AUMA GST Audit Trends by the CRA

Transcription

1 AUMA GST Audit Trends by the CRA Danny Crawford CPA, CMA September 23, 2015

2 Agenda GST/HST Overview P3 & Other Arrangements Overview of public-private arrangements Grant vs. Consideration Cost-sharing Employer GST/HST Reporting on Pension Plans Parking Sponsorships vs. other types of supplies Northern Allowance Other Allowances & GST Recovery Non-arms length entities GST/HST Status of Various Revenue Streams Self-assessments 1

3 GST Overview for Municipalities MUSH Sector is one of the more complex areas of GST/HST Each sector has their own rebate percentage, which was historically based on embedded FST in costs (pre-1991), and based on a 7% GST rate. The original municipal rebate was 4/7ths or 57.14%. Lobbying for additional federal funding led to the municipal rebate being increased to 100% in With full recovery of GST, many municipal supplies that were GST-exempt became taxable. For provinces that have harmonized under the HST, there is no full rebate on the PVAT component: Ontario 78% NB and NS 57.14% NL and PEI 0% With the 100% rebate on the federal GST, the CRA has not paid much attention to municipalities until recently 2

4 P3 & Other Arrangements P3 is not used in Alberta to the same degree as say in Ontario and British Columbia Typical P3 arrangement range from low level private sector involvement to high level involvement. Typically, the higher the level of private sector involvement, the higher the risk of loss to the private sector participant. Examples include: Design-Build (DB) Operation License (OL) Operation and Maintenance (O&M) Design-Build-Operate (DBO) Design-Build-Finance-Maintain (DBFM) Build-Finance (BF) Design-Build-Finance-Operate (DBFO) 3

5 P3 & Other Arrangements GST/HST Implications of P3 Arrangements Nature of Supply Identify all of the different supplies Single or multiple supplies Tax status of supply (exempt, taxable, subject to a deeming provision) Forms of consideration Flow of consideration When consideration for a supply is not ascertainable Example: Cash call where municipality is an owner or part-owner of a Part IX NPO 4

6 P3 & Other Arrangements Real Property Supply of Lease or License Municipality provides land to Private Sector (PS) for purposes of constructing infrastructure Ownership of the infrastructure is transferred to the municipality upon completion/installation Supply of land and infrastructure back to PS under a lease/license Supplies of real property by lease/license is taxable when supplied by a municipality, but may be exempt if another public service body (eg. NPO community league) is making the supply Private sector participant has made supplies of improvements to the real property. Private sector claims ITC s on construction, and accounts for GST on supply back to the municipality. Supply of Operation and Maintenance Services PS must charge GST on services Often find varying forms of consideration for the services such as a payment to cover operating deficit. 5

7 P3 & Other Arrangements CRA Audit Activity DBFOM project private sector (PS) was assessed for failing to collect GST/HST Capital payment by PSB was capped at a maximum per a schedule The maximum is subject to deductions if for example, the PS does not meet completion date target Maximum capital payments are also adjustable for inflation Construction completed in 2009 and PS charged GST on capital payments received Future payments were to become due and calculation to be less than the maximum; PSB advised PS of deeming rule on GST timing [168(3)(c) of ETA]. PSB provided PS a valuation of future payments. PS reported GST on valuation of future payments CRA review: alleges valuation of Capital Payments was incorrect; assessment for additional $50 million of tax, based on the maximum amount of capital payments in the schedule PS and PSB response some amounts included in maximum capital is based on potential deductions in the future, based on events not ascertainable at time of completion of construction [168(6)] 6

8 P3 & Other Arrangements Alberta Type Issues Grant or Consideration Monies provided by a municipality to a NPO to expand facility Who owns the facility? (Municipality or NPO) If it is a municipal facility, then the funds would appear to be consideration for a supply of construction services/management. If it is the NPO s facility, the funds could be considered a public purpose grant and not consideration for a supply. Note the NPO may not be entitled to a full recovery of GST on costs related to the expansion. Are there any planning alternatives? Cost-sharing on construction of a Rec Centre with a School Board If the facility is municipally owned, GST should be charged on funds provided by the School Board for its share of costs. Funds represent consideration for the right to use the facility when completed 7

9 P3 & Other Arrangements Agreements with Private Developers Lands are exchanged between the parties Private Developer sets up a separate legal entity, Project Manager, who charges a management fee to manage project on behalf of each party s interest in the development Project manager has contractual authority to enter into supplier contracts on behalf of the municipality and private developer. Supplier charges GST to the project manager What is the legal relationship of private developer, project manager and municipality? Options may include, purchase and resupply by the project manager the project manager making acquisitions as agent for the two parties The existence of a joint venture with the possibility of appointing the project manager as the operator of the joint venture 8

10 Employer GST/HST Reporting on Pension Plans CRA Audit Activity has picked up in municipal sector due to lack of reporting of tax on this obligation Employers are required to remit tax on all the resources they expend in administering their employee pension plans The tax remitted by the employer is eligible for a 33% rebate of GST claimed by the pension plan Three types of supplies are deemed (section 172.1) to be made by the employer to the pension plan: Property or services acquired for resupply to the pension plan; Employer resources supplied to the pension plan; Employer resources that are not supplied to the pension plan. 9

11 Employer GST/HST Reporting on Pension Plans Deemed tax obligation includes a federal component and a provincial (PVAT) component, where members of the pension plan reside in a harmonized province (HST). Federal component is generally computed by multiplying the following three elements: FMV of resupplied property and services, and the FMV of any employer resources In the case of employer resources, the extent to which the employer consumed or used the resource during the fiscal year for the purpose of making the pension supply The federal rate, 5% Provincial component is based on PVAT rate in ON, PE, NS, NB or NL where there are active members in those province (retirees residing there). Relief for small amounts Dollar amount of employer resource is $5,000 or less and the GST is 10% or less of the total net GST paid for all expenses of the pension plan 10

