161-223

In finding that an agreement between two forestry companies (Company A and B), under which A Co will manage and harvest timber within B Co's licences, was not for the right to exploit a forestry resource to which s. 162(2) applied, CRA noted that "a person, who cuts trees where the timber remains the property of the person who was originally granted the right to exploit the resource, is not utilizing the resource or turning it to account," and then stated:

In substance, the purpose of the agreement is for A Co to supply to B Co a service of cutting trees. This position is supported by the fact that…the agreement states that title to the felled timber passes to B Co when the timber is felled in accordance with the applicable B Co licence. … Since B Co already owns the logs, the amounts paid by B Co are not consideration for a supply of logs by A Co but would appear to be [taxable] compensation paid to A Co for cutting the timber.

On the other hand, under a second agreement, B Co grants to A Co (in this regard, a "Harvesting Party") the right to harvest timber under the B Co licences for its own consumption at its mills on the terms and conditions contained in the agreement, and A Co grants to B Co (in this regard, also a Harvesting Party) the right to harvest timber under the A Co forest licence for its own consumption at its mills. In finding that s. 162(2) applied to both supplies, CRA stated:

The… harvested timber becomes the property of the Harvesting Party at the moment it is felled. Thus, the agreement is not for a supply of cut timber… . Nor is the agreement for a supply of a service of cutting trees, since title to the cut timber passes from the licence holder to the Harvesting Party. Furthermore, if the agreement was for a supply of a service of cutting trees, the Harvesting Party performing the cutting would be receiving payment, not making payment.

However, the provision of the licence holder's planning, engineering and assessment work was a taxable supply.

The Optionor "options" mineral resource Tenures to an Optionee who is granted the right to explore the Tenures, and is required to make specified annual payments, to expend certain amount annually on exploration or development, to issue common shares of the Optionee and to assume all the costs for maintaining the Tenures. If these conditions are met, at the end of the specified period of XX years, the Optionor transfers title to the Tenures to the Optionee. In finding that the "optioning" under the agreement by the Optionor was a provision of natural resource rights in respect of an unproven property which s. 162(2)(a) deemed not to be a supply, CRA stated:

Strictly speaking, an option to acquire something is not necessarily the same as acquiring the thing itself and an option to acquire something is generally considered to be a supply. However…we do not consider the Optionor to be making a separate supply of the option. As long as the Optionee meets its obligations, it will automatically acquire the Tenure. It will be deemed to have exercised the Option, and no further consideration is paid. The nature of the Agreement is similar to a conditional sales contract for the sale of a good, whereby title to the good passes automatically upon full payment of the consideration.

Overview of section 162

1. Section 162 deems the following supplies of natural resource property rights not to be supplies for GST/HST purposes:

• a right to explore for or exploit a mineral deposit, a peat bog or deposit of peat or a forestry, water or fishery resource,
• a right of entry or user relating to such rights,
• any right to a royalty or profit interest in relation to the resource, or
• a right to enter or use land to generate or evaluate the feasibility of generating electricity from sun or wind.

Meaning of mineral ss 123(1)

3. "Mineral" includes... substances that are considered to be minerals within the ordinary meaning of that word. Although not specifically mentioned, rock and riprap are also included.

Freehold v. royalty

19. Subject to the exceptions set out in subsection 162(3), a supply of a right to explore for or exploit a mineral deposit, if supplied by itself, is deemed not to be a supply pursuant to subsection 162(2). Where the right to explore for or exploit a mineral deposit is only one component of a supply of a bundle of rights, subsection 162(2) does not apply because subsection 162(2) applies only to supplies of those rights that are specifically listed therein. Therefore, subsection 162(2) does not apply to a sale of a freehold mineral title or a sale of land that includes the underlying minerals.

General synopsis of ss.162(1) and (2).

After noting that "special rules are in place in subsection 162(4) to eliminate the requirement to establish a value for certain property or services exchanged between a farmor and a farmee in a farm-out agreement that is entered into for the purpose of the exploration and potential development of real property for mineral deposits," CRA stated:

[B]y virtue of paragraph 162(4)(b), the farmee's contribution need not be valued for purposes of determining any tax on the property or services given by the farmor. This is achieved by deeming the value of the farmee's contribution as consideration for any property or service given by the farmor to the farmee under the agreement to be nil.

However, if part of the consideration given by the farmor for the farmee's contribution is a service or property (each of which is referred to as the farmor's additional contribution) that is not a natural resource right in respect of unproven property:

• the farmee is deemed to have supplied a separate taxable service to the farmor and this separate service is deemed to be consideration for the farmor's additional contribution; and
• the value of the farmee's service is deemed to be equal to the fair market value of the farmor's additional contribution.

