The Canadian Goods and Services Tax and its effect on non-residents of Canada.

• Author: Bloom, Mitch

On January 1, 1991, the Government of Canada implemented the Goods and Services Tax (GST) - a seven-percent tax on the sale of most goods and services in Canada. The GST, which replaced the federal sales tax in effect since 1924, is designed to treat residents and non-residents of Canada in essentially the same manner, by taxing only goods and services consumed in Canada. This article explores the non-resident's responsibility under the Canadian GST system.

MEANING OF NON-RESIDENT

First, who is a non-resident? The Canadian Excise Tax Act (the Act) defines "non-resident" to mean "not resident in Canada." In the case of an individual,"(1*) residency status is determined according to general legal principles. These principles are the same as a number of those used for purposes of the Canadian Income Tax Act and include such matters as:

* permanence and purpose of stay abroad,

* residential ties with Canada,

* residential ties elsewhere, and

* regularity and length of visits to Canada.

Interpretation Bulletin IT-221R2, Determination of an Individual's Residence Status, has been published by Revenue Canada, Taxation on this subject.(2) The deeming provisions in the Income Tax Act concerning the residency status of individuals, however, do not apply for GST purposes.

Persons(3) other than individuals will be considered residents of Canada under the terms set out in subsection 132(l) of the Excise Tax Act.(4) That subsection deems the following persons to be resident in Canada:

* a corporation - if it is incorporated or continued in

Canada but not elsewhere;

* a partnership, an unincorporated society, a club,

an association, an organization, or a branch of any

of them - if the member, or majority of the members,

which has management and control of the

particular person is resident in Canada at the time;

and

* a labour union - if it is carrying on activities as

such in Canada and has a Iocal union or branch at

that time.

Furthermore, according to general legal principles, a corporation that is not incorporated in Canada but is incorporated elsewhere may still be considered a resident of Canada if the central management and control of the Canadian activities of the corporation are exercised in Canada. The following factors are considered when determining whether a particular person is centrally managed or controlled in Canada (or in another country):

* the place where its directors reside and hold their

meetings;

* the place where its shareholders reside and hold

their meetings;

* the place where its managers reside and hold their

meetings; and

* the place where its principal business and operations

are carried on and where its books are kept.

A trust is generally resident in the country where the trustee, who has management and control of the trust, resides. If more than one trustee has management and control, the trust is resident in the country where the majority of the trustees reside. Moreover, a non-resident person will be deemed to be resident in Canada in respect of particular activities of the non-resident person if the non-resident person has a permanent establishment in Canada.(5)

NON-RESIDENTS AND REGISTRATION

By virtue of subsection 240(l) of the Excise Tax Act, every non-resident person who carries on business in Canada, other than a small supplier, must register for GST purposes if they make taxable supplies in Canada.(6) A small supplier is a person with annual worldwide sales of taxable supplies of 30,000 or less (Canadian dollars).

If the non-resident does, in fact, make taxable supplies in Canada, but because of the small supplier rules is not required to register - or if it is determined that the non-resident is not carrying on business in Canada - then the supplies made in Canada by the non-resident will be deemed to be supplies made outside Canada by virtue of subsection 143(l) of the Act,(7) as long as the other requirements specified in that subsection are met.

Before considering whether a non-resident person is carrying on business in Canada, a determination must be made whether that non-resident is engaged in a business and, also, whether that business is carried on. The definition of "business" for Canadian income tax purposes which is contained in subsection 248(1)(8) and section 253(9) of the Income Tax Act differs from the GST definition found in the Excise Tax Act. Therefore, a non-resident person considered to be carrying on business for Canadian income tax purposes is not necessarily considered to be carrying on business for purposes of the GST. Equally important, where it is determined that a non-resident person is carrying on business in Canada for GST purposes, this in itself does not establish that the non-resident will be considered to be carrying on business in Canada for purposes of the Canadian Income Tax Act.

Consideration should also be given to specific provisions in the Act supplanting any determination whether a particular non-resident person will be considered to be carrying on business in Canada. For instance, subsection 240(2) requires that a person who enters Canada for the purpose of making taxable supplies of admission in respect of a place of amusement, a seminar, an activity, or an event, must register for GST purposes before making such supplies.(10) Therefore, it need not be determined whether such a person is carrying on business in Canada. Similarly, subsection 240(4) deems a non-resident person who in Canada solicits orders to supply prescribed goods, such as magazines, books or periodicals, sent by mail or courier to persons in Canada, to be carrying on business in Canada.(11) As such, the non-resident is required to register and collect GST on any taxable supplies made in Canada if his or her worldwide revenues from taxable supplies exceed the small supplier threshold.

These distinctions and qualifications are important in considering whether a non-resident person is carrying on business in Canada.

CARRYING ON BUSINESS

Subsection 123(l) of the Excise Tax Act defines...