Revenue Canada liaison meeting on excise tax issues.

• Position: Tax Executives Institute's Canadian Commodity Tax Committee

On December 13, 1994, Tax Executives Institute held its annual liaison meeting on pending excise tax issues with officials of Revenue Canada-Customs, Excise and Taxation. (A separate liaison meeting was held on pending income tax issues.) The meeting was arranged under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Pierre M. Bocti of Hewlett-Packard (Canada) Ltd., and the Institute's delegation was chaired by C. Graham Kennedy of MacMillan Bloedel Limited, the Institute's Vice President-Region I. Reprinted below are the questions that the Institute submitted to Revenue Canada in advance of the liaison meeting.

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on several pending commodity and excise tax issues, which will be discussed with representatives of Revenue Canada Customs, Excise and Taxation during TEI's December 13, 1994, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either C. Graham Kennedy, TEI's Vice President for Canadian Affairs, at (604) 661-8549 or Pierre M. Bocti, chair of the Institute's Canadian Commodity Tax Committee, at (905) 206-3399.

1. Electronic Data

   Interchange

   To reduce costs and maintain international competitiveness, businesses are rapidly embracing many new information technologies. In particular, electronic data interchange (EDI) systems permit companies to compress many activities formerly carried out in several departments and multiple steps into one or two functions and a single transaction. Eliminating several steps of human intervention produces substantial labor cost savings to both EDI trading parties (the taxpayer and the other commercial party to an EDI exchange). In addition, EDI technology permits companies to establish systems that reduce or eliminate a substantial amount of paper documents that generally flow in commercial transactions, resulting in further cost savings from reduced record storage and retrieval costs.(1)

   Revenue Canada has, so far, not publicly committed to updating its information and record-retention requirements to permit taxpayers and the government alike to keep pace with the technological changes. Without that crucial revision, taxpayers will not achieve the cost savings available from EDI, since they may be required to maintain (or even create) duplicate records in a paper format solely for tax purposes. Businesses are concerned that at some point in the future a Revenue Canada auditor may deny input tax credits because a record otherwise unnecessary for managing the taxpayer's business either is not retained for tax purposes or, more likely, is retained in a format that the auditor is unfamiliar with or uncomfortable accepting for audit purposes.

   Taxpayers urgently require guidance regarding their EDI-related recordkeeping duties. In addition, the government must begin to train its auditors in respect of EDI technology in order to conduct proper audits of taxpayer EDI records. We urge Revenue Canada to establish an on-going consultation process with the business community (as well as its governmental counterparts in the United States) to permit the technological changes that are already underway to be incorporated into the tax compliance and governmental audit functions.(2) As part of the process, Revenue Canada should consider updating the Input Tax Credit Information Regulations, the Credit Note Information Regulations, and several Technical Information Bulletins. In any event, Revenue Canada should issue immediate guidance to GST registrants concerning the form and substance of information required to be maintained to claim input tax credits in the context of EDI transactions.

2. Alternative Valuation of

   Imported Software

   Has Customs made any progress in determining an alternate valuation method for software imported into Canada? A discussion paper was released some time ago with a view to applying the GST only on the value of the media rather than the value of both the media and the embedded software code.

3. GST on Supplies

   Assume the following set of facts. Company A and Company B enter into an agreement pursuant to which Company A, in 1994, will sell to Company B certain computer hardware and software for $5 million (the "old equipment"). During 1995, 1996, and 1997, Company B will use the old equipment to develop new techniques to be used in the treatment of diseases. As further consideration for the old equipment, during the same three-year period Company A will be permitted to incorporate new investigative techniques into future products (i.e., the new techniques may be embedded as new software code into computer hardware and be marketed on a combined basis as a new product). In return for use of the investigative techniques, Company A also promises to provide a credit to Company B - the amount of which will be computed on the actual sales dollar volume of the subsequently developed products during 1998 and 1999. As a result...