CRA provided an example:

[A] GST/HST registered farmor supplies natural resource rights in an unproven property and transfers equipment with a fair market value of $8,000 to a farmee in return for the exploration and development of the unproven property, and a processing service to be provided by the farmee. The usual charge for the processing service performed by the farmee is $10,000. The farmor must charge the farmee tax calculated on the value of the equipment that the farmor is supplying to farmee (i.e., $8,000). In turn, the farmee is deemed to have supplied a service to the farmor for the same value of consideration that was paid for the equipment and must charge tax to the farmor, which is calculated on $8,000. The farmee must also charge the farmor tax on the processing service actually supplied.

However, the tax on the processing service is only calculated on $2,000 (the amount by which the value of the service exceeds the value of the equipment). Therefore, the farmee must charge tax on the total amount of $10,000 (the fair market value of the processing service).

Consequently, with respect to the ancillary supplies of property and services between the farmor and the farmee, each party is required to charge tax on the fair market value of the supply that they made and to pay tax on the fair market value of the supply that they received in return.

A surcharge made by a car dealership to its customers in order to recover the cost to it of an amount payable by it to the manufacturer to reimburse the manufacturer for a $100 excise tax imposed on an air conditioner included in the car, would be part of the consideration for the sale of the automobile.

"Where a separate amount is paid by a lessee on account of property taxes, this amount is part of the consideration for the rental of the property, even if the lessee pays the amount directly to the municipality ... While the Tenant may be responsible under the agreement to pay property taxes to the municipality, the ultimate liability to pay the property taxes rests with the Landlord."

"... The payment of property taxes by a tenant, pursuant to the terms of a lease agreement, constitutes consideration for the lease of property where the landlord has a joint liability to pay such property taxes."

The portion of the consideration for a taxable supply made by a charity or political party, that can reasonably be regarded as a gift or contribution, is that amount for which a receipt could be issued, or in the case of a donation to a charity, a receipt that could be issued to an individual. The GST is not charged on the portion that is deemed to be the gift or contribution.

In finding that the grant of a franchise by the Franchisor to a new Franchisee respecting a specific site qualified as the supply of a business that was established by the supplier (the Franchisor) notwithstanding that the Franchisor did not directly supply real estate to the franchisee and the site instead was subleased by a subsidiary of the Franchisor to the Franchisee, CRA stated:

… Real property, whether purchased or leased, is normally required to carry on a food restaurant store/business.

[Here] the Franchisor is to provide to the Franchisee the right and licence to use proprietary marks, assistance in obtaining an approved location, initial training including the services of one experienced employee and loan of manuals, as well as having plans/specifications prepared and construction, decoration, outfitting of the required fixtures, furnishings, equipment, signs, accessories, supplies, etc. necessary to permit the Franchisee to commence the operation of the Franchised Business. Since the Franchise Agreement includes terms that transfer all of the above, and terms under which the land and buildings are transferred under a Sublease assigned by the Franchisor's subsidiary, the first condition to the election is met.

Respecting the second ("all or substantially all") test, CRA stated:

Any property acquired by the Franchisee subsequently or already in the possession of the Franchisee that can reasonably be regarded as being necessary for it to be capable of carrying on the Franchised Business would need to be 10% or less of the fair market value of all the property required to carry on the business.

Shares of Newco, which was incorporated solely for the purposes of purchasing all of the business assets of a supplier, are sold to a third party purchaser and Newco is immediately amalgamated with the purchaser after the asset transfer. In confirming that the s. 167 election would not be available for the business acquisition by Newco if Newco did not carry on a business before its amalgamation, CRA stated:

Under section 271, an Amalco is deemed for GST/HST purposes to be a separate person from each of its predecessors, except as otherwise provided under the ETA. … There is no provision deeming a predecessor (in this case, Newco) to acquire the characteristics of its successor Amalco. In other words, Newco's ability to register cannot be based on the proposed actions of a corporation, i.e., Amalco, that does not exist at the time Newco needs to be a registrant so it can make the section 167 election.

In confirming that a s. 167 election is not available to Amalco where an operating company ("Opco") is amalgamated with another corporation, and the amalgamated corporation (Amalco) immediately sells all of the assets, CRA stated:

One of the conditions for making an election under subsection 167(1) is for the supplier to be supplying a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier. Since a predecessor corporation (in this case, Opco) is the entity that established or carried on the business, the Amalco cannot be considered to have done so, since it is deemed to be a separate person for GST/HST purposes. Moreover, the Amalco did not acquire the business from its predecessor (Opco) since paragraph 271(c) deems the transfer of property from Opco to Amalco not to be a supply for GST/HST purposes.

Under the former version of s. 167(1), accounts receivable were not considered to be included in the determination of whether "all or substantially all" of the property was being transferred.

"The supply by a partnership of an undivided interest in the partnership property to one of the partners would generally not be considered to be a supply of a business or part of a business because it cannot operate on its own and as a result, the election under subsection 167(1) would not be available."

Where the purchaser of a "mothballed" restaurant must spend more than 10% of the purchase price to equip the restaurant before beginning its operations, the "all or substantially all" test would not be satisfied.

