TEI meets with Canada Revenue Agency on excise tax issues.

• Author: Riley, Phil C.
• Position: Tax Executives Institute

December 9, 2008

On December 9, 2008, Tax Executives Institute held is annual liaison meeting on customs and excise tax issues with officials of the Canada Revenue Agency. The agenda for the meeting, which is reprinted below, was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Phil C. Riley of ArcelorMittal Dofasco Inc. Minutes of the meeting will be posted to TEI's website after they become available.

Tax Executives Institute, Inc. (hereinafter "TEI" or "the Institute") welcomes the opportunity to present the following questions on Canadian Commodity Tax issues, which will be discussed with representatives of the Canada Revenue Agency (hereinafter "CRA" or "the Agency") during TEI's December 9, 2008, liaison meeting. If you have any questions about the agenda, please do not hesitate to call Sherrie Ann Pollock, TEI's Vice President for Canadian Affairs, at 416.955.7373, sherrieann.pollock@rbcdexia-is.com; or Phil W. Riley, Chair of the Institute's Canadian Commodity Tax Committee, at 905.548.4475, phil.riley@arcelormittal.com.

Technical Questions

1. Demurrage

   Under section 162.1 of the Excise Tax Act ("ETA"), an amount that is paid as or on account of demurrage is deemed not to be consideration for a supply, and therefore not subject to GST/HST. Why is only the initial supply made by a carrier to a shipper considered demurrage and any other amount paid/recovered throughout the chain not?

   Please confirm that demurrage is not subject to GST/HST in the following situations:

   a) Company A agrees to make a sale to Company B. Company A hires Vessel Carrier X to deliver the goods to Company B. Vessel Carrier X invoices Company A for the freight services provided, plus an amount that relates to demurrage, illustrated as follows:

   [ILLUSTRATION OMITTED]

   b) Company A agrees to make a sale to Company B and hires Vessel Carrier X to deliver the goods to Company B. Vessel Carrier X provides freight services to Company A and invoices Company A for freight services, plus an amount that relates to demurrage. Company B makes a sale of the goods to Company C and hires Vessel Carrier X to deliver the goods to Company C. Vessel Carrier X invoices Company B for freight services, plus an amount that relates to demurrage, illustrated as follows:

   [ILLUSTRATION OMITTED]

   c) Company B has a contract with Company A enabling it to buy goods from Company A to make an export sale to Company C. Company B bears all costs and risks needed to bring the goods to the disposal of its buyer. Company A owns the rights to Vessel Carrier X, which delivers the goods on behalf of Company B to Company C. Vessel Carrier X invoices Company A for the freight services provided, plus an amount that relates to demurrage. Company A invoices Company B for the freight charges incurred, plus the amount that relates to demurrage. Company B invoices Company C for the freight charges incurred, plus the amount that related to demurrage, illustrated as follows:

   [ILLUSTRATION OMITTED]

2. Administration of Voluntary Disclosure Program

   Please provide an update on the Voluntary Disclosure Program ("VDP'), including the changes effective April 1, 2007, as part of the Standardized Accounting Initiative. (1) Specifically:

   a) According to CRA, a legal entity is allowed one voluntary disclosure per entity, encompassing both income tax and GST issues. Limiting the program to one claim per entity may inhibit taxpayers from disclosing GST errors because of the higher penalties that may be applicable in respect of income tax omissions. TEI believes that this restriction conflicts with the principle of the program, i.e., to promote compliance "with Canada's tax laws by encouraging taxpayers to voluntarily come forward and correct previous omissions in their dealings with the CRA."

   b) Legislative changes to the ETA's fairness provisions (both for GST/HST and non-GST/HST purposes) were introduced in 2006. Beginning April 1, 2007, CRA's discretion to waive or cancel penalties and interest was limited to requests for reporting periods that ended within any of the 10 calendar years preceding the calendar year in which the request was made. Has CRA's administration of these provisions changed since the introduction of standardized accounting?

   c) The main advantage to making a voluntary disclosure is the elimination of all penalties (and in some instances, the elimination of both penalties and interest). With the elimination of the 6-percent penalty--which was replaced by a higher interest component effective April 1, 2007--the incentive to make a voluntary disclosure is diminished since interest is not relieved under the VDP.

   In a business-to-business (B2B) transaction, why is no relief provided under the VDP for a GST registrant, for example, where the recipient would have claimed a full GST Input Tax Credit?

   Consider the following B2B scenarios where all registrants are involved in 100-percent commercial activities and companies A, B, C, and D are divisions of the same legal entity. Will relief be granted?

   i) In June 2007, Company A realizes that it had not charged Company B GST on a December 2006 management fee of $50,000,000. Company A files a voluntary disclosure.

   ii) In June 2008, Company C realizes that it had not charged Company D GST on a December 2007 management fee of $50,000,000. Company C files a voluntary disclosure.

   iii) Assuming the Voluntary Disclosure in i) above is accepted, will it disqualify Company A...