Danny Crawford, CMA KPMG LLP

Transcription

1 Danny Crawford, CMA KPMG LLP Edmonton Young Practitioners Group Agenda Overview of Indirect Tax Focus on Reorganizations Share Transactions ITC s on takeover costs, costs as a holdco, costs to raise capital Asset Transactions Elections under section 167, section 150, and section 156 Partnerships, Joint Ventures, Amalgamations, Windups PST Questions 2 Edmonton Young Practitioners Group

2 Overview Indirect Taxes are generally transaction taxes Taxes can seem to be straightforward once a business has processes in place for routine transactions Reorganizations are generally a series of transactions that range in complexity and are not routine Often Indirect Taxes are not considered d and consultation does not occur until the 11 th hour. 3 Edmonton Young Practitioners Group Reorganizations - Indirect Taxes to Consider GST/HST QST Provincial Sales Taxes (SK, MB, BC effective April 1 st ) Provincial Sales Taxes in HST provinces (motor vehicles, planes, boats, etc. Provincial Land Transfer Taxes Aboriginal sales/transfer taxes Customs (cross-border transactions) Industry/Product Specific (e.g., fuel, energy, insurance, alcohol and tobacco) 4 Edmonton Young Practitioners Group

3 Reorganizations- Indirect Tax review Type of transaction (sale, lease, combination) What is being supplied? (Characterization: TPP vs IPP vs services) Who is the supplier Who is the recipient What is the consideration, What is the value of consideration (FMV, s. 85 ITA) Tax application Tax relief (exemption, zero-rating, administrative policy, elective relief, cash-flow mechanisms) Tax Planning alternatives 5 Edmonton Young Practitioners Group Share Transactions Change of ownership of shares. The exchange of shares is an exempt financial service for GST/HST purposes. No PST on the exchange of shares. Assets remain in the corporate entity, thus no Indirect Tax triggered on the assets. Impact of Land Transfer Taxes (2% on values over $200,000 in BC for e.g.,) to considered before ruling out a share transaction. ti 6 Edmonton Young Practitioners Group

4 Share Transaction (cont d) The reorganization can be adapted (move out tangibles and/or intangibles) and keep real property in the corporation. Due Diligence in Share Transactions: Include Indirect Tax in any due diligence workplan Watch for consideration paid for the shares Other shares Debt instruments Issuance of new shares 7 Edmonton Young Practitioners Group Share Transactions - ITC s Takeover costs related to transaction Subsection 186(2) of the ETA deems costs to be in commercial activity where all or substantially all of the target s shares are acquired (or attempted to be acquired) ITC Entitlement for Holding Companies Once transaction is complete and corporations are related, ITC entitlement for holding companies in 186(1) to the extent the cost is related to holding shares or indebtedness of related (per ITA) corporation. 8 Edmonton Young Practitioners Group

5 Share Transactions ITC s and Raising Capital Issuance of shares or debt is an exempt supply of financial services: General rule is no ITC entitlement on costs to make exempt supplies. Section 185 of the ETA (non- FI s) deems costs in respect of supplying financial services that relate to commercial activities, to be used in commercial activities and allows ITC s (e.g. issue promissory note to buy equipment) Provisions cannot be combined (e.g., issuance of shares/debt to raise capital necessary to acquire shares of a target) no longer relates to commercial activities 9 Edmonton Young Practitioners Group Asset Transactions (GST/HST) General rule assets are subject to GST/HST; look for a purchase price allocation on non-taxable assets (e.g., A/R) If tax is applicable, plan around timing of tax to mitigate cash flow (e.g, Dec 31 transaction tax paid to supplier on Jan 30 to allow for payment, ITC claimed by purchaser in early Jan to offset) 10 Edmonton Young Practitioners Group

6 Asset Transactions (GST/HST) Sale of assets used in GST/HST exempt activities (e.g., dental practice) may be exempt (excludes real property) under 141.1(1) of the ETA. Exemption avoids cascading of tax Real property has its own means of eliminating cascading of tax via an ITC (section 193) or rebate (section 257) Supply considered not to be made in commercial activity where consumed or used exclusively in non-commercial (exempt) activities. 11 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Non-compete payments Vendor Shareholder not registered for GST/HST; supply is made, but not in the course of commercial activity Shareholder is registered (for any purpose/business), GST/HST applies (CRA Ruling 8293, March 27, 2000) 12 Edmonton Young Practitioners Group

7 Asset Transaction (GST/HST) Cash-Flow Relief Section 167 election Section 156 election Self-reporting of tax on acquisition of real property under subsection 221(2) and 228(4) Timing of filing GST/HST returns and obtaining ITC refund 13 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Section 167 Election Provides relief of tax not an exemption (good thing) avoids payment of tax and ITC No GST/HST is payable under the agreement, except: Taxable services rendered by the supplier (management services) Property by way of lease, license, etc. Purchaser is not registered when supplier is registered Purchaser is not registered then real property is taxable 14 Edmonton Young Practitioners Group

8 Asset Transaction (GST/HST) Section 167 Election - Conditions Supplier must sell all or a part of business Business established by supplier (e.g., a turn key franchise) Business acquired by the supplier (purchase for resale) Business is broadly defined (CRA New Memo 14.4) 15 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Section 167 Election Part of a Business Functionally and physically discrete operating unit An activity which support or is related to the broader business, but is organized as a separate activity which is capable of operating on its own Indicia of separate part - accounting records as a separate division A single asset would rarely qualify, but could be argued in some cases 16 Edmonton Young Practitioners Group

