Pending excise tax issues: December 7, 2004.

PositionCanada Revenue Agency

On December 7, 2004, 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 TEI's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock of the Royal Bank Canada.

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 Revenue Agency (CRA) during TEI's December 7, 2004, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either David M. Penney, TEI's Vice President for Canadian Affairs, at 905.644.3122, or Sherrie Ann Pollock, chair of the Institute's Canadian Commodity Tax Committee, at 416.955.7373.

Goods and Services Taxes (GST)

l. Supply & Installation of Equipment

A commercial GST-registered corporation (eligible for input tax credits (ITCs)) acquires two large production machines (e.g., blast furnaces) that will be firmly attached to its manufacturing premises--one located in Ontario and the other one located in Manitoba. The corporation will use both machines to produce goods over the next ten years.

For purposes of the Ontario Retail Sales Tax Act (ORSTA), the installed machine would be considered a fixture when installed.(1) For purposes of Manitoba Retail Sales Tax Act (MRSTA), the installed machine would be considered tangible personal property (TPP).

The corporation hires a GST-registered contractor, resident in both provinces, to supply and install each large production machine. The contractor will purchase the production machines from a third-party supplier and then install them at the manufacturing sites in Ontario and Manitoba.

The total contract price is $12,000,000. Goods and Services Tax (GST) is not included in that price. The payment terms are $1,000,000 per month (GST excluded), beginning January 1, 2005, through December 1, 2005.

Part I--Initial Sale, Delivery & Installation

Assume title to the production machines passes from the contractor to the corporation on delivery to the manufacturing sites. Each machine will be delivered to each site on October 1, 2005, and will be completely installed by December 1, 2005. The contract does not contain any international commerce terms (Incoterms) and does not contain a delivery clause.

One party believes that, for GST purposes, the supply and-install contract is a sale of TPP and thus the contractor should invoice GST of $70,000 on each monthly payment. The other party believes that the contract is the supply of real property and thus the contractor should not be required to invoice, remit, or collect any Division II tax since subsections 221(2) and 228(4) of the Excise Tax Act (ETA) apply. The purchaser would therefore self-assess and recover the tax as an ITC, but is not clear when this should be done--each month or in December 2005.

Questions

(a) Which party is correct? For the purposes of the ETA, is the above supply-and-install contract considered the sale of TPP or real property? If the supply is considered real property, when is the proper time to self-assess and recover the tax as an ITC in accordance with sections 221(2) and 228(4) of the ETA?

(b) Does the differing treatment of the production machines under the respective provincial sales tax acts--Ontario as a fixture (real property) and Manitoba as TPP--affect the treatment for GST purposes?

(c) If the contract had separate selling prices for the supply and installation of each production machine identified within the contract--e.g., sale of machines, $5,000,000 each; installation of machines, $1,000,000 each--would the answer to question (a) be different?

(d) If two contracts with the same party were used, one for the sale and another for the installation, would the answer to question (a) be different?

(e) If title to the production machines passes from the contractor to the corporation on installation rather than delivery, would the answers to questions (a) and (b) be different?

Part II--Subsequent Sale

Three years later, the corporation decides to ease its cash flow needs by selling the two production machines located in Ontario and Manitoba to a non-related leasing company for $10,000,000 (GST not included). The GST-registered leasing company will receive payments of $375,000 (GST not included) per month from the corporation.

Under the negotiated sale-leaseback contract, no physical invoices are issued from the leasing company to the corporation. The leasing company will automatically withdraw the proper amount monthly from the corporation's bank account as provided in the agreement. Both the corporation's and the leasing company's GST registration numbers, full names, payments dates, etc., will be contained in the sale-lease-back contract, i.e., all the standard documentation needed to recover an ITC.

Questions

(f) Will the sale of the installed production machines to the leasing company be considered the sale of TPP for GST purposes (which the corporation should invoice Division II tax to the leasing company) or will the sale be considered the sale of real property, with subsections 221(2) and 228(4) of the ETA applying to the leasing company?

