Pending excise tax issues: December 6, 2005.

On December 6, 2005, Tax Executives Institute held its annual liaison meeting with officials of the Canada Revenue Agency on pending excise tax issues. Reprinted below is the agenda for the meeting, which was prepared under the aegis of TEFs Canadian Commodity Tax Committee, whose chair is Natalie St-Pierre of BCE Inc.

Tax Executives Institute welcomes the opportunity to present the following comments and questions on income tax issues, which will be discussed with representatives of the Canada Revenue Agency (hereinafter "CRA" or "the Agency") during TEI's December 6, 2005, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call Monika M. Siegmund, TEI's Vice President for Canadian Affairs, at 403.691.3210 or Natalie St-Pierre, Chair of the Institute's Canadian Commodity Tax Committee, at 514.870.6552.

1. CRA Presentation

2. Administrative Issues

   During the meeting, TEI would like to provide its perspective on three administrative issues creating significant challenges and costs for taxpayers (presentation attached).

3. Questions for Discussion & Written Responses

   1. New importer rules & brokerage fees

      Question 13 from the December 2003's liaison meeting agenda presented the following scenario in respect of section 178.8 of the Excise Tax Act (ETA):

      A non-resident, GST-registered supplier (Company A) makes a sale to its customer (Customer B) with the delivery terms FOB Boston, i.e., outside Canada. The goods are shipped to Ontario. Company A does not invoice, remit, or collect Division II GST since the supply is considered to be made outside Canada for GST purposes. Company A utilizes its business expertise, however, to arrange transportation and importation of the goods into Canada. Company A pays Division III GST at the time the goods are imported into Canada. Company A's name appears as the importer of record, and is not a licensed broker. Assume the transaction occurred after October 3, 2003, and there is no written agreement as described in subsection 178.8(3). *

      CRA's answer to question 13 from the December 2003's liaison meeting agenda was that Customer B would be considered the "constructive importer" of the goods. Additionally, Customer B would be able to claim an ITC for the Division III tax paid by Company A on importation ($700.00) as long as Company A's reimbursement invoice to Customer B had the associated import documentation, whether or not Company A appeared as the importer of record.

      Part I

      Now assume that Company A pays its broker a brokerage fee (e.g., $100 plus $7 GST), any applicable duty (e.g., $150), and the Division III GST (e.g., $700), for a total of $957. As in the 2003 question, Company A would then seek reimbursement of the Division III tax ($700) it paid by invoicing Customer B and attaching the import documentation.

      (a) Has CRA's answer to original question changed?

      (b) Can Company A claim an input tax credit (ITC) for the $7.00 brokerage charge? If not, please explain why not.

      (c) If Company A cannot claim an ITC for the $7.00 brokerage charge, can Customer B claim the $7.00 GST recovery if Company A invoices Customer B the $107.00 (GST included) and attaches the broker's documentation?

      Part II

      Now assume that Company A invoices Customer B for the cost of the brokerage fee (GST excluded) and duty, and does so using the same invoice seeking reimbursement of the Division III tax. Customer B agrees to pay for the brokerage and duty charge at cost:

      Division III tax paid in respect of import documentation $700.00 Brokerage fee $100.00 Duty $150.00 Subtotal $950.00 (d) Is the request for reimbursement of the brokerage fee and the duty considered a supply? If considered a supply, is it part of the consideration of the original supply of the goods (and thus considered to be made outside Canada)?

      (e) Will Company A have to invoice Customer B the Division II tax on the brokerage or the duty or both?

      (f) Does Division II tax apply on the amount of Division III tax invoiced for reimbursement regardless if the brokerage fee or the duty (or both) are considered a supply?

      (g) Has a prescribed form for written agreements been issued in regard to section 178.8(3) of the ETA?

   2. Multi-employer plans--GST rebate under section 261.01 of the ETA

      Under amendments to the ETA proposed October 3, 2003, the definition of "multi-employer plan" would be changed to include all registered pension plans that have more than one participating employer. This means that a pension plan in which more than 95 percent of the members of the plan are employed by a related group of employers would be eligible to claim the 33 percent GST rebate. On November 17, 2005, the Department of Finance issued a notice of proposed amendments indicating that these changes would not be pursued. The notice also indicated that a revision to revision to CRA's technical information bulletin B-032R, Registered Pension Plans (TIB-032R), would be sufficient to address this issue. Please provide an update on the status of refund claims and this issue in general.

