GST Leaders Forum April 30th to May 2 nd, 2017 Presentation to the CPA Commodity Tax Symposium November 2017 The GST Leaders met from April 30 th to May 2 nd, 2017 for its 11th Forum. This is a summary of the discussions. VAT/GST/SUT and the digital economy (including presentation from Karl Frieden from Counsel on State Taxation) There is widespread consensus that destination should be the guiding principle with revenue accruing to the country where final consumption occurs. However, it creates difficulty in relation to enforcement of collection from foreign vendors. In some circumstances, it may require the need to extend nexus to a virtual PE (on site business presence). In the US, sales and use taxation varies from typical VAT countries as it is: imposed by subnational governments, SUT rates are generally lower than VAT rates, typically there is no constitutional issues in VAT countries, VAT has broader application, B to B transactions are less of an issue in VAT countries because of the input tax credit mechanism. States are putting forward legislation to extend the imposition of collection duties to foreign vendors without physical presence in a state (ex: click through nexus). Other states force sellers to provide detailed information regarding transactions, hoping vendors will prefer registration instead. Other important issues discussed were the sharing economy and sales tax uniformity. As of today, only 24 states have joined the Streamlined Sales Tax project. Voluntary disclosures The Forum discussions were held after the release of the Offshore Compliance Advisory Committee (OCAC) recommendations regarding the Canada Revenue Agency (CRA) Voluntary Disclosures Program. Subsequent to the meeting, the CRA released Draft GST/HST Memorandum 16.5, Voluntary Disclosures Program, which set out its proposed changes to the GST/HST Voluntary Disclosures Program (VDP). The memorandum raised new concepts and introduced new issues that were not discussed at our meetings, such as the three-track approach and curtailment of the no names voluntary disclosure process. In this summary, we have not considered these new concepts or any other changes to the VDP that were announced or otherwise introduced after our meeting. At the meeting, there was widespread consensus that the GST/HST is significantly different from income tax, particularly with respect to the role and obligations of the taxpayer. For purposes of the VDP, taxpayer includes a GST/HST registrant/claimant, which generally refers to suppliers of property and services. For income tax purposes, a taxpayer is a person required to pay and remit tax to the CRA. Under the GST/HST regime, suppliers are deemed to be agents of the Crown and required to properly charge, collect and remit GST/HST. Typically, a GST/HST voluntary disclosure will arise because of errors made by the supplier in one or more of its charging, collecting and remitting 1 P a g e
obligations. Income tax voluntary disclosures, on the other hand, typically arise from the taxpayer s failure to pay tax in compliance with its obligations under the Income Tax Act (Canada). In revising the GST/HST VDP, the CRA should be sensitive to the suppliers important role in the GST/HST administrative process and the fact that suppliers typically do not benefit from their failure to properly not charge and collect tax. Accordingly, the CRA should provide suppliers with every incentive to use the VDP by ensuring that the VDP process is efficient, coordinated and provides certainty of outcome and recognizing that the GST/HST/VDP should generally not require the same type of punitive element as that recommended for the income tax VDP by the OCAC. As taxpayers are only required to retain books and records for six years and the normal period for assessment is four years, taxpayers who have failed to properly collect tax due to errors that do not involve misrepresentation, due to neglect, carelessness or willful default or fraud, may be in a significantly worse position making a voluntary disclosure than a supplier who does not come forward and face the risk of a normal GST/HST audit. There was consensus that where the supplier failed to collect the appropriate amount of GST/HST, the lookback period should match the four-year audit period under the ETA. However, it was generally agreed that there should be no set lookback period in cases where the supplier collected, but failed to remit the tax to the CRA. The concept of wash transactions is unique to the GST/HST regime. It is currently CRA policy to waive penalties and interest for wash transactions disclosed under the VDP. However, there are some situations where wash transaction relief is not available even though the CRA would not suffer revenue loss; for example, where a non-resident registrant fails to collect GST/HST from a financial institution that would have the obligation to self-assess and remit the applicable tax. There was consensus that the CRA should consider including these transactions as wash transactions. In addition, given the fact that wash transactions involve no revenue loss to the CRA, it is unfair to burden the supplier with the requirement to collect GST/HST (and require the recipient of the supply to claim input tax credits thereon), which may involve significant administrative costs and customer relationship issues. Furthermore, the current policy imposes financial risk on suppliers as their customers may no longer be solvent, have a relationship with the supplier or be engaged in any activities in Canada. Given the fact that the VDP may not be used more than once for a particular issue, there was consensus that the GST/HST should not be assessed against the supplier in wash transactions. The current VDP provides that income tax returns with no taxes owing or with refunds expected would be handled using normal processing procedures. There is no mention as to how GST/HST returns with refunds expected would be handled under the VDP. Given the nature of the GST/HST, it may often be the case that a taxpayer making a voluntary disclosure may have taxes owing for certain reporting