Recurring GST/HST Issues: A Hot Topics Overview
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Recurring GST/HST Issues:
A Hot Topics Overview
1
Presenters
Douglas Han, LL.B.
Principal
Veridical Tax Advisors Inc.
Shawn Starkes, CGA
Principal
Veridical Tax Advisors Inc.
2
Agenda and Approach
• Introduction
• ITC Basics / ITC Hot Topics
• Hot Topics: Examples
• Summary
• Questions
3
ITC Basics /
ITC Hot Topics
4ITC Basics
• GST/HST generally not a significant cost because of
the input tax credit (ITC) mechanism
• Key risk area
– controls needed for recurring and large one time
transactions
• Recovery of tax perceived as a privilege not a right by
the CRA
• Specific requirements must be met to claim ITCs
5ITC Basics
To claim ITCs a person must:
• Acquire (or import) a supply for consumption, use or
supply in the course of “commercial activity”
• Incur GST/HST payable/or otherwise paid tax
• Be a “registrant”
• Have sufficient supporting documentation
Ref: ETA ss.169(1)(4), Input Tax Credit Information (GST/HST) Regulations
6ITC Basics
Key terms/phrases
• When is GST/HST considered to be payable or paid?
• What constitutes commercial activity?
• Who is a registrant?
• What is considered sufficient supporting
documentation?
7ITC Basics
Special issues/considerations
• Meals and entertainment expenses
– generally limited to 50% with some exceptions
• 100% restricted expenses
– example: annual golf club dues
• HST restricted input tax credits (RITCs)
– “temporary” restrictions for provincial portion of HST on
specific expenses (reported on returns)
• Allocate if providing exempt and taxable supplies
Ref: ETA s. 170, s.236, s. 141.01, New Harmonized Value-add Tax System Regulations
8ITC Basics
Reasons for assessments?
• Documentation not obtained/retained
• Invalid supplier registration number
• Documentation errors
– incorrect party named, etc.
– CRA registry available
• Supply not linked to registrant’s commercial activities
• Supply acquired before becoming a registrant
– not a “small supplier”
Ref: ETA ss.171(1)(2)
9ITC Hot Topics
• Basics and Context
• Issues
• Examples
10ITCs – Importing Goods
Basics and Context
• GST applies to most commercial goods imported
into Canada
• Recovery not based on who paid the tax
– importer of record
• ITC generally available to constructive importer
– generally the person who causes the goods to be delivered
into Canada
Ref: ETA s.178.8, s.212
11ITCs – Importing Goods
Issues
• Imported goods not tied to commercial activity of
registrant
• Uncertainty on legal delivery location
– confusion with new INCO terms
• Supplier claims ITC (not constructive importer)
– agreement under ss.178.8(3) allows supplier to claim ITC
• supply of goods deemed to be made in Canada
• supplier must collect GST/HST from recipient
12ITCs – Importation of Goods
United States Canada
No ss.178.8(3) agreement
USCO • CANCO claims ITC on import
(registered) • USCO does not collect tax
With ss.178.8(3) agreement
• USCO claims ITC on import
• USCO collects/remits tax
• CANCO claims ITC
Common issue:
• USCO claims ITCs
• USCO does not CANCO
collect/remit
13ITCs – Employee Reimbursements
Basics and Context
• Employer deemed to acquire supply at time of
employee reimbursement
• Allows employers to claim ITCs and rebates
• Company credit cards
– not an employee reimbursement unless employer and
employee jointly and severally liable
Ref: ETA s.175, GST/HST Policy Statement P-184 Credit Card Expenses and the Registrant’s
Use of Factors for Claiming Input Tax Credits
14ITCs – Employee Reimbursements
Basics and Context
• Two options for recovery of tax:
– Actual method
• requires full supporting documentation
– Factor method
• documentation requirements relaxed
• requires some supporting documentation in most case
(e.g., gas purchase credit card receipt)
15ITCs – Employee Reimbursements
16ITCs – Employee Reimbursements
Issues
• Use of wrong factor
– allowance vs. reimbursement
– wrong jurisdiction
• Reimbursement to non-employees
• ITC claimed on an expense not subject to tax
• ON and BC RITC amounts not accounted for or
reported on returns
17ITCs – Employee Reimbursements
Documentation issue – Eligibility for ITCs?
