GST/HST Tips and Traps February 11, 2014 Presented by: Katherine Xilinas kxilinas@millerthomson.com Stephen Rukavina srukavina@millerthomson.com
Overview 1. Introduction 2. Real Property 3. Asset Purchases and Related Party Transactions 4. Cross-Border Transactions
INTRODUCTION: When Does GST/HST Apply? On taxable supplies of goods and services made in Canada (collected by vendor) On importation of goods into Canada (collected by CBSA at the border points of entry) On self-assessment in certain situations (paid by recipient of supply)
INTRODUCTION: Characterization of Supplies Property Real property Tangible personal property (goods) Intangible personal property Services Taxable supplies - includes zero-rated supplies Exempt supplies - distinguish from zero-rated
GST/HST & REAL PROPERTY: Definition of Real Property - s. 123(1) Any interest in real property (legal or equitable) Every estate or interest in real property, whether legal or equitable is, itself, real property For example, an option on, or a leasehold interest in, real property is real property Definition also includes mobile or floating homes and any interest therein
GST/HST & REAL PROPERTY: Liability for Tax Real property sales are subject to tax unless specifically exempted, because: the supply of real property is always made in the course of a commercial activity unless specifically exempted under Schedule V - s. 123(1) a non-registrant may have to collect tax on a supply of real property - s. 221 even a small supplier is required to collect tax on a taxable sale of real property (unless purchaser is a registrant) - s. 166
GST/HST & Real Property: Collection and Remittance of Tax S. 221(2)(b) no tax is collected on real property sold to a registered person A registered purchaser of real property must self-assesses tax - s. 228(4) S. 221(2)(b) is mandatory vendor must not collect tax from a registered purchaser A person whose only commercial activity is the taxable sale of real property need not register - s. 240(1) An unregistered vendor who collects tax on a real property sale reports on a monthly basis - s. 245(1) Unrecovered tax previously paid on acquisition or improvements to RP by an unregistered vendor can be recovered when the property is sold in a taxable supply - ss. 193, 257
GST/HST & REAL PROPERTY: Timing of Payment of Tax Tax on a taxable sale of real property becomes payable when ownership is transferred or when possession is transferred under the agreement of sale, whichever occurs first - s. 168(5) Tax on a taxable lease, license or similar arrangement becomes payable when the rents are paid or become payable under the lease, etc., whichever occurs first - ss. 168(1), 152(2)
GST/HST & REAL PROPERTY: Exempt Supplies (V-1) Sale of used residential real property (half hectare rule) Sale of leased land that forms part of a residential complex, where land sold w/o building Sale of personal use real property by individual or personal trust - can not have been subdivided into more than 2 parts (exception where part(s) acquired by a former spouse or relative for personal use)
GST/HST & REAL PROPERTY: Exempt Supplies Exempt leases of residential real property (same tenant for at least one month or rent does not exceed $20/day) Transfer of farmland to a relative for personal use or change in use of farmland to personal use Exempt supplies by public sector bodies (but be careful many supplies of RP by PSBs are taxable)
GST/HST & REAL PROPERTY: Liability for Misrepresenting Exempt Status The use to which real property is put before being supplied can determine whether the supply is taxable generally, the purchaser is unable to ascertain use pursuant to s. 194, where the purchaser obtains written confirmation from the supplier that a supply of real property is exempt as used residential real property, the purchaser is relieved of any obligation to pay GST if it is subsequently determined that the exemption did not apply and the supply was taxable the vendor is then deemed to have collected GST on the supply s. 194 does not protect the purchaser where the purchaser knew, or ought to have known, that the supply was not exempt
GST/HST & REAL PROPERTY: Combined Supplies - s. 136 Specific rules require that combined supplies of real property are accounted for separately s. 136 contains rules specific to real property that require that taxable (e.g., commercial) and exempt (e.g., used residential) supplies of real property be accounted for separately however, s. 138 could deem personal property that is incidental to real property to form part of the real property where the two are supplied together for a single consideration E.g., chattels (fridge, stove) supplied with a new house or condo and included in the purchase price But be careful
GST/HST & REAL PROPERTY: Incidental Supplies - s. 138 CRA policy: Is the supplier's primary objective to provide a particular property or service, or several properties or services together? Is the value of consideration charged for a particular property or service provided together with other properties or services the same as, or only marginally different from, what the value of the consideration for the particular property or service would be if it were provided alone?