periods and a refund entitlement for other periods. To satisfy the completeness requirement, all returns must be filed under the VDP. However, we understand that the CRA removes returns with refunds from the VDP and sends them to audit for normal processing. Accordingly, the taxpayer is required to remit the amount of tax owing under the VDP and possibly interest on that amount; however, the taxpayer may not receive its refunds until the refund integrity unit has processed the returns, which may be delayed and could lead to a broader audit. There was consensus that given the nature of the GST/HST and the fact that GST/HST reporting follows transaction flow, refund returns should be considered together with returns showing tax owing in evaluating the voluntary disclosure and the amount payable by the taxpayer. However if this approach is not accepted, it has been the Leaders experience that taxpayers are not always informed that returns are being sent outside the VDP for processing and the reasons for doing so. Accordingly, there was consensus that VDP officers should inform a taxpayer of the decision to send returns for review and processing outside the VDP and allow the taxpayer to respond to the concerns of the VDP. This may involve establishing clear channels of communication between the VDP and the refund integrity unit/cra audit and a process to allow the taxpayer to provide its input where required. 2 P a g e
The form letters issued by the VDP to the disclosing taxpayer name the team leader but do not provide a contact phone number. Rather, the letters direct the taxpayer to call the CRA s general business window with questions. However, in many cases, the taxpayer will want to follow up with the VDP officer or team leader to discuss particular aspects of the voluntary disclosure. Leaders note that while in some cases, VDP officers have provided their phone number, this is not done consistently. There was consensus that the VDP officers and team leaders should provide contact information to the taxpayer making the disclosure. It has been the experience of Leaders that VDP officers do not have the expertise to evaluate technical positions in voluntary disclosures, and apparently, do not consult with CRA subject matter experts. As voluntary disclosures are subject to subsequent audit, it is possible that CRA audit may not accept the position taken in the disclosure. This could lead to problems managing client expectations where the issue subject to the disclosure is a technical issue open to more than one plausible interpretation. Although the voluntary disclosure has been accepted, it is not clear that the taxpayer is safe from audit. It is not apparent whether it is CRA policy to audit transactions following a voluntary disclosure, but if the CRA reaches a different conclusion on the technical issue, the taxpayer should not be penalized for taking a reasonable position on the issue. There was consensus that the VDP should have access to subject matter expertise as part of the acceptance process. Moreover, there was consensus that if the CRA does not agree with a technical position taken in a voluntary disclosure (at the disclosure stage or in a future audit), the taxpayer should still be entitled to penalty and interest relief for the periods disclosed. There is a potential problem in making a voluntary disclosure where a non-resident (NR) has collected but not remitted tax. We have seen VDP officers require the NR to register with retroactive effect in order to accept payment from the NR and finalize the voluntary disclosure. However, by registering retroactively for GST, the NR loses the protection of subsection 143(1) for past periods. This may result in audits for past periods that should otherwise have been protected. As a result, advisors must recommend either (i) that the NR should not register for GST/HST to accommodate the VDP, or (ii) if the NR is required by the CRA to register, the CRA should acknowledge that the registration is only for purposes of remitting GST/HST and does not result in the loss of the subsection 143(1) protection for past periods. Drop shipments There was widespread consensus that the new drop shipment rules were beneficial, and that they fixed many of the issues with the CRA s interpretation of the old drop-shipment rules. The new rules: Created the concept of an Owner s Certificate which worked in the same manner as a drop shipment certificate, but could apply to additional situations; Created new liability for consignees and owners who issue certificates; Created new rules dealing with inputs used in the manufacturing process; Created new rules dealing with leases; and Clarified retention of possession rules in s.179(4). Some concern was expressed that the amendments were not retroactive, and that this would mean that many taxpayers would still have to go to court based on the CRA s interpretation of the old rules. Arranging for financial services A discussion on history of the provision and the reason for the 2010 changes took place. According to Finance, the goal was to Reaffirm the long-standing policy intent underlying the concept of financial service for GST/HST purposes. 3 P a g e
Below is the summary of the policy intent: Financial Service = financial intermediation, market intermediation, risk pooling. Financial service also includes services closely related to intermediation such as operation and maintenance of accounts (including transaction fees, withdrawal fees, check cashing fees, ATM fees, fees for account statement). Credit card fees. Supply of insurance including receipt of premiums and payment of claims. Arranging for the purchase, sale or placement of a financial instrument including commissions earned by independent agents selling insurance policies to ensure consistent treatment of independent insurance agents and employees of insurance companies. Services associated with the arrangement of the financial services or activities which are normally performed by an insurance agent, a mortgage broker and an investment dealer. Under the policy intent it is important to note that the following