"Where a person purchases the land, building, or the manufacturing equipment, all the related office equipment and goodwill then generally the person is acquiring all or substantially the property that can reasonably be regarded as being necessary to carry on the business ...".

R.C. discusses various requirements for the purchase of an undivided interest in an oil and gas joint venture to qualify for the election.

7. The value of any property that is not acquired under the agreement for the supply, but that the recipient requires to carry on the business must generally be not more than 10% of the fair market value of all the property necessary to carry on the business.... The recipient must be capable of carrying on the same kind of business that was established or carried on, or acquired, by the supplier, with the property that the recipient has acquired under the agreement.

9. In general, a "part of a business" is an activity that may be a functionally and physically discrete operating unit, or it may be an activity that supports or is related to the broader business, but is organized as a separate activity that is capable of operating on its own. The guidelines that apply when determining if there is a supply and acquisition of a business also apply when determining if there has been a supply and acquisition of "part of a business". [CRA then provides example of the sale (eligible for the election) by a pulp and paper company of the inventory, equipment and goodwill of its printing division, with the real estate being leased to the purchaser.]

21. In the case of a supply by a franchisor to a franchisee of a new business, the franchisor must make a supply of a business that was established (i.e., a turn-key operation and not just certain individual assets) in order to qualify for the election under subsection 167(1). In general...the following property and services should be included...: right to use a trade name/trademark, land and building, equipment necessary to operate the business, initial inventory, training of principals and staff, and operating manuals.

22. ...[W]ith respect to some service businesses, the nature of business is such that the land and building are not significant to the business operations (e.g., the office space required is minimal and the service is provided at the customer's location). In this case, a supply that does not include the land and building may still qualify as the supply of an established business... .

After noting that "a trustee of a bare trust, for example, a nominee corporation, may act as an agent of the participants in a joint venture by performing certain activities on their behalf," CRA stated:

Generally, an agent is considered to be an extension of the principal and makes or acquires supplies on behalf of the principal who for GST/HST purposes is considered to have made or acquired the supplies. Therefore, it is the principal that is generally required to charge and account for the tax on the supplies made by the agent…[and] who is entitled to claim any input tax credits on the supplies acquired by the agent on behalf of the principal.

An Ontario purchaser ("Ontario Co") remitted HST to a Quebec supplier ("Quebec Co," a GST registrant) on the basis of its view that the place of supply of a purchase of goods was in Ontario, but Quebec Co (which now is insolvent) did not remit the provincial component of the HST on the basis of a view that the place of supply was in Quebec. Ontario Co claimed an ITC.

CRA stated that "Ontario Co is not entitled to claim an ITC for any amount paid in error… ."

In response to a question on pre-incorporation contracts, CRA stated that even in jurisdictions where the corporate legislation did not address such contracts:

CRA may accept the accounting for pre-incorporation transactions by a newly formed corporation which has adopted a written contract made in its name or on its behalf before it came into existence based on the intention and actions of the parties, and on a case-by-case basis.

To the extent that the adoption of a pre-incorporation contract is in connection with acquiring or establishing the commercial activities of a newly formed corporation, paragraph 141.1(3)(a) of the ETA will deem the adoption of that contract to be done in the course of the corporation's commercial activities.

Where property and services are acquired by a corporation prior to it becoming a GST/HST registrant, the corporation is precluded from claiming ITCs on those property or services, except as provided for under section 171… .

After using a property partly to generate revenues from commercial activities and partly from exempt activities (programs geared to children under 14), a City constructs a multi-use recreational complex on the property.

CRA rules that the City will be eligible to claim full ITCs with respect to the construction of the complex provided that the construction costs form an improvement to the property, immediately after the property was last acquired by the City, the City was using the property primarily (more than 50%) i its commercial activities, and at the time tax in respect of the improvements is paid or becomes payable, the property is used primarily in commercial activities of the City.

In its explanation, CRA noted that the complex would generally be considered an improvement to the property (so that para. (b) of B of s. 169(1) would be relevant), and that ss. 169(1), 209(1) and 199(4) would apply provided that

where an election under s. 211 is not in effect in respect of capital real property, a municipality is entitled to full ITCs on the acquisition of an improvement to capital real property only if, at the time tax in respect of the improvement is paid or becomes payable, the capital real property is used primarily in commercial activities of the municipality.

Furthermore:

Subsection 141.01(3) provides that a person is considered to use property (e.g., capital real property) in commercial activities only to the extent that the property is used for the purpose of making taxable supplies for consideration....

CRA also rules on the availability of ITCs for acquisitions of capital personal property and operating property or services.

A Canadian company enters into an agreement with a non-resident registered service provider for its equipment to be refurbished outside Canada, with the equipment then being returned to Canada by the non-resident acting as importer of record and paying the GST on importation. Given that the Canadian company is the de facto importer, it is the only person entitled to claim ITCs for such GST, which would require it to obtain copies of the customs documentation from the non-resident.

