TEI liaison meeting with the Canadian Department of Finance and Canada Revenue Agency on excise lax questions December 7-8, 2010.

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On December 7 and 8, 2010, representatives of Tax Executives Institute met separately with officials from Canada Revenue Agency and the Canadian Department of Finance on excise tax matters. The agenda was prepared under the auspices of the Canadian Commodity Tax Committee, whose chair is Kim N. Berjian of Conoco Phillips Canada. Committee Vice Chair Carol Felepchuk of TD Bank Financial Group was the project manager for the agenda. Mary Lou Fahey, TEI General Counsel and legal staff liaison to the committee, coordinated the preparation of the agenda, with the assistance of Daniel J. De Jong, Tax Counsel. The minutes of the liaison meeting will be posted on TEI's website when 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 Canada Revenue Agency (CRA) and the Department of Finance during TEI's December 7-8, 2010, liaison meetings. If you have any questions about the agenda, please do not hesitate to call Rodney C. Bergen, TEI's Vice President for Canadian Affairs, at 604.488.5231 (or Bergen@ jp-group.com), or Kim N. Berjian, Chair of TEI's Canadian Commodity Tax Committee, at 403.233.3807 (or kim.n.berjian@conocophillips.com). (1)

Technical Questions

  1. 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 harmonized sales tax (HST) paid or payable on specified property and services in British Columbia and Ontario.

    1. Amended Returns. Generally, if a registrant fails to report RITCs in the appropriate reporting period, taxpayers must correct those omissions or errors on an amended return for that period. Questions have arisen concerning what constitutes an error that requires an amended return. For example, an invoice is delayed in the mail and received after the appropriate reporting period. The invoice is paid promptly upon receipt. Does this constitute an error requiring an amended return?

    2. Penalties. The penalty for not reporting an amount as required under the RITC rules is calculated as follows:

      * A "base penalty" equal to five percent of the amount that should have been reported minus the amount reported; plus

      * One-fifth of the amount calculated above for each complete month (up to a maximum of five months) that begins on the day the return was required to be filed and ends on the earlier of (i) the day the person reports the particular amount and reporting period, and (ii) the day the notice of assessment is sent for the particular reporting period.-" The penalty imposed under this section is excessive, especially when compared with penalties imposed for failure to answer a demand ($250 for each occurrence) or failure to provide information when required ($100 for each failure).3 Is there any effort to make the penalty more reasonable?

      In addition to discussing the above issues during both the CRA and Finance liaison meetings, TEI requests a written response from CRA concerning the following two questions:

    3. Internet Services. Under the old Ontario Retail Sales Tax (ORST) Act, Ontario was the only province not to tax Internet services. In the Ontario Sales Tax Guide 651, the Ontario Ministry of Revenue provided examples of Internet services that included web hosting, advertising fees, etc. Similar guidance has not been issued under the federal goods and services tax (GST) or HST.

      (i) May registrants rely on Guide 651 for determining whether a telecommunication service qualifies as an Internet service and thus is not subject to the RITC rule for HST purposes in Ontario and British Columbia?

      (ii) If not, when will CRA issue administrative guidance on what is considered an Internet service to assist registrants in identifying RITCs?

    4. Employee Reimbursements. Consider the following example:

      A fully commercial GST-registered corporation (i.e., eligible for full ITCs) in Ontario (Supplier A) has a customer in the province who needs repairs to its equipment permanently affixed to the real property in Ontario.

      Supplier A sends its employee to the customer's site to fix the equipment, which will take two days to complete. The round-trip mileage to the customer's site is 226 kilometers. The employee uses his own vehicle to travel to the site and is reimbursed at 50 cents per kilometer.

      Company A also provides the employee the option of submitting his out-of-pocket expenditures or accepting a per diem allowance of $75 per night for lodging and $56.50 per day for meals with no receipts. (For income tax purposes, assume that these allowances are reasonable.)

      The employee files the following expense report:

      Mileage Allowance $113.00 Lodging Allowance $ 75.00 Meals Allowance $113.00 ($56.50 x 2 days) / Total $ 301.00 The example prompts the following questions:

      (i) 13/113 of the $113.00 mileage allowance (i.e., $13.00) may be taken as an initial ITC. Do the recapturing rules apply to the $13.00, i.e., is 5/13 or $5.00 allowed as an ITC and 8/13 reported as an Ontario RITC? Or is the full $13.00 allowed as an ITC?

      (ii) 13/113 of the $75.00 lodging allowance ($8.63) may be taken as an initial ITC. Please confirm that the lodging allowance is not subject to the recapture rules.

      (iii) 13/113 of the $113.00 ($13.00) meals allowance may be taken as an initial ITC. Company A uses, however, the 50-percent reduction provision when the expense account is initially processed. Thus, the eligible ITC is $6.50. Please confirm that the recapturing rules apply to this $6.50 amount, i.e., only 5/13 or $2.50 is allowed as an ITC and 8/13 ($4.00) reported as an Ontario RITC.

  2. Audit Issues (CRA Only)

    1. Compliance Relief for Calendar Year 2010. Because of the delay in issuing regulations relating to the HST, TEI recommends that CRA provide some administrative penalty relief upon audit for the 12-month period following the implementation date of the HST (July 1, 2010).

    2. Substantiating RITCs and Proxies. ITCs are not subject to recapture in respect of certain specified energy or telecommunication services. To simplify compliance, proxies (eligible recovery percentages) may be used to determine (i) the portion of "specified energy" considered to be used directly in the production of tangible personal property (TPP) for resale, or for activities that are eligible scientific research and experimental development (SR&ED) activities; and (ii) the proportion of the consideration not attributable to specified telecommunications. What documentation will taxpayers be required to provide to substantiate the RITCs and the use of proxies?

    3. Use of Formulae. What documentation is required to substantiate the use of formulae in calculating RITCs when not using proxies? Are formulae developed by (i) internal engineers, or (ii) external engineers, acceptable?

  3. NETFILE (CRA Only)

    1. Use of MyBusiness. MyBusiness is an excellent online tool to permit taxpayers to review their CRA accounts and decrease the administrative burden for both taxpayers and CRA. There are, however, several challenges with accessing MyBusiness. A taxpayer must provide a code or the line 150 amount from his or her personal tax return to receive a password for accessing an employer's corporate information. The internal policies of many large tax departments forbid employees from providing personal information to access the system.

      All corporations must file an RC59 with CRA to authorize an employee to access a corporation's tax...

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