Recurring GST/HST Issues: A Hot Topics Overview

Transcription

1 Recurring GST/HST Issues: A Hot Topics Overview 1

2 Presenters Douglas Han, LL.B. Principal Veridical Tax Advisors Inc. Shawn Starkes, CGA Principal Veridical Tax Advisors Inc. 2

3 Agenda and Approach Introduction ITC Basics / ITC Hot Topics Hot Topics: Examples Summary Questions 3

4 ITC Basics / ITC Hot Topics 4

5 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 5

6 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 6

7 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? 7

8 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 , New Harmonized Value-add Tax System Regulations 8

9 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) 9

10 ITC Hot Topics Basics and Context Issues Examples 10

11 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

12 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 12

13 ITCs Importation of Goods United States USCO (registered) Canada No ss.178.8(3) agreement CANCO claims ITC on import 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 collect/remit CANCO 13

14 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 14

15 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) 15

16 ITCs Employee Reimbursements 16

17 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 17

18 ITCs Employee Reimbursements Documentation issue Eligibility for ITCs? Employer Reimbursement Supplier Supply Payment Employee online expense report/ receipts retained 18

19 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: Ref: ETA s

20 ITCs Coupons Product manufacturer and service provider Wholesale product sale Retailer Registrant (manufacturer) claimed ITCs under coupon rules Invoice reduced to customer not a coupon Use of s rebate provision - tax included reference required Retail product sale Customer Ref: Tele-Mobile Company Partnership v. The Queen, 2012 TCC

21 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) 21

22 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) 22

23 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 23

24 ITCs Holding Companies Management Company claims ITC for tax on taxable advisory services fees with no direct taxable supply being made 100% Parent Company 100% Operating Company Loans Management Company Taxable advisory services Service Provider 24

25 ITCs Holding Companies Parent Company BuyerCo 100% BuyerCo offers to purchase all Holding Company shares Holding Company 100% SubOpco BuyerCo claims ITCs for advisory services on proposed purchase of Holding Company shares Parent Company claims ITCs on services relating to sale of Holding Company shares? 25

26 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 26

27 ITCs Amalgamations Potential exception for Amalco claiming ITCs Shareholders Shareholders Newco Opco Amalco (Newco + Opco amalgamate) Taxable advisory service Professional Advisor CRA s position has been no ITCs where Newco did not make/or intend to make a supply before amalgamation 27

28 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 , ss. 186(1)(2), GST/HST Policy Statement P-219 Registration of a Partner 28

29 ITCs Partnership Issues Partner Company A Partner Company B No ITCs for Holding Partnership on expenses relating to holding shares of Opco Holding Partnership 100% Opco 29

30 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,

31 ITCs Pensions Employer Investment Management Services Investment Manager Pension Plan Employees Employer funds pension plan Pension Funds Pays the Investment Manager from Pension Funds 31

32 HOT TOPICS Examples and Illustrations 32

33 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

34 Gift Certificates Application under revised CRA policy Promoter (markets cards online) Sale of $25 qualifying gift card for $20 - No tax Retailer Promoter required to collect GST/HST for any marketing charges, if any Customer 34

35 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 , P-051R2-Carrying on Business in Canada 35

36 Challenges for Non-residents Trapped tax due to transaction flow Canadian Subsidiary Supplier Invoice for service not zero-rated includes tax US Parent Supplier (not registered) Invoice for service includes embedded tax Canadian Subsidiary Customer Invoice for service includes embedded tax US Parent Customer (not registered) Potentially also subject to tax as an imported service 36

37 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

38 Drop-shipments Brazil Processor Canada Goods shipped 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 (Non-Registered) Possible flow through ITC - s.180 ETA 38

39 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 39

40 Buying Agents vs. Re-supply Accounting service provided Re-supply at different rates Alberta Supplier (re-supplies service) Ontario Service Supplier NFLD Customer 40

41 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? 41

42 Corporate Groups ParentCo SupplierCo Taxable service Purchasing Company (re-supplies service) Exempt service 150 election SFI Election not advantageous in this case No election, GST/HST fully recoverable No ITC making exempt supply Customer 42

43 SUMMARY Understand the transaction Consider CRA views Documentation Manage risk 43

44 QUESTIONS 44

45 This webinar is brought to you by CCH Canadian and in partnership with Veridical Tax Advisors Inc. Douglas Han: Shawn Starkes: For more information please contact CCH customer service at Visit for a full list of our webinars. 45