TEI-Revenue Canada liaison meeting: excise tax questions.

• Position: Tax Executives Institute

December 1, 1998

On December 1, 1998, TEI held its annual liaison meeting with representatives of Revenue Canada on pending excise tax issues. The Institute's agenda for the meeting is reprinted below. The agenda was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Munir A. Suleman of The Bank of Nova Scotia. Pierre M. Bocti of Hewlett-Packard (Canada) Ltd., the Institute's Vice President-Region I, coordinated 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 during TEI's December 1, 1998, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Pierre M. Bocti, TEI's Vice President for Canadian Affairs, at (905) 206-3399 or Munir A. Suleman, chair of the Institute's Canadian Commodity Tax Committee, at (416) 866-4698.

1. Assume the following facts. Company Z contracts with a third-party placement firm (TPPF), a GST registrant that carries on commercial activities, for temporary personnel who will perform clerical or administrative duties for Z either during peak business periods or as substitutes for Z's vacationing employees. The contract specifies that the work is generally performed at a location in Canada (Location L) for an agreed upon labour rate (e.g., $20.00 per hour, plus applicable taxes). In addition, the contract states that Z will pay any supplemental travel and living expenses (other than the daily commuting expenses to L) for TPPF's employees.

   Z asks X, a non-registrant individual employee of TPPF, to travel temporarily to a different location where X will incur travel and living expenses. X will receive a T4 slip from TPPF. Z is considering three options in respect of its obligation to pay X's temporary travel and living expenses:

1. X is to submit expense receipts (hotel charges, rental car, gasoline, meals, etc.) directly to Z for which Z will issue a reimbursement cheque directly to X.

2. Z will pay X directly under the expense account reimbursement procedures that Z's employees regularly use and a cheque will be issued directly to X.

3. X submits travel and living expenses to its employer, TPPF, that in turn bills these amounts to Z.

   The advantage of options 1 and 2 is to accelerate reimbursement to X (who is working temporarily at Z's premises rather than at TPPF's premises). It also eliminates the administrative procedure of processing X's expenses through TPPF initially for subsequent re-invoicing to Z. In order to evaluate the pros and cons of the three options, please answer the following questions:

1. Under option 1, can Z recover the GST on X's expenses?

2. Under option 2, can Z, in accordance with GST Memorandum 400-1-2, recover the GST on X's expenses processed through an expense account that is normally used by employees of Z?

3. If the answer to 1 and 2 is no, please advise whether the following alternative will enable Z to recover the GST on X's expenses:

   * TPPF processes X's expenses through TPPF's regular employee expense account reimbursement procedures; * TPPF, in accordance with GST Memorandum 400-1-2, claims back the GST on X's expenses; * TPPF invoices Z for the value of the expenses (on a net-of-GST-recovery basis), plus Division II GST; * Z claims the Division II GST paid to TPPF as an input tax credit (ITC) on X's net expenses. 2. Section 5, Part V, Schedule VI provides a zero rating for the services of a "sales representative" to a non-resident provided certain conditions are met. One condition is that the supply of goods for which the sales representative is providing service for the non-resident must be made outside Canada. Assume the following facts. A firm (Servco) provides the services of a "sales representative" to a non-resident (NR) as defined in section 123 of the Excise Tax Act (ETA). The supplies that NR makes are of goods and Servco is not an agent of the NR. In addition, NR's sales are made directly to NR's Canadian customers, i.e., Servco does not take title to the goods for resale to Canadian customers. NR requests that Servco act as the importer of record for NR's goods. (Note that Servco is not a licensed custom's broker). As a result, Servco is required under section 218 of the ETA to pay Division III tax on importation of NR's goods into Canada because Servco is the person liable for Customs duties under the Customs Act.

   NR believes that Servco can claim the ITC for the Division III GST paid by Servco on importation of the NR's goods because Servco is providing a zero-rated service of a "sales representative" to a non-resident in relation to those goods. Servco, on the other hand, does not believe it is permitted to claim an ITC for the Division III GST paid by Servco on importation of the NR's goods because Servco is not using those goods in Servco's own commercial activity. In other words, even though the sale of goods is attributable to the "sales representative" service provided by Servco to NR, Servco does not believe it is using the goods in the course of providing its services of a sales representative.

