Tax & Trade Blog

Businesses (other than financial institutions) that provide a mix of both taxable and exempt supplies must utilize the allocation rules found in section 141.01(5) of the Excise Tax Act (ETA) to determine the proper amount of input tax credits (ITCs) to claim in their GST/HST return.  This generally requires that the taxpayer employ a fair and reasonable method to determine the extent to which its inputs are each used in making taxable or exempt supplies.   

The TCC decision in BC Ferry Services (2014 TCC 305) provides a good overview of various aspects of the ITC allocation rules for non-financial institutions. 

Both the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”) include an increased burden on entities considered “large corporations” or “specified persons”, respectively, when it comes to the level of detail required in a notice of objection.  Specifically, the “large corporation rule” in section 165(1.11) of the ITA requires that a large corporation, inter alia, “reasonably describe each issue to be decided” and “provide facts and reasons relied on by the corporation in respect of each issue” in its notice of objection.  The “specified person rule” in section 301(1.2) of the ETA includes the same requirements.  In each instance, the taxpayer is only allowed to appeal to the tax court in respect of the issues described in its notice of objection that meet the requirements of the large corporation/specified person rule.

Prior to the enactment of these rules, a number of large corporations had their tax years left open through outstanding notices of objection or appeals such that they had been able to raise new issues based on emerging interpretations and court decisions challenged by other taxpayers. The rules were intended to identify disputed issues sooner so that a taxation year's ultimate tax liability can be timely determined, and avoid appeals from dragging on.

Recently, in Ford Motor Company of Canada v. The Queen, 2015 TCC 39, Justice Boyle of the Tax Court of Canada (“TCC”) considered a Crown motion to strike portions of a Notice of Appeal under the ETA on the basis that the issues identified in the Notice of Appeal were not “reasonably described” in the Notice of Objection.  The decision includes a thorough analysis of the existing case law on the rule and a serves as an example of its sound, practical application.

Liquefied Natural Gas (LNG) has been making the headlines for the past year as a result of significant interest in potential sales to energy-hungry Asian markets from the coast of British Columbia. There are at least 19 LNG proposals for British Columbia, but so far none of the proponents have commenced construction.

Where a business provides both taxable and exempt services, claiming ITCs can become a thorny issue that generally requires an attribution of inputs between the business’ supply of exempt and taxable services.  Section 141.01 of the Excise Tax Act (“ETA”) creates a framework for allocating ITCs for non-financial institutions.  These rules require registrants to allocate ITCs in a manner that is “fair and reasonable”, which predictably leaves significant room for interpretation. 

In the recent decision in Sun Life Assurance Company v. The Queen (2015 TCC 37), the Tax Court of Canada considered whether ITC allocation in respect of leased office space was “fair and reasonable” under section 141.01(5).  The decision is notable for what it says regarding the concept of intention in allocating ITCs for the purposes of section 141.01(5). 

Determining whether contracts are for the sale of tangible personal property or for provision of services is often of central importance in provinces still levying Provincial Sales Tax (“PST”).  This issue has been the subject of on-going litigation in the context of providing oilfield services to oil and gas exploration companies in British Columbia and Saskatchewan.  A recent case from the British Columbia Court of Appeal (“BCCA”) provides practitioners with increased guidance on how to avoid application of PST on materials used in the provision of oilfield services.  The bottom line still remains:  get advice early and often !