plan and employment insurance.  In this case, the Canada Revenue Agency determined that the individual was an employee and the Tax Court of Canada disagreed --- the individual was an independent contractor.

The Tax Court of Canada examined what the Courts have held to constitute a contract of service. Based on Wiebe Door Services Ltd. v M.N.R. (F.C.A.) [Wiebe Door], and accepted and expanded by subsequent cases, the following test is applied focusing on the total relationship of the parties with the analysis centered around four elements:

(a) degree of control and supervision;

(b) ownership of tools;

(c) chance of profit; and 

(d) risk of loss.

Each situation has unique facts because the issue is the characterization of a relationship. Each case must be decided on a case-by-case basis. 

Business that are engaged in exempt activities for GST/HST purposes are less likely to structure the business around independent service providers because the GST/HST cost is generally unrecoverable (in Ontario that would be 13% on the service provider's fees).  Businesses that are engaged in zero-rated or taxable activities can recover the GST/HST paid to independent service providers.  The focus would be on the assessment risk in the event that mistakes are made or the Canada Revenue Agency has a different opinion concerning the characterization of the expense.

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I was asked the following question:

Hi, what if I initially thought that I would not be doing $30,000 worth of business and therefore, did not charge the HST.  Then part way through the year, I get a surprise project that puts me over the $30,000 limit.  Do I then just start charging the HST, or, would I need to re-invoice the other clients for the HST amount?

The answer is that you must register for GST/HST purposes when you take on the project that will cause you to exceed the small supplier threshold. After you are registered for GST/HST purposes, you must invoice GST/HST where applicable on invoices issued after that date.  Unless you retroactively register for GST/HST purposes, you would not re-issue old invoices issued before the date of registration.

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The services of an employee (a real employee) are not subject to goods and services tax ("GST") or harmonized sales tax ("HST").  The services of an independent contractor are subject to GST/HST if that person is not a small supplier.  A small supplier is a person who makes less than $30,000 per year - they do not need to register for GST/HST purposes and are not required to charge, collect and remit GST/HST.

Persons who are independent contractors and who make supplies that exceed $30,000 per year must register for GST/HST purposes and charge, collect and remit GST/HST.  This would include service providers from outside Canada who come to Canada to perform services. 

Persons who hire independent contractors must pay the GST/HST on the services.  If the person is engaged in exempt activities, they may not be able to recover the GST/HST paid to the independent contractor.  As a result, the GST/HST can represent an increase in the cost of the services.  If the person is engaged in commercial activities, the person may be assessed for failure to pay GST/HST if the independent contractor does not charge GST/HST when required. As a result, the business must be a watchdog in this area.

With the implementation of HST, the distinction between employees and independent contractors has become more important.  If a business wants a person to be an employee, they need to document the employment arrangement and make all necessary source deductions.  If a business wants a person to be an independent contractor, they should review income tax case law to ensure that the person meets the factual requirements associated with an independent service provider.  For example, an independent contractor uses his own tools to perform his/her trade. 

This area is more complicated than it seems.  Depending on the amounts at issue, it may be worth taking some time to structure the arrangements more carefully and clearly.

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I have seen an increase in Regulation 105 withholding tax audits recently and non-residents registered for GST/HST are affected.  The withholding tax audits are usually audits of Canadian companies who make payments to non-resident suppliers (often from the United States).  The cases I have seen recently involve a non-resident who provides services to the Canadian company at the a Canadian location.  Often, the contract calls for the Canadian company to reimburse the non-resident supplier for expenses incurred during the delivery of the services (e.g., the travel costs).  More recently, the Canadian business asks the non-resident to register for GST/HST purposes so that the non-resident can remove imbedded GST/HST in the agreed disbursements. With the implementation of HST, the disbursement costs have increased.  When the non-resident voluntarily registered for GST/HST, they checked the box on the registration form that they are carrying on business in Canada.

In many cases, when a Canadian business pays an amount to a non-resident business, the Canadian business must withhold a percentage specified in an tax treaty (the withholding tax) and remit that amount to the Canada Revenue Agency.  For example, if a U.S. company provides services to a Canadian company, the withholding tax rate would be 15%.  The Canadian business provides the non-resident with the requisite forms and the non-resident takes steps to get the money back from the Canadian Government. It is beyond the scope of this blog posting to cover all the withholding tax rates of Canada and all the exceptions and the steps to pay and recover withholding tax.  What is clear is that many Canadian companies do not withhold and get audited and assessed.

My reason for posting this blog article is to communicate to non-residents that the administrative task of completing a GST/HST registration form establishes a paper trail for non-residents and a simple answer relating to one Canadian tax may result in non-so-simple issues regarding another Canadian tax.  Please ask questions of an experienced Canadian tax lawyer.

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In December 2010, the Organization for Economic Co-Operation and Development (OECD) released for comment a document entitled "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality".  The deadline for filing comments is March 22, 2011.

Canada is a member of the OECD.  Canada imposes the goods and services tax (GST) and harmonized sales tax (HST), which are value-added taxes.  As a result, the OECD guideline may be incorporated into Canadian law in the future.  As a result, it will be important for Canadian businesses who operate multi-nationally and may be affected by the guideline to prepare thoughtful comments.

