Pending excise tax issues: December 2, 2003.

• Position: Canada Customs and Revenue Agency

On December 2, 2003, 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, which was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock of the Royal Bank of Canada, is reprinted below. The answers to the questions will be 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 2, 2003, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Mario M. Tombari, TEI's Vice President for Canadian Affairs, at 514.932.6161, ext. 2943, or Sherrie Ann Pollock, chair of the Institute's Canadian Commodity Tax Committee, at 416.955.7373.

Goods and Services Taxes (Gst)

1. Please confirm the responses given by CCRA representatives to the following three questions at TEI's 2003 Region I Conference in Gatineau, Quebec. The fourth question arose from subsequent discussions among TEI members.

   (i) A GST-registered Canadian manufacturer sells its accounts receivable on a non-recourse basis to a financial institution (FI) in Canada. The manufacturer services the receivables and charges a fee to the FI. Is the fee subject to GST? Does it matter whether the FI is a related or unrelated entity?

   (ii) A GST-registered Canadian manufacturer sells its accounts receivable on a non-recourse basis to a non-GST registered, non-resident company. The manufacturer services the receivables and charges a fee to the non-resident. Is the fee subject to GST? Does it matter whether the buyer is a related or unrelated entity?

   (iii) Based solely on the fact situation outlined in subparagraph (ii) above, is the non-resident carrying on business in Canada and required to register for GST?

   (iv) Would the answers to (i) through (iii) change if the accounts receivable were sold on a recourse basis?

2. At TEI's 2001 liaison meeting, CCRA was presented with the following fact pattern (question no.14):

   A GST-registered entity (CANCO) sells an item to a Canadian customer (Company X). The terms of delivery are FCA (free carrier) Company X's site in Ottawa. CANCO purchases the good from its U.S. parent in Boston, Massachusetts, which has itself acquired the good from a third-party U.S. supplier that delivered it to the parent's warehouse in Boston. The good is shipped from Boston to Company X's site in Canada. CANCO invoices Company X $100 for the good, $20 for a "handling and administrative fee," and $15 for the actual freight charge. All three amounts show as separate line items on CANCO's invoice to Company X. The $20 "handling and administrative fee" is a fee paid by CANCO to its U.S. parent for receiving, warehousing, and locating the transportation company; the $15 freight charge is for the actual transportation cost from Boston to Ottawa. U.S. parent pays the transportation cost to the transportation company and then invoices CANCO. CANCO then invoices both charges to its Canadian customer. TEI asked whether GST applied to either the administrative fee or the freight charge. CCRA responded that both the $20 "handling and administrative fee" and the $15 freight charge were part of the consideration for the supply, irrespective whether the fee or freight charge were modified to reflect a higher or lower value than the actual freight charge.

   Consider these additional facts: Assume that CANCO imported the goods into Canada and paid Canadian duty of $5, plus the Division III GST. This duty amount will be invoiced to Company X as a separate line item on CANCO's invoice to Company A, similar to the $20 "handling and administrative fee" and the $15 freight charge. Please confirm that:

   (a) CCRA's 2001 answer to this question has not changed, i.e., both the $20 "handling and administrative fee" and the $15 freight charge are considered part of the consideration for the supply (along with the $100), and Division II tax applies to CANCO's invoice to Company X for all three line items ($135).

   (b) When CANCO invoices Company X for the $5 duty amount as a separate line item, the $5 is also considered part of the consideration for the supply and Division II tax applies on CANCO's invoice to Company X for this item.

   (c) The Division III tax that CANCO paid on importation of the goods into Canada is fully recoverable as an input tax credit (ITC) by CANCO, assuming standard documentation exists.

