Commodity tax highlights

By Shashi Fernando-Eden
Illustration: Jason Schnieder

While the GST has been a part of tax life for more than 10 years,
there's always something new to consider

When it comes to the goods and services tax/harmonized sales tax (GST/HST), matters are rarely free from trouble or doubt. Despite the fact that the GST has been around for more than 10 years, issues continue to arise in a broad range of the legislation. However, recent changes and issues concerning the GST will assist taxpayers in complying with the GST legislation and implement effective tax planning strategies. The most recent round of provincial budgets resulted in some changes to retail sales tax legislation. The most significant changes are outlined here.

GST/HST changes affecting municipalities
Several important technical changes affecting municipalities were announced. Municipalities (cities, towns, villages and those entities determined to be a municipality by the Minister of National Revenue) were entitled to claim a public service bodies' rebate of 57.14% of the GST, or the federal portion of the HST that is not recoverable as an input tax credit. The rebate percentage was increased to 100%. The provincial portion of the HST is not affected. The increased rebate applies only to GST or the federal portion of the HST that becomes payable or is paid after January 31, 2004.

The legislation was enacted May 13. The Canada Revenue Agency (CRA) will now pay out the increased rebate. A notice providing instructions on how to claim the rebate was released in June.

• If a municipality has already filed for the additional rebate for a claim period, the rebate will be paid shortly. The CRA will pay the applicable interest (which applies 21 days from the date the CRA receives the application).
• If a municipality has only filed for the 57.14% rebate for a claim period, the municipality can submit another rebate for the same claim period for the increased amount (write "additional rebate amount" at the top of the form).
• If the municipality has not yet claimed the municipal rebate for a claim period, the municipality can claim the rebate using the application form (at line 300, cross out 57.14% and indicate 100%).
  
  Several supplies made by municipalities will be affected by the introduction of the increased rebate. However, the change does not affect the exemption on supplies of municipal services, such as public transit and water and sewer services, or other general exemptions (leases of residential units or sales of used residential property). The new rules apply to supplies where consideration becomes due after March 9, unless the supply is made under an agreement entered into before March 10. Changes include the following:
• most supplies of personal property by a municipality will be taxable;
• municipalities that are charities cannot avail themselves of the "charity" rules;
• the direct cost exemption will no longer apply to municipalities; and
• the exemption for supplies of real property made by public service bodies will not apply to municipalities.

Municipalities should ensure they collect GST/HST on supplies rendered taxable under the changes. The changes are retroactive to March 10, and it may be difficult to collect the GST/HST after the supplies are made. As a result, municipalities should review the tax application to all of their supplies to ensure the correct application of GST/HST.

As a result of the increase to the rebate percentage, new remittance rates for municipalities using a simplified method are required to calculate their GST/HST remittance. The new rates apply to reporting periods of a municipality ending after January. The new rates will not apply to a reporting period that includes February 1, where consideration was paid or became payable before February 1. Municipalities should review whether the benefits of us- ing a simplified method outweigh the reduced financial benefit of remitting the full amount of GST on their taxable supplies.

Promotional allowances
To explain a particularly confusing topic, the CRA recently issued a draft policy statement on the GST/HST treatment of promotional allowances. It clarifies the meaning of promotion and assists in determining whether an amount paid, credited or allowed as a discount is an amount in return for the promotion of the property (e.g, goods) for purposes of Section 232.1 of the Excise Tax Act (ETA). The policy statement indicates that for purposes of Section 232.1, the term "promotion" means "efforts, activities or actions that directly or indirectly inform, persuade and influence the acceptance, distribution and sale/purchase of a product." Generally, a promotional allowance is an amount paid by a manufacturer to a reseller/wholesaler/distributor who agrees to promote the manufacturer's goods.

The draft policy statement considers the following as promotional allowance: cooperative advertising allowances, retail display or space allowances, temporary price reduction programs, conference and trade show sponsorships, new product list fee and new product allowances, store opening allowances, signing bonuses, brand-specific advertising, exclusivity fees, and fees for the non-promotion of the competition's product.

Essentially, if the requirements of Section 232.1 are met, a promotional allowance is not regarded as consideration for a supply and therefore no GST/HST applies. This means the reseller would not be required to collect GST/HST on the amount received. However, this does not mean there are no GST/HST implications to the payment of the allowance. The treatment of the allowance depends upon the manner in which the allowance is paid or credited to the reseller of the goods in question.

