TEI liaison meetings with the Canadian Department of Finance and Canada Revenue Agency on Excise Tax questions: December 4-5, 2012.

On December 4 and 5, 2012, Tax Executives Institute held its annual liaison meetings with Canada Revenue Agency and the Department of Finance on commodity and excise tax questions. The combined agenda for the separate meetings, which is reprinted below, was developed by the Institute's Canadian Commodity Tax Committee, whose chair is Robert J. Smith of McKesson Canada. TEI Tax Counsel Daniel B. De Jong, liaison to the committee, coordinated the preparation of the agenda.

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 4-5, 2012, liaison meetings. If you have any questions about the agenda, please do not hesitate to call Kim N. Berjian, TEI's Vice President for Canadian Affairs, at 403.233.5480 (or kim.n.berjian@conocophillips.com), or Robert Smith, Chair of TEI's Canadian Commodity Tax Committee, at 514.832.8198 (or robert.smith@mckesson.ca). (1)

Technical Questions

1. Provincial Matters and the Harmonized Sales Tax There are pending Harmonized Sales Tax (HST) measures in Quebec, British Columbia, and Prince Edward Island that we would like the Department of Finance and the Canada Revenue Agency to address.

   1. Revocation of HST in 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.

      (i) Please provide any available details concerning the agreement for the province of Quebec to harmonize the Quebec Sales Tax (QST) with the Goods and Services Tax (GST).

      (ii) Please confirm that Quebec will not be listed in Schedule VIII to the Excise Tax Act (ETA) as a participating province, and that it will not be considered a "participating province" as defined in subsection 123(1) of the ETA.

   3. Introduction of HST in Prince Edward Island. Please provide an update on the timetable, transitional rules, and any other legislative or administrative changes that will be required to adopt the HST in Prince Edward Island.

2. Recaptured Input Tax Credits (RITCs) on per Km Auto Allowance

   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 British Columbia and Ontario. (2) Many large businesses in those provinces pay a per kilometre auto allowance (AA) to employees who use their personal vehicles for business purposes. The AA is treated as an allowance for purposes of section 174 of the ETA and is deemed to include HST. When calculating the amount of an AA, large businesses take into consideration various expenditures attributable to owning / leasing a passenger vehicle, including insurance, repairs and maintenance, and, in British Columbia, fuel costs, which are not a "specified property or service" as contemplated in the Regulations to the ETA. Further, there are instances where an AA is paid to employees who acquired their vehicle before the HST was introduced on July 1, 2010.

   Typically, the large businesses that pay an AA claim a full input tax credit (ITC) to recover the tax deemed to be included in the allowance. Uncertainty exists whether any part of that deemed tax is subject to the recapture of input tax credit (RITC) rules since the AA includes items falling both in and outside the definition of a "specified property or service."

   GST/HST Technical Information Bulletin B-104 (under the heading Allowances and Reimbursements on page 19) states that the deemed HST included in the AA, but not attributable to "specified property or services," is not subject to the RITC rules:

   If a large business pays an allowance ... to an employee ... in circumstances where ITCs would be available under the Act ... in respect of that allowance .... the large business will generally be required to recapture the provincial component of those ITCs to the extent that the allowance is attributable to specified property and services. (Emphasis added.) During last year's liaison meetings, TEI was informed that Finance was in discussions with British Columbia and Ontario on the creation of an administrative factor for registrants to use in calculating the ITCs subject to the RITC regime for purposes of an AA. In the meantime, CRA suggested that registrants use a reasonable allocation based on the historical composition of their AAs. We have the following questions:

   (i) Would Finance provide an update on the status of the negotiations with the governments of Ontario and British Columbia to announce an administrative factor in respect of AAs?

   (ii) Should the "reasonable allocation" discussed at last year's liaison meetings take into account variations in ITCs for vehicles acquired before or after July 1, 2010, all other things being equal?

3. GST/HST on Substantial Completion --Public-Private Partnerships

   Under public-private partnership (PPP) agreements, the private sector party generally designs and constructs infrastructure, and then finances, maintains, and operates the infrastructure for an extended period of time, usually 20 or 40 years. The PPP agreement grants the private sector party a licence to access the land allowing performance of the obligations under the PPP agreement. Title to the infrastructure typically transfers to the public sector party during construction, not when construction is substantially completed. As a result, the private sector party never owns any interest in the land nor the materials incorporated into the project site. The type of infrastructure supplied by the private sector party varies depending on the PPP agreement; these agreements have been used in the past to build hospitals, prisons, schools, roads, bridges, and public transit systems, among other things.

   The private sector party may receive a lump-sum payment at substantial completion of the infrastructure construction (the substantial completion payment). In addition, the private sector party typically receives monthly service payments or monthly availability payments for the term of the PPP agreement. These monthly payments are based on, among other factors, unpaid design and constructions costs, finance charges, operation and maintenance cost of the infrastructure, and a rate of return or mark-up. The fixed contract price for the PPP agreement is typically calculated using a complex financial model that includes the cost for the infrastructure, a projection of the operating and maintenance costs for the life of that infrastructure, and financing charges, as well as other items. This financial model is used solely in the bidding process to determine the contract price.

   The "payment schedule" of the PPP agreement will establish the amount of the monthly payments over the life of the agreement. These may be adjusted based on changes to the scope of services provided and inflation. While the private sector party's cost estimate for the infrastructure is known at the time the financial model is prepared, the actual cost may vary. Any cost overruns are the responsibility of the private sector party.

   Under paragraph 168(3)(c) of the ETA, GST/HST becomes payable on the value of...