3. Assume that a non-registered non-resident (Company A) is selling goods to a Canadian GST registrant (Customer B), who is fully using the goods in its commercial activity and therefore is entitled to an ITC. Company A is not carrying on business in Canada and is not required to register for GST purposes. Customer B is a monthly filer and files on a calendar basis. Company A agrees to be the importer of record. Company A pays some Canadian duty and the Division III GST on the value of the goods imported. Consider the following transaction:

   * Customer B issued a purchase order to Company A on November 15, 1999.

   * Company A shipped the goods on December 1, 1999, to Customer B.

   * Company A issued an invoice to Customer B on December 3, 1999 (Division II tax is not charged).

   * Company A imports the goods into Canada on December 4, 1999, and pays duty and Division III GST.

   Company A and Customer B later realise that section 180 of the Excise Tax Act (ETA) could be used to flow through the GST Division III tax paid on importation by Company A to Customer B, permitting Customer B to recover the Division III GST without having embedded GST in the commercial transaction. On November 1, 2003, Company A issues an invoice to Customer B seeking reimbursement for the Division III tax Company A paid on the goods when they were imported in 1999. Assume that there is appropriate documentation and that Customer B has a four-year time period in which to recover the GST.

   (i) When Customer B receives the invoice from Company A for the reimbursement of the Division III GST, may Customer B claim the invoiced GST as an ITC, given that the reimbursement invoice is four years less a month after the initial supply?

   (ii) If the date on which Company A issues a reimbursement invoice to Customer B is changed from November 1, 2003, to December 1, 2003, may Customer B claim the invoiced GST as an ITC, given that the reimbursement invoice is four years after the initial supply?

   (iii) If the date on which Company A issues a reimbursement invoice to Customer B is changed from November 1, 2003, to January 1, 2004, may Customer B claim the invoiced GST as an ITC, given that the reimbursement invoice is four years plus a month after the initial supply?

4. A GST-registered company resident in Canada (Company S) is in the business of designing, developing, and providing access to a database that contains information readily available from a variety of sources. Company S primarily employs researchers and other technical staff who ensure that the database is kept current. Company S has existing license agreements with Canadian and U.S. customers to allow them to use the database. Company S intends to sell to Company X (a non-registered, non-resident located in the United States) the right to market and license Company S's database worldwide other than for use in Canada. Company S will retain the right to market and license Company S's database in Canada (the "primary agreement").

   (i) Please confirm that the sale of the right to market and license Company S's database worldwide other than for use in Canada is not subject to GST because it relates to intangible personal property that cannot be used in Canada.

   Company S and Company X also agree to an ongoing separate agreement (the "secondary agreement") under which Company S will continue to use its staff to enhance existing databases, as well as to create new databases. The rights to market and license the right to use these updates and new databases will be also be sold to Company X under the same parameters as the initial agreement, i.e., Company X will have the right to market and license the enhancements and the new databases worldwide other than for use in Canada.

   (ii) Please confirm that the sale of the right to market and license Company S's enhanced and newly created databases worldwide other than for use in Canada is not subject to GST because it relates to intangible personal property that cannot be used in Canada.

   One year later, Company X decides to acquire the remaining rights of Company S to market and license Company S's databases in Canada, i.e., an addendum to the primary agreement is adopted. Company X also decides to enter into a similar arrangement for the ongoing enchantments to the existing databases and the creation of new databases for use in Canada, i.e., an addendum to the secondary agreement is adopted. Separate prices will be negotiated and identified for these rights in Canada.

   (iii) Please confirm that the sale of the right to market and license Company S's databases in Canada is subject to GST (assuming a separate selling price is identified). In addition, any invoices for the ongoing enchantments to the existing databases and the creation of new databases for use in Canada will be subject to GST (assuming a separate selling price is identified).

   Assume that the primary agreement is for the right to market and license Company S's databases worldwide for use both inside and outside Canada, and there is no segregation of the selling price between these rights.

   (iv) Please confirm that Company S is required to invoice the GST on the full value of the selling price because there is no segregation of the selling price.

   Assume, however, that the primary agreement is for the right to...