should not constitute a financial service: o o The service of providing advice financial or otherwise. Management services provided to investment funds, such as daily supervision, or administration and management of the fund s portfolio. Finally, if other services are bundled together with a financial service for which a single consideration is charged, the entire transaction would be a financial service if the financial service was the primary supply. Also, because a financial service can involve both an administrative element and a financial element, the service will only be a financial service if performed or provided by: (a) A person at risk with respect to the financial service; (b) A person closely related to the person at risk; or (c) An agent, salesperson, or broker who arranges for the issuance, renewal or variation, or the transfer of ownership, of the instrument for a person at risk. Despite the relative clarity of the policy intent, there are still a number of contentious situations that exists such as: Principal business of the supplier and licensing requirements - According to CRA, the principal business of supplier, and the statutory, need to be licensed are important criteria to determine if a financial service is rendered. Bundling of services and form of considerations. Discussion on the form of consideration (commission, fixed dollar fee for service, per hour rate), the triggering point for payment (i.e. per successful transaction, per referral, per application), the unbundling of the fee. Involvement of intermediary is the contact with customer or supplier of the financial service essential? Should there be different principles for different industries? 4 P a g e
Discussions on ITC allocation and selected court cases A few selected court cases addressing ITC allocations were discussed: Sun Life Assurance Company of Canada v. The Queen (Tax Court 2015) Rental of premises to third parties to support Sun Life business. Should vacant spaces be allocated to Sun Life s taxable or exempt activities? The judge considered methodology reasonable because it accurately reflects Sun Life s purpose with respect to the direct use of the vacant spaces. Judge also noted there could be more than one reasonable methodology. University of Calgary v. The Queen (Tax Court 2015) Allocation of ITCs for common areas internal and external (green space) Allocation of property used indirectly in making supplies According to the judge, it requires one to determine how the use of the property relates to the aim or objective of making taxable supplies. External common areas can be allocated between taxable and exempt activities same as internal areas. Value of inputs not a criteria to allocate use in this situation. British Columbia Ferry Services v. The Queen (Tax Court 2014) Allocation of ITCs where the taxpayer carries on an ancillary business (taxable) in addition to its main business (exempt) How far to push the link between expenses normally incurred as part of the exempt business and the ancillary business (ex: relationship between fuel to propel the ferry and the supply of taxable meals and the rental of cabins) The Court summarizes four guiding principles in allocation cases: o Whether a particular allocation method chosen will be fair and reasonable is a question of fact. o The Court does not have to decide whether it is the best or most appropriate method. o A degree of deference is to be accorded to the taxpayer. o Regardless of such deference, a registrant must always be able to satisfactorily substantiate that the chosen method is, in fact, fair, reasonable and consistent. Based on these facts, the Court concluded that, as per Bay Ferries case (Tax Court 2004), The chosen method should not distort the financial reality of the commercial activity. Ultimately, the input must contribute to the ultimate production of taxable supplies. The Court will look for some nexus between the expense under consideration and the commercial activity. CIBC World Markets Inc. v. Canada (Fed Court of Appeal 2011) Changing allocation methods going back to previous years; Court of Appeal found nothing wrong with CIBC s approach: There are no words in the text of the Act that prohibit more than one claim for input tax credits concerning the same taxation year. Academy of Applied Pharmaceutical Sciences v. The Queen (Tax Court 2014) CRA audited and agreed to a certain allocation for a year under review; 5 P a g e
Registrant adopted that same methodology for future years without regard to whether it continued to be fair and reasonable ; During subsequent audit, CRA rejected the earlier approach in favour of a lesser rate of recovery; Taxpayer argued for (i) estoppel or (ii) officially induced error; Unfortunately, neither one is applicable against the Crown and the taxpayer lost on appeal. GST/HST potpourri The following items were discussed: Section 186 ETA: - Discussion on.reasonably regarded as being for consumption or use in relation to capital stock or debt of a related corporation test and CRA narrow interpretation and first order supply test and Miedzi Copper and Stantec Inc. decisions. Section 156 election: - Effective January 1, 2015 all elections need to be filed. To this effect: - CRA auditors continue to accept retroactive elections for pre-2015 periods - P-255: LATE-FILED SECTION 156 ELECTIONS AND REVOCATIONS (July 2016) - Written submission required with clear explanation on why election is late - All parties must have consistently treated supplies as having been made for no consideration - All parties must be up to date in filings and fully compliant The leaders also discussed the following: Rectification - the potential impact of the Supreme Court of Canada's decision on rectification in Fairmont Hotels, and the possible increased role of "rescission" in correcting errors Inter-provincial Place of Supply Rules - issues regarding several aspects of the inter-provincial place of supply rules were raised and discussed NPOs - developing issues regarding NPOs, including sponsorship payments, grants and subsidies, and the availability to NPOs of ITCs 6 P a g e