TEI liaison meeting with the Canadian Department of Finance and Canada Revenue Agency on excise tax questions.

• Position: Tax Executives Institute

December 6-7, 2011

On December 6-7, 2011, representatives of Tax Executives Institute met with officials from Canada Revenue Agency and the Canadian Department of Finance on excise tax matters. The agenda, which is reprinted below, was prepared under the auspices of the Canadian Commodity Tax Committee, whose chair is Kim N. Berjian of Conoco Phillips Canada. Daniel B. De Jong, TEI Tax Counsel and legal staff liaison to the committee, coordinated the preparation of the agenda. The minutes of the liaison meeting will be posted on TEI's website when they become available.

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 December 6-7, 2011, liaison meetings. If you have any questions about the agenda, please do not hesitate to call David V. Daubaras, TEI's Vice President for Canadian Affairs, at 905.858.5309 (or david.daubaras@ge.com), or Kim N. Berjian, Chair of TEI's Canadian Commodity Tax Committee, at 403.233.5480 (or kim.n.berjian@conocophillips.com). (1)

Technical Questions

1. Provincial Matters and the Harmonized Sales Tax

   Earlier this year, residents of British Columbia approved a referendum to repeal the Harmonized Sales Tax (HST) and reinstate the Provincial Sales Tax (PST). On August 26, 2011, the British Columbia Ministry of Finance published its Action Plan to Re-implement PST. The Action Plan notes that the process of transitioning back to the PST will require much effort and a minimum of 18 months to achieve. In contrast, Quebec agreed on September 30 to make changes to the Quebec Sales Tax (QST) to harmonize it with the federal Goods and Services Tax (GST).

   1. HST and British Columbia. Please provide an update on the timetable, transitional rules, and any other legislative or administrative changes that will be required to rescind the HST in British Columbia?

   2. QST and GST. Please provide any available details concerning the agreement announced on September 30, 2011, with the province of Quebec to harmonize the QST with the GST?

   3. Other Provinces (Finance Only). Is Finance negotiating with other provinces to replace their provincial sales taxes with the HST?

2. Recaptured Input Tax Credits (RITCs)

   As a temporary measure beginning July 1, 2010, and effective through June 30, 2018, large businesses and certain financial institutions (other than selected listed financial institutions) are required to recapture input tax credits for the provincial part of the HST paid or payable on specified property and services in British Columbia and Ontario. Although the HST has been repealed in British Columbia, it remains in effect while the province develops transitional rules for a return to the PST.

   1. Audit Issues (CRA Only). The rules for reporting RITCs can be difficult to apply in practice. Please provide an update on the compliance issues being discovered upon audit of returns that include RITCs?

   2. TEI Submission (Finance Only). Reporting RITCs pursuant to the time frames required in the current regulations is not possible, and the inability to comply exposes businesses to significant penalties and increased administrative costs. On March 7, 2011, the Institute submitted a letter urging Finance to amend paragraph 30(d) of the New Harmonized Value-added Tax System Regulations, No. 2 to permit reporting RITCs either (1) within 90 days of the invoice date; or (2) in the period in which it is accounted for unless there has been a deliberate or undue delay in the reporting. Could Finance provide an update on this issue?

   3. Reimbursed Expenses--Generally. Many common business arrangements require customers to reimburse suppliers for certain expenses. The GST/HST treatment of those transactions remains unclear in certain situations. Consider the following example:

      Company A provides taxable services to Company B. Compensation for these services is determined, in part, by the expenses incurred by Company A in providing them. The expenses are not incurred by Company A as agent of Company B nor are the supplies to which the expenses relate re-supplied by Company A to Company B; the reimbursement of expenses is simply part of the formula for determining the consideration payable for the overall services provided. Some of the reimbursed expenses are subject to the RITC mechanism.

      Please confirm that it is Company A and not Company B that is required to account for the RITCs on these expenses. Would the answer change if some of the expenses to be reimbursed by Company B consist of meals and entertainment expenses incurred by Company A that are identified as such on Company A's invoices to Company B?

   4. Reimbursed Expenses--Start-up Costs. The treatment of reimbursed costs also remains unclear where one company incurs start-up costs attributable to a related company which consist at least partly of taxable supplies. Consider the following example:

      Company A forms a new subsidiary Company B. Prior to making its first taxable supply, Company B obtains its GST/HST registration number and begins setting up its general ledger, computer systems, purchasing and sales departments and modules, etc. Company A provides support to Company B and incurs expenses for which it is entitled to be reimbursed by Company B as start-up costs. Some of these expenses may be legal fees relating to the incorporation of Company B but others are operational in nature (e.g., telecommunications services subject to RITCs, purchases and/or leases of passenger vehicles and gasoline to operate these vehicles, meals and entertainment expenses incurred by Company A's employees working on the project to establish Company B that are subsequently reimbursed by Company A). Company A issues invoices to Company B that clearly identify the nature of these expenses.

      Which of the two companies, if any is subject to the RITC rules respecting the aforementioned expenses originally incurred by Company A and re-charged by Company A to Company B?

3. Input Tax Credits--Section 180 Pass Through ITCs and Services (Finance Only)

   Unregistered nonresidents must pay HST/GST on certain imports of goods into Canada. These nonresidents are generally not entitled to an input tax credit for those taxes. The Excise Tax Act provides relief in certain...