If the allowance is given as a discount or credit against the price of goods after the consideration for the original supply has been invoiced or collected, the allowance is treated as a price reduction of those goods and is subject to the debit/credit note rules. The manufacturer can choose to adjust the tax by issuing a credit note or not adjust the tax. If the manufacturer chooses to add GST/HST to the allowance, the manufacturer must issue a credit note and then may deduct the amount of tax credited on its GST/HST return; the reseller must add the amount of tax credited to its GST/HST return. If the manufacturer chooses not to add the GST to the allowance, the promotional allowance has no GST consequences. If the allowance is given as a discount or credit against the price of goods and GST has not yet been charged or collected on the selling price of the goods, GST applies to the selling price of the goods net of the promotional allowance.

Where the promotional allowance is not a discount or credit against the price of the goods, the allowance is deemed to be a rebate for purposes of Section 181.1 of the ETA. This also means the supplier can choose to treat the allowance as tax-included or tax-excluded. If the allowance is treated as tax-excluded, there are no GST implications to the supplier or the recipient. Conversely, if the allowance is tax-in-cluded, the supplier may claim an input tax credit for the amount of tax included in the allowance where the supplier provides written indication to the recipient of the allowance that the allowance includes GST, and that, in turn, requires the recipient of the allowance to report the amount of GST included in the allowance as tax collected or collectible on its GST return.

It should be noted if the allowance is received by someone other than the recipient who acquired the goods or is paid by someone other than the supplier of the goods, then Section 232.1 would not be applicable and the supply is a taxable supply. Therefore, to ensure compliance, registrants should, on a case-by-case basis, determine the GST consequences of var-ious allowances paid or received. Certain allowances (volume discounts, freight allowances, percentage allowance in lieu of returning goods) will continue to be consideration for a supply or a reduction of consideration. If an adjustment to tax is made or tax-included rebate is provided, the manufacturer must satisfy the relevant documentary requirements.

De facto importer
Who is entitled to claim input tax credits (ITC) for the GST paid on the importation of goods is a never ending debate. The much-anticipated change to the de facto importer approach was included in the Notice of Ways Means Motion in October 2003. The proposed amendment will apply to goods imported on or after October 3, 2003.

Where a registrant pays GST, a registrant is eligible to recover the GST as an ITC to the extent it relates to its commercial activities. However, the CRA's policy is that only the de facto importer is eligible to claim an ITC for GST paid on the importation of goods into Canada. According to the CRA's administrative policy, a de facto importer is the person who caused the goods to be imported into Canada. If the goods are acquired outside Canada and brought into Canada by the purchaser, the purchaser is generally considered to be the de facto importer. However, if the vendor imports the goods into Canada for delivery in Canada, then the vendor is the de facto importer and is the person eligible to claim the ITC for the GST paid on the importation. The problem arises where the delivery of goods occurs outside Canada and the vendor acts as importer of record. The CRA has disputed the vendor's entitlement to claim ITCs in this situation on the basis that once legal delivery has occurred, any expense incurred by the vendor is not for its "consumption, use or supply." Proposed Section 178.8 sets out new rules in an attempt to resolve this issue.

Proposed new Section 178.8 is intended to ensure that the recipient of the imported goods is in the position to claim an ITC, provided the recipient obtains the necessary documentation to substantiate the claim. The amendment implements a deeming provision where the concept of "constructive importer" (the person who is the last to whom the supply is made outside Canada) is introduced. Where the goods are delivered outside Canada, this provision deems the constructive importer to have imported the goods and paid the GST on the importation on its own behalf and not by or on behalf of any other person. Thus, only the constructive importer can claim an ITC for the GST paid on importation provided the constructive importer meets the documentary requirements for claiming an ITC. Therefore, where another person accounts (supplier) for goods on their importation, that other person would have to pass on to the constructive importer the necessary information to substantiate an ITC claim.

The proposed amendment also provides two exceptions to the deeming rule. First, if a registered supplier delivered goods outside Canada to the constructive importer accounts for the goods at time of importation, the supplier does not have to provide the import documentation to the constructive importer for purposes of recovering the tax paid on the goods. Under this proposed exception, the supplier and the constructive importer of the goods have the option of entering into an agreement that has the effect of permitting the supplier to claim an input tax credit for the GST paid on the importation. Under these circumstances, the supply is deemed to be made in Canada and the supplier would have to charge the constructive importer GST on the sale of the goods. The constructive importer would in turn be entitled to claim an ITC for that tax, provided the constructive importer met all other conditions for claiming the ITC.

At this time there is no prescribed form or prescribed information available. However, it is the CRA's recommendation that a jointly signed document identifying the goods and stating that both parties agree to have the supplier claim the ITC and both agree to treat the sales as if they had been made in Canada. The document does not have to be sent to the CRA but should be dated and kept on file.