In a corporate reorganization involving a GST registrant that is engaged exclusively in commercial activities, assets are first transferred to a NewCo who immediately thereafter is amalgamated with another corporation ("SuccessorCorp") who will use the assets exclusively in a commercial activity. After noting the CRA position that NewCo may not be eligible to register or clqim ITCs, the question asked whether SuccessorCorp would be entitled to claim ITCs for GST that was payable by NewCo. CRA responded:

It appears that NewCo will not be engaged in commercial activity as defined in subsection 123(1) of the ETA. As a result, SuccessorCorp would not be eligible to claim ITCs with respect to the property that NewCo acquired unless SuccessorCorp is using the property in commercial activity and a change-in-use provision applies. For example, if all other conditions of the provisions are met, SuccessorCorp may be eligible to claim ITCs on the change of use of capital personal property under subsection 199(3) and of capital real property under subsection 206(2) based on the basic tax content of the property.

A real estate nominee not only holds legal title to project real property but also, at the direction of the beneficial owners, enters into arrangements to maintain, develop, improve, manage or sell the project. CRA indicated that provided the nominee is a bare trustee, the beneficial owners rather than the nominee would be entitled to claim ITCs, including in respect of the commercial activities conducted by the nominee as their agent.

Where a registrant which hads claimed ITCs for accounts payable goes bankrupt, and the supplier then claims a bad debt deduction in computing net tax, the ITC will not be denied, but the "the registrant may be assessed for the tax payable that was not paid to the supplier."

Respecting the construction by a corporation of a facility and its sale to a subsidiary for lease back to that corporation for use by it in activities that entitled it to no or partial ITCs for the GST on the rents, CRA stated that it is its "position on sale-leaseback transactions that one must look to the first-order supply, not the ultimate intended use, for purposes of determining ITC entitlement."

"To be entitled to an ITC in respect of Division III tax, the person must be the de facto importer of the good (i.e., the person who caused the goods to be imported). Although the person listed as the importer of record on the B3 provides prime facie evidence that the person is the de facto importer, such evidence can be reversed through other evidence."

[A] bare trust is not engaged in commercial activities and is not entitled to claim ITCs. Instead, the beneficial owners are entitled to claim ITCs for the GST on expenses relating to their commercial activities. These expenses may be incurred by the bare trust acting as their agent.

In a purported butterfly reorganization, Subco, which operates a department store, transfers its real estate to a newly-incorporated subsidiary (Newco) of its parent (Parent) in consideration for non-voting preference shares, with Newco then being immediately wound-up into Parent and with the real estate being leased to Subco. Rulings that Newco will be permittted to register under s. 240(3) and that Newco will be entitled to full ITCs.

"'Exclusively' means 90 per cent or more consumption, use or supply in the course of commercial activities".

The deeming by s. 153(3) of a supply to be made for nil consideration does not alter the status of the supply as a taxable supply for other purposes, e.g., ITC purposes.

Where a registrant imports tangible personal property of an unregistered non-resident for the purpose of providing storage services to the non-resident, an ITC for Division III tax payable on the importation is available.

When an imported taxable supply is used partly in a commercial activity, registrants will be able to claim an input tax credit on the GST payable on that part of the supply for use in a commercial activity.

In a situation where an unregistered non-resident was listed as the importer of record, and it supplied goods to a registrant who wishes to obtain an ITC under s. 180, CCRA indicated that "a copy of the B3 Customs Coding Form will be considered sufficient evidence for purposes of paragraph 169(4)(a) and subparagraph 180(a)(ii) of the Act ... . An agreement in writing between the supplier and the recipient of the commercial service, or other relevant documents which will provide sufficient evidence in determining the identity of the supplier and the recipient of the commercial service and verify that the non-resident caused the transfer of the physical possession of the goods to the resident will also constitute sufficient documentary evidence."

Discussion of simplified "6/106" method for claiming ITCs re meal and entertainment expenses.

The appellant, which engaged in a home construction business, paid management fees to its two shareholders, which were companies whose sole respective shareholders were the founder of its business (Germain) and his son (Eric). Germain managed the office including personnel management, financing and overseeing land purchases and house sales. Eric focused on home design and construction. The management fees were allocated between the two shareholder companies on a 50-50 basis for 2009 and were $1,250,000, $1,770,000 and $950,000 for the appellant's 2008, 2009 and 2010 fiscal years (each ending on July 31). The Minister applied s. 170(2)(b) to allow input tax credits ("ITCs") only on the first $950,000 of the management fees for the 2009 year. In allowing the appeal, Favreau J stated (22-25, 28, 30, TaxInterpretations translation):

[T]he Minister alleges that the management fee was a mere year end accrual, that there was not management agreement and that there were no objective criteria for determining the amount… . The management fee was merely a profit distribution mechanism as it varied from year to year, without any real change in the qualify or level of services rendered… .