GST/HST & REAL PROPERTY: Incidental Supplies s. 138 9056-2059 Quebec Inc. v. The Queen, [2011] GSTC 143, 2011 FCA 296 Secondary does not equal incidental Minor, non-essential Small value in relation to the principal supply (< 10%?) Not intended to apply to transactions where application would have significant tax revenue implications
GST/HST & REAL PROPERTY: Definitions Key - Builder The definition of builder is important in determining: whether the exempting provisions apply to the supply of a residential complex (tax status depends on whether supplier is a builder e.g., sale of a previously unoccupied residential complex is exempt if sold by someone other than the builder) whether a rebate is available (rebates for new housing and new residential property are generally only available where the home is supplied by a builder) if tax is to be self-assessed on a newly constructed or substantially renovated residential complex (conversion to use)
GST/HST & REAL PROPERTY: Self-Supply Rules for Residential Property s. 191 Require that a builder account for tax on a new residential complex when the complex is supplied (but not sold) as follows: Occupancy given to a tenant; Occupancy given to the builder or a related person; Possession of a condominium given to a purchaser who subsequently defaults
GST/HST & REAL PROPERTY: Exceptions to Self Supply Rules Self-supply rules do not apply to: An individual builder who uses the complex primarily as his or her place of residence (provided builder has not claimed ITCs w/r/t construction or renovation) A student residence constructed by a university, public college or school authority A builder who constructs remote housing for employees A communal organization (as defined under s. 143 of the ITA)
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Section 273 Joint ventures not included in definition of person in ss. 123(1); therefore, each participant must account for GST/HST on a pro rata basis Joint venture election in s. 273 enables one member of the joint venture (the operator ) to collect and remit GST/HST and claim input tax credits on behalf of the joint venture.
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Requirements for Section 273 1) Joint venture cannot be a partnership; 2) Joint venture must either be: for the exploration or exploitation of mineral deposits (including gravel, sand, coal, oil shale, etc.) or for a prescribed activity (includes the construction of real property and activities relating to the sale of lease of real property) 3) There must be a joint venture agreement, evidenced in writing; 4) Operator must be a registrant as defined in subsection 123(1); 5) Operator must be a participant in the joint venture; 6) Operator and the co-venturer must jointly complete Form GST21 or a statement containing the prescribed information
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Election Process Process described in ss. 273(4). No need to file with Department
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Effect of Election All activities of the joint venture are for GST/HST purposes, included in the activities of the operator as if the operator were carrying on the commercial activities of the joint venture. Supply of property or service by an operator to a co-venturer is generally not subject to GST/HST if the property or service is for consumption use or supply in commercial activities of the joint venture. ss. 273(5) provides for joint and several liability between all electing participants and the operator for GST/HST obligations.
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Issue: Who accounts for GST on behalf of a joint venture? Under s. 273 of the ETA, only a participant in a joint venture can be designated as an operator for the purposes of a s. 273 election
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Can a bare trust holding legal title to real property account for GST on behalf of the beneficial owners of the property? A true bare trust is merely vested with the legal title to the property and has no other duty to perform, responsibilities to carry out or powers to exercise in respect of the property; as a result, it does not carry on the commercial activity that relates to the property and should not account for GST/HST denial of ITCs
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Lau v. The Queen, [2007] TCC 718 must have an ownership interest or participate in the profit/losses of the joint venture; or must have an operational or managerial role in the activities of the joint venture
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Recent CRA Rulings (2013): For the purposes of the s., 273 Election, a person who does not invest in the joint venture may be considered to be a participant in the joint venture if that person is designated as the operator of the joint venture under an agreement in writing and has managerial or operational control of the joint venture. The agreement in writing merely has to identify the person as the operator of the joint venture. Whether the person has managerial or operational control is a question of fact which is determined via a full examination of the person's duties. For a person to have managerial or operational control of a joint venture the person must have authority to manage the joint venture's daily activities without needing the input or approval of any financial participant. This may include the management of the accounts, the filing of the GST/HST returns and the daily administration of the joint venture's activities. Where the person has engaged no staff to perform any of the operator's duties it is doubtful whether they have managerial or operational control.
