Indirect Taxes - Canada

Transcription

1 Indirect Taxes - Canada Jeff Smith Manager, Indirect Taxes Pembina Pipeline Corporation Calgary, Alberta CA jesmith@pembina.com David Crawford Senior Manager, Indirect taxes PwC LLP (Canada) Calgary, Alberta CA David.B.Crawford@pwc.com 2017 IPT s Value Added Tax Symposium

2 Disclaimer The following information is being presented on the understanding that it is intended for information purposes only. Neither Pricewaterhouse Coopers LLP, Pembina Pipeline Corporation nor the presenters have been engaged for the purpose of providing legal, accounting, taxation, or other professional advice. No person should act based upon the examples/information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific circumstances are considered IPT s Value Added Tax Symposium 2

3 Agenda GST/HST/QST Overview GST and Imports Non-Resident Overview Recovery of Tax ITC/ITR Entitlement Issues Recent Developments Current Audit Trends Provincial and federal carbon pricing regimes Provincial and federal insurance premiums taxes Saskatchewan PST changes Questions? 2017 IPT s Value Added Tax Symposium 3

4 GST/HST/QST OVERVIEW 2017 IPT s Value Added Tax Symposium 4

5 Canadian Indirect Tax Rates (As of October 1st, 2017) Province GST/HST Rate PST Rate Combined Rate Alberta British Columbia Manitoba New Brunswick Newfoundland/Labrador 15 (1) 0 15 Northern Territories (Nunavut, Yukon and NW) Nova Scotia Ontario Prince Edward Island 15 (2) 0 15 Quebec Saskatchewan 5 6 (3) 11 Notes: (1) New-Brunswick and Newfoundland and Labrador increased their HST rate to 15%, effective July 1, 2016; (2) Prince-Edward-Island increased its HST rate to 15%, effective October 1, 2016; (3) Saskatchewan increased its PST rate to 6%, effective March 23, IPT s Value Added Tax Symposium 5

6 GST/HST Overview For most businesses, GST/HST regime should not affect bottom line (i.e., no P/L effect) balance sheet transactions only (i.e., receivable/payable) Generally, GST/HST is paid at every level (i.e., no exemption certificates) with limited exceptions Common tax administration and simplified returns Caution numerous exceptions to general rules 2017 IPT s Value Added Tax Symposium 6

7 What is GST? Federal applies throughout Canada Value-added tax Broad base applies to most goods and services Applies at every level (e.g., production, distribution, retail) Current rate: 5% Prior to 1/1/08: 6% Prior to 7/1/06: 7% Introduced on 1/1/1991 (replacing the MST) 2017 IPT s Value Added Tax Symposium 7

8 When does GST apply? On taxable supplies made in Canada (collected by vendor Div. II) On importation into Canada (collected at border points of entry Div. III) On self-assessment in certain situations (paid by recipient of supply Div. IV) if recipient not entitled to ITCs 2017 IPT s Value Added Tax Symposium 8

9 When is supply made in Canada? GST applies to supply made in Canada or imported Different rules for: Tangible personal property (i.e., goods) Services Intangibles Non-resident override exception s. 143 Customs rules s. 144 (supply before release) Look at whether HST applies s IPT s Value Added Tax Symposium 9

10 Types of Supplies All property (goods, intangibles, real property) Services (performed in whole or in part in Canada) Taxable supplies includes zero-rated supplies Exempt supplies distinguished from zero-rated 2017 IPT s Value Added Tax Symposium 10

11 What is HST? Applies only in New-Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island Essentially same base as GST No need to track separately Complex place of supply rules (determines rate) Rate of tax varies from 13% to 15% Recaptured input tax credits ( RITCs ) in Ontario* and PEI** for large businesses with >$10M of taxable supplies in Canada, including associated entities * Phasing out between July 1, 2015 & June 30, 2018 ** Phasing out between April 1, 2018 & March 31, IPT s Value Added Tax Symposium 11

12 HST Overview HST applies in the five participating provinces New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island = 5% GST + 10% provincial component Ontario = 5% GST + 8% provincial component = 13% HST Administered by federal government GST registration also means HST registration Same return/compliance as for GST 2017 IPT s Value Added Tax Symposium 12

