TEI comments on possible changes to the GST/HST nil consideration election.

• Position: Tax Executives Institute, goods and services tax/harmonized sales tax - Canada

On September 19,2014, TEI submitted a letter to the Canadian Revenue Agency (CRA) and Canadian Department of Finance on proposed changes to the section 156 election for nil consideration. The election allows supplies between qualifying members of a closely related group to be made free of GST/HST. The Institute's letter welcomed the expansion of the election to include certain new members of a closely related group, and expressed concerns with new requirements that will mandate filing of all section 156 elections with CRA highlighting the associated administrative burden such a system would impose on businesses and CRA. The letter was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Richard Taylor of Rogers Communications Inc. Contributing substantially to the development of TEI's comments were Dwaine Arnason of Shell Canada Ltd., Carole S. Levesque of Shaw Communications Inc., and Kevin Thom of ConocoPhillips Canada. Daniel B. De Jong of the Institute's legal staff coordinated the development of the Institute's comments.

Tax Executives Institute, Inc. welcomes the opportunity to present the following questions on Canadian commodity tax issues, which will be discussed with representatives of Canada Revenue Agency and the Department of Finance during TEI's November 18-19, 2014, liaison meetings. If you have any questions about the agenda, please do not hesitate to call Paul T. Magrath, TEI's Vice President for Canadian Affairs, at 905.804.4930 or Paul.Magrath@astrazeneca.com, or Richard Taylor, Chair of TEI's Canadian Commodity Tax Committee, at 416.935.2568 or richard. taylor@rogers.ca. (1)

Technical Questions

1. Phasing Out of Recaptured Input Tax Credits

   As a temporary measure beginning July 1, 2010, and effective through June 30, 2018, large businesses must recapture input tax credits for the provincial portion of the HST paid or payable on "specified property and services" in Ontario (commonly referred to as "recaptured input tax credits" or "RITCs"). For the first five years, the rate of recapture was 100-percent. Beginning July 1, 2015, the rate of recapture will decrease by 25-percent per year until reaching O-percent for all supplies made on or after July 1, 2018. (Similar rules came into force in Prince Edward Island on April 1, 2013, where the phase out will begin on April 1, 2018 and end on March 31, 2021.)

   Large businesses devoted considerable resources modifying their systems to properly account for these RITCs. For example, several companies engaged specialty consulting firms or devoted significant internal resources to acquire the information technology support necessary to identify and report supplies of hydro and electrical purchases consumed in manufacturing and research processes. Even with systems improvements the process for identifying, tracking, and reporting RITCs involves intensive analytical work and requires substantial manual intervention.

   With the phase out of RITCs in Ontario scheduled to begin July 1, 2015, businesses must start planning for the requisite changes to their IT systems. Please provide an update on the timetable for releasing guidance, including transitional rules, on how the phase out will be reported on GST/HST returns and those issues with the phase out causing concern.

2. Project to Update GST/HST Bulletins, Publications, and Forms (CRA Only)

   Changes in the law and the economy necessitate constant revisions to published guidance. For example, CRA's website notes that several forms and publications related to selected listed financial institutions are currently being developed (http://www. cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/frmspbs/clntgrp-eng.html). Outdated guidance creates uncertainty for businesses attempting to apply those rules and can result in disputes between business and CRA. We invite a discussion of the process CRA uses for identifying which publications are out of date and how it prioritizes the revision of those documents.

3. Rules for Recovery of GST/HST on Out-of-Pocket Costs (CRA Only)

   Service firms, consultants, and other GST/ HST registrants routinely charge their clients for out-of-pocket costs they incur in the course of performing their work. Those expenses commonly include travel and related costs for food and beverages (and occasionally, entertainment). (2) Misapplication of the GST/HST rules to those charges complicates compliance by businesses invoiced for out-of-pocket expenses by their service providers.

   Some suppliers mistakenly include GST/HST charged on out-of-pocket expenses in the amounts that are passed through to their clients. Those charges should be invoiced to clients ex-original GST/HST and treated as additional consideration for the underlying service (also taking on the same GST/HST status). Further complications arise when suppliers and/or their clients misapply income tax and GST/ HST rules for meals and entertainment costs. When a client is aware its supplier has not correctly handled the GST/HST aspects of the suppliers disbursements charges, the client must spend time bringing the error to the attention of a supplier and explaining why the invoice is incorrect. Because this occurs frequently, it creates an inefficient system often involving cancellation and re-issuance of invoices.

   Although CRA has published guidance concerning lawyers' disbursements, there is no single publication that explains the GST/HST rules for a non-law firm's recovery of out-of-pocket costs, including those that are non-taxable when initially incurred such as costs incurred outside Canada. Clear direction on this topic, including examples, would help reduce the frequency of GST/HST errors on re-billable disbursements. TEI would be willing to work with CRA on guidance applicable to this issue.

   Is CRA willing to create written guidance that provides...