This document succinctly summarizes some of the important principles behind GST/HST style taxes and, therefore, may be VERY useful to litigants in explaining why an auditor's approach is incorrect.  I have considered its usefulness in the context of may GST/HST disputes. 

For example, proposed guideline No. 1 is "The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation."  This is a basic principle and I can hear you saying "YES".  I can hear you saying "Why did the auditor assess me as a supplier when I am engaged in a taxable business?"

Read this document!

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Of course you would.  The "HST Map" to getting to "Right" is exactly what you want.  What should you do to get the right result every time?  What should you do to collect the right amount of HST every time you make a supply?  What should you do to calculate the right amount of input tax credits and recaptured input tax credits every time you file a GST/HST return?  What should you do to recover the maximum amount of credits, refunds & rebates allowed?  What should you do so that the Canada Revenue Agency says you are in the "Right" place when they complete any audit?

Unfortunately, these maps do not exist on supermarket shelves - but they can be generated or customized on a business-by-business basis by commodity tax lawyers and accountants.  Where "Right" is for you depends upon the facts and where you want to go.  Just as there are many cities and towns with the same name, there are many different "Right" destinations on an HST map.  If you do not know where is "Right", how are you going to determine the path to take to get there? How can you be sure you are taking the correct route to "Right"?  If you follow the directions someone else uses to get to "Right" you may be at the wrong "Right".

Once you can identify the destination of "Right", then a customized map can show you how to get there.  The customized map will set out the process that you must follow to get to your chosen "Right" destination.  The directions are a critical part of the map to "Right".

The HST map may take the form of a memorandum or opinion letter.  Sometimes the process involves seeking additional directions, which would be in the form of an advance GST/HST ruling from the Canada Revenue Agency.

It is possible to hire a commodity tax lawyer or accountant to prepare a customized HST map if you would like to get to "Right" and stay there.  These maps do exist - believe it or not.  Would you like one?

I should add one closing note that the Department of Finance may move "Right" on you when you are not looking.  Just like with the television show "Lost", you may find that you are no longer where you thought you were/should be.  Maybe the producers were thinking about the tax authorities when they came up with the plot for "Lost" --- hmmmm

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Yesterday I had a discussion with a friend who was deciding on whether to write to the Canada Revenue Agency, GST/HST Rulings Directorate for a GST/HST ruling on an issue.  The discussion started that the client had followed advice given years ago that its supply was exempt.  The client had not collected GST for a number of years.  With the implementation of harmonized sales tax, the cost of being wrong has increased from 5% to 13% (in Ontario).  The client contacted my friend to revisit the issue.  The client does not want to be assessed - this is understandable.

The problem with writing in for an advance GST/HST ruling is that the CRA may not give the desired answer.  The CRA may disagree with the original analysis.  The CRA may see things differently.  The CRA may have given other rulings that are inconsistent with the ruling requested.  What if the CRA determines that the supply is taxable now, was previously taxable, and that the exemption did not apply to past supplies? What if the CRA determines that they were not in the "Right" place? There is a risk.

When there is a risk that the CRA will not give the ruling requested, the affected party (i.e., the client) must answer the question "Do you want to get to "Right"?  If the client wants the "Right' answer and to know where is "Right", the client should obtain an advance GST/HST ruling (which is binding) or an interpretation (which is not binding).  If the clients wants to continue to treat its supplies as exempt, then the client does not want to be at "Right".  If the client plans to ignore the ruling if it does not reaffirm what they want to do/are doing, the client does not want to be at "Right" and would increase its risk by applying for an advance GST/HST ruling.

It is important to determine whether the client (or you) want to have the "Right" answer or merely the answer the client (you) want.  They are not necessarily the same thing.

If the client (you) want to get to "Right", it is possible to prepare a customized map.  If the client(you) are not sure whether you really want to get to "Right", more thought is required on whether you do not care if you stay at 'Lost".

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The Canada Revenue Agency (CRA), local taxation offices for submitting registration applications for GST/HST purposes keeps on changing.  Here is the LINK to the latest version of the CRA's offices handling registrations filed by non-residents.  It took me over 10 minutes to find it today.

Please note that you generally must fax the request for a business number and it can take over 10 days for the CRA to process the request and issue a GST/HST number.

It used to be that I could walk across the street to 1 Front Street, stand in line at the Business Window, file a client's forms and get a number - Not any more.  All requests for registration must be sent to the CRA by fax and I must wait patiently with my client for a number to arrive in the mail.

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If you would like to register for GST/HST purposes and do not have the forms, maybe I can help point you in the right direction:

1) Fill out the Business Consent Form (RC 59) if you are appointing someone to act on your behalf (like me)

2) Fill out the Request for a Business Number (RC1) if you would like more than just the GST/HST account number (e.g. income tax, payroll or import/export)

or

Fill out the Business Number (BN) - GST/HST Account Information if you have a business number (often provided automatically with a Canadian or provincial incorporation) and only need to set up a GST/HST account.

3) If you are a non-resident, you may need to post security.  More information about posting security is found in GST Memorandum Series 2-6 "Security Requirements for Non-Residents".

I should note that completing these documents is not a simple task and the answers provided to the questions may have serious consequences to you.