13 When does HST apply? On taxable supplies made in an HST province (collected by vendor) Place of supply rules determine when to charge 13% or 15% HST or just 5% GST Not applied on commercial importations into Canada 2017 IPT s Value Added Tax Symposium 13

14 GST/HST Nexus Supply made in Canada, but do I have to register? Non-residents not carrying on business in Canada not required to register, but confirm non-residency Test based on 12 factors, not former common law Nexus threshold getting lower over time Not a bright line test, weighted on certain factors Uncertainty is getting higher, especially with pending legislation on remote sellers and e-commerce 2017 IPT s Value Added Tax Symposium 14

15 GST/HST Registration Required to register or voluntary registration Non-residents with no permanent establishment ( PE ) in Canada must post security in cash or bond Must also provide records in Canada if requested Watch tripping PE rules for income tax purposes Register early to avoid losing out on ITCs and ITRs Exceptions to general rules to avoid registration in certain situations 2017 IPT s Value Added Tax Symposium 15

16 Collection of GST/HST Collection under Div. II only if supply is made in Canada and registered at time of supply Other than exempt and zero-rated supplies No collection on otherwise taxable supplies (deemed or actual) made outside Canada Place of supply rules determine whether supply is made in or outside of Canada Non-resident is not carrying on business in Canada and is not registered ( Non-resident override rule ) 2017 IPT s Value Added Tax Symposium 16

17 Input Tax Credits GST/HST registrants may claim an ITC for GST/HST paid or payable Only available if supply acquired or imported in course of commercial activity ITCs allow businesses/suppliers to recover tax paid Not available to businesses/suppliers who are involved in exempt activities 2017 IPT s Value Added Tax Symposium 17

18 Non-Residents & ITCs Must be registrant to claim ITCs Registrant = registered or required to be registered Timing of registration is key Needs to be addressed early Retroactive registration can be achieved in certain situations to recoup ITCs prior to registering 2017 IPT s Value Added Tax Symposium 18

19 Simplified GST Example Assume the following transactions occurred during a retailer s reporting period: Buys $500,000 in inventory, plus $25,000 GST Pays $100,000 for lease and other expenses, plus $5,000 GST Pays $200,000 for payroll, which attracts no GST Sells $1 million in taxable merchandise invoices a total of $50,000 in GST to customers 2017 IPT s Value Added Tax Symposium 19

20 Simplified GST Example (cont d) Retailer s GST Return GST Invoiced on Sales $50,000 Input Tax Credits (30,000) Net Payment/(Refund) $20, IPT s Value Added Tax Symposium 20

21 GST AND IMPORTS 2017 IPT s Value Added Tax Symposium 21

22 Application of GST to Imports On importation of goods into Canada: Collected at the border by CBSA under Division III of the Excise Tax Act ( ETA ) Self-assessment in certain situations: Including imported services, intangible personal property ( IPP ), and tangible personal property ( TPP ) e.g., drop-shipments Collected by Canada Revenue Agency ( CRA ) under Division IV through regular GST/HST returns 2017 IPT s Value Added Tax Symposium 22

23 Division III Tax Overview GST under Division III of the ETA is payable when goods imported into Canada Tax paid by person liable to pay duty Importer Importer of Record ( IOR )? (5% X Duty Paid Value) valuation is crucial AMPS (Administrative Monetary Penalty System), plus interest Customs Act provisions apply ITC recoverability generally only for importer in fact (not always same as IOR) if a GST/HST registrant Exception for Section 180 flow-through, whereby goods imported for supply to registrant in commercial activities 2017 IPT s Value Added Tax Symposium 23

24 Non-Taxable Importations Schedule VII lists the non-taxable importations Imports for processing Non-Taxable Imported Goods (GST/HST) Regulations Zero-rated goods Export certificates 2017 IPT s Value Added Tax Symposium 24

25 Division IV Tax Overview Self-assessed on imported taxable supplies Services purpose is tax neutrality TPP drop-shipment counterpart Intangible personal property Applies to non-commercial activities (e.g., FIs, charities) and non-registrants 2017 IPT s Value Added Tax Symposium 25