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures CRA Audit Manual: If the wrong person claims the ITC where there is an agency or bare trust and it is unclear who should have claimed the ITC, the error can be corrected within the fouryear period under subparagraph 225(4)(b) of the ETA. If the issue arises on audit, the incorrectly claimed ITC will be reversed by way of assessment and subject to penalty and interest.
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures GST/HST Notice 284 February 6, 2014: temporary administrative tolerance where nominee/bare trustee has been designated the operator of a joint venture but does not have managerial or operational control and is therefore not a participant auditors advised not to assess for GST/HST owing where an assessment could be raised because the nominee/bare trustee is accounting for GST/HST on behalf of the joint venture administrative tolerance contingent on all returns having been filed and all amounts remitted and on JV partners being otherwise fully compliant on a going forward basis, JVs must re-arrange their affairs to ensure that a participant is the operator of the JV for GST/HST purposes administrative tolerance available for reporting periods ending before January 1, 2015.
GST/HST & REAL PROPERTY: Bare Trusts & Joint Ventures Agency election (s. 177(1.1)) may also be available if nominee/bare trustee acting as agent of co-venturers in making supplies agent can account for tax But beware: agent not entitled to claim ITCs
Business Sold by Asset Sale Categorize each asset as exempt, zero-rated or taxable Personal property used in a commercial activity generally taxable when sold or leased unless exempt or zero-rated (Section 141.1(1)(a))
Real Property: Sections 221(2) & 228(4)(a) Special rules for taxable real property to relieve cash flow issue Vendor doesn t collect GST if purchaser GST registered (extra conditions if purchaser an individual) Purchaser required to self-assess GST offset by ITCs = No net tax to remit
Personal Property Not Used in Commercial Activities: Section 141.1(b) Personal property not used in commercial activity generally not taxable when sold Vendor must have acquired, imported, manufactured or produced the property Are customer lists produced? Yes Is goodwill produced? Maybe Section 167.1 may eliminate GST on goodwill
Section 167 Election: Overview Can eliminate GST on asset sale Section 167.1 provides similar rule for goodwill but somewhat easier to satisfy Abused provisions
Conditions for a Section 167 Election Vendor registrant then purchaser must be registrant Purchaser must acquire an established business or part of a business Vendor established, carried on or acquired the business or part
Conditions for a Section 167 Election Cont d 4. Purchaser is acquiring all or substantially all of the property that is reasonably necessary to carry on the business or part & 5. Joint election & filed if purchaser registrant
Business or Part of a Business Generally not difficult to know when an entire business is purchased But what is part of a business? People often interpret it to mean individual assets... CRA has a very different view
Business or Part of a Business Cont d CRA s view: Franchise or branch of a business that Functions as a business on its own & has its own Assets Location Goodwill Books & records
Business or Part of a Business Cont d No statutory requirement that the business or part is a going concern... CRA has made some contrary comments No requirement that the purchaser ever operate it Purchaser can combine it with existing business
All or Substantially All CRA s view: 90% of property required to carry on business or part Courts say it can be < 90% Easier if just go with CRA s view Purchase Price / Dollar value of necessary property Must equal 0.9
All or Substantially All Cont d All the property does not need to be bought from vendor as leasing from vendor counts CRA says don t take account of property already owned or leased by purchaser
All or Substantially All Cont d Do you need real property? Normally test won t be satisfied if buy real property separately (simply b/c costs so much) Appears can satisfy test if lease property from 3 rd party at market rate CRA has not confirmed Be careful still purchasing a business or part
Specific Exclusions: Section 167(1.1)(a) Taxable supply of a service by vendor Taxable supply of property by way of lease, license or similar arrangement Where purchaser is not registrant, taxable supply by way of sale of real property
Specific Exclusions : Problems for Franchises Franchises often include tangible assets, licenses for trade-marks & vendor training Licenses & training will be taxable despite election