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I would like to offer you words of encouragement to make positive improvements towards better goods and services tax (GST), harmonized sales tax (HST) and other sales and local taxes (SALT) compliance.  I would like to motivate you to make your working lives easier if you are blessed with the task of GST/HST/SALT recording and reporting.

The Canada Revenue Agency (CRA) motivates us to act by fear of negative events, such as an audit and/or assessment.  The CRA motivates compliance by threat of penalties and interest assessments.  They are not wrong in approaching GST/HST in this manner as it is a self-reporting system --- follow the rules of suffer negative consequences.  Many businesses are motivated by money and fear and this system works for some. However, it does not work for many. 

Almost all businesses have just completed the task of filing a GST/HST return.  Annual filers filed their first GST/HST by today's deadline.  Quarterly filers have filed their second GST/HST return (for Q4 2010) by today's deadline.  Monthly filers filed their December 2010 GST/HST return by today's deadline. 

How many of you have spent hours of frustration in performing the calculations and rechecking documentation and numbers in order to file the GST/HST return?  How many of you could not verify whether you were to remit GST at 5% or HST at 13% or 12% or 15%?  How many of you had to self-assess GST/HST and were unsure what to do?  How many of you needed to complete documentation for a refund/rebate and were not sure what to do?  How many of you could not trace your point of sale rebates, your exempt sales and your zero-rated sales (sales when you did not charge GST/HST)?  How many of you walked away from the task wanting to scream at assistants and others within your organization?  How many called someone in your organization and "idiot" or other unpleasant name (if you did, go apologize).

Would you like this task to be easier for the next reporting period?  Are there answers you need in order to perform the task better next month or quarter or year? Is there training that you or your employees need? Would you like to take better control over this reporting process?

If you want to make the tasks related to GST/HST reporting easier, you can. Take the negative experience and make a list of why it was a negative experience to file your GST/HST return.  Write down what worked and what did not.  GST/HST compliance will improve if you fix the things you listed as not working properly. 

Did you have difficulties making sure you claimed 100% of you input tax credits? Fix it.

Did you have difficulties making sure you recaptured input tax credits where required? Fix it. 

Did you have difficulty reconciling various reports? Fix it. 

Were you lacking information that you needed to make decisions? Fix it.

Do you need help to fix it? Find people who understand GST/HST to help you. They do exist.

You can do this.  You can improve your job. You can spend more time with family and friends during GST/HST reporting time. You can be the force of positive change and others will be grateful. what are you waiting for --- another SALT return?

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The most frequent question that I ask U.S. businesses is "Are you doing business in Canada or doing business with Canadians?"  It is an important GST/HST question.  If a business is merely doing business with Canadians, it is not required to register for GST/HST purposes.  If a non-resident business (also applies to resident businesses) are doing business in Canada, they may be making taxable supplies in Canada and may be required to register for GST/HST purposes.

The phrase "doing business in Canada" is a term of tax art.  The phrase "doing business in Canada"  is not defined in the Excise Tax Act (Canada). The phrase has been considered in many income tax and sales tax cases.  As a result, a determination is made on a case-by-case basis.  The Canada Revenue Agency has issued administrative statements to inform suppliers on factors they consider in making a determination.  In many cases, it is recommended that a non-resident supplier apply for an advance GST/HST ruling (usually in cases where they want a decision that they are not doing business in Canada).

I have been asked to look at this issue more than any other GST/HST issue.  I could give many examples that cross many forms of businesses.  I will give two of my more recent examples.

Example #1: A U.S. company provides specialized services to clients.  They design and develop custom computer programs and implement the program after completion.  Employees of the U.S. company spends months (sometimes over a few years) at the clients' premises.  In recent years, the U.S. company was retained by a few Canadian companies for big and small projects. The U.S. company has established a Canadian bank account in which it was paid for its services.

This company was doing business in Canada and needed to register for GST/HST purposes.  It did not matter that the U.S. company did not have its own offices in Canada and only worked at the premises of its clients.  Given the amount of time that the U.S. company spent in Canada performing services on Canadian soil, it was easy to determine that the company was carrying on business in Canada.

Example #2: A U.S. company with a business location in the United States very near the Canada/U.S.border sold goods.  While Canadians could cross the Canada-U.S. border, buy goods, and be responsible for taking the goods across the border, This was not what usually happened.  The U.S. company regularly delivered the goods f.o.b. Canadian customer's front door.

If the U.S. company delivered the goods infrequently f.o.b Canada, it may have been considered to be doing business with Canadians.  If the U.S. company delivered the goods f.o.b U.S. business and the customer arranged for shipment across the border, the U.S. company may have been considered to be doing business with Canadians.  However, the reality was very different. Based on the actual activities of the U.S. business, they would likely be considered to be carrying on business in Canada.

The facts are always very important.  Even if you have asked this question before and are attempting to NOT carry on business in Canada, it is important that non-residents of Canada ask what is the practical reality.  Based on my experience, non-resident businesses often get into difficulty because employees change the game plan without knowing why things are being done a certain way.

"Are you carrying on business in Canada" is an important question to ask. 

