Tax & Trade Blog

Businesses engaged exclusively in commercial activities get full input tax credits (“ITCs”) enabling them to recover all the GST/HST they pay in the course of their business activities.  Organizations engaged exclusively in “exempt” activities (financial services, healthcare, educational-related institutions) get no ITCs, meaning that GST/HST is a hard cost in their business. 

In between the two are businesses that carry on BOTH commercial and exempt activities, and in order to determine the ITCs these businesses are eligible to claim, a “fair and reasonable” allocation method has to be used.  A recent decision of the Tax Court of Canada (the “TCC”) in Marine Atlantic Inc. v. The King (2023 TCC 95) explores what that really means.

The Tax Court of Canada recently released its decision in Windsor Elms Village for Continuing Care Society v. The King (2023 TCC 58), which dealt with the application of the GST/HST self-supply rules to a long-term care facility for seniors. The decision illustrates the complexity of the self-supply rules under the Excise Tax Act (“ETA”), especially in the context of mixed use or exempt use real estate transactions.

Since the inception of the GST/HST in 1991, the Canada Revenue Agency (“CRA”) has taken what we consider to be a strict approach to the documentary/information requirements under section 169(4) of the Excise Tax Act (“ETA”), which must be met in order to claim input tax credits (“ITCs” and the “ITC Information Requirements”). This approach has likely lead to millions if not billions of ITC denials, leaving GST/HST registrants unable to recover GST/HST paid on their business inputs, and leaving the costs of their goods and services artificially too high – because of this unrecoverable GST/HST left embedded in the system.

In what we regard as potentially the most important case in decades, the Tax Court of Canada’s (“TCC”) decision in CFI Funding Trust (2022 TCC 60) underscores that CRA’s strict approach is overly technical and incorrect!

Subsection 141.01(2) of the Excise Tax Act (“ETA”) deems a property or service acquired for use in a business to be for use in commercial activities only to the extent that it is used in the making of taxable or zero-rated supplies. On the other hand, subsection 141.1(3) provides that any action of a person in connection with the acquisition, establishment, disposition, or termination of a commercial activity is deemed to occur in the course of commercial activities. An apparent conflict therefore exists where a property or service is acquired by a registrant in connection with the acquisition, establishment, disposition or termination of a commercial activity, but where taxable supplies have not yet been made or have ceased: a registrant is deemed to have incurred the property or service in the course of commercial activities by subsection 141.1(3), but also deemed to have incurred same in the course of non-commercial activities by subsection 141.01(2).

The Canadian government has chosen to make many financial services tax exempt under the Excise Tax Act (“ETA”). In particular, under the definition of “financial service” in ss. 123(1) of the ETA, a service is an exempt financial service where it is included in any of paras. (a) to (m), and not excluded by any of paras. (n) to (t). Unfortunately, determining what constitutes a financial service and what ancillary or supporting activities are subject to GST/HST is not always clear. It’s been particularly difficult since the introduction of Bill C-9, the Jobs and Economic Growth Act (“Bill C-9”) on March 29, 2010, which refined the definition of “financial service” in ss. 123(1) to clarify that that services that support the delivery of a financial service that are in the nature of management, administration, marketing or promotional activities are not themselves financial services and are thus taxable.

The Bill C-9 changes have created considerable uncertainty in many industries as to whether exempt financial services under ss. 123(1) prior to the enactment of Bill C-9 remained exempt after the Bill C-9 changes. The uncertainty was particularly felt by issuers, acquirers, merchants, credit card companies, and any other entity that operates in the payment/credit card processing industry where prior to Bill C-9 the ss. 123(1) definition of financial service had been broadly applied to ancillary services in cases such as Costco Wholesale Canada Ltd. v The Queen, 2009 TCC 134.

That said, the question of whether or not parties operating in the payment/credit card processing are supplying exempt financial services has gotten even more uncertain after the recent decision of the Tax Court of Canada (“TCC”) in CIBC v The Queen, 2018 TCC 109 (“CIBC”).

Over the past several years, the CRA Audit Division has directed more attention to businesses that use Employment Agencies for their staffing needs. We understand that many businesses dealing with Employment Agencies, Temporary Labour, Staffing Agencies, or other similar entities, have already been contacted by CRA Auditors looking to confirm their eligibility for Input Tax Credits (ITCs).

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.  

Section 224 of the Excise Tax Act (ETA) allows a supplier who has remitted GST/HST collectible from, but as yet unpaid by, a recipient, to sue the recipient for the tax remitted as if it were a debt owed to the supplier.  

There has been little case law or helpful interpretative materials from the CRA on this provision.