26 Importer of Record vs. De Facto Importer Assume non-resident carrying on business in Canada or registered Tangible personal property sold by non-resident to Canadian customer with delivery in US (EXW Incoterms) Registered non-resident importer acts as IOR and claims ITC for Division III tax paid to CBSA, but Canadian customer is de facto importer (owns goods at time of import) No Division II tax on sale as supply outside Canada CRA will challenge ITC claim by registered non-resident Other permutations can result in problems as well IPT s Value Added Tax Symposium 26

27 Section Import Arrangements Assume non-resident registrant sells goods to Canadian business customer outside of Canada Sale outside of Canada (e.g., EXW US plant) NR registrant is importer of record and pays import GST As NR registrant is not the owner of the goods at time of import, they generally are not entitled to claim ITC Section election permits the transaction to be deemed to be in Canada Agreement between the parties permits NR registrant to claim ITC NR registrant must charge Div. II tax to customer IPT s Value Added Tax Symposium 27

28 NON-RESIDENT OVERVIEW RECOVERY OF TAX 2017 IPT s Value Added Tax Symposium 28

29 What is a Non-resident? Importance of term non-resident ( NR ) Types of entity (individual, corporation, trust, partnership) Common law and statutory provisions Non-resident with a permanent establishment (deemed residency) 2017 IPT s Value Added Tax Symposium 29

30 Non-Resident GST/HST Registration Mandatory if carrying on business in Canada Mandatory if prescribed property publications Registration on a voluntary basis if the person regularly solicits orders for supply of: TPP for export to, or delivery in, Canada Services to be performed in whole or in part in Canada IPP to be used in Canada 2017 IPT s Value Added Tax Symposium 30

31 Non-Resident GST/HST Registration Non-resident without a PE in Canada is required to post security bond Minimum of $5,000 and maximum $1 million Based on 50% of the estimated net tax to be remitted or refunded Books and records requirement All requirements to be fulfilled before registration final Otherwise, possible revocation of account Income tax and transfer pricing considerations 2017 IPT s Value Added Tax Symposium 31

32 Carrying on Business in Canada No definition of "carrying on business in Canada" question of fact Predominant factors under jurisprudence Place contract is concluded (e.g., place offer to provide property or service is accepted) Location of company s profit making apparatus 2017 IPT s Value Added Tax Symposium 32

33 Carrying on Business In Canada Factors CRA (per Policy P-051R2) Place where agents or employees of the non-resident are located Place of delivery Place of payment Place where purchases are made or assets acquired Place from which transactions are solicited Location of assets or an inventory of goods Location of bank account 2017 IPT s Value Added Tax Symposium 33

34 Carrying on Business In Canada Factors (cont d) Place where non-resident s name and business are listed in a directory Location of branch or office Place where service is performed See CRA Policy Statement P-051R2 No bright line test or # of factors to be met More art than science 2017 IPT s Value Added Tax Symposium 34

35 CRA Approach on Permanent Establishments Websites will not constitute a permanent establishment ( PE ) Server may constitute a permanent establishment Is the server at the disposal of the non-resident? Are supplies made through the server? Indicator of PE, not necessarily of carrying on business in Canada 2017 IPT s Value Added Tax Symposium 35

36 Recovering Tax on Imports Non-residents Registration for GST/HST and claiming ITCs Section 169(2) re: commercial service Section 180 flow-through of ITCs Rebates under sections 215.1, 216, 252 et al Drop-shipment rules for unregistered non-residents may eliminate need to register 2017 IPT s Value Added Tax Symposium 36

37 Recovering Tax on Imports Non-residents Section 169(2) re: commercial service Registrant can claim ITC if goods of NR imported by registrant to perform services to goods Rebates under sections 215.1, 216, 252 et al Returned or damaged goods Exported goods of non-resident Tour packages or foreign conventions Non-resident exhibitors Installation of TPP into real property 2017 IPT s Value Added Tax Symposium 37

38 Flow Through of ITCs Section 180 In certain situations, NR 2 can pass on ITC to registrant customer NR 2 imports/pays GST to CBSA Supply of goods in Canada to registered person (delivered or made available) No change in use of/to goods Registrant can utilize ITC and refund NR 2 Need parties to agree on terms (security?) 2017 IPT s Value Added Tax Symposium 38