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Harmonized sales tax ("HST") is complicated.  I get asked easy and hard questions every day.  What I am seeing is that many business owners want to be correct on all maters HST, but do not ask the right questions.  A business owner must ask:

• What am I supplying?
• Am I making a single or multiple supply?

Many business owners start with a different question.  Unfortunately, they do not take sufficient time to analyze what they actually supply (or may be seen by a Canada Revenue Agency Auditor to supply) as a first step.  BUT, if you do not know what it is that you are supplying, then you may not property apply other HST rules (such as the place of supply or transition rules).

For example 1: A number of years ago, I had a client tell me that they license computer programs.  I asked to see the licenses that allowed users to use their computer programs.  They looked at me blankly and said none of their customers had signed a license agreement.  When we dug into what they actually supplied, they ran a web-site that allowed persons to access information via the Internet.  They had developed a computer program for their own use in order to run their web-site and process information received from Internet users.  They never gave the Internet users the ability to download this computer program.  The actual deliverable was a list of names and useful information that the Internet user could then use to contact one of the supplied names to acquire an unrelated service from a third party.

This client thought that they provided tangible personal property when in fact they performed a service or provided intangible personal property.

For example 2: Another client is an interior designer.  The interior designer said she provided interior design services.  However, for many clients, the interior designer bought and resold paint, tiles, wall paper, furniture, etc. and chargde a 15%-25% mark-up.  The interior designer actually provided tangible personal property and services.

For example 3: Another client is an exterminator (of pests).  The exterminator thought he performed a valuable service.  In the world of HST, he actually performed a service in respect of real property.

The list of examples could go on and on.  My point is that unless you look at the question of "What Am I Supplying?" from an HST perspective, you may not apply the other HST rules properly.  There are many other HST rules to apply properly.

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Harmonized sales tax ("HST") is here to stay in Ontario for 5 years due to the arrangement between Premier McGuinty and the Government of Canada.  The provincial portion of the rate (currently 8% and called PVAT to those in the know) may be altered on or after July 1, 2012.

Now for something serious and not so serious at times - the ABCs of HST:

A is for Almost Everything - HST covers almost everything;

B is for Bookkeeping - Registrants need to keep detailed records and maintain books are records that can be audited by the Canada Revenue Agency Auditors;

C is for Canada Revenue Agency - The CRA enforces the HST (both the GST and PVAT portions);

D is for Documentary Requirements - A top 10 audit issue is that registrations do not maintain adequate information to support input tax credit and refund claims;

E is for Exemptions - Exempt means that HST/GST is not charged, but the supplier is not entitled to claim input tax credits - so GST/HST is passed on in the price of the property/services;

F is for Filings - Registrants must file their GST/HST returns on time and large businesses must recapture ITCs on time and builders must report certain information in their filings or face costly penalties;

G is for Government Contracts - Suppliers to the Ontario, British Columbia and Nova Scotia Governments must charge GST/HST (previously Ontario and BC did not pay GST or PST);

H is for HST - should have expected this one - or I could have written "Hated Sales Tax";

I is for Input Tax Credits - ITCs are good for businesses engaged in commercial activities who get to recover GST/HST on business inputs (good until they get audited and mistakes are found);

J is for Judge - If you disagree with the CRA about an assessment, file a notice of objection and notice of appeal and take the dispute to a Tax Court of Canada judge;

K is for Knowledgeable - While it is self-serving, you need to talk to a knowledgeable practitioner as the HST rules are complicated;

L is for Legislation - the Excise Tax Act needs to be updated - we have not had a good review since 1997;

M is for MUSH Sector - The MUSH (Municipalities, Universities, Schools, Hospitals) sector have a rebate scheme and difficult rules;

N is for Non-Residents - Businesses outside Ontario (e.g., in other Canadian provinces, the United States and overseas) may be required to charge, collect and remit HST and do not know or understand it;

O is for Ontario Retail Sales Tax - HST replaces ORST, but ORST is still applicable on used car sales and certain insurance premiums;

P is for Place of Supply Rules - Whether you charge HST depends in part on the application of the place of supply rules, which determine if the supply takes place in an HST province and which HST province;

Q is for Quick Method - really a misnomer because it is not quick and some people using it will have to apply special transition rules;

R is for Recaptured ITCS - Large businesses (those that make over $10 million is sales per annual alone or with affiliated entities) must pay back certain ITCs claimed relating to PVAT and must report on monthly GST/HST return;

S is for Small Suppliers - Small supplier do not have to register for GST/HST purposes;

T is for  Technology - Technology helps capture and report GST/HST information - this cannot be done manually;

U is for Unhappy Consumers - Consumers are paying more on electricity, home heating, bikes, services, etc because of HST;

V is for Voluntary Disclosures - If you make a mistake and have not been contacted by a CRA auditor, you may consider making a non-names voluntary disclosure via a practitioner so save paying a penalty;

W is for web-site - go to www.thehstblog.com for information on HST or www.cra.gc.ca;

X is for Xerox - you need to keep good records as evidence to show auditors - you need to invest in a good scanner or photocopier;

Y is for Yikes - This is what a person says when they hear they will be audited for HST (probably say something else - but this is a clean web-site); and

Z is for Zero-rated - If property or services are zero-rated, you pay GST/HST at a rate of 0% and the supplier gets an input tax credit (therefore, health care and educational services should be zero-rated instead of exempt).

