Tax Executives Institute - Revenue Canada liaison meeting on excise and commodity tax issues; December 13, 1994.

• Position: Liaison Meeting Special

On December 13, 1994, Tax Executives Institute held its annual liaison meeting with representatives of Revenue Conado--Customs, Excise, and Taxation on a variety of excise and commodity tax issues (including those relating to the Goods and Services Tax). (Separate meetings were held with Revenue Canada on income tax issues, and with the Deportment of Finance on both commodity and income tax issues). TEI's Revenue Canada liaison meeting on commodity tax issues was coordinated by Pierre M. Bocti of Hewlett-Packard (Canad

1. Ltd., chair of TEI's Canadian Commodity Tax Committee, and C. Graham Kennedy of MacMillan Bloedel Limited, the Institute's Vice President-Region I (Canada). Participating in the meeting were TEI'.s President Linda B. Burke, Executive Director Michael J. Murphy, and members of the Commodity Tax Committee and Institute staff. The agenda for the liaison meeting is reprinted in the January-February 1995 issue of The Tax Executive (beginning on page 67), and Revenue Canada's written responses to the questions posed in the agenda are reprinted below.

   1. Electronic Data Interchange (EDI) Systems

      Section 2 of the Input Tax Credit Information Regulations (the "Regulations") defines "supporting documentation" as "the form in which information prescribed by section 3 is contained." Section 3 enumerates the required information to be contained in the documentation supporting ITC claims. Pursuant to paragraph 2(g) of the Regulations, "supporting documentation" includes "any record contained in a computerized or electronic retrieval or data storage system." EDI systems are covered by the definition of "supporting documentation" of the Regulations.

      The prescribed information is not required to be contained in a single document. Where the information related to an ITC claim is distributed between EDI systems and other supporting documentation, the registrant has obtained the documentary requirements for claiming an ITC, provided that the documents refer to one another.

      As for the Credit Note Information Regulations, the Regulations cover information requirements and do not apply to the form in which the information must be contained.

   2. Alternate Valuation of Imported Software

      Excise/GST, in close consultation with Customs and the Department of Finance, has developed a new administrative approach to assessing the GST on imported custom software supplied under a signed/specific license agreement. There is no change in the treatment of other types of imported software packages. The new policy is explained in Technical Information Bulletin B-037R, Imported Computer software dated November 1, 1994, and in Customs MemOrandum D13-11-6, Determining Value For Duty of Computer Software dated November 23, 1994.

      Effective December 1, 1994, the Department will treat the software component of imported licensed custom software as intangible personal property, which will be taxed in one of two ways:

      * if the nonresident supplier is registered for the GST and the supply is deemed by subparagraph 142(1)(c)(i) to be made in Canada, the tax will be collected by the supplier; or

      * if the nonresident supplier is not registered for the GST, the Canadian licensee may be required to self-assess the tax under Division IV if the software is not for use exclusively in commercial activities.

      In each of these situations, the GST at the time of importation will be collected on the value of the carrier medium only.

   3. GST on Supplies

      The promise of credit by A to B in return for permission to use new investigative techniques developed by B is only one transaction among many that are envisaged in the agreement. Given the fact that those transactions are linked to each other and follow a sequence of events it would be easier to understand the tax consequences of one transaction if one could see the tax consequences of all the transactions from the beginning to the end of the sequence of events.

      The agreement entered into between A and B contains several elements: sale of old equipment, payment of $5 million, granting of a right to use new technology (referred to as "supply of new technology"), and granting of a conditional right to the reduction of consideration for future purchases (referred to as "supply of credits"). It is the Department's view that each of those elements, except for the $5 million payment, would constitute a separate supply. If they are separate supplies, when do the supplies occur? Are they all taxable supplies? Some of the supplies would take the form of barter. If they are taxable, how do we determine the value of consideration and the time of tax liability for each supply?

