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

The Globe & Mail is reporting that Prime Minister Harper & Premier Jean Charest may sign a Comprehensive Integrated Tax Coordination Agreement (CITCA) (also known as an HST Agreement) on Friday, September 30, 2011.  In an article entitled "Ottawa, Quebec poised to ink $2.2 billion HST deal", it appears that the agreement promised during the election campaign has been negotiated.

The question for sales tax practitioners is: How different is this CITCA going to be from the model version used with Ontario, British Columbia and Nova Scotia?  It appears that Canada has agreed to a significant change.  Revenue Quebec will continue to collect the tax in Quebec.

However, will Quebec loose the QST and adopt the HST?  In other words, will Quebec lose its naming rights?

When is the implementation date?  Businesses will need time to make necessary changes.

Also, will the HST rate go up, go down or stay the same? One benefit of harmonization is that QST should no longer be payable on the GST included amount.

What point of sale rebates (provincial exemptions from PVAT) will be selected by Quebec?  Will Quebec be restricted to point of sale rebates on only 5% or will they be permitted a higher percentage of coverage for point of sale rebates?

What will happen to zero-rated financial services?  Currently, under the QST regime, many financial services are zero-rated.  Under the GST regime, many financial services are exempt.  Zero-rated is better than exempt because the intermediary financial institutions are entitled to full input tax credits on inputs purchased for use in commercial activities (including zero-rated activities). A shift from zero-rated supplies to exempt supplies will have a significant effect on financial institutions.

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Robert H. Jackson once wrote that:

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

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

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

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

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Finance Minister Flaherty's written statement on March 26, 2010 concerning the proposed changes to the goods and services tax (GST) definition for "financial services" does not provide sufficient clarification for affected businesses.  He said:

"The proposed changes contained in the Notice of Ways and Means Motion tabled in the House of Commons on March 22, 2010 are designed to confirm our long-standing policy intent and restore the situation that existed prior to court decisions. We are not imposing new taxes."

There are three big problems wit this statement:

1) The Notice of Ways and Mean Motion tabled in the House of Commons on March 22, 2010 retroactively changes the definition of "financial services" in subsection 123(1) of the Excise Tax Act(Canada).  The changes are retroactive to January 1, 1991 and Canada Revenue Agency officials have stated that the changes will be used in audits; and

2) The Tax Court of Canada has considered the existing definition and has issued its decisions interpreting the law against the Canada Reveneu Agency and in favour of the taxpayer.  It is inconsistent to say that the Department of Finance is responding to Court decisions that were decided against the Canada Revenue Agency and that the proposed amendemnts that are intended to improve the Canada Revenue Agency's chances of success in other and future cases are not changes to the law; and

3) The proof will be in the actions of the Canada Revenue Agency and not in a Statement by the Minister of Finance. The real problem will arise when an auditor assesses a financial service business in the future for non-collection of GST on supplies of financial services or when the Canada Revenue Agency issues a ruling that a particular supply is GST taxable in circumstances where (a) a ruling was provided to the taxpayer prior to the changes in which the CRA took a different position, (b) taxpayers follow the Tax Court of Canada decisions, (c) taxpayers follow the Canada Revenue Agency's pre-amendment administrative statements (e.g., policy P-239), or taxpayers exercised due diligence and did not collect GST (and HST) based on a reasonable interpretation of "arranging for".

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