   Questions:

1. Can Servco claim an ITC for the Division III GST paid by Servco on importation of the NR's goods where NR sells the goods directly to NR's Canadian customers without a re-supply (i.e., purchase and resale) through Servco?

2. As long as Servco supplies the services of a sales representative to NR and NR is a non-resident making supplies outside Canada, please confirm that, regardless of whether NR is a GST registrant, Servco's providing services of a sales representative is zero rated under Section 5, Part V, Schedule VI of the ETA.

3. In some cases, Servco may not be able to determine whether NR made its supply inside or outside Canada. For example, NR may be a GST registrant and the original terms of sale reflect that the NR is selling the goods FOB USA plant. Subsequent to Servco's sales representative performing its service, NR and the ultimate customer change the terms of sale to FOB Canadian destination. Under such facts, does Servco's supply remain zero rated? At the time Servco supplies its sales representative service, it has a good faith belief that NR's sale would be made outside Canada.

4. What evidence must Servco produce to establish that the service is entitled to zero rating when Servco cannot determine whether NR's supplies will be made outside Canada?

3. Company A and Company B are amalgamated on January 1, 1998. The amalgamated company retains the name of one of its predecessors -- Company A. Assume that Companies A, B, and their amalgamated successor were, and remain, in a fully commercial activity (i.e., permitted to claim 100 percent of ITCs). As a result of an internal audit following the amalgamation, the company discovers on March 15, 1998, that Company B inadvertently failed to claim ITCs on its October 1997 GST return for which proper documentation exists.

1. Can the amalgamated company claim the omitted ITCs on its March 1998 GST return that relate to Company B's commercial activity in October 1997? In answering the question, bear in mind that the name of the recipient on the supplier invoices in October 1997 is Company B rather than the name of the amalgamated claiming the ITC in 1998, Company A.

2. If the answer to question 1 is no, what mechanisms are available for Company B (or its successor, newly amalgamated Company A) to recover ITCs that were legally claimable by B in October 1997?

4. An individual is transferred to Canada from Canco's parent, a company resident in the United States under an arrangement whereby the individual is paid by a related, GST-registered third party that invoices Canco for the individual's services. In other words, while the individual is in Canada and performing services in Canada, Canco is invoiced the full cost of the individual's salary and benefits, plus the applicable GST. Under the arrangement, Canco remits the withholding amounts for the individual's Canadian income tax, Canada Pension Plan, etc. Canco also issues the individual a T4 for Canadian income tax purposes. Since the individual receives a T4 from Canco, please confirm that, for purposes of the ETA, the individual is classified as an employee. Moreover, please confirm that under GST Memorandum 400-1-2 any of the individual's expenses that are properly documented on an employee expense account form are eligible for GST recovery.

5. Company C provides employment for students from a local university on a four-month rotational basis. Student S receives a T4 from C, but is not entitled to other benefits such as life insurance, pension plan contributions, or medical or dental insurance plan coverage. S occasionally travels on business trips authorized by C and incurs travel and living expenses that are reimbursed by C. Assuming S's expenses are properly documented, please confirm that C can recover the GST on S's travel and living expenses pursuant to GST Memorandum 400-1-2.

6. Assume that a vital piece of equipment used by GST registrant (R), engaged 100 percent in a commercial activity, experiences a break down. The equipment is out of warranty, damaged beyond repair, and must be replaced as soon as possible to keep R's business operating. The manufacturer of the equipment (M), a company located in the United 'States, does not stock the equipment and cannot manufacture replacement equipment in less than three months. Such a delay, however, would cripple R's business. Hence, M agrees to lend R a used piece of similar equipment for three months until new equipment can be manufactured and delivered. M does not charge R for the use of the equipment while it is "on-loan." R will be the importer of the "on-loan" equipment and will pay the requisite Division III tax.

1. May R claim an ITC for the Division III tax R pays even though M will not...