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 3rd
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 3rd
party
– Transfer assets from Parent Corporation to
Subsidiary
– Sell shares of Subsidiary to 3rd 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
Individual
Parent
Sub 1
Sub 1
Sub 2
Yes
Sub 2
Yes
Corp 2
Corp 1
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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