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Recurring GST/HST Issues:
A Hot Topics Overview
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Presenters
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Douglas Han, LL.B.
Principal Veridical Tax Advisors Inc.
Shawn Starkes, CGA
Principal Veridical Tax Advisors Inc.
Agenda and Approach
• Introduction
• ITC Basics / ITC Hot Topics
• Hot Topics: Examples
• Summary
• Questions
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ITC Basics /
ITC Hot Topics
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ITC Basics
• GST/HST generally not a significant cost because of the input tax credit (ITC) mechanism
• Key risk area – controls needed for recurring and large one time
transactions
• Recovery of tax perceived as a privilege not a right by the CRA
• Specific requirements must be met to claim ITCs
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ITC Basics
To claim ITCs a person must:
• Acquire (or import) a supply for consumption, use or supply in the course of “commercial activity”
• Incur GST/HST payable/or otherwise paid tax
• Be a “registrant”
• Have sufficient supporting documentation
Ref: ETA ss.169(1)(4), Input Tax Credit Information (GST/HST) Regulations
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ITC Basics
Key terms/phrases
• When is GST/HST considered to be payable or paid?
• What constitutes commercial activity?
• Who is a registrant?
• What is considered sufficient supporting documentation?
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ITC Basics
Special issues/considerations
• Meals and entertainment expenses – generally limited to 50% with some exceptions
• 100% restricted expenses – example: annual golf club dues
• HST restricted input tax credits (RITCs) – “temporary” restrictions for provincial portion of HST on
specific expenses (reported on returns)
• Allocate if providing exempt and taxable supplies Ref: ETA s. 170, s.236, s. 141.01, New Harmonized Value-add Tax System Regulations
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ITC Basics
Reasons for assessments?
• Documentation not obtained/retained
• Invalid supplier registration number
• Documentation errors – incorrect party named, etc.
– CRA registry available
• Supply not linked to registrant’s commercial activities
• Supply acquired before becoming a registrant – not a “small supplier”
Ref: ETA ss.171(1)(2)
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ITC Hot Topics
• Basics and Context
• Issues
• Examples
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ITCs – Importing Goods
Basics and Context
• GST applies to most commercial goods imported into Canada
• Recovery not based on who paid the tax – importer of record
• ITC generally available to constructive importer – generally the person who causes the goods to be delivered
into Canada
Ref: ETA s.178.8, s.212
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ITCs – Importing Goods
Issues
• Imported goods not tied to commercial activity of registrant
• Uncertainty on legal delivery location – confusion with new INCO terms
• Supplier claims ITC (not constructive importer) – agreement under ss.178.8(3) allows supplier to claim ITC
• supply of goods deemed to be made in Canada
• supplier must collect GST/HST from recipient
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ITCs – Importation of Goods
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USCO
(registered)
United States Canada
CANCO
No ss.178.8(3) agreement • CANCO claims ITC on import • USCO does not collect tax
With ss.178.8(3) agreement • USCO claims ITC on import • USCO collects/remits tax • CANCO claims ITC
Common issue: • USCO claims ITCs • USCO does not
collect/remit
ITCs – Employee Reimbursements
Basics and Context
• Employer deemed to acquire supply at time of employee reimbursement
• Allows employers to claim ITCs and rebates
• Company credit cards – not an employee reimbursement unless employer and
employee jointly and severally liable
Ref: ETA s.175, GST/HST Policy Statement P-184 Credit Card Expenses and the Registrant’s
Use of Factors for Claiming Input Tax Credits
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ITCs – Employee Reimbursements
Basics and Context
• Two options for recovery of tax: – Actual method
• requires full supporting documentation
– Factor method • documentation requirements relaxed
• requires some supporting documentation in most case (e.g., gas purchase credit card receipt)
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ITCs – Employee Reimbursements
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ITCs – Employee Reimbursements
Issues
• Use of wrong factor – allowance vs. reimbursement
– wrong jurisdiction
• Reimbursement to non-employees
• ITC claimed on an expense not subject to tax
• ON and BC RITC amounts not accounted for or reported on returns
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ITCs – Employee Reimbursements
Documentation issue – Eligibility for ITCs?