39 Drop-shipments Purpose of drop-shipment rules: Relieve GST/HST burden in appropriate circumstances for unregistered non-residents Ensure GST/HST applies in situations involving consumers/exempt entities not entitled to ITCs Avoids requiring/placing security or chasing non-residents 2017 IPT s Value Added Tax Symposium 39

40 Revised GST/HST Memorandum 3.3.1, Drop-shipments Drop-shipment rules requirements: Unregistered non-resident sells to registered Canadian Sale of goods that originate in Canada and delivered to resident customer Non-resident makes arrangements with a Canadian supplier to ship goods to non-resident s registered customer GST/HST applies to the fair market value of the goods that are drop-shipped in Canada (if not for these rules) Subject to exceptions, including consumers, exempt activities, registered NR (or NR that should be registered) 2017 IPT s Value Added Tax Symposium 40

41 Typical Drop-shipment Scenario Unregistered/ Non-Resident Supplier purchase of goods sale of goods Registered Canadian Supplier delivery of goods Canadian Customer 2017 IPT s Value Added Tax Symposium 41

42 Drop-shipment Rules Intent is to deem supply to be made outside Canada Registered Canadian supplier obtains a drop-shipment certificate from registered Canadian customer No GST/HST is charged by registered Canadian supplier to its nonresident supplier customer All parties need to agree ahead of time (query whether retroactive use of certificate) 2017 IPT s Value Added Tax Symposium 42

43 Drop-shipment Rules Non-resident supplier must not be registered and not be a consumer of the property or service Registered Canadian supplier is responsible for determining residency and registration status of NR customer Need written certification of being both non-resident and not registered from non-resident supplier The Canadian customer must: Not be in exempt activity (e.g., a bank or other FI) Be registered Certify that it is purchasing the goods for its commercial use 2017 IPT s Value Added Tax Symposium 43

44 GST/HST Drop-shipment Certificate Can be restricted to a single drop-shipment or it may be a blanket certificate covering multiple drop-shipments Can be issued on retroactive basis After physical possession of the goods has transferred to the registered consignee Can be used for manufacturing or other commercial services provided to NR 2017 IPT s Value Added Tax Symposium 44

45 ITC/ITR ENTITLEMENT ISSUES 2017 IPT s Value Added Tax Symposium 45

46 ITC/ITR Entitlement Issues Recapture of Input Tax Credits ( RITCs ) Temporary requirements for large businesses defined as $10M in taxable supplies made in Canada, including associated persons Provincial component of HST in Ontario and Prince Edward Island Does not apply to GST or HST in other provinces Ontario phase-out began July 1, 2015 (current recapture rate is 25%) and ending on June 30, 2018 Reporting requirements Gross ITCs less recaptured amount 2017 IPT s Value Added Tax Symposium 46

47 ITC/ITR Entitlement Issues Recapture of Input Tax Credits ( RITCs ) Specified property Telecommunications Meals and entertainment Energy not used in manufacturing or farming Licensed road vehicles Fuel for licensed road vehicles Excludes items acquired for resale Significant penalties (but imposed infrequently) 2017 IPT s Value Added Tax Symposium 47

48 ITC/ITR Entitlement Issues Recapture of Input Tax Credits ( RITCs ) Common issues Failing to report RITCs Timing of reporting Identification of specified telecommunications Apportionment of energy costs Incorrect use of proxies Failure to file election on time Administrative tolerance no longer guaranteed 2017 IPT s Value Added Tax Symposium 48

49 ITC/ITR Entitlement Issues Restricted Input Tax Refunds ( RITRs ) in Quebec Essentially the same set of rules under the Quebec sales tax as those for GST/HST in Ontario and PEI. Reported on QST return or combined GST/QST return if located in Quebec, but reporting simplified RITRs are not claimed, not reported, unlike RITCs and the QST is simply foregone in the claim process. Phasing out between January 1, 2018 & December 31, 2020, with current restriction rate of 75% of QST payable IPT s Value Added Tax Symposium 49