The jurisprudence addressing section 67 of the [ITA] is not relevant…because the text of section 67 is different… .

The evidence reveals that we have here a very profitable business which was very well managed by very experienced managers… . The annual revenues…for…2007, 2008, 2009 and 2010 were $16,045,841, $12,883,743, $13,180,230 and $11,970,088, respectively.

The services rendered by the management companies and their shareholders were not limited to customary management services as they encompassed financing and access to a bank of serviced lots ready for development, which were held by corporations controlled by …Germain and his children, Lyne and Eric.

…The payment of the management expenses by the appellant was essential to protecting its assets from the risks associated with carrying on its construction business. …That which was deductible at the appellant's level was subject to taxation at the level of the management companies at the same rate of federal [income] tax.

…[T]he management fees paid…[for] 2009 were clearly justified for the level of services received and were reasonable in the circumstances.

Where a "capital pool company" which has raised capital pursuant to a prospectus on a blind pool basis has identified an acquisition of assets that will be used in a commercial activity, anything done by the CPC (other than the making of a supply) in connection with the acquisition or establishment of that commercial activity shall be deemed by s. 141.1(3)(a) to have been done in the course of the commercial activities of the CPC. Once s. 141.1(3)(a) so applies, it may be able to claim ITCs under s. 171(1) on property held by it at that time including expenses previously incurred by it which are considered eligible capital property for income tax purposes, given that eligible capital may be considered property for ETA purposes.

Where a person does not register prior to acquiring a business, it will be subject to s. 171 upon becoming a registrant.

General synopsis.

General synopsis.

Various adminsitrative services are provided by employers to various pension plans (which are adminstered by Corporation A), including preparing and submitting payroll contributions, remitting monthly contributions, distributing annual pension adjustment amounts and providing enrolment information information, constituted "pension activities." In response to a question as to whether the employers would be required to calulate and remit GST/HST even though the employer resources utilized in performing these tasks were immaterial, CRA indicated that the employers would be deemed under s. 172.1(6) or (7) to collect tax on the fair market value of these "employer resources." However, CRA stated that "we understand that the Department of Finance is currently examining issue of materiality with respect to the scope of the application of 'employer resources'."

With respect to various services provided by participating employers of registered pension plans, CRA first noted that:

For purposes of subsection 172.1(6) and (7), an "employer resource" is essentially anything acquired, created, developed and/or produced by the employer including the employee labour and overhead required to do these things.

CRA then stated:

In our view, the following items listed in your submission would be related to the establishment, management or administration of the pension plan or a pension entity of the pension plan and would not qualify as an "excluded activity". We consider each of these items to be in respect of a "pension activity" to which section 172.1 would apply.

• Services pertaining to the establishment or subsequent amendment of a pension plan or plan trust.
• The preparation and filing of actuarial reports, financial reports and other information for a pension plan pursuant to statutory requirements.
• Administration services in relation to the collection of pension contributions and payment of pension benefits.
• The reconciliation of pension contributions to payroll records.
• The maintenance of records pertaining to employee hires, terminations and deaths.
• Pension benefit calculations.
• Pension adjustment calculations.
• Preparation of a pension entity's periodic pension rebate application forms (GST4607) and SLFI returns (GST/HST 494).
• Trustee services rendered by the employer or by third parties contracted by the employer.
• The retention of a trustee for a plan trust.
• Custodial or nominee services for plan trust assets.
• The appraisal of plan trust investment performance.
• The appointment of an investment manager for a plan trust.
• Plan trust portfolio management.
• Investment advice with respect to plan trust assets.
• Salaries or wages paid to employees who invest or manage funds for a pension entity.
• Brokerage, agents' charges and all other property or services relating to the acquisition, utilization or disposal of plan trust assets.
• Legal, accounting or auditing services rendered in respect of plan trust assets.

Conversely, we do not consider the following items listed in your submission to be in respect of a "pension activity". Accordingly, these would not be subject to the deeming rules of section 172.1.

• Third party accounting services supplied to an employer to determine the employer's obligations under section 172.1 of the ETA (i.e., with respect to deemed taxable supplies and the corresponding deemed tax collected).
• In the case of a hostile takeover of an employer, actuarial services and the preparation of an actuarial report to determine the liabilities of a pension plan, for the sole purpose of assessing the related financial impact on the assets and liabilities of a participating employer of the plan.

A registrant acquires personal property strictly for the personal use, free of charge, of an employee or a shareholder. Under s. 170, the registrant may not claim an input tax credit for the GST/HST paid on the purchase, and under s. 173(1)(c) the use of the registrant in so supplying the property to the employee/shareholder is deemed to be use of the property goods in the course of a commercial activity – so that a resale of the goods is taxable under s. 200 or 141.1. On the resale, is the registrant entitled to claim an input tax credit for the GST/HST paid on the original purchase, and if so, on what basis? CRA stated:

]E]ven though paragraph 173(1)(c) deems the property to be for use in the registrant's commercial activities, the registrant would not be entitled to claim an ITC for the GST/HST payable or paid on the original purchase if subsection 170(1) has denied the registrant an ITC in respect of that property.