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Supplier
Employer
Supply
Reimbursement
Employee online expense
report/ receipts retained
Payment
ITCs – Coupons
Basics and Context
• Potential ITCs for GST/HST included – fixed dollar reimbursable manufacturer coupons
– tax included retail coupons
• “Coupon” includes a “voucher, receipt, ticket or other device…” – what is a “device”?
• CRA ruling - a free gift card is not a “coupon” – June 29, 2010 CRA ruling: RITS/No: 84050
Ref: ETA s.181
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ITCs – Coupons
Ref: Tele-Mobile Company Partnership v. The Queen, 2012 TCC 256
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• Registrant (manufacturer) claimed ITCs under coupon rules
• Invoice reduced to customer – not a coupon
• Use of s.181.1 rebate provision - tax included reference required
Product manufacturer
and service provider Retailer
Customer
Retail product sale
Wholesale product sale
ITCs – “Holding” Companies
Basics and Context
• Commercial activity and ITCs – watch for deeming provisions
• ITCs for expenses relating to holding shares/debt of qualifying related corporation based on deeming provision
• Relevant shares/debt must be “related” corporation as defined in ETA ss.126(2) & ITA ss.251(2) – (6)
Ref: ETA ss.186(1)
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ITCs – “Holding” Companies
Basics and Context
• Substantially all of the related corporation’s property must have been acquired for use exclusively in commercial activities
• Shares/debt of a related corporation in another qualifying related corporation meet the requirements – permits multi-level structures
Ref: ETA ss.186(3)
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ITCs – “Holding” Companies
Issues
• CRA administrative position narrow: – limited to expenses directly related to holding shares/debt
– denying ITCs for expenses related to Holdco’s own shares or indirect activities
• Stantec v. The Queen 2009 GTC 2009 FCA decision more expansive than CRA policy
• ITCs may be claimed on certain expenses for proposed share purchases (takeover fees)
Ref: ETA ss.186(2); GST/HST Memorandum 8.6 – ITC for Holding Corporations
and Corporate Takeovers
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ITCs – “Holding” Companies
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Parent Company
Management Company
Operating Company
Service Provider
Loans
Management Company claims ITC for tax on taxable advisory services fees with no direct taxable supply being made
100% 100%
Taxable advisory services
ITCs – “Holding” Companies
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Parent Company
BuyerCo
Holding Company
100%
100%
SubOpco
• BuyerCo claims ITCs for advisory services on proposed purchase of Holding Company shares
• Parent Company claims ITCs on services relating to sale of Holding Company shares?
• BuyerCo offers to purchase all Holding Company shares
ITCs – Amalgamations
Basics and Context
• Amalco generally considered a distinct person – Amalco is considered the same person for specific purposes
• ITCs of predecessors may generally be claimed by Amalco with predecessors’ documentation – can be an issue at time of CRA audit
Ref: ETA s. 271, Amalgamation and Wind-Up Continuation (GST/HST) Regulations
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Amalco (Newco + Opco amalgamate)
Opco Newco
ITCs – Amalgamations
Professional Advisor
Taxable advisory service
CRA’s position has been no ITCs where Newco did not make/or intend to make a supply before amalgamation
Potential exception for Amalco claiming ITCs
Shareholders Shareholders
ITCs – Partnership Issues
Issues
• Partnerships are “persons” for GST/HST purposes
• Partner may claim ITCs for expenses related to partnership’s activity – partnership cannot claim ITCs when expense relates to a
partner’s activity
• A partnership holding or purchasing shares disadvantaged vs. corporation – no ITCs for these types of expenses
Ref: ETA s. 272.1, ss. 186(1)(2), GST/HST Policy Statement P-219 Registration of a Partner
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ITCs – Partnership Issues
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Partner Company A
100%
Opco
Holding Partnership
Partner Company B
No ITCs for Holding Partnership on expenses relating to holding shares of Opco
ITCs – Pensions
Issues
• CRA permits ITCs by employer for pension related expenses (investment management fees) for defined benefit plans
• Pension plan funds often used to pay supplier – CRA takes position that employer is providing actual supply
to the plan
• Under CRA position tax applies twice – as an actual and deemed supply – Tax Adjustment Note (TAN) required to correct inequity
