Tax & Trade Blog

As we blogged about here, experienced indirect tax practitioners will know to always check section 154 of the Excise Tax Act (“ETA”) when dealing with provincial taxes and to think about whether the that provincial tax is excluded from the “consideration” for the supply. If the provincial tax is not excluded, it means that GST will be applied on top of the provincial tax — in effect meaning there will be tax (GST) on the tax (provincial sales tax).

The most recent issue of the CRA Excise and GST/HST News explained how the GST applies on top of British Columbia’s Major Events Municipal and Regional District Tax ( “Major Events Tax” or “MET”) and serves as another example of this principle in practice.

A common misconception when it comes to oil and gas trading with Canada is that, for GST/HST purposes, there will never be any obligations on foreign sellers selling on a DAP basis.* This is not true, and there can indeed by GST/HST collection and remittance obligations on US and international sellers, if certain conditions are met.

To understand why these misconceptions exist, one needs a deeper appreciation of the Canadian GST/HST legislation, found in Part IX of the Excise Tax Act(“ETA”), and also to get deep into the mindset of the Canada Revenue Agency (“CRA”), which administers the ETA and enforces GST/HST compliance.

Section 182 of the Excise Tax Act (“ETA”) generally deems any payment made to a registrant as a consequence of a breach, modification, or cancellation of an agreement (other than as consideration for a supply), to be a taxable supply. This rule, in effect, means that where there is a breach of an agreement to supply property or services, a payment to the supplier by the recipient to compensate for that breach will generally be deemed to include GST/HST.

Unfortunately, section 182 is often overlooked by parties resolving legal disputes, as the recent Tax Court of Canada (“TCC”) decision in THD Inc. c. La Reine, 2018 CCI 147 demonstrates.

Whenever a person imports commercial goods into Canada they are required to pay the GST at the border at the time of importation pursuant to Division III of Part IX of the Excise Tax Act (the “ETA”).   This GST rate is currently set at 5%. 

Those who are insufficiently familiar with Canada’s GST/HST system may find themselves treating this tax as a hard cost, or charging the GST/HST to Canadian customers and then keeping it as a form of reimbursement for the tax previously paid at the border.  Neither approach is correct.  

Subsection 223(1)of the Excise Tax Act (ETA) requires registrants to disclose sufficient information to their customers in respect of their customers’ GST/HST liabilities by indicating on any invoices/receipts issued to customers the net-of-tax price and the GST/HST thereon or if prices are on a tax-included basis, noting this on invoices/receipts issued to customers. 

Where a sales contract is silent with respect to the obligation to pay the GST/HST, disputes often arise as to whether the quoted price is tax-extra or tax-included. 

A recent case is a good example of the general disposition of Courts to conclude that where contracts are silent, GST/HST will generally still be payable!

It is not uncommon for the CRA to issue administrative policies or directives that provide CRA auditors and the public with direction on how the Excise Tax Act (ETA) or Income Tax Act (ITA) should be applied to certain industries/situations. While people may believe that following these directives means they are following the law, these directives are simply the CRA's view of how the law should be applied. Accordingly, they can sometimes be a source of false comfort, and not accurately reflect the law. Such was the case in the recent Tax Court of Canada (TCC) decision of Dr. Brian Hurd Dentistry Professional Corporation v. The Queen, 2017 TCC 142 (Brian Hurd) where the Court found the CRA GST policy statement was wrong and misleading.

After the recent decision of the Federal Court of Appeal (“FCA”) in Canada v. Callidus Capital Corporation, 2017 FCA 162 (“Callidus”), any secured creditors dealing with debtors that also have CRA issues, should immediately seek professional advice about the implications of this case before acting on their security interests to seize funds or property.

The reason for this gratuitous advice follows!

Subject to a few narrow exceptions, there are special income tax and GST/HST provisions giving the CRA super-priority to certain tax amounts in the possession of a tax debtor.  Specifically, unremitted GST/HST and unremitted income tax withholdings are both subject to a “deemed trust” in the hands of the taxpayer under special provisions in Excise Tax Act (ETA) and the Income Tax Act (ITA).   When funds or property of a tax debtor are paid over or seized by a tax debtor’s secured creditors that deemed trust remains intact, and the CRA holds a “super-priority” over those funds and that property.

In the past, secured creditors took the position that these rules and the “super-priority” disappeared on the subsequent bankruptcy of a debtor.

However, the Federal Court of Appeal in Callidus held that a tax debtor’s bankruptcy does not extinguish the Crown’s deemed trust over assets that were received or obtained by a secured creditor prior to the tax debtor’s bankruptcy.   More importantly, the FCA confirmed that secured creditors in these situations remained personally liable to the CRA for the tax debtor’s unremitted GST/HST and unremitted source withholdings, up to the value of the assets received or realized upon.