When the personal property is subsequently sold, and the use of the property in commercial activities (including the deemed use in paragraph 173(1)(c)) results in the sale being a taxable supply under the provisions of sections 141.1 or 200, there is no provision in the ETA that allows an ITC as a result of that taxable supply, unless the personal property is a passenger vehicle.

General synopsis.

Where a registrant imports tangible personal property of an unregistered non-resident for the purpose of providing storage services to the non-resident, and physical possession of the tangible personal property is transferred at a place in Canada to the registrant (the "consignee") purchasing the goods from the non-resident, and the consignee gives the registrant storage service provider a drop-shipment certificate, the provision of the storage services to the non-resident is deemed under s. 179(2) to have been made outside of Canada and thereby is not subject to Division II tax.

23 ....The consignee who issues the drop-shipment certificate to the registrant acknowledges its potential tax obligation as a result of acquiring physical possession of the goods. This tax obligation may occur as a result of the general drop-shipment rule where the consignee is acquiring physical possession of the goods to supply a commercial service to the unregistered non-resident in respect of the goods or a service of manufacturing or producing goods for an unregistered non-resident. It may also occur as a result of an obligation to self-assess tax in respect of the goods where the consignee is a recipient of an imported taxable supply of the goods (explained beginning at paragraph 29)....

29. Division IV imposes tax on an "imported taxable supply". Generally, these are supplies that are made outside Canada and acquired by the recipient for consumption, use or supply in Canada otherwise than exclusively in the course of a commercial activity. The recipient, as opposed to the supplier, is required to account for tax on an imported taxable supply.

P-107R1 "Certificate for Pre-Retail Drop-Shipments" 5 May 1999

Where an unregistered non-resident company (A) agrees with a registered Canadian company (B) to install goods manufactured outside Canada by A and imported into Canada by a Canadian registered customer (C) and B has charged GST to A who has included the GST in its invoice to C, there are no provisions in the ETA that would allow an input tax credit to be claimed by C in respect of the installation of the property.

General synopsis. GST will apply to co-operative advertising payments in the normal manner.

A member of a frequent flyer award program exchanged accumulated credits (XXXXX Miles) in exchange for an award ticket for travel within North America and also was required to pay various airport taxes as well as the GST ($44 U.S. funds) in respect of the award ticket. Was such GST collectible? After noting that the flight was not zero-rated under Sched. VI, Pt. VII, s. 3 and that

the definition of "coupon" encompasses intangible devices that have the characteristics of a traditional paper coupon…[including] the type of mileage credit issued [here]

CCRA stated:

The CCRA has taken the position that subsection 181(4) applies to coupons that are accumulated and redeemed after certain thresholds are met (e.g. points, award miles or other similar devices).

… Therefore, airlines...would be required to collect the GST/HST on the net value of the consideration for the award ticket once the accumulated mileage credits have been applied to reduce the value of the consideration for the supply. When a coupon is accepted as the total consideration for a supply, then no GST/HST is payable.

Other Charges

...A cancellation fee paid by a patient for a missed or cancelled appointment is treated as payment for the intended supply (i.e., treatment or other naturopathic service). Where the naturopathic service is taxable, the GST/HST will apply to the cancellation fee.

Supplier agrees to deliver 100 widgets to the Recipient at $10 per widget, but is only able to obtain 20 widgets. An action of the Recipient is settled by Recipient agreeing to release Supplier from all damages in exchange for a payment of $100 and for the provision by the Supplier of 20 widgets at no cost. CRA agreed that s. 182 would not apply, and that (under "general taxing concepts"), as the damages payment "appears to be entirely compensatory and is not linked to a supply of property or services," it would not be subject to GST/HST, regardless of it being made partly in kind (i.e., widgets valued at $200).

A break-up fee (referred to as a "non-completion fee") paid in connection with an aborted merger of two companies did not represent consideration for a supply, nor was it governed by subsection 182(1) as the agreement to which the fee related was an agreement for the making of an exempt financial service. Accordingly, no GST was payable on the fee.

A Canadian law firm was successfully sued for damages respecting its negligent advice on pension matters to a Canadian corporation that also was a registrant. Does s. 182(1) or s. 165(1) apply? Would the answer change if the law firm agreed to make the damage payment pursuant to a settlement agreement? CRA responded:

1. Although the settlement may have been made as a consequence of the breach of an agreement for the making of a taxable supply, subsection 182(1) does not apply, because the payment at issue is made to the recipient by the supplier. ...
2. Subsection 165(1) does not apply to the situation, because the damage payments are not consideration for a supply. The law firm does not receive property or a service in return for making the payments. It is merely providing compensation for the damages that the corporation has suffered. ...
3. The GST/HST status of the settlement payment does not depend on whether the settlement occurs as a result of a court decision or a voluntary agreement, but on whether property or service are given in exchange for the payments.

