TEI submits excise tax questions to Canada Revenue Agency and the Department of Finance.

• Position: Tax Executives Institute

December 3-4, 2013

On December 3-4, 2013, representatives from Tax Executives Institute, led by 2013-2014 Vice President for Canadian Affairs Shiraz J. Nazerali, met with officials from Canada Revenue Agency and the Canadian Department of Finance to discuss tax policy and administrative matters. The agendas for the meetings on commodity tax matters were prepared by the Institute's Canadian Commodity Tax Committee, whose 2013-2014 chair is Robert J. Smith of McKesson Canada. Daniel B. De Jong of the Institute's legal staff coordinated the preparation of the comments. The responses from CRA will be published on TEI's website (www.tei.org) in early 2014.

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 3-4, 2013, liaison meetings. If you have any questions about the agenda, please do not hesitate to call Shiraz Nazerali, TEI's Vice President for Canadian Affairs, at 403.213.8125 (or Shiraz.Nazerali@dvn.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

   Since our liaison meetings last year, there have been several changes to Harmonized Sales Tax (HST) measures in British Columbia, Quebec, and Prince Edward Island that significantly affect businesses with operations there. We welcome a discussion on the following related issues with the Department of Finance (Finance) and Canada Revenue Agency (CRA).

   1. Revocation of HST in British Columbia. Please provide CRA's and Finance's views on the revocation of the HST in British Columbia including any issues which you consider worthy of our focus.

   2. Enhanced Harmonization of QST. Please provide CRA's and Finance's views on the enhanced harmonization of the Quebec Sales Tax including any issues which you consider worthy of our focus.

   3. Introduction of HST in PEI. Please provide CRA's and Finance's views on the introduction of the HST in Prince Edward Island including any issues which you consider worthy of our focus.

   4. Reduction of HST in Nova Scotia. Please provide CRA's and Finance's views on the status of the announced reduction of HST in Nova Scotia to 14% effective July 1, 2014. The measure was introduced by the NDP government that was subsequently voted out of power in October 2013, and the newly elected Liberal government in Nova Scotia has stated that the HST reduction will occur only if the province has a surplus that would offset the loss of revenue resulting from the rate reduction.

2. Returned Goods (CRA Only)

   Section 232 of the Excise Tax Act (ETA) permits a supplier to refund, adjust, or credit GST/HST when a supplier has collected or charged an excess amount of tax or when the consideration for a supply is reduced after GST/HST has been charged or collected in respect of a supply. GST/HST Memoranda Series 12.2, Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act, provides additional guidance on the application of this rule. Specifically, paragraph 10 of that publication reads as follows:

   "A reduction in consideration is not considered to have occurred if the goods are sold back to the original supplier. To be considered a reduction of consideration, it must be evident that the goods are being returned to the supplier rather than being sold to the supplier."

   Despite this explanation, it remains difficult in some situations to distinguish between a return of goods and a sale of goods back to the supplier. For purposes of the following questions, please consider the following example: A supplier and a recipient have entered into a supply and purchase agreement pursuant to which the recipient has purchased goods from the supplier and legal title to the goods has transferred to the recipient.

   1. Time Interval Before Return to the Supplier. Does CRA impose a time limit from the date of original sale after which goods cannot qualify as returned but will be treated as sold back to the supplier?

   2. Price Change Since Original Sale. Does CRA require that returned goods be credited at the original sales price in order for a transfer back to the supplier to be treated as a return of goods and not as goods being sold back to the supplier (e.g., where the supplier and recipient agree that the market value of goods initially sold at $100 per unit has decreased by 10%, and supplier refunds only $90 per unit)?

3. Demurrage and Layover Fees (CRA Only)

   Under section 162.1 of the ETA, an amount paid as or on account of demurrage is deemed not to be consideration for a supply, and therefore not subject to GST/HST. Paragraph 52 of GST/HST Memoranda Series 28.2, Freight Transportation Services provides further guidance:

   "Any demurrage fees and any penalty paid by one railway corporation to another railway corporation for delay in returning railway rolling stock are deemed not to be consideration for a supply. They are therefore not taxable. Demurrage fees are amounts that a shipper pays a carrier for the detention of a ship, freight car or other cargo conveyance during loading or unloading beyond the scheduled time of departure."

   While this language provides helpful guidance, the application of section 162.1 to some layover charges remains unclear. For example, assume a carrier and a shipper enter into a freight transportation service agreement (that does not include a charter component for the carrier's truck and trailer) for the carrier to provide a taxable domestic freight transportation service. The agreement allows the carrier to add a layover charge if the cargo being shipped is not ready at the agreed time of delivery of the goods to the carrier.

   In some instances, the carrier's invoice for the freight transportation service will label this layover charge as a demurrage fee. Given that it is related to a supply of a taxable domestic freight transportation service, it is unclear whether the layover charge in this instance would be relieved of GST/HST by virtue of section 162.1. We invite CRA to provide its view on the treatment of the demurrage rules to layover fees such as the one described in our example.

4. Transitional Rules for GST/HST Rate Changes

   Over the last 10 years there have been several changes to the GST/HST and PST landscape. On July 1, 2006 the GST rate dropped from 7% to 6%, with a further reduction to 5% effective January 1, 2008. On July 1, 2010 British Columbia and Ontario harmonized their respective PSTs with the HST. British Columbia subsequently reverted to its preexisting GST/PST regime effective April 1, 2013. That same day Prince Edward Island adopted the HST. Manitoba raised its PST rate by 1% effective July 1, 2013, and Nova...