Recurring GST/HST Issues: A Hot Topics Overview

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Recurring GST/HST Issues: A Hot Topics Overview
Recurring GST/HST Issues:
A Hot Topics Overview
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Recurring GST/HST Issues: A Hot Topics Overview
Presenters

        Douglas Han, LL.B.
        Principal
        Veridical Tax Advisors Inc.

        Shawn Starkes, CGA
        Principal
        Veridical Tax Advisors Inc.

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Recurring GST/HST Issues: A Hot Topics Overview
Agenda and Approach
•   Introduction
•   ITC Basics / ITC Hot Topics
•   Hot Topics: Examples
•   Summary
•   Questions

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Recurring GST/HST Issues: A Hot Topics Overview
ITC Basics /
ITC Hot Topics

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ITC 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

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ITC 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

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ITC 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?

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ITC 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

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ITC 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)

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ITC Hot Topics
• Basics and Context
• Issues
• Examples

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ITCs – 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

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ITCs – 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

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ITCs – 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

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ITCs – 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

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ITCs – 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)

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ITCs – Employee Reimbursements

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ITCs – 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

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ITCs – Employee Reimbursements
Documentation issue – Eligibility for ITCs?

                                    Employer

                           Reimbursement

                  Supply
                                     Employee
 Supplier                          online expense
                Payment                report/
                                  receipts retained

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ITCs – 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

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ITCs – 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

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ITCs – “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)

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ITCs – “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)

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ITCs – “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

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ITCs – “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

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ITCs – “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?

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ITCs – 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

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ITCs – 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

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ITCs – 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

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ITCs – 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

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ITCs – 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

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ITCs – Pensions
                              Investment Management
                                     Services                Investment
        Employer
                                                              Manager

                                   Pension
                                    Plan
                                                                Pays the
                                                                Investment
              Employer                                          Manager from
              funds pension                                     Pension Funds
              plan
                                             Pension Funds
Employees

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HOT TOPICS
Examples and Illustrations

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Gift 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

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Gift 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

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Challenges 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

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Challenges 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

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Drop-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

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Drop-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

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Buying 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

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Buying Agents vs. Re-supply
                           Alberta
•   Accounting service     Supplier
    provided             (re-supplies
•   Re-supply – at         service)
    different rates

      Ontario
      Service                             NFLD
      Supplier                          Customer

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Corporate 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?

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Corporate 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

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SUMMARY
•   Understand the transaction
•   Consider CRA views
•   Documentation
•   Manage risk

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QUESTIONS

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This 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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