Employer
Reimbursement
Supply
Employee
Supplier online expense
Payment report/
receipts retained
18ITCs – Coupons
Basics and Context
• Potential ITCs for GST/HST included
– fixed dollar reimbursable manufacturer coupons
– tax included retail coupons
• “Coupon” includes a “voucher, receipt, ticket or other
device…”
– what is a “device”?
• CRA ruling - a free gift card is not a “coupon”
– June 29, 2010 CRA ruling: RITS/No: 84050
Ref: ETA s.181
19ITCs – Coupons
Wholesale
Product product sale
manufacturer Retailer
and service provider
• Registrant (manufacturer) claimed Retail
ITCs under coupon rules product
• Invoice reduced to customer – not a sale
coupon
• Use of s.181.1 rebate provision
- tax included reference required
Customer
Ref: Tele-Mobile Company Partnership v. The Queen, 2012 TCC 256
20ITCs – “Holding” Companies
Basics and Context
• Commercial activity and ITCs
– watch for deeming provisions
• ITCs for expenses relating to holding shares/debt of
qualifying related corporation based on deeming
provision
• Relevant shares/debt must be “related” corporation
as defined in ETA ss.126(2) & ITA ss.251(2) – (6)
Ref: ETA ss.186(1)
21ITCs – “Holding” Companies
Basics and Context
• Substantially all of the related corporation’s property
must have been acquired for use exclusively in
commercial activities
• Shares/debt of a related corporation in another
qualifying related corporation meet the requirements
– permits multi-level structures
Ref: ETA ss.186(3)
22ITCs – “Holding” Companies
Issues
• CRA administrative position narrow:
– limited to expenses directly related to holding shares/debt
– denying ITCs for expenses related to Holdco’s own shares or
indirect activities
• Stantec v. The Queen 2009 GTC 2009 FCA decision
more expansive than CRA policy
• ITCs may be claimed on certain expenses for
proposed share purchases (takeover fees)
Ref: ETA ss.186(2); GST/HST Memorandum 8.6 – ITC for Holding Corporations
and Corporate Takeovers
23ITCs – “Holding” Companies
Management Company
claims ITC for tax on
Parent
taxable advisory services
fees with no direct taxable
Company
supply being made
100%
100%
Operating Management
Company Loans Company
Taxable advisory
services
Service
Provider
24ITCs – “Holding” Companies
Parent
BuyerCo
Company
100%
• BuyerCo offers to purchase all
Holding Company shares
Holding • BuyerCo claims ITCs for
Company advisory services on proposed
purchase of Holding Company
shares
100%
• Parent Company claims ITCs
on services relating to sale of
SubOpco Holding Company shares?
25ITCs – Amalgamations
Basics and Context
• Amalco generally considered a distinct person
– Amalco is considered the same person for specific purposes
• ITCs of predecessors may generally be claimed by
Amalco with predecessors’ documentation
– can be an issue at time of CRA audit
Ref: ETA s. 271, Amalgamation and Wind-Up Continuation (GST/HST) Regulations
26ITCs – Amalgamations
Potential exception for Amalco claiming ITCs
Shareholders Shareholders
Amalco
Newco Opco (Newco + Opco
amalgamate)
Taxable advisory CRA’s position has been no ITCs
service where Newco did not make/or
intend to make a supply before
amalgamation
Professional Advisor
27ITCs – Partnership Issues
Issues
• Partnerships are “persons” for GST/HST purposes
• Partner may claim ITCs for expenses related to
partnership’s activity
– partnership cannot claim ITCs when expense relates to a
partner’s activity
• A partnership holding or purchasing shares
disadvantaged vs. corporation
– no ITCs for these types of expenses
Ref: ETA s. 272.1, ss. 186(1)(2), GST/HST Policy Statement P-219 Registration of a Partner
28ITCs – Partnership Issues
Partner Partner
Company A Company B
No ITCs for Holding Holding
Partnership on Partnership
expenses relating to
holding shares of 100%
Opco
Opco
29ITCs – Pensions
Issues
• CRA permits ITCs by employer for pension related
expenses (investment management fees) for defined
benefit plans
• Pension plan funds often used to pay supplier
– CRA takes position that employer is providing actual supply
to the plan
• Under CRA position tax applies twice – as an actual