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Some individuals register for GST/HST purposes for their business activities.  When "Bob Smith" registers for GST/HST purposes as a sole practitioner or as a partner in a partnership or as the operator of a joint venture or as a trustee of a trust, he may expose himself to assessment risk for failure to collect GST/HST on all supplies.  When Bob Smith has a garage or contents sale, he is making taxable supplies and should be collecting and remitting GST/HST.  In 99.9% of the cases, the registered Bob and Jane Smith's of Ontario (or Canada for that matter) do not realize they must charge GST/HST.

The rest of us who are not registered for GST/HST purposes (in our individual capacity) do not charge GST/HST at garage and content sales because they do not have a reasonable expectation of profit.  As a result, they do not need to voluntarily register for GST/HST purposes (unless they sell goods on EBay and other web-sites and their sales exceed $30,000 per year).

Bob Smith would say that he does not have a reasonable expectation of profit with respect to the sales of the old kitchen appliances, books, clothes, etc. sold at the garage sale.  He is probably correct.  But, since he is already in the GST/HST system because he has a reasonable expectation of profit in his business activities, the collection and remittance obligations arise. 

If you think about it, the rule IS NOT that a sole practitioner/partner/joint venturer/trustee charges GST/HST when the sale is a profitable sale and does not charge GST/HST when the sale is not a profitable sale.  The sole practitioner charges GST/HST on all sales.

Many individuals have registered for GST/HST purposes for a number of reasons.  these registrants should consider the wider ramifications of that registration --- including their personal activities that may give rise to GST/HST collection and remittance obligations.

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I have helped many non-residents of Canada register for goods and services tax (GST) purposes over the years. These GST registered non-residents must apply the HST place of supply rules to their transactions involving Canadian buyers/clients.

In addition, many of these non-resident clients have filed extra-provincial registrations to carry on business in a Canadian province so that they could open a bank account and pay the Receiver General any GST collected. 

These non-resident entities have made two representations to the Government of Canada and/or a provincial government that they are 'carrying on business" in Canada.  Many have done so without considering income tax and/or withholding tax consequences.

The implementation of HST should trigger a closer look at a non-resident's Canadian business activities.  So far, I am close to 100% in finding mistakes that could be or are already very costly.

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The GST rules (now the HST rules) have historically allowed a supplier (seller) of taxable real property to make a supply to a recipient (purchaser) and not collect GST/HST in respect of the real property if the purchaser is registered for GST/HST purposes and provides a written certification of registration status.  The relevant sections of the Excise Tax Act are subsections 123(1), 221(2) and 228(4).

What happens in these real property transactions is that the purchaser provides the seller a certification at closing and the supplier verifies the purchasers GST/HST registration number with the Canada Revenue Agency (as a due diligence step).  If the certification is verified by the Canada Revenue Agency, the seller does not collect GST/HST from the purchaser at the time of the closing/transfer and the purchaser self-assesses GST/HST on its GST/HST return for the period in which the transaction took place.  On the GST/HST return, the purchaser indicates the amount of GST/HST he/she/it is self-assessing and takes an input tax credit  on the same return to neutralize the cash flow effect. The purchaser also files a GST Form 60 with its GST/HST return.

These certifications are not a prescribed form (that is the CRA has not developed a form to complete) and many lawyers and real property businesses have developed a precedent that they use.  These precedent certifications need to be updated to account for HST.

I would recommend that the new certifications include the following information:

1. The Recipient's (buyer's) correct legal name;
2. The Recipient's GST/HST number;
3. The Recipient's reporting period (not necessary, but helpful to diarize self-assessment deadline);
4. The Recipient's mailing address in the Canada Revenue Agency's records (I have needed this in the past to verify items 1 and 2);
5. The municipal address of the real property (in order to make HST place of supply determination at the time f the self assessment)
6. The transfer value of the real property; and
7. The rate of HST applicable (based on 5 and 6).

The Registrant Real Property Certification should make reference to both GST and HST on a going forward basis so as not to confuse the auditor who wants to raise a big assessment against the parties.

We have prepared such precedent certificates for transactions and will be willing to sell a precedent for a flat rate of $100 (the cost of which can be recoverable).

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I am giving a webinar on July 21, 2010 at noon (EST) organized and hosted by the Association of Registered Graphic Designers - Ontario.  Members and non-members are permitted to register for the webinar.  I will spend time looking at the harmonized sales tax (HST) place of supply rules applicable to various types of graphic designers. I will also talk about things you can do to improve compliance with HST rules.  If you would like to register, please go here.

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More actors and actresses are concerned that Ontario's and British Columbia's decisions to implement harmonized sales tax (HST) will affect them --- and they should be concerned.  If they do not consider the issue of HST, the cost may be 13% of the contract in Ontario or 12% in British Columbia.  Since an actor/actress may make millions of dollars filming a movie in Canada, we are not talking about small numbers.