The Tax Court of Canada (TCC) recently considered how the GST/HST works in situations where individuals and businesses buy and sell used motor vehicles, and the case is instructive.

In Brian & Deborah Dewan Enterprises Ltd. v. The Queen (2017 TCC 135), the TCC dismissed the appeal of the appellant which failed to collect and remit the GST/HST on disposition of vehicles used in its commercial activities on the mistaken belief that the GST/HST was paid by the purchaser to the Ministry of Transportation (MTO) on registration of the vehicles. 

Businesses which fail to understand the possible interaction of the federal GST/HST and provincial sales tax in certain circumstances, for example, in this case, the Ontario Motor Vehicle Tax (MVT) on disposition of used vehicles, would be put in a disadvantageous position and suffer losses.

A director can defeat personal liability for his/her corporation’s tax debt by establishing that the director’s assessment was made more than two years after he/she has ceased to be a director of the corporation (section 325(5) of the Excise Tax Act (“ETA”); section 227.1(4) of the Income Tax Act).  What a director needs to do in order to demonstrate that there was an effective resignation? As discussed in the following cases, an objectively verifiable communication of a resignation to the corporation is required and that any mess up in the requirements of Ontario’s Business Corporations Act (“OBCA”) will affect the efficacy of the resignation.  When in doubt, it is advisable for directors to seek legal advice. 

In Excise and GST/HST News No. 101 the CRA clarified that in its view doctors/dentists and other medical practitioners must charge GST/HST on their on-call fees. 

Over the past several years, the CRA Audit Division has directed more attention to businesses that use Employment Agencies for their staffing needs.  If your business deals with Employment Agencies, Temporary Labour, Staffing Agencies, or other similar entities, consider consulting us for strategies on safeguarding your ITCs.

Whether or not a supply is a financial service is a significant issue for suppliers because suppliers of financial services are unable to claim ITCs for the GST/HST they pay on their inputs. Accordingly, financial service providers scrutinize their own suppliers carefully to ensure they are only paying GST/HST where appropriate.

New Brunswick is increasing its HST by 2%, effective July 1, 2016, resulting in an HST rate of 15%.

Businesses will need to consider which tax rate – the existing HST rate of 13% or the new HST rate of 15%, will apply to transactions that straddle July 1, 2016.

The concept of claiming input tax credits (“ITC”) for private businesses that provide both taxable and exempt services has recently been explored by the TCC (see for example: Sun Life (2015 TCC 37) and BC Ferry Services (2014 TCC 305)).  For real property, those businesses must determine the extent to which its property is used in making taxable or exempt supplies, and claim ITCs in line with that amount.  Although the same general principles apply with respect to public service bodies (“PSB”), PSBs can generally only claim ITCs in respect of real property where 50% or more of its property is used in making taxable supplies.  However, PSBs can make an election to have the same general proportional allocation rules apply.  In the recent decision of University of Calgary (2015 TCC 321) (with an identical decision reached in University of Alberta (2015 TCC 336)), the TCC considered PSBs that made such an election.  

The issue of single versus multiple supplies in the context of the GST is the subject of frequent litigation.  This is likely attributable to the fairly fact-driven analysis employed by the courts in determining the existence of single or multiple supplies and the arguably subjective nature of the test applied to those facts. 

The recent Tele-Mobile decision (2015 TCC 197) will likely do little to reduce the frequency of this issue coming before the courts; however, it does provide some additional clarity on how the issue should be analyzed.

Although section 323 of the Excise Tax Act imposes joint and several liability onto the corporate director for a corporation’s failure to remit GST/HST, this liability is negated if the director “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.”  In order to establish this due diligence defence, a director has to meet a fairly high threshold according to current jurisprudence.  The recent decision of Cherniak (2015 TCC 53), suggests that this defence will be very difficult to meet where the corporation assessed was involved in “artificial” transactions.

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.

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). 

Input Tax Credits (“ITCs”) are typically not available for “holding companies” that exist solely to hold shares or indebtedness of another company due to the fact that taxpayers are only entitled to ITCs in respect of tax paid on property or services acquired in the course of commercial activities. However, section 186(1) of the Excise Tax Act contains a special rule allowing a company to claim ITCs in respect of expenses “that can reasonably be regarded as having been so acquired for consumption or use in relation to shares of the capital stock, or indebtedness, of another corporation that is at that time related to” the company, in certain instances. 

In a recently released GST/HST ruling, CRA seems to place a high bar on the exempt treatment of administrative services acquired by an Insurance Company in operating its insurance business.  In RITS 154220 (Application of GST/HST to Insurance-related Administrative Services), the CRA effectively takes the view that virtually all administrative services acquired by an insurer are viewed by CRA as excluded from the financial services exemption, and therefore taxable for GST/HST purposes.