and deemed supply
– Tax Adjustment Note (TAN) required to correct inequity
Ref: TIB B-032 Registered Pension Plans – August, 2011
30ITCs – Pensions
Investment Management
Services Investment
Employer
Manager
Pension
Plan
Pays the
Investment
Employer Manager from
funds pension Pension Funds
plan
Pension Funds
Employees
31HOT TOPICS
Examples and Illustrations
32Gift Certificates
Basics and Context
• “Gift certificates” treated as cash
– term not defined in the ETA
• GST/HST applies at time of redemption
– based on the tax status and the consideration of the supply
• Per revised CRA Policy 202 – Gift Certificates
– does not have to be purchased at face value
– cannot have preconditions
e.g., the purchase of a minimum value of merchandise
Ref: ETA s.181.2
33Gift Certificates
Application under revised CRA policy
Promoter Sale of $25 qualifying
(markets cards gift card for $20 - No
Retailer
online) tax
Promoter required to
collect GST/HST for any
marketing charges, if any
Customer
34Challenges for Non-residents
Challenges for non-resident entities include:
• CRA’s strict carrying on business/registration policy
• Security deposit if no PE in Canada
• Potential “trapped tax” cost when not registered
• No s.156 or s.150 elections with branches/subs in
most cases
• Branches/subs of FIs have significant imported
taxable supply burden
Ref: ETA ss.240(1)(6), s.218.01, P-051R2-Carrying on Business in Canada
35Challenges for Non-residents
“Trapped tax” due to transaction flow
Invoice for service
Canadian not zero-rated – includes tax US Parent
Subsidiary Supplier
Supplier (not registered)
Invoice for service
includes embedded tax
Canadian US Parent
Subsidiary Customer
Invoice for service
Customer (not registered)
includes embedded tax
Potentially also subject
to tax as an imported service
36Drop-shipments
Basics and Context
• Canadian supplier/processor may be required to
remit GST/HST on fair market value of goods when
drop-shipping for non-resident that is not
registered
• “Flow through” ITC possible
• Relief where a consignee provides a drop-shipment
certificate (consignee subject to self-assessment) –
or goods exported
Ref: ETA ss. 179(1)(2), s.180
37Drop-shipments
Brazil Canada
Goods shipped
Processor Customer
Processor IOR – ITC
on importation
- ETA ss.169(4)
If Customer does not issue
DS certificate – Processor remits
GST/HST based on FMV of goods
Brazilco Possible “flow through” ITC
(Non-Registered) - s.180 ETA
38Buying Agents vs. Re-supply
Basics and Context
• When acting as an agent (in law)
– don’t claim ITCs, don’t collect GST/HST
• When acting as principal
– claim eligible ITCs, collect GST/HST
• Are relationships sufficiently documented?
• Re-supplies of service or intangible
– rate may not be the same for buy/sell transactions
Ref: GST/HST Policy Statement 182R Agency
39Buying Agents vs. Re-supply
Alberta
• Accounting service Supplier
provided (re-supplies
• Re-supply – at service)
different rates
Ontario
Service NFLD
Supplier Customer
40Corporate Groups
Issues
• Central purchasing companies common
• Consider transaction relationship
– agent vs. principal?
– is there supporting documentation?
• Are supplies provided at less than FMV?
– could be deemed to be at FMV
• Are ETA s.156 elections/s.150 elections in place?
– does transaction qualify for elections?
– are elections advantageous to the group?
41Corporate Groups
ParentCo
Taxable Exempt service
Purchasing
service – 150 election
SupplierCo Company SFI
(re-supplies
service)
No ITC –
making exempt
• Election not advantageous supply
in this case
• No election, GST/HST fully
recoverable
Customer
42SUMMARY
• Understand the transaction
• Consider CRA views
• Documentation
• Manage risk
43QUESTIONS
44This webinar is brought to you by CCH Canadian and in
partnership with Veridical Tax Advisors Inc.
Douglas Han: dhan@veridicaltax.com
Shawn Starkes: sstarkes@veridicaltax.com
www.veridicaltax.com
For more information please contact CCH customer service at
1-800-268-4522.
Visit www.cch.ca/ExpertEdge for a full list of our webinars.
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