Subsection 143(1) of the Excise Tax Act (Canada) provides that:

For the purposes of this Part, a supply of personal property or a service made in Canada by a non-resident person shall be deemed to be made outside Canada, unless
(a) the supply is made in the course of a business carried on in Canada;
(b) at the time the supply is made, the person is registered under Subdivision d of Division V; or
(c) the supply is the supply of an admission in respect of a place of amusement, a seminar, an activity or an event where the non-resident person did not acquire the admission from another person.

If this provision applies, then an actor/actress would not have to register for GST/HST purposes and would not have to charge collect and remit GST/HST on their services performed in Canada.

On the other hand, subsection 240(1) of the Excise Tax Act (Canada) is the provision relating to registration and provides that:

"Every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for the purposes of this Part, except where
(a) the person is a small supplier;
(b) the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business; or
(c) the person is a non-resident person who does not carry on any business in Canada."

If a person must register for GST/HST purposes, they must charge, collect and remit GST/HST (if applicable) in respect of services performed in Canada (and a participating province).

Assuming that the actor/actress is a non-resident of Canada, the key question is whether they are "carrying on business" in Canada.  There is no definition of "carrying on business in Canada" in the Excise Tax Act.  As a result, whether a particular actor/actress is carrying on business in Canada will depend on the specific facts.  There are many factors specific to the work/life of the actor/actress, their background and their activities in a year that may cause the Canada Revenue Agency (Canada's IRS) (the "CRA) to conclude he/she is carrying on business in Canada as opposed to carrying on business outside Canada and visiting Canada (briefly) in connection with that outside business.

The CRA has issued a policy statement concerning the factors they consider when determining whether a person is carrying on business in Canada --- but none of the examples relates to actors/actresses. Policy Statement P-051R "Carrying on Business in Canada" was last updated in 2005.

It is important to note that getting GST/HST correct may mean that the actor/actress (or their production company) would charge GST/HST on the portion of their services performed in Canada and the payor would recover that GST/HST by way of an input tax credit.  If they do not ask the question, it may result in auditors, assessments and a bad & costly experience.

It is important to note that the GST/HST test is not connected to a permanent establishment in Canada like the Canada-United States Income Tax Treaty. In other words, an individual may not have to pay Canadian income tax and may be entitled to register for GST/HST purposes and charge GST/HST on a contract for services.

Canadian commodity tax lawyers can help apply the CRA's "carrying on business" test and provide opinions that are subject to solicitor-client privilege.

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

The Ministry of Revenue states:

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

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

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

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

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Yesterday, I was speaking with a friend who manufactures custom designed jewelry for customers/clients.  She is in the process of updating her computer system to charge the appropriate amount of Canadian sales taxes (as at July 1, 2010).  The applicable rates in Canada (as at July 1, 2010) are:

It is important to note that the tax rates can change (often in the Spring at the time budgets are tabled).

If a supplier is registered for GST purposes, they will have to charge (1) GST in respect  of taxable sales in Canada and (2) HST at the applicable HST rate if the HST place of supply rules deem a supply to be made in a participating province.

The rules may be different on when a vendor must register for provincial sales tax purposes and charge provincial sales tax on a sale of goods in a province or on services in respect of tangible personal property.

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I received the following question today:

I am a furniture manufacturer who works with interior designers.  When I invoice, if an item is being re-sold by the designer then I do not invoice the Ontario retail sales tax (ORST).  The designer will invoice ORST directly to the client. How will this change with the HST?  Will my clients be exempt if they are re-selling an item?   Also, when I purchase materials for manufacture many items such as wood, screws glue etc are PST exempt when I purchase them and get added into the cost once sold to the customer?  How will the HST deal with this?

The answer is that the furniture manufacturer will be required to charge HST when he/she sells to the interior designer.  The interior designer is no longer entitled to provide an ORST purchase exemption certificate to be exempted from payment of sales tax.  The interior designer will pay the GST/HST and claim an input tax credit (if he/she is registered for GST/HST purposes.  The interior designer will charge the final consumer GST/HST.

In addition, the furniture manufacturer will no longer purchase his/her inputs using an ORST purchase exemption certificate.  In other words, the furniture manufacturer must pay GST/HST on all materials and components used in the manufacture of the furniture.  The furniture manufacturer would be entitled to claim an input tax credit if he/she is registered for GST/HST purposes.

This will result in cost flow issues for both the manufacturer and the interior designer (the two businesses in the example).  The businesses will have to fund the GST/HST portion when paying invoices and will be able to claim input tax credits (and offset GST/HST collected) on their GST/HST returns for the period during which the supply occurred.  I am told that some businesses may need to increase their lines of credit in order to fund the HST component that was previously ORST exempt by virtue of the purchase exemption certificate.

To be clear, on July 1, 2010, purchase exemption certificates will be invalid for purchases after July 1, 2010.  The days of the sales tax relief will over gone for good.  The Canada Revenue Agency auditors will be auditing the entire supply chain to make sure that GST/HST was paid at each step in the supply chain.

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On May 14, 2010, the Ontario Government released Ontario Tax Tip 7 "Prepare for Ontario's HST: Small Business Transition Support" in which Ontario discusses a payment small business would receive to offset costs of modifying systems in order to transition to harmonized sales tax (HST).  Ontario Tax Tip 7 is intended to help small businesses understand if they are eligible for a small business transition support payment and explain how the support payment will be delivered to them. This support payment has been commonly referred to as the “Small Business Transition Credit”.