Specific Exclusions : Restrictive Covenants According to Manrell v. Canada, RC not property CRA says RC must be a service (probably right) RC given by vendor selling business assets taxable & election does not apply RC given by shareholder or employee generally not taxable
Change-in-Use: Section 167(1.1)(b) Election includes deeming rules that synchronize the election with ETA s change-inuse rules Change-use-rules may trigger tax if Capital property would be subject to tax but for election & Purchaser does not use exclusively in commercial activities
Use of Section 167 Where Not Applicable Vendor liable for uncollected GST on all assets except real property bought by GST registered purchaser GST registered purchaser liable for unremitted GST on real property Both parties liable for interest but CRA may reduce or waive interest
Use of Section 167 Where Not Applicable Cont d No advantages for vendor Loss of cash flow Liable for tax & interest Cash flow advantage for purchaser Vendor should obtain indemnity, representation & undertaking
Section 156 Election: Overview Allows GST free transfer of property & services b/t closely related corporations & partnerships Can be used to (indirectly) sell assets to 3 rd party Transfer assets from Parent Corporation to Subsidiary Sell shares of Subsidiary to 3 rd party
Section 156 Election: Overview Cont d Transfer b/t specified members of a qualifying group Transfer deemed for $0
Qualifying Group Qualifying group = 90% common corporate ownership Parent Parent Individual Sub 1 Sub 1 Sub 2 Corp 1 Corp 2 Sub 2 Yes Yes No
Specified Member GST registrant Resident in Canada & Corporation must consume, use or supply its property exclusively in commercial activities or If no property, substantially all of its supplies must be taxable supplies
Specified Member Cont d Newly formed corporations may have no property or made no supplies Solution Transfer nominal amount of property & use in connection with acquisition or establishment of commercial activity Possibly can enter into agreements to make nominal taxable supplies in the future
Form GST25 Election made using Form GST25 Form is not filed Backdating allowed provided all conditions for an election were satisfied at point in time form dated
Specific Exclusions: Section 156(2.1) Sale of real property But if GST registered can self-assess to avoid cash flow issues Supply of property or service not acquired for consumption, use or supply exclusively in the course of commercial activities i.e., where no ITCs would be available
CROSS BORDER TRANSACTIONS: Division III Tax Overview GST under Division III is payable when goods imported into Canada Tax paid by person liable to pay duty Importer Importer of Record? 5% x Duty Paid Value valuation crucial or AMPs, interest Customs Act provisions apply ITC Only for importer not IOR who is the importer? Common mistake!
CROSS BORDER TRANSACTIONS: Self Assessment Obligation CBSA collects HST on casual goods GST only collected on commercial goods, even if destined for a participating province Certain importers required to self-assess provincial portion on goods imported in the commercial stream Importing exclusively (CRA interprets >90%) for use in commercial activities? If not, then must self assess on value for tax. PSBs using simplified method must also self assess.
CROSS BORDER TRANSACTIONS: De Facto Importer Issue Assume non-resident carrying on business in Canada or registered Tangible personal property sold by non-resident to Canadian customer delivery o/s Canada Registered non-resident importer non-resident claims input tax credit for Division III tax No Division II tax on sale CRA will challenge
CROSS BORDER TRANSACTIONS: Recovering Tax on Imports Non-Residents Avoid by Drop Shipment Rules Registration for GST and transfer goods o/s Canada Section 169(2) re commercial service Section 180 flow-through of ITCs Rebates under 215.1 (goods imported on consignment or approval and re-exported w/o having been used or consumed; or where no ITC and abatement under CA available because goods are damaged, inferior defective, etc.) and 216 (rebate of over-paid amount following determination or re-determination of customs value)
CROSS BORDER TRANSACITONS: Imported Taxable Supplies of Services and IPP Self Assessment of GST on imported services, intangibles Services, intangibles imported by a financial institution or any person not entitled to full input tax credits (PSBs) Services performed in or o/s Canada by non-registered nonresident are supplied to Canadian resident and relate to Canadian business activities Intangible property acquired by a Canadian resident o/s Canada (e.g., license of software acquired o/s Canada for use in Canadian business activities Must self assess GST/HST Big issue for Charities and NPOs paying for management services
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