General discussion.

A non-financial institution is allowed to claim ITCs with respect to inputs acquired for use in the raising of capital that are related to its commercial activity.

As s. 186(1) only applies for ITC purposes, it does not affect the determination of whether there is an imported taxable supply. However, where a registrant failed to account for HST on an imported taxable supply which should have been self-assessed and has not claimed an ITC for those amounts, administrative tolerance generally will be exercised so that no interest is assessed.

General discussion.

Where a "capital pool company" which has raised capital pursuant to a prospectus on a blind pool basis has identified a corporation to acquire, s. 186(2) may apply to permit it to claim ITCs respecting the related expenses thereafter incurred by it.

ACo was a registrant which, in order to promote sales of its products, provided purchasers with a chance to win a cash prize directly from it by participating in a "game of chance [which] is conducted through having certain labels affixed to a product's packaging." In finding that s. 188(1) did not permit ACo to claim an input tax credit with respect to the payment of the cash prizes, CRA found that the promotional contest was not itself a business or an adventure in the nature of trade, but instead was part of the retail business which it promoted given the "high degree of interconnection and interdependence between the retailing of products that are taxable for purposes of the GST/HST and the promotional contest."

S.190(1) would apply to the conversion of a hotel to a nursing home. Accordingly, s. 191(1) would require the builder to self-assess on the entire complex when the first unit was rented out or occupied.

If a person purchases newly constructed or substantially renovated housing for the purpose of leasing or licensing it to an individual as a place of residence, the person will generally not be a builder of the housing for GST/HST purposes, even if the person hires a property manager as agent for the purpose of renting the housing. However:

If a particular person purchases such housing for the purpose of supplying it under a head lease to another person (lessee/sub-lessor) who in turn leases the housing to an individual as a place of residence, the particular person will be a builder for GST/HST purposes and different rules apply. Where such a builder enters into a head lease that is exempt under section 6.1 or 6.11 of Part I of Schedule V to the Act with a lessee/sub-lessor who is acquiring the housing for the purpose of making exempt supplies that include giving possession or use of the housing (e.g., under a sublease that provides for the continuous occupancy of the housing as a place of residence or lodging by an individual for at least one month) and possession of the housing is given to the lessee/sub-lessor, the builder is considered to have made a taxable sale and repurchase (a self-supply) of the housing.

In such case, the builder is considered to have collected and paid the GST/HST on such deemed sale and repurchase on the fair market value of the housing at the time possession of the housing is given to the lessee (or on completion of construction or substantial renovation, if later) - and if a registrant may claim an ITC for the tax paid on the housing purchase.

The City leases land to the Developer (with a right to sever and remove improvements on the termination of the lease), and the Developer enters into a "Purchase Agreement" with the Purchaser (conditional upon the Lessor's consent to the transfer of the Lease) for a stipulated purchase price, with the Developer covenanting to construct a townhouse in accordance with specifications. CRA stated:

One of the basic principles of real estate law is that a fixture, such as a building, forms part of the land to which it is affixed, even if the person who affixed the building has retained the right to sever and remove it. …There is no indication in the Lease that the City has given ownership of the building portion of the Unit to the Developer. … The Developer has only an interest in the Unit constructed on the Lot and cannot therefore dispose of something more (i.e., the Developer cannot make a separate sale of the building portion of the Unit). …Instead of the sale of the building portion of the Unit and a lease, or assignment of a lease, in the land portion of the Unit, we would characterize the supply in this case as an assignment of a lease of land on which the building is located (i.e. an assignment of the leasehold in the Unit). As such, neither the condition in subparagraph 191(1)(b)(i) nor the condition in subparagraph 191(1)(b)(ii) is met and the Developer is not required to self-supply the Unit. As there is no self-supply under subsection 191(1), there is no rebate entitlement under section 254.1 (i.e., a… new housing rebate is not permitted). …This is a taxable supply as there are no provisions to exempt the supply.

However, the new housing rebate under section 256 for owner-built homes was available.

If the facts of a particular case indicate that an individual is not given possession of a room or suite in the facility, then section 191 of the Act will not apply, even if the remaining conditions of that section are met. It is important to note that it is possible for an individual to have possession of a room or suite in a residential care facility even if the operator has access rights to that room or suite to perform their obligations under the agreement (e.g., cleaning, changing linens, responding to emergency situations).

Some residential care facilities (e.g., nursing homes) often contain private and semi-private accommodations. The type of room or suite in which an individual stays is not necessarily determinative of whether that individual has been given possession of a room or suite for purposes of section 191 of the Act. In the case of shared rooms, the above factors and any other relevant factors should be considered in determining whether individuals are given possession of a shared room or suite.