      Additionally, we believe that multi-employer plans with related employers may be significantly penalized compared with other plans without these amendments, because such plans have never been allowed to claim any amount of GST (either through a rebate or an ITC through the employers). Would CRA allow employers who are members of a multi-employer plan to claim their share of ITC based on TIB-032R?

   3. Electronic records

      Section 2 of the Input Tax Credit Information (GST/ HST) Regulations defines supporting documentation as "any record contained in a computerized or electronic retrieval or data storage system," and GST/HST Memorandum 15.2, Computerized Records (June 2005), contains the requirements under the ETA for computerized business records. Please confirm that paper invoices are not required for inter-company transactions where electronic records are maintained and contain sufficient information to allow determination of the amount of tax to be paid or collected, or the amount to be refunded, rebated or deducted from net tax.

   4. Supply of goods by way of sale

      Example No. 10 in GST/HST Policy Statement P-051R2, Carrying on Business in Canada, describes a supply of goods by way of sale scenario and concludes that the non-resident supplier is not carrying on business in Canada. For purposes of this question, assume that there is a GST-registered service company (ServiceCo) between the registrant shipping the goods and the customer of the non-resident supplier (assume one customer). The non-resident supplier was not and is not currently registered for GST.

      ServiceCo will provide a commercial service (such as electroplating) to the goods of the non-resident, non-GST registered supplier in Canada, and then ship those "serviced" goods to the customer of the non-resident supplier in Canada.

      The registrant has legal title to the goods initially, but transfers legal title to the goods to the non-resident supplier when the goods are received at ServiceCo's plant in Canada.

      After performing the commercial service on the non-resident's goods, ServiceCo will ship the goods to the customer of the non-resident supplier in Canada. ServiceCo will invoice the non-resident for the supply of service.

      Legal title to the goods will pass from the non-resident supplier to the customer of the non-resident supplier when the goods are shipped from ServiceCo.

      (a) Would Division II tax normally apply on the sale from the registrant to the non-resident supplier for the goods shipped to ServiceCo?

      (b) Does subsection 179(2) of the ETA apply?

      (c) If the registrant receives a certificate from the non-resident, non-GST-registered supplier reiterating these facts, and ServiceCo provides a properly completed consignee drop shipment certificate to the registrant, have the requirements of subsection 179(2) been met (so that the registrant does not need to invoice the non-resident, non-GST-registered supplier for the Division II tax for the supply of goods)?

      (d) Would Division II tax apply to the supply of service from ServiceCo to the non-resident supplier for the service work since the service is performed in Canada?

      (e) Could subsection 179(2) of ETA apply to the transaction in (d) as well?

      (f) If ServiceCo receives a certificate from the non-resident, non-GST-registered supplier reiterating these facts, and the customer of the non-resident provides a properly completed, consignee drop shipment certificate to ServiceCo, have the requirements of subsection 179(2) been met (so that ServiceCo does not need to invoice the non-resident, non-GST-registered supplier for the Division II tax for the supply of goods)?

      (g) Please confirm that the non-resident, non-GST-registered supplier is not considered to be carrying on business in Canada, although the non-resident supplier acquires and transfers legal title to the goods in Canada and also has a service performed on the goods in Canada during the time they hold title to the goods?

   5. Lease of tangible personal property

      Example No. 2 in GST/HST Policy Statement P-051R2, Carrying on Business in Canada, describes a lease of tangible personal property scenario and concludes that the non-resident lessor is not carrying on business in Canada. The non-resident lessor was not and is not currently registered for GST.

      Part I

      For purposes of this question, assume that for an additional fee, the non-resident lessor will also supply an optional, ongoing maintenance service (both parts and labor) in relation to the leased goods. The maintenance service will start and end on the same dates specified for the lease. The lease agreement identifies the rental amount and the maintenance fee separately.

      The lessee opts for the additional maintenance service. The lessee will still be responsible for maintaining the leased goods, but is paying an additional fee to the lessor to supply this service.

      The non-resident...