In order to qualify for a transition support payment, an eligible business must:

• not be a listed financial institution under the Excise Tax Act (Canada);
• carry on business in Ontario and be a GST/HST registrant on July 1, 2010;
• make GST/HST taxable supplies (including zero-rated supplies) in the course of carrying on business;  and
• have taxable annual revenues of less than $2 million (as announced in the 2010 Ontario Budget, the province will prescribe the 12-month period for calculating the $2 million taxable revenue threshold for purposes of the transition support payment).

If a small business for the transitional support payment, the amount the business will receive will be based on the following:

How is the Ontario Government going to program the computers to identify sole proprietorships and partnerships (joint ventures) and other businesses that are not separate legal entities?  There are many forms of small businesses that are not Ontario incorporated entities.  There are many forms of business that do not file separate tax returns.  A sole proprietor would report business income on his/her personal income tax return.  A partnership is not a legal entity for income tax purposes and the partners report business income and business losses on their respective income tax returns. 

Will the Canada Revenue Agency look at both income tax returns and GST/HST returns?  If the CRA is going to look at GST/HST returns, how will the annual filers be found and their quarterly sales revenues determined?

Are branches of foreign companies going to be treated differently than Ontario corporations?  If so, this approach would not encourage foreign direct investment to Ontario.

Are municipalities, schools, school boards, hospitals and other MUSH sector entities entitled to receive the small business transition credit if their taxable sales fall within the thresholds?

What is the Ontario Government going to do to prevent abuse?  What if a person registered 1000 corporations in June 2010?  Would they receive $30,000 from the Ontario Government even if each reported revenues of $10?

There are a number of questions that need to be answered so that all small businesses are recognized.  Equally as important, questions need to be asked so that cheques are not blindly written to HST-abuse vehicles.

Small businesses will need the financial assistance because it will cost more than $300-$1000 to implement the necessary changes correctly.  The problem is that there are problems with the mechanism.

Finally, I should mention that the small business support is taxable for income tax purposes.  The Department of Finance confirmed this today at the Southern Ontario Commodity Tax Group Meeting at the Toronto Board of Trade.

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Is it a coincidence that today I had a discussion with an accountant who asked about whether a client must start charging GST and HST on July 1, 2010 (or starting on May 1, 2010 if the transition rules apply) and the Ontario Government comes out with Tax Information Notice 6 "HST Notice for Suppliers of Taxable Property and Services to the Ontario Government"?  Probably it was a coincidence.

Tax Information Notice 6 states:

Under the sales tax harmonization agreement between the Government of Ontario and the Government of Canada, the Canada-Ontario Comprehensive Integrated Tax Coordination Agreement (CITCA), Ontario has agreed that, effective July 1, 2010, all Ontario government ministries, agencies, boards, commissions and Crown corporations ("Ontario government entities") will pay Goods and Services Tax (GST) / Harmonized Sales Tax (HST) on their purchases of taxable property and services. Property could be goods, real property or intangible personal property such as trademarks, rights to use a patent, and digitized products downloaded from the Internet.

What this means is that existing contracts where suppliers do not charge goods and services tax (GST) and/or Ontario retail sales tax (ORST) may be subject to GST and HST after May 1, 2010.  It used to be that Ontario Government ministries, departments and crown corporations told suppliers that they are GST-exempt.  This was not the correct term: the Ontario Government ministries, departments and crown corporations were not exempt under a provision of the GST legislation (a.k.a, the Excise Tax Act (Canada)).  The correct term is that the supplies were not taxable (but were not in the non-taxable importations schedule to the GST Legislation).  In simple terms, the federal government could not request that the provincial government pay tax and entered into a reciprocal taxation agreement.

Tax Information Notice 6 goes on to state:

Ontario government entities that are currently paying GST, as well as those that are currently claiming an exemption from GST (i.e., ministries and other provincial entities listed on Schedule A of the current Canada-Ontario Reciprocal Taxation Agreement (RTA) – see Appendix for list of entities, will pay GST/HST on their purchases of taxable property and services effective July 1, 2010. (Emphasis added)

Suppliers to the Ontario Government need to revisit existing contracts and change their invoicing and record keeping.  More importantly, the suppliers may need to educate their Ontario Government clietns/customers that they need to pay GST and HST. Information Notice 6 contains a warning not to be fooled by Ontario Government clients/customers:

Accordingly, suppliers must generally charge and collect GST/HST on any consideration that becomes due on or after July 1, 2010 in respect of a taxable supply to an Ontario government entity. In these cases, suppliers should not rely on or accept any Crown funds exemption requests or certifications requesting GST/HST relief at the point-of-sale.

Can you imagine the conversation between suppliers and their Ontario Government customers/clients where the Ontario Government customers/clients say they do not have to pay the GST/HST and the supplier must "respectfully disagree"?