12 Time for a Pause / Reminder 11

13 Employer CRA Comments Do something! the local CRA auditors have not received any direction on how to audit, so KPMG has been verbally told if they see some degree of reporting, they will not audit further. We have seen one assessment in Alberta where the calculation was rudimentary the CRA took a % of salary costs of two employees and calculated GST on same. KPMG As the CRA become more proficient at this piece of legislation, expect more sophisticated audit activity Larger municipalities have their own plans (fire, police etc.) and have this requirement LAPP? While Alberta Pension Services Corp ( APS ) is a listed provincial government entity and does not pay GST, the pension plans they administer are not on the list To what extent are employers expending a lot of resources for LAPP and other APS administered plans (materiality)? 12

14 Parking Exemption for Supplies for Nil Consideration (section 10, Part VI, Schedule V) If all or substantially all of the supplies of property or service by a PSB are made for no consideration, then all supplies are exempt Municipalities stopped remitting GST/HST on metered parking and other parking revenue based on premise that 90% or more of the parking supplied was for free (street parking) Amendments made to this provision in 2013 to ensure paid parking was taxable, retroactive to 1991 Local CRA indicated they increased their focus on municipal audits because they found three municipalities in still not reporting GST on parking revenue 13

15 Sponsorships Pursuant to section 135 of the Excise Tax Act (the Act), a supply made in exchange for sponsorship funds is deemed not to be a supply and is therefore not subject to GST/HST where the following conditions are met: the supplier is a public sector body, meaning a government, a non-profit organization, a charity, a municipality, a hospital authority, a school authority, a public college or a university; the public sector body makes a supply of a service, or a supply by way of licence of the use of a copyright, trade-mark, trade-name or other similar intellectual property of the body; the recipient of the supply is a person who is a sponsor of an activity of the public sector body; the supply is for use by the sponsor exclusively in publicizing the sponsor's business; and the payment by the sponsor is not primarily (more than 50%) for a service of advertising on television or radio, or in a newspaper, magazine or other publication published periodically. 14

16 Sponsorships Section 135 only applies to supplies of a service or certain types of intellectual property made by public sector bodies. Supplies of other types of property, such as real property or naming rights, are not relieved of tax by virtue of section 135. Sponsorships in lieu Person provides goods or services in exchange for a sponsorship (Eg., GM provides free use of vehicles for an event in return for a sponsorship). Two supplies one is fully taxable. Municipality provides use of a facility for an event (e.g. Cancer fundraiser). Cancer Society has supplied a sponsorship. Municipality must report GST on value of facility rental which is equal to cash value of sponsorship. 15

17 Northern Allowance CRA has found northern municipalities claiming rebates on the northern living allowance paid to employees. What allowances qualify for the rebate or ITC (recovery of GST)? Allowance is paid by an employer to an employee or partner, or by a charity or public institution (MUSH entity that is also a charity) to a volunteer; The allowance is either for supplies all or substantially all of which bear GST or HST; or for use of motor vehicle in Canada A amount in respect of the allowance is deductible under the Income Tax Act ( ITA ) (or would be deductible if the person is not subject to income tax) If the allowance is a motor vehicle or a travel allowance described in ITA subparagraphs 6(1)(b)(v) to (vii.1), then the allowance must be considered reasonable. Effect is that the employer is deemed to have received a taxable supply of the property or service. 16

18 Northern Allowance CRA assesses for rebates claimed on this allowance as it does not meet criteria. The allowance is reported as employee income on the T4 representative of an unreasonable allowance and is characterized as employee remuneration. 17

19 Other Allowances May Qualify for Recovery There are other allowances that do qualify for recovery via rebate or ITC Look for allowances paid through the payroll system Some do meet the criteria and we have found that rebates are not being claimed by municipalities 18

20 Non-arms Length Entities For many public service bodies and/or MUSH entities, the CRA has challenged for GST to be collected on the fair market value of a supply and not on the agreed value Eg. Nominal rent for use of a facility Prevalent in post-secondary sector. For eg. CRA looks for the university having control (veto power) over the activities of the students union creates GST on FMV of building rent when rent is otherwise nominal. Municipalities have a para-municipal exemption and therefore not a huge issue, but good to be aware of issue. 19

21 GST on Revenue Streams CRA comments municipalities have been conservative and have been charging GST when there is any doubt of a revenue being taxable. CRA views that GST is being charged in error. Converse: Municipalities make many small supplies to the general public and it would be difficult to collect tax after the fact where an assessment has been made. KPMG has noted some areas of contention and confusion (not already discussed): Requests for Information Property disposals via auction & if person is an auctioneer GovDeals.com (appears to operate similar to Ebay and will forward GST to the municipality to report and remit) Permits and inspections and other services related to same Damage payments Transit Environmental levies, and many others. 20

22 Self-Assessments Although municipalities receive a 100% rebate, they are still subject to self-assessments on importations of services and intangibles (that do not get processed by the Canada Border Services Agency) Software Non-resident consultants (also potentially subject to NR4 remittances) Real Property Acquisitions Municipalities are registered for GST and do not pay GST to the vendor, they must self-report tax payable on line 205 and claim offsetting rebate. Tax is still payable, just not to the vendor to facilitate cash-flow. 21

23 Summary Municipalities continue to enjoy the 100% rebate for the GST component of GST/HST, and have not been a focus of CRA audit activity until recently. The CRA has found it to be worth their while to start auditing municipalities that is, they are finding assessments! Municipalities should prepare themselves for this eventuality ahead of time if they have not already been audited. 22

24 Thank you Presentation by: Danny Crawford

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