(g) Please confirm whether the leasing company is required to remit Division II tax on the lease payments (which are automatically drawn from the corporation's bank account with no physical invoice being issued) regardless of whether the machines are considered TPP or real property (i.e., $375,000 x 7% = $26,250 in GST).

(h) Assuming the leasing company is required to remit the Division II tax on the monthly lease payment, please confirm that the corporation is eligible to claim back the GST on such payments as an ITC, based on the ITC documentation contained in the sale-leaseback agreement, even though actual invoices are not issued.

  1. Emission Credits

    At TEI's 2003 liaison meeting, CRA was asked about the application of GST to "emission trading credits" and "emission offset credit instruments" (question no. 6). Please provide an update on whether these "instruments" are a supply of intangible personal property, a commodity, a service, a right in respect of real property, or an exempt supply of a financial instrument.

  2. Documentation of Employee Expenses

    An employee of a GST-registered, commercial employer takes a business trip and stays overnight at a hotel in Ottawa. The hotel room cost is $100 plus $7 GST plus $5 Ontario Retail Sales Tax ($112 total).

    The employee pays for the hotel stay with an employer-provided credit card. The agreement between the employer, the employee, and the credit card company is that the employer and employee are joint and severally liable for the purchases charged to the credit card.

    On checking out of the hotel, the employee receives an invoice detailing the total amount owed ($112.00). The employee signs a paper document authorizing the hotel to charge the credit card account and the employee is provided a copy of that document.

    The employer uses the so-called 6/106th prescribed factor method described in subparagraph 65(a) of CRA Publication G400-1-2, Documentary Requirements (GST 400-1-2).

    The flow of funds is, as follows: The hotel receives payment from the credit card company. The credit card company notifies the employer of the expense. The employer pays the $112. The employee is informed of the credit card charge, and asked to verify it. After the employee has completed the report, the employer's accounting process charges the hotel expense to the correct operational expense account and calculates any applicable GST recovery based on applicable allowed percentages.

    Which of the following correctly describes the documentation required to justify the GST recovery by the employer of the ITC on the hotel expense?

    (a) No documentation is required, i.e., neither the hotel invoice nor the document authorizing the hotel to charge the credit card account is required since the 6/106th prescribed factor method is used.

    (b) The hotel invoice is required even though the 6/106th prescribed factor method is used.

    (c) The document authorizing the hotel to charge the credit card account is required even though the 6/106th prescribed factor method is used.

    (d) Both the hotel invoice and the document authorizing the hotel to charge the credit card account are required even though the 6/106th prescribed factor method is used.

  3. Cross-border Transportation of Goods

    A GST-registered company (Company A) sells goods to a GST-registered purchaser (Customer B). Company A obtains the goods from its U.S. parent in Boston, Massachusetts. The U.S. parent is not GST-registered. With regard to title to the goods, U.S. parent sells the goods to Company A, which then sells the same goods to Customer B (who is aware of this relationship).

    The international commerce term (Incoterm) used in respect of these supplies between Company A and Customer B is Free Carrier (FCA) Post-Canada-Customs clearance (i.e., post importation into Canada).

    Under the existing process, the goods are directly shipped from Boston to Customer B. Company A is the importer of record, pays Division III GST, and subsequently recovers the tax as an ITC. The goods are never physically delivered to Company A. Company A invoices Customer B for the Division II tax (standard ITC documentation being provided).

    Only one freight carrier, which is GST-registered, delivers the goods from Boston to Customer B's location in Canada. The freight carrier invoices Customer B without including GST because the freight carrier views the supply as a zero-rated supply on an international transportation service.

    Please confirm that:

    (a) Based on the Incoterm used (FCA), the supply between Company A and Customer B is considered made in Canada;

    (b) Company A is correct in invoicing Division II to...

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