50 RECENT DEVELOPMENTS 2017 IPT s Value Added Tax Symposium 50

51 GST/HST Measures Recent Developments New election for nil consideration Effective January 1, 2015 Relief extended to new members of a group New filing requirements Joint and several liability 2017 IPT s Value Added Tax Symposium 51

52 GST/HST Measures Recent Developments Voluntary Disclosure Program proposals: Elimination of no-names disclosures Limited penalty and/or interest relief; disclosure of wash transaction non-compliance only avenue for full penalty and interest relief Large dollar amounts and/or sophisticated registrants : no penalty or interest relief, but no imposing gross negligence or prosecution Disclosure of advisor in respect of disclosed subject matter 2017 IPT s Value Added Tax Symposium 52

53 GST/HST Measures Recent Developments Supply before release (s. 144): CRA recently released a host of no-names interpretation letters regarding this issue and denying its benefits in many scenarios. Provision is intended to provide GST/HST relief for supplies made while goods are still in bond under Canada Customs and not yet released, deeming the supply to be made outside Canada. CRA s interpretation applies where non-resident importer is registered; negates use of s.144 in most circumstances and GST/HST would need to be collected as well as GST paid on value for duty of goods imported by non-resident or CDN purchaser 2017 IPT s Value Added Tax Symposium 53

54 CURRENT AUDIT TRENDS 2017 IPT s Value Added Tax Symposium 54

55 GST/HST/QST Issues Current Audit Trends Number of desk audits continues to rise Limited reporting periods initially potential for expansion Requests for detailed information Joint ventures, bare trustees and real property Financial Institutions Focus on fraud and the underground economy 2017 IPT s Value Added Tax Symposium 55

56 Current Audit Trends GST/HST/QST Issues Documentary requirements Meals and entertainment expenses Failure to collect tax ITC allocation methods Place of supply issues (ongoing CRA project for registered NR s) Employee expense claims Holding companies claiming ITCs 2017 IPT s Value Added Tax Symposium 56

57 GST/HST/QST Issues Current Audit Trends ITCs claimed by wrong person Section 156 election; qualification of parties Section 167 election: sale of a business Section partnerships: whether expenditure by partner qualifies for partnership ITC Financial services; more services taxable if only tangentially in respect of financial service 2017 IPT s Value Added Tax Symposium 57

58 Current Audit Trends Less administrative tolerance vs. stricter interpretation of legislation Focus on desk audits vs. field audits Lack of industry-specific knowledge More inexperienced auditors Requests for extensive information 2017 IPT s Value Added Tax Symposium 58

59 Current Audit Trends CRA watching import arrangements more closely, causing resident companies to force more non-residents to register and comply with GST/HST, import duties, NAFTA and origin requirements, etc. CRA more diligent in contacting non-compliant registrants, including non-resident place of supply project Making voluntary disclosures more difficult Proposed voluntary disclosure policy could make it even worse Problem where registered NR makes supply in Canada and must charge GST/HST based on delivery terms AND, does not act as importer of record; but Canadian customer does; double tax 2017 IPT s Value Added Tax Symposium 59

60 Current Audit Trends QST Issues Documentary requirements Aggressive approach continues Policies and procedures under review??? Fraud and the underground economy False invoicing and/or fraudulent suppliers Who should bear the risk? Court decisions continue to go both ways 2017 IPT s Value Added Tax Symposium 60

61 Federal & provincial carbon pricing 2017 IPT s Value Added Tax Symposium 61

62 Canadian carbon regimes status Cap & Trade regimes 1. Quebec (linked to California market) 2. Ontario (linked to California market) 3. Nova Scotia (proposed Fall 2017) Carbon Tax / Levy regimes 1. Alberta (moving to output based allocation scheme in 2018) 2. British Columbia (increasing $5/tonne annual through 2021) 3. Newfoundland & Labrador (large industrial emitters >15K tonnes of GHGs) 4. Proposed Federal Backstop Framework 2017 IPT s Value Added Tax Symposium 62