      When do the supplies occur (i.e., time of supply)? Pursuant to section 133 of the Act, an agreement to provide any property or a service is treated as a supply of the property at the time the agreement is entered into. Paragraph 133(b) further states that the actual provision of the property or service under the agreement would become part of the original supply (i.e., agreement) and not a separate supply. All three supplies (sale of old equipment, the supply of new technology, and the supply of credits) would be deemed to have been made at the time the agreement is entered into in 1994.

      Since the supply of credits is dependent upon the future sales (i.e., a condition), one could argue that an agreement to provide the credits would not exist until such time those sales occur (i.e., the condition is satisfied). However, B (the recipient or potential recipient of the supply) has agreed to pay the consideration (i.e., supply of new technology) prior to the condition's being satisfied. This is an indication that the parties have agreed on each other's obligations to make supplies at the time the agreement is entered into in 1994.

      Are they all taxable supplies? Assuming that no special rules apply to the transactions (e.g., A is not supplying capital personal property, i.e., old equipment, which immediately before the sale is used otherwise than primarily in A's commercial activities), all of the supplies would be treated as taxable supplies. In the case of the supply of credits, we have assumed that they do not carry a right to be paid money (i.e., a debt security) or have any cash surrender value but can only be applied against the purchase of new equipment.

      How do we determine the value of consideration and the time of tax liability?

      (i) Sale of old equipment by A to B. Under the agreement, the consideration for the sale of equipment is expressed partly in money ($5 million) and partly by way of a supply of property (i.e., supply of new technology developed by B). As to the value of consideration that has been expressed in money (i.e., $5 million), the tax would become payable on the earlier of (i) the day that amount is paid or becomes due or, (ii) under paragraph 168(3)(a) of the Act, at the latest, the last day of the calendar month following the month in which ownership or possession of the equipment is transferred to B.

      As for the other part of the consideration (i.e., the supply of new technology developed by B) of which the value may not be ascertainable at the time the tax is deemed to become payable under paragraph 168(3)(a), the tax would not become payable until the value is ascertainable. Given the linkages that exist between the transactions, the time the value is ascertainable would be the time the value of credits are determined (see our discussion below).

      (ii) Supply of new technology B to A. The supply of new technology is made by B as further consideration for the sale of equipment by N. Therefore, one must determine whether any part of the value of the equipment supplied by A is attributable to the supply of technology by B. For example. if the fair market value (FMV) of the equipment exceeds $5 million. that excess value would be treated as part consideration for the supply of technology by B.

      The other part of the consideration for the supply of new technology is the promise made by A to provide a credit to B that could be applied later as a partial payment toward the purchase of new equipment from A. What would be the FMV of the promise at the time the agreement is entered into in 1994? Most likely, the value would be nil. In the case of a supply of intangible property (i.e., supply of a right to use new technology), there are no overriding rules such as paragraph 168(3)(a) to deem the tax to become payable or subsection 168(6) to defer the valuation of consideration to the time value is ascertainable. Consequently, no tax liability would arise for that part of the consideration that is expressed in property (i.e., supply of credits).

      (iii) Supply of credits by A to B. The consideration for the supply of credits by A to B is the supply of new technology by B to A. Similar to the arguments presented in (ii) above, the FMV of the right to use new technology at the time the right is supplied in 1994 would most likely be nil since the techniques have not yet been developed. Accordingly, no tax liability would arise for the supply of credits by A to B.

      (iv) Sale of new equipment by A to B. If B uses the credits earned as a partial payment toward the purchase of new equipment from A, what would be the consideration for the sale of new equipment? As noted earlier, the credits are rights earned by B. The redemption of the credits would be a surrender of those rights for the purpose of purchasing new equipment. Therefore, value of the credits redeemed by B at the time of purchase would be treated as part consideration for the sale of new equipment by A.

      It is important to note that neither the sale of new equipment nor the surrender of credits was part of the agreement entered into in 1994. Thus, the FMV of the credits surrendered would be determined at the time the sale of new equipment is made and not any earlier. For example, if B purchases $10 million of equipment, in the year 2003, for $9 million cash and by using $1...