Pending excise tax issues: December 3, 2002.

• Position: Canada Customs and Revenue Agency

On December 3, 2002, 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. 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 3, 2002, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Glenn G. Wickerson, TEI's Vice President for Canadian Affairs, at 403.233.1135, or Martina Krummen, chair of the Institute's Canadian Commodity Tax Committee, at 514.856.6675.

Customs

1. Consider the following example: A National Customs Ruling (NCR) is issued to a client on a particular product. The client believes the ruling is in error, but because it is not currently importing this product, the client does not protest the ruling. At a later point, the client begins importing the product, but does not follow the NCR. A Compliance Officer discovers the issue on audit and issues a re-assessment and imposes an Administrative Monetary Penalty System (AMPS) penalty.

   Must the client submit two appeals--one for the tariff classification and one for the AMPS penalty? If so, are both appeals submitted to the regional office? Will the regional offices with a Deputy Minister-Appeals have the authority to consider the AMPS appeal? If the NCR is found to be in error, will the AMPS penalty still stand?

2. Effective May 1, 2002, the electricity market in Ontario opened and the Independent Market Operator (IMO) was authorized to administer the competitive market for sales and purchases of wholesale electricity and ancillary services in the Province. The IMO was established as a separate entity by the Energy Competition Act of 1998 to administer the market rules and perform market surveillance and dispute resolution. All market participants, including the IMO, must have a license from the Ontario Energy Board (OEB).

   The IMO is not required to administer contracts for energy "wheeled" through Canada where the agreement stipulates that the energy purchased by a Canadian company from a non-resident company is for resale to another non-resident company (a "pass-through purchase"). The IMO must, however, be notified of any pass-through purchases where energy is "wheeled" through Canada.

   Consider the following example:

   Can Co. purchases energy from New York Co. for resale to Michigan Co. as a pass-through purchase. The energy purchased by Can Co. is physically "wheeled" through Canada before it can be "wheeled" to its American destination, Michigan Co. (Flow A).

   [ILLUSTRATION OMITTED]

   Must Can Co. prepare the B3 import document for the purchase of energy from New York Co. that is "wheeled" through Canada (see subsection 144.01 of the Excise Tax Act) and the export documentation relating to the sale to Michigan Co. for the energy "wheeled" from Canada to the United States?

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

4. At a recent meeting of the Canadian Society of Customs Brokers in Toronto, John Gillan, Regional Director, Customs, Verification and Services, noted that CCRA is contemplating moving its Customs Appeals offices (currently located in Toronto and Hamilton) to London. Please confirm whether this is correct. If so, must taxpayers who want to meet with CCRA Appeals personnel travel to London?

   Goods and Services Taxes (GST)

5. If a financial institution that does not carry on exclusively commercial activities makes a voluntary disclosure with respect to Division IV tax (i.e., for imported taxable supplies) and the disclosure goes beyond the two-year period in which input tax credits (ITCs) are permitted, there is apparently no mechanism to enable the financial institution to claim the ITCs. That is, the claim for ITCs is provided in Net Taxes (i.e., in Division II tax) and there is a rule restricting the period in which ITCs are claimed. Such a process seems unfair. During the meeting, we invite CCRA's comments on this issue.

6. In GST/HST Technical Information Bulletin B090, under the section "Place of Supply," a statement is made that services will be considered to be performed--and therefore a supply made in Canada--if "the supply involves doing something to or with a recipient's equipment by accessing it from a remote location, and the recipient's equipment is located in Canada." Although the type of service described in the Bulletin is very narrow, this interpretation seems to be a clear move away from the historical view of looking at where the service provider was physically located when the service was performed. TEI is concerned that this interpretation will be applied to other types of services performed outside Canada in respect of customers located in the country.

   Please explain why CCRA has moved away from the use of physical performance in determining where services are performed. Also, given the common meaning of the word "perform," TEI suggests that CCRA issue supplemental guidance on what constitutes performance within the borders of Canada.

7. Policy paper P-193R provides four sample rulings. In sample ruling #3, a logging firm is leasing equipment from a GST/HST registered, non-resident person located in Maine. Based on the four statements of fact in this sample ruling, the supply of the equipment is deemed to be made available outside Canada. Thus, Division II tax does not apply on the leasing invoices from the lessor to the logging firm, even though the non-resident is registered for the GST.

   (i) Please confirm that the above answer has not changed, i.e., the supply is made outside Canada.

   Statement of fact #3 states that the logging firm makes monthly payments to the GST-registered non-resident "in Maine."

   (ii) Does the wording "in Maine" mean the payment to the logging firm must be made and paid geographically "in Maine"? For example, if the logging firm makes monthly payments to the registered non-resident and the addressee of that payment is the lessor and the address is geographically "in Maine," it appears that the requirement in statement of fact #3 is clearly met. If, however, the logging firm makes monthly payments to the registered non-resident and the addressee of that payment is the non-resident but the payment is (a) mailed to a post office box geographically located in Canada, or (b) mailed, couriered, or delivered to a company that collects the non-resident's Canadian and foreign accounts receivable in Canada, does this change the place of supply? In other words, given these two possible changes in the original mailing address, is the supply still considered to be made available outside Canada?

   Statement of fact #1 provides that the logging firm leases equipment from a registered non-resident in Maine.

   (iii) If the lessor is a registered resident in Canada (and the other statements of facts have not changed), please confirm that the supply is made available outside Canada.

8. A firm in Alberta that repairs production equipment sends its employees to remote customer sites in the Province where hands-on repairs are made to the equipment. The cost of these repairs is based on a flat hourly rate plus expenses. Expenses are segregated into two categories. Category one (C1) expenses are for items of a non-meals and entertainment variety (such as car rental, gasoline, hotel accommodation, etc.). The second category (C2) is for meals and entertainment while the employee is at the customer's site location. Assume no mark up is made on the C1 and C2 expenses.

   The firm's invoice to its customer has three separate line items:

   * One...