The second exception to the deeming rule in new Section 178.8 is where the constructive importer and the supplier do not opt to treat the supply as if it was made in Canada. In this case, the constructive importer and the supplier agree the person who acted as the importer of record can claim the abatement or refund where the GST amount paid on importation is reduced under specific relieving provisions. The importer would have to issue a tax adjustment note to the constructive importer indicating the amount of abatement or refund obtained and the constructive importer would have to make the necessary adjustments to its net tax.

It is important to note that new Section 178.8 is not intended to interfere with the operation of existing mechanisms. Under subsection 169(2), a registered person who imports the goods of an unregistered nonresident for the purpose of providing a taxable service in respect of those goods is entitled to claim ITCs for tax payable on those goods at time of importation provided certain conditions are met. Section 180 applies when a nonresident, nonregistered supplier imports goods into Canada, pays the GST on importation, and delivers the goods to a registered purchaser in Canada (in that case, the purchaser may claim an ITC for the amount of GST paid by the supplier).

Ontario
This fall, draft retail sales tax regulations relating to exempt transfers of assets between related corporations will be issued. In addition, rules for the transfer of assets between partnerships and their principals will be regulated and made consistent with the rules for related corporations. The proposed effective date would be the release of the draft regulations.

The rebate for vehicles purchased to transport persons with permanent physical disabilities has been eliminated. Rebates will no longer be provided for motor vehicles purchased or leased on or after May 19. Rebates will be paid for qualifying vehicles purchased on or before May 18 and delivered before August 1. The exemption for equipment (wheelchair lifts, ramps, tie-down systems to accommodate a wheelchair or hand controls designed to assist drivers with a disability) designed solely for the use of people who are chronic invalids or have a physical disability remains.

The government proposes to proceed with the changes to simplify procedures for claiming exemption from retail sales tax on purchases, such that a Purchase Exemption Certificate will no longer require a signature, a list of items or an expiry date.

Quebec
The measures concerning the full GST rebate to municipalities will not apply for Quebec sales tax purposes. Municipalities remain ineligible to a partial rebate relating to their exempt activities. The Quebec sales tax provision will be changed to specify that the supply of municipal transit services will be exempt where it is made to a government or government body that is exempt from paying tax. This change is retroactive to April 23, 1996. It is intended to counter the argument that financial assistance received by municipalities from government bodies is consideration for a taxable supply.

The Ministére du Revenu du Quebec issued a revised interpretation bulletin to clarify the terms and conditions of the administrative policy with respect to the simplified calculation methods, which can be used by an employer to determine the allowable input tax refund (ITR) in respect of expenses an employer reimburses to employees. The bulletin contains a change for large business that use the 4.1% simplified factor to recover the Quebec sales tax reimbursed through expense reports. If an employer uses the 4.1% factor on expense reports and chooses to pay some expenses directly to the supplier, the employer can now only claim 4.1% of the available ITR in respect of the invoices paid directly to the supplier. If an expense paid directly to the supplier is subject to the ITR restrictions, then no ITR is allowed.

British Columbia
The exemption for software incorporated into other software for retail sale was expanded. Now software acquired exclusively for the purpose of making copies to incorporate into other goods for retail sale or re-licensing copies of the software for retail sale is exempt.

The application of tax where taxable and nontaxable goods and/or services are sold for a single price (bundled purchase) has changed. Generally, sales tax applies on the fair market value of the taxable portion. Now for bundled purchases, tax will apply to the fair market value of the taxable component with the following exceptions:

• no tax applies if the value of the taxable portion is $50 or less and represents 10% or less of the total selling price;
• tax applies to the total purchase price if the package is sold for $500 or less and the fair market value of the taxable portion is 90% or more; and
• no tax applies if the tangible personal property is incidental to the purchase of a service that is not subject to tax (e.g., drawings provided under a contract for architectural services, research reports provided under a contract, or master copy of a movie provided under a movie production contract).

The exemption on production equipment for waste management and pollution control equipment is restricted to manufacturers who are eligible for the production machinery exemption and the machinery and equipment is purchased for use at an eligible site.

The legislation has been clarified regarding the application of tax to returnable and reusable containers. Tax applies to containers that are capable of being returned and reused. Tax applies regardless of whether the containers are purchased in BC or brought into the province. Tax does not apply if there is evidence that the containers will not be returned after sale.

Manitoba
The provincial sales tax base was expanded to include certain legal, accounting, architectural, engineering, alarm-monitoring and private investigation services. Effective July 1, retail sales tax applies to these services. For contracts that straddle the effective date, service provided on or after July 1 will become taxable.

Saskatchewan
The provincial sales tax rate in Saskat-chewan was increased to 7% from 6%. The new rate applies to all taxable sales or leases made on or after April 1.

Changes to provincial sales tax in the various jurisdictions in the respective budget announcements were minimal. The above-noted discussion highlights some of the changes. Reference should be made to the budget documents for further detail.