A recent case seems to clarify that where a supplier fails to charge and collect the GST/HST initially, the two-year limitation period on such a claim runs from the time that the supplier pays same to the CRA when assessed for the unremitted GST/HST.

In the recent case of Club Intrawest v. Her Majesty the Queen (2017 FCA 151), the Federal Court of Appeal (the "FCA") was faced with a unique fact pattern not contemplated by the legislation. In dealing with this unusual situation, the FCA did what common law courts do best, and improvised a solution which it considered both fair and legally justifiable. In the process, the FCA has introduced a new gloss on the common law "single versus multiple supply analysis" and held that even where a recipient is only charged a single amount of consideration, a court may nevertheless find that there were two separate supplies, each with different tax treatment.

Most businesses will, at some point, have to deal with a situation where they have made advance payments for goods and services that never end up being provided.  The cause for this non-supply is often due to the fact that the supplier has become impecunious.  This results in obvious commercial headaches for the recipient, which can be exacerbated by corresponding GST implications. 

Typically in such situations, the recipient will pay GST to the supplier in respect of the advance payment and take a corresponding Input Tax Credit (“ITC”) in its next GST Return.  The supplier is required to remit that GST collected to the fisc.  Pursuant to subsections 232(1) and (3) of the ETA, where the supplier will not be making the supply (or, for other reasons, reduces the consideration owed for the supply), it can adjust, refund or credit the amount collected (including the GST collected), and issue a “credit note” to the recipient.  In turn, pursuant to paragraph 232(3)(b), the supplier can apply an adjustment in its next GST return to reduce its net tax by the GST amount in the credit note.  Correspondingly, pursuant to paragraph 232(3)(c) the recipient is required to apply an adjustment to increase its net tax by the same amount (to account for the portion of the ITC previously taken, but now credited). 

To the extent that the supplier is impecunious, the recipient will be left with a situation where it has had to increase its net tax, pursuant to a credit note received that will never actually be honoured.  This was exactly the situation in the TCC decision in North Shore Power Group Inc. (2017 TCC 1).

The recent Tax Court decision in Les Ventes et Façonnage du Papier Reiss Inc. v The Queen (2016 TCC 289) (the “Reiss Case”) places new emphasis on the verification obligations of GST/HST and QST registrants claiming input tax credits (“ITCs”), confirming and expanding the “duty of verification” first asserted by the CRA in Salaison Lévesque Inc v The Queen (2014 TCC 36: at para 86).

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.

In The Great-West Life Assurance Company v The Queen (2016 FCA 316) [“Great-West Life”], the Federal Court of Appeal upheld the TCC’s decision that services related to processing claims for drug benefits were not financial services, and so not exempt from GST/HST.

Section 141.1(3) of the of Excise Tax Act (“ETA”) broadens the scope of what is considered to be in the course of commercial activities to activity done “in connection with” extraordinary transactions such as starting and winding-up commercial activities.  The Tax Court of Canada (“TCC”), in Onenergy Inc. v. The Queen (2016 TCC 230), discussed how the section should be interpreted.

For years, the CRA has consistently assessed taxpayers for GST/HST and interest in circumstances where although there was technical non-compliance with the rules, there was no true financial impact to the government. Examples of such situations (e.g. so called “wash transactions”) would include the wrong person collecting and remitting the GST/HST in a closely related group, or GST/HST not being collected in circumstances where the recipient would have been entitled to a full Input Tax Credit (“ITC”) in any event.

The practice of demanding interest for monies that the CRA already had in its possession, albeit received from another person, is viewed as patently unfair by many of the taxpayers so assessed. In the recent GST/HST case Gordon v AGC (2016 FC 643), the Federal Court put into issue the fairness of the CRA’s approach, and found that the CRA must consider waiving interest in these circumstances on a case by case basis.

If your business ever provides a good or service in exchange for advertising, you should be aware of a recent CRA ruling (RITS 2015-158946), dated November 4, 2015), which sets out how GST/HST applies to barter transactions and includes an example of a person who exchanges advertising services for goods or services. Case law such as 9022-8891 Québec Inc. (2006 TCC 60)confirmed that a barter of goods or services for advertising may constitute two taxable transactions for GST/HST purposes. RITS 2015-158946, however, provides more details on the tax consequences of a barter exchange - consideration, place of supply, input tax credits, and zero-rating - and represents a blueprint for the GST/HST analysis of barter transactions.

Living Friends Case - In Living Friends Tree Farm (2016 TCC 116), the central issue was whether the taxpayer’s expenses in respect to preparation for a Christmas tree farm were incurred in relation to commercial activity.  The TCC held for the Minister, noting that it was impossible to determine how much of the alleged commercial venture was genuinely commercial and how much reflected the registrant’s personal lifestyle desires.

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.  

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.