Indirect Taxes, Canada: Cross-Border Developments: Court decisions, interagency tensions, and ETA amendments could significantly affect taxpayers doing business in Canada or with Canadian companies.

AuthorGelkopf, Allan
PositionExcise Tax Act

Three recent Canadian goods and services/ harmonized sales tax (GST/HST) developments may have significant consequences for and warrant close attention from those engaged in businesses either in Canada or outside Canada with business or financial interests in Canada, as well as their tax advisors.

One of these concerns is whether the Canadian courts have significantly expanded the scope of "carrying on business in Canada" for GST/HST purposes for nonresidents of Canada who have no physical presence in Canada. This issue could have a significant impact on e-commerce.

Another concern is the ongoing tension between the Canada Revenue Agency (CRA) and the courts regarding the eligibility of Canadian resident holding companies to claim input tax credits (ITCs) for costs related to their operating subsidiaries in Canada and abroad. For the moment, the courts appear to have the upper hand in broadening such eligibility requirements.

The third development concerns proposed amendments to the Excise Tax Act (Canada), or the ETA, that have implications for nonresident investment limited partnerships in which Canadian investors have an interest. Such partnerships may be required to self-assess GST/HST with respect to their Canadian activities (which would likely not be recoverable as an ITC).

Mandatory GST/HST Registration for Nonresidents

The primary threshold question for determining whether a nonresident of Canada is subject to GST/HST registration and ongoing reporting and remittance obligations is whether the nonresident is "carrying on business in Canada." The ETA does not define the phrase "carrying on business in Canada" for GST/HST purposes. A "business" is defined broadly to include

a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment. (1) The CRA recognizes, however, that "the mere fact that a nonresident person undertakes an activity that falls within the definition of a 'business' does not mean that the business is being carried on in Canada." (2)

There is no GST/HST-specific jurisprudence specifically addressing the meaning of the phrase "carrying on business in Canada," though there is Canadian income tax-related jurisprudence that can be applied, with due regard to the differences between the two tax regimes. (3) The CRA's current administrative policy regarding when a nonresident is carrying on business in Canada for GST/HST purposes consists of twelve factors to be applied in a fact- and context-specific manner. The factors include whether agents or employees of the person are in Canada (and what the length of their stay in Canada is), the place where business contracts are made, and the location of a branch or office, among others. (4)

The CRA acknowledges that some factors that are relevant for businesses engaged in conventional business transactions may not be applicable to businesses engaged in electronic commerce, where the physical footprint of the business need not be in Canada. The CRA's guidance regarding e-commerce businesses has generally been that without a physical presence in Canada (e.g., computer servers or employees), the person is not carrying on business in Canada. (5)

One potential development in this area could significantly expand the scope of "carrying on business in Canada" for GST/HST purposes. In Equustek Solutions Inc. v. Google Inc., (6) the British Columbia Court of Appeal (BCCA) expanded the scope of "carrying on business" in the province for purposes of giving the British Columbia Supreme Court in personam jurisdiction over Google Inc., a nonresident of Canada. Google Inc. had relied on the leading Supreme Court of Canada jurisprudence, which stated that

The notion of carrying on business requires some form of actual, not only virtual, presence in the jurisdiction, such as maintaining an office there or regularly visiting the territory of...

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