Pending excise tax issues: December 4, 2001.

• Position: Canada Customs and Revenue Agency

On December 4, 2001, Tax Executives Institute held its annual liaison meeting with the Canada Customs and Revenue Agency on pending commodity and excise tax issues. The written agenda for the meeting, prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Martina Krummen of Air Canada is reprinted below. Alan Wheable, the Institute's Vice President-Region I, coordinated preparations for the liaison meeting. The answers to the questions are posted on TEI's website.

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on pending commodity and excise tax issues, which will be discussed with representatives of the Canada Customs and Revenue Agency (CCRA) during TEI's December 4, 2001, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Alan Wheable, TEI's Vice President for Canadian Affairs, at 416.982.8003, or Martina Krummen, chair of the Institute's Canadian Commodity Tax Committee, at 514.856.6675.

Customs Issues

1. Under the Administrative Monetary Penalty System (AMPS) which will soon be adopted by CCRA's Customs branch when an error is made in respect of an import valuation, the penalty is calculated on the entire amount of the line item on the customs document, rather than just the amount of the error. In certain circumstances, items such as casing and packing or freight may be prorated over an entire shipment. Consequently, if an error is made in the valuation of these items, it will affect all items in the shipment.

   Where the penalty is disproportionately high in relation to the dollar value of the error, the Customs officer may waive the penalty and issue a warning for the first offense. The language of the waiver provision, however, is not mandatory, resulting in inconsistent applications for similar offenses. Moreover, the waiver is available only for the first error.

   TEI believes that calculating the penalty on the entire amount of the line entry conflicts with CCRA's penalty system under both the Income and Excise Tax Acts. Under these Acts, penalties are generally calculated solely on the amount of the error or omission. Calculating the penalty on the entire value is excessive and fails to reflect the materiality of, or potential harm caused by, the error. In addition, the restrictive nature of the waiver provision limits the relief available to taxpayers.

   Would CCRA consider calculating the penalty on the value of the error made (i.e., the difference between the value declared and the value that should have been declared), rather than the entire value of the line item in question? Such an approach would ensure that the penalty levied is proportionate to the error made and be consistent with the methodology for calculating penalties under the other statutes administered by the CCRA.

2. AMPS imposes a graduated series of penalties, based on whether the error in valuation is the importer's first, second, or third infraction. The legislative changes are due to be implemented in the 2001-2002 fiscal year. An issue arises concerning the treatment of prior infractions under the new penalty system. Will a prior notice from Customs (through National Customs Rulings, detailed adjustment statements, seizures, or audit results) be regarded as "being advised" in respect of AMPS? Or will taxpayers and the government start with a clean slate and only infractions after the legislation is passed be taken into account for AMPS purposes?

3. During TEI's December 6, 2000, meeting with CCRA, an issue arose concerning the imposition of interest on the Goods and Services Tax when goods are imported into Canada, and the importer subsequently realizes that additional GST is payable. CCRA suggested that we raise this issue with the Director of the Trade Incentives Program, which the Institute did in a letter dated February 14, 2001. During this year's meeting, TEI requests a status report concerning this issue.

   Goods and Services Tax (GST) Issues

4. A registered freight-shipping corporation (ABC Freight) provides freight transportation services in Canada to various parties. ABC Freight makes zero-rated, 7-percent taxable, and 15-percent taxable supplies, generally contracting directly with the owner of the goods. ABC Freight has acquired insurance arising with respect to the movement of the goods. The company offers this insurance coverage to its customers. If the customer chooses the insurance coverage, ABC Freight's invoice provides one line item for the transportation of the goods and another line item for the insurance. Is ABC Freight making a single supply of a freight transportation service or two supplies one for the freight transportation service and another for the insurance coverage?

5. For several years, TEI has raised concerns about documentation issues and claims for input tax credits (ITCs) in respect of procurement card purchases. We understand that CCRA has made progress in this area and will soon issue guidance. Please provide an update on the procurement card issue. If a draft is available, the Institute would be pleased to review it prior to our December meeting and discuss it during the meeting.

6. The GST Regulations prescribe the information that a registrant must obtain before filing a return in which an ITC is claimed. Is it sufficient for a registered recipient of a taxable supply to prepare the documentation of the information pertaining to the supply or must the information be physically provided by the supplier? For example, a contractor may document the prescribed information for payment for a taxable supply provided by a subcontractor. If permitted to prepare the documentation, must the contractor physically send that documentation to the subcontractor for its records? What documentation, if any, must the contractor obtain from the subcontractor, e.g., a letter on the subcontractor's letterhead stating its GST registration number?

7. Assume that there is a written agreement between a registered recipient and a registered provider of a taxable supply that calls for more information than required by the GST Regulations. Does this contract have any bearing on the registered recipient's ability to claim an ITC under section 169 of the Excise Tax Act (ETA) if all the information prescribed by the Regulations is available but the additional information is not (assuming there is no effect on the timing or amount of GST paid or payable)?

8. Please provide an update on the Export Distribution Centre Program, including the number of taxpayers using the program, the types of activities that they are carrying out in Canada, and the dollar value of imports entering Canada under this program. Are most program applicants approved by CCRA? Are there any plans to broaden the program?

9. Please provide an update on CCRA's study of electronic commerce. Is more work being considered in this field?

10. Consider the following:

    A financial institution uses a broker to import a computer into Canada. The computer costs $10,000 and is supplied by a nonresident, non-GST-registered vendor. The broker pays $700 in Division III tax on importation of the computer and is reimbursed by the financial institution. The financial institution plans to use the computer entirely in its noncommercial activity and thus is not able to recover the Division III paid on importation as an ITC. In installing the computer, the institution discovers that the computer is damaged and inoperable. It ships the computer back to the original supplier located outside Canada for a full credit. Please answer the following questions:

    (i) May the financial institution adjust its GST liability and recover the Division III tax of $700?

    (ii) If a GST-registered supplier in Canada invoiced the financial institution for this computer plus the Division II tax ($10,000 plus $700) and the computer were then found to be inoperable and returned, would the GST-registered supplier in Canada provide a credit for the full amount?

    (iii) If the financial institution may not adjust its GST liability and recover the Division III tax, is there another procedure that would provide for the recovery? Would section 215.1(2) or 215.1(3) (relating to rebates for returned goods) or any other provision provide relief?

11. Assume the same facts as in question 10, but assume that the foreign owner provides the computer to the financial institution on a "temporary-loan" basis for three months and retains title to the computer. The foreign owner has determined that the useful life of the computer is three years. During the three months, the financial institution will use the computer in its non-commercial activity. Normally, the financial institution would not be able to recover any of the Division III tax paid on importation as an ITC. After three months, the financial institution returns the computer to the foreign owner. Please answer the following questions:

    (i) Because the computer was used for only three months in Canada, may the financial institution adjust its GST liability downward by $641.66, which represents 91.667 percent (i.e., 33 out of 36 months) of the GST that the financial institution paid on importation?

    (ii) If not, is there any procedure for the financial institution to recover any portion of the $700 GST paid on importation?

    (iii) Would the answer to (i) be different (other than the mathematics) if the value of the computer were $100,000 and $7,000 of Division III tax had been paid on importation?

    (iv) Instead of a non-resident, non-GST-registrant owner lending the computer to a financial institution, assume the lender was a Canadian resident, GST-registered party. The lender normally would not issue a physical invoice to the financial institution since there is no consideration (except possibly a no-charge invoice for shipping purposes). Please confirm that Division II tax is not applicable under this assumption since no...