63 Canadian carbon regimes status No regime or system currently - possible legal challenges from some provinces and potentially Territories 1. Saskatchewan (in draft from 2009, but not enacted; legal challenge against federal government may be forthcoming) 2. Manitoba ( in the works, but considering legal challenge with Feds) 3. NWT, Yukon & Nunavut (seeking voter input) 4. New Brunswick ( in the works ), PEI ( working on something ) 2017 IPT s Value Added Tax Symposium 63

64 Cap & Trade vs. Carbon Taxes Cap & Trade regimes Emission credits are allocated, purchased or given to emitters by governments. Emission credits are reduced over time. Emitter can buy and sell emission credits if they need or have credits. Often bought/sold through an auction process or from the government. Encourages free-market principles. Encourages technological improvements and the benefactor accrues the economic benefit IPT s Value Added Tax Symposium 64

65 Cap & Trade vs. Carbon Taxes Carbon Taxes or Levies A tax or levy based upon some measure of emission output (i.e. CO2) with parallel volumetric rate on consumption/combustion in lieu of output tax. Exceptions available to emitters facing international competition. Revenue neutrality vs. reinvestment in green Some regimes introduced are purported as revenue neutral (i.e. not a tax grab); however BC moving away, Alberta to re-invest in emissions reductions, federal system to similarly return all revenues to provinces. Potential to decrease personal and corporate taxes, but may not be realistic; stay tuned IPT s Value Added Tax Symposium 65

66 Federal and provincial insurance taxes 2017 IPT s Value Added Tax Symposium 66

67 Federal and provincial insurance taxes Most provinces and federally, tax insurance premiums acquired (including self-insurance) outside Canada, or from unregistered insurers or brokers not licensed to insure in Canada. Rates range 7% (BC) to 50% (Alberta) and either applied on invoice/policy or premium basis, federal tax is 10% on top of the provincial taxes; NFLD just reinstated tax at 15%. Applies generally to most types of risks insured in Canada or the particular province, although some exceptions exist depending on the province. In most cases, insurance must not be generally available from Canadian insurers for tax/levies not to be payable or at best, payable at a reduced rate IPT s Value Added Tax Symposium 67

68 Federal and provincial insurance taxes Alberta with highest rate of 50% (called a levy) of premiums paid, now enforcing insurance regulator legislation through corporate tax audits; focus on non-residents with Canadian operations. No current voluntary disclosure program, no statute-barring and penalty equal to 50% of the levy, plus interest thereon. Saskatchewan recently enacted changes to apply 6% PST on most insurance premiums, Manitoba introduced 8% PST in Other provincial insurance legislation can also apply an additional layer of taxes on similar insurance procured outside the province and/or Canada. Work-arounds exist in some situations, including buying insurance with federally or provincially registered insurers/brokers IPT s Value Added Tax Symposium 68

69 Saskatchewan PST Changes 2017 IPT s Value Added Tax Symposium 69

70 Saskatchewan PST Changes Increase of PST rate to 6% effective March 23, Expansion of tax base to include restaurant meals, children s clothing and footwear, and insurance premiums. Elimination of PST remission on mobile capital equipment used in potash and oil & gas extractive industries; greatly impacting service companies IPT s Value Added Tax Symposium 70

71 Saskatchewan PST Changes Effective April 1, 2017, PST applies to most real property service contracts in Saskatchewan. Second PST province to Manitoba on move to apply a sales tax to most real property services contracts. Potentially, this is the largest single change in Saskatchewan PST in several years IPT s Value Added Tax Symposium 71

72 Saskatchewan PST Changes Most oilfield construction services subject to PST effective April 1, 2017, requiring PST registration: Well bore construction Cementing services Pipeline construction and servicing Above ground construction and servicing Welding services Hydrovac services Well abandonment services Contractors providing taxable services can acquire materials exempt from PST IPT s Value Added Tax Symposium 72

73 Saskatchewan PST Changes Drilling services remain exempt Many downhole services exempt: Fracturing services Perforating services Swabbing services Snubbing services Recompletion services Contractors providing exempt services must pay PST on materials used in the contract. Administrative burden for customers and service providers, related to real property contract clearance certificate process and/or bonding requirement IPT s Value Added Tax Symposium 73

74 QUESTIONS? 2017 IPT s Value Added Tax Symposium 74