I have to warn you about the May 1, 2010 - June 30, 2010 period.  The Ontario Government is telling suppliers in Information Notice 6 that if they currently have to pay GST (because they are not in Appendix A), they have to continue to pay GST.  If they currently are not required to pay GST (because the client/customer is listed in Appendix A), they do not have to pay GST during the May 1, 2010 to June 30, 2010 transition period (but will after July 1, 2010).  If they have to pay HST during the May 1, 2010 to June 30, 2010 transition period (and Appendix A does not apply when one talks about OHST), they must pay such OHST. Thanks for clearing up that up! 

Some suppliers who are not currently registered for GST purposes (because they only make non-taxable supplies to the Ontario Government) will have to get registered for GST/HST purposes.  Some suppliers who are not collecting and GST will have to adjust their record keeping to charge GST and HST on invoices and record such collections in their accounting records.  In addition, such businesses who have not been claiming input tax credits will need to record input tax credits in accounting records in connection with purchases.  Large businesses may be affected by the restricted input tax credits rules and cannot claim all OHST paid on business inputs. Some suppliers will need to file GST/HST returns electronically and be in a position to retrieve information from accounting records with respect to GST/HST collected, GST/HST invoiced and collectible, and input tax credits on purchased inputs. There is a lot more suppliers to the Ontario Government need to do to prepare for HST.

One last word of warning is that suppliers to the Ontario Government should prepare to be audited after implementation of HST.  They will be "low hanging fruit" for Canada Revenue Agency auditor as some will be making mistakes.  These changes are big changes.

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On April 19, 2010 the Ontario Ministry of Revenue issued Tax Tip #5 "Public Service Bodies" to give guidance to public service bodies about how harmonized sales tax implementation will affect them.  It is important to note that the document itself says it was issued in "April 2010", which is technically correct - but it may be misleading in 2 years or more when an auditor wishes to use this document against a PSB in the context of an audit.  I  am looking into my crystal ball and see an auditor telling a PSB that they had an entire month before the May 1, 2010 transition rule date to read the document.

This tax tip is for PSBs, which includes charities, municipalities, universities, public colleges, school authorities, hospital authorities and non-profit organizations.  These entities provide exempt supplies (at least in part) and are not entitled to claim full input tax credits to recover goods and services tax (GST) and harmonized sales tax (to the extent that it is applicable on their purchases).  That being said, these entities may be entitled to claim certain public service body rebates:

It is important to note that the provincial rebate percentage in other provinces in the HST Zone (e.g., British Columbia) are different.

What this chart means is that if a charity makes a purchase for $100, it will pay $5 in GST and $8 in HST.  The charity is entitled to a PSB rebate of $2.50 of the GST and $6.56 of the HST.  The charity does not recover $3.94, which is an unrecoverable expense.  When the charity completes its GST/HST return, it must claim the rebate amounts and fill out all the necessary paperwork to recover the $2.50 and $6.56.  While recovery of otherwise unrecoverable amounts is good - there are administrative costs that need to be acknowledged (for which compensation is not available).

Tax Tip #5 covers the mere basics regarding (1) registration (including the small supplier threshold), (2) charging HST, (3) self-assessment (including the transition period between October 14, 2009 and May 1, 2010 - but does not give much assistance), (4) rebates, (5) quick method accounting, (6) special net tax calculation for charities, etc.

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There are a number of key dates in the time lines for harmonized sales tax (HST) in Ontario and British Columbia.  I hope that these time lines help you prepare and organize yourselves.

Ontario

British Columbia

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I came across an interesting post by Music Central News about the implementation of HST. What is interesting about this post to an HST specialist is:

1) That they have attended GST/HST seminars;

2) They are communicating to their audience the HST as they understand them; and

3) They are concerned about the HST having an impact on an increasing underground economy.

However, I am concerned about such posts - Unfortunately, the information is not prestinely accurate.  They write:

If you have already booked with us for a date after July 1, 2010 and paperwork has been sent out with just the G.S.T. then you will continue to pay just the G.S.T..  An advantage for booking early!

Actually, the transition rule for services to be performed after July 1, 2010 requires (1) the contract to be entered into before May 1, 2010 and (2) payment of consideration before May 1, 2010.  If the payment is received after May 1, 2010, then the services performed after July 1, 2010 would be subject to HST. If the contract is not signed and returned before May 1, 2010 (it is not sufficient for the quotation to be mailed), then the services performed after July 1, 2010 would be subject to HST.  A deposit is not considered to be consideration for the performance of a service. A deposit is treated as consideration for the supply at the moment in time that it is allocated to the supply. Also, the amount owing under the contract must be paid in full before May 1, 2010 to satisfy the HST transition rule.

Another unfortunate issue is the underground economy. Just because a person does not charge HST does not mean that they are bad and part of the underground economy. If a small supplier does not make taxable sales in excess of $30,000 per year, they are not required to register for GST/HST purposes and do not have to charge GST/HST. A business cannot get around the small supplier threshold of $30,000 by having more than one business - the threshold is calculated based on the related businesses. If a business does not register for GST/HST purposes, they will not be entitled to recover input tax credits regarding the GST/HST paid on business inputs.

My last point, and I really hate to bring this up when the Music Central news is trying hard to be helpful, highlights the problem with prepayments of deposits. When amounts are paid for services before they are delivered, it is possible that the services will not be provided. Is the risk of non-performance of services worth saving the 8% HST. I would rather have control over 100% the money for the services.

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