9 Asset Transaction (GST/HST) Section 167 Election - Conditions Purchaser must acquire ownership, possession or use Does not need to purchase all assets (real property can be made under lease) Must be part of the agreement for supply Purchaser acquires all or substantially all of the property reasonably regarded d as necessary to carry on the business or part as a business Exclude assets not needed (cash, A/R) 17 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Section 167 Election - Conditions Closely review for eligibility if multiple purchasers Who is getting the new entity registered for GST/HST? No ITC entitlement for non-registrants if new entity is not a small supplier CRA backdating administrative policy is limited to 30 days 18 Edmonton Young Practitioners Group

10 Asset Transaction (GST/HST) Section 167 Election GST 44 Filing Signed by both parties Purchaser required to file with or before next GST/HST return (except where purchaser is not registered keep in file) Risk for uncollected GST/HST remains with supplier Legal indemnity for supplier 19 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Section Goodwill Applies if meets same conditions as section 167 Part of consideration reasonably attributed to goodwill of business Applies automatically (but often listed on election) 20 Edmonton Young Practitioners Group

11 Asset Transaction (GST/HST) Section 150 election where one corporation is a financial institution Closely Related Group One member of the group is a listed financial institution under section 149 of the ETA Effect of election is to exempt supplies between parties Other effects be careful 21 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Section 156 Election - Closely Related 90% of voting shares Corporations Partnerships where partners are corporations, have 90% common ownership, and resident in Canada Parent and subsidiary corporations Corporations closely related to the same 3 rd corporation (sister corps with same 90% parent) Corporations owned by same individual not closely related 22 Edmonton Young Practitioners Group

12 Asset Transaction (GST/HST) Section 156 Election - Section 156 election Available to specified members of a qualifying group specified member is either a qualifying member or a temporary member Qualifying member is a registrant, member of a qualifying group, not party to a section 150 election, and 23 Edmonton Young Practitioners Group Asset Transaction (GST/HST) Section 156 Election Qualifying member cont d 90% or more of its property is used in taxable supplies, or If no property, 90% or more of supplies are taxable supplies Newco has no assets and has not made supplies, and is not a qualifying i member Staged asset transfer or make a taxable supply 24 Edmonton Young Practitioners Group

13 Asset Transaction (GST/HST) Section 156 Election Temporary member Member of qualifying group that has no assets and made no supplies Limited to corporations engaged in butterfly transactions under subpara 55(3)(b)(i) of ITA GST 25, not fl filed with CRA, can be retroactive 25 Edmonton Young Practitioners Group Partnerships Treated as a separate person for GST/HST and PST Must register for GST/HST and PST for its own number Transfer of assets to partnership subject to GST/HST (if a taxable supply) Section 167 election may be available 26 Edmonton Young Practitioners Group

14 Partnerships s of ETA Transfer of assets to partner subject to GST/HST (if taxable) Supply deemed to be at FMV If on dissolution, unlikely we can rely on s. 167 If assets are used in exempt supplies (medical, dental), may not be subject to GST/HST Partners are joint and severally liable of partnership GST/HST and PST obligations Partnership deemed to continue until registration cancelled 27 Edmonton Young Practitioners Group Partnerships s of ETA Rollover to new Partnership if partnership would otherwise cease to exist under 272.1(7), but for continuation of registration Continuation where majority of members of old partnership that >50% of capital of old partnership becomes members of new partnershp Must comprise more than half of members of new partnership 28 Edmonton Young Practitioners Group

15 Partnership Indirect Taxes other than GST/HST and PST Reporting obligations are the partner s Land Transfer Tax on acquisition of undivided interest of real property held as tenant in common 29 Edmonton Young Practitioners Group Joint Ventures Not a person for GST/HST Need to distinguish between a partnership and JV Joint Venture often turns out to be something else General rule is each party to account for share of GST/HST collected and claim share of ITC s 30 Edmonton Young Practitioners Group

16 Joint Ventures Section 273 election If election is made, designates an operator to account for all GST JV Regulations have expanded list of prescribed activities (passed March 2011 retroactive to 1991) Joint and several liability among all JV participants Election is not filed with CRA, kept on file and can be retroactive 31 Edmonton Young Practitioners Group Joint Ventures Section 273 Operator of JV must be Registrant Participant in JV Operate under JV made in writing All participants must make the election Assignee of JV interest from person who made the election is deemed to have made the election May be able to make s 167 election on interest transfer 32 Edmonton Young Practitioners Group

17 Joint Ventures and Bare Trustees Current CRA position is that Nominee Corporation cannot also be a JV operator; Bare Trustee cannot also be a JV participant. Many nominee corporations are registered in error 33 Edmonton Young Practitioners Group Amalgamations Section 271 Applies if more than two or more corporations merged or amalgamated New corporation is deemed separate person Generally no GST/HST on asset transfer deemed not to be a supply from predecessor to successor Amalco must register, can and usually keeps Business Number of dominate predecessor Possible change in use if Amalco uses property in exempt activities 34 Edmonton Young Practitioners Group

18 Wind-ups Section 272 Applies where Parent owns 90% or more of each class of subsidiary s shares Generally no GST/HST Transfer deemed not to be a supply Parentco is deemed same person as subsidiary for specified purposes Possible change in use (self assessment) if Parentco uses property in exempt activities iti 35 Edmonton Young Practitioners Group PST issues Tax free transfers of property between closely related corporations Property must be PST paid Corporations must remain closely related for time period after transfer Watch for multiple flips of assets Application of some exemptions Manufacturing and processing equipment Natural resource equipment Resale inventory 36 Edmonton Young Practitioners Group