Ref: TIB B-032 Registered Pension Plans – August, 2011
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ITCs – Pensions
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Employer
Pension Plan
Investment Manager
Employees
Pension Funds
Employer funds pension plan
Investment Management Services
Pays the Investment Manager from Pension Funds
HOT TOPICS
Examples and Illustrations
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Gift Certificates
Basics and Context
• “Gift certificates” treated as cash – term not defined in the ETA
• GST/HST applies at time of redemption – based on the tax status and the consideration of the supply
• Per revised CRA Policy 202 – Gift Certificates – does not have to be purchased at face value
– cannot have preconditions e.g., the purchase of a minimum value of merchandise
Ref: ETA s.181.2
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Gift Certificates
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Promoter (markets cards
online)
Retailer
Customer
Sale of $25 qualifying gift card for $20 - No tax
Promoter required to collect GST/HST for any marketing charges, if any
Application under revised CRA policy
Challenges for Non-residents
Challenges for non-resident entities include:
• CRA’s strict carrying on business/registration policy
• Security deposit if no PE in Canada
• Potential “trapped tax” cost when not registered
• No s.156 or s.150 elections with branches/subs in most cases
• Branches/subs of FIs have significant imported taxable supply burden
Ref: ETA ss.240(1)(6), s.218.01, P-051R2-Carrying on Business in Canada
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Challenges for Non-residents
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Canadian Subsidiary Supplier
Canadian Subsidiary Customer
US Parent Supplier
(not registered)
US Parent Customer
(not registered)
Invoice for service not zero-rated – includes tax
Invoice for service includes embedded tax
Invoice for service includes embedded tax
Potentially also subject to tax as an imported service
“Trapped tax” due to transaction flow
Drop-shipments
Basics and Context
• Canadian supplier/processor may be required to remit GST/HST on fair market value of goods when drop-shipping for non-resident that is not registered
• “Flow through” ITC possible
• Relief where a consignee provides a drop-shipment certificate (consignee subject to self-assessment) – or goods exported
Ref: ETA ss. 179(1)(2), s.180
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Drop-shipments
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Processor
Brazil Canada
Customer
Brazilco (Non-Registered)
Goods shipped
If Customer does not issue DS certificate – Processor remits GST/HST based on FMV of goods Possible “flow through” ITC - s.180 ETA
Processor IOR – ITC on importation - ETA ss.169(4)
Buying Agents vs. Re-supply
Basics and Context
• When acting as an agent (in law) – don’t claim ITCs, don’t collect GST/HST
• When acting as principal – claim eligible ITCs, collect GST/HST
• Are relationships sufficiently documented?
• Re-supplies of service or intangible – rate may not be the same for buy/sell transactions
Ref: GST/HST Policy Statement 182R Agency
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Alberta Supplier
(re-supplies service)
Buying Agents vs. Re-supply
Ontario Service Supplier
NFLD Customer
• Accounting service provided
• Re-supply – at different rates
Corporate Groups
Issues
• Central purchasing companies common
• Consider transaction relationship – agent vs. principal?
– is there supporting documentation?
• Are supplies provided at less than FMV? – could be deemed to be at FMV
• Are ETA s.156 elections/s.150 elections in place? – does transaction qualify for elections?
– are elections advantageous to the group?
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Corporate Groups
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Purchasing Company (re-supplies
service)
SupplierCo
SFI
Taxable service
Exempt service – 150 election
• Election not advantageous in this case
• No election, GST/HST fully recoverable
No ITC – making exempt supply
Customer
ParentCo
SUMMARY
• Understand the transaction
• Consider CRA views
• Documentation
• Manage risk
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QUESTIONS
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This webinar is brought to you by CCH Canadian and in
partnership with Veridical Tax Advisors Inc.
For more information please contact CCH customer service at
1-800-268-4522.
Visit www.cch.ca/ExpertEdge for a full list of our webinars.
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Douglas Han: [email protected]
Shawn Starkes: [email protected]
www.veridicaltax.com