Deemed self supply resulting from naturopathic services becoming exempted after February 10, 2014

If, as a result of naturopathic services becoming exempt from the GST/HST, there is a change in use of the capital personal property by the naturopathic doctor from more than 50% in taxable activities to 50% or less in taxable activities, the naturopathic doctor ceases to use the property primarily in taxable activities. As a result, if the naturopathic doctor is a GST/HST registrant, he or she is deemed by subsection 200(2) to have sold the property immediately before the change in use occurs and, at the time the change in use occurs, is deemed to have collected the GST/HST on the sale of the property equal to the basic tax content of the property at that time.

General discussion.

The change-of-use rules will apply to those assets which, as a result of the election under s. 150, will be used to make exempt supplies.

In a corporate reorganization involving a GST registrant that is engaged exclusively in commercial activities, assets are first transferred to a NewCo who immediately thereafter is amalgamated with another corporation ("SuccessorCorp") who will use the assets exclusively in a commercial activity. After noting the CRA position that NewCo may not be eligible to register or clqim ITCs, the question asked whether SuccessorCorp would be entitled to claim ITCs for GST that was payable by NewCo. CRA responded:

It appears that NewCo will not be engaged in commercial activity as defined in subsection 123(1) of the ETA. As a result, SuccessorCorp would not be eligible to claim ITCs with respect to the property that NewCo acquired unless SuccessorCorp is using the property in commercial activity and a change-in-use provision applies. For example, if all other conditions of the provisions are met, SuccessorCorp may be eligible to claim ITCs on the change of use of capital personal property under subsection 199(3) and of capital real property under subsection 206(2) based on the basic tax content of the property.

Deemed self supply resulting from naturopathic services becoming exempted after February 10, 2014

Where a decrease of 10% or more in the use of the capital real property in taxable activities occurs (but there is no cessation of use, which is described in the section below), a corporation or partnership that is a GST/HST registrant is deemed under subsection 206(5), immediately before the change in use occurs, to have sold a portion of the property that reflects the decrease in use in taxable activities. In addition, unless the sale is exempt, the corporation or partnership is deemed to have collected, at the time the change occurs, the GST/HST equal to the basic tax content of the property on the portion of the property that is no longer used in taxable activities.

As indicated above, the deemed sale effectively requires the registrant to account for all, or part, of the GST/HST previously claimed as an ITC on the original purchase of, or on any later improvements made to, the property.

a university which is the registered and beneficial owner of three contiguous parcels of land (A, B and C) reconfigures its ownership so that it is the owner of parcel AB consisting of all of (former) parcels A and B plus a portion of (former) parcel C, and parcel C1 representing the balance.

Such reconfiguration would cause parcels A, B and C to cease to exist for ETA purposes so that fresh s. 211 elections would be required.

"For purposes of this election, real property generally means the entire estate or interest in the real property (including a leasehold interest) held by the charity and that is contained within a single legal description (which includes the land and all structure and other improvements that are fixtures to the land)."

The term Canadian activity means an activity of the person carried on, engaged in or conducted in Canada. It would include but is not limited to a business (as defined in subsection 123(1)) carried on. The phrase "carried on, engaged in or conducted in Canada" is intended to give the term "Canadian activity" a broad meaning.

As s. 186(1) only applies for ITC purposes, it does not affect the determination of whether there is an imported taxable supply. However, where a registrant failed to account for HST on an imported taxable supply which should have been self-assessed and has not claimed an ITC for those amounts, administrative tolerance generally will be exercised so that no interest is assessed.

Loading restricted to the administrative component [and not amounts that are fundamentally financial]

Subject to the position concerning service level agreements that meet the criteria described below, the amount representing that part of the reinsurance premium that may reasonably be allocated to administrative expenses, i.e., loading, including any error or profit margin specific to those expenses, is subject to tax under the import rules.

Amounts paid to reinsurer over and above the best estimate of losses (to reflect the transfer of risk) are excluded

In the case of the amount that the insurance industry refers to as the "margin for risk transfer" portion of the reinsurance premium, the industry has stated that this amount exclusively represents the compensation paid by the primary insurer to the reinsurer over and above the "best estimate of losses" to reflect the transfer of risk to the reinsurer for potential future insurance claims under the insurance/reinsurance policy/contract, and that some or all of this amount could become profit of the reinsurer. … The amount in the reinsurance premium described above as the margin for risk transfer is not considered to be included in loading as defined in section 217. As a result, the amount is not excluded from paragraph (k) of the definition of permitted deduction in section 217 and is not subject to tax.

Ceding commissions and expense allowances for Canadian services are excluded

The ceding commission or expense allowance that compensates the primary insurer for certain property or services acquired or performed by the primary insurer exclusively in Canada is not subject to tax under the import rules.

Safe harbour (treating all of reinsurance premiums as exempt) where there is arm's length pricing for separate properly-scoped service level agreement

[T]he import rules are not intended to impose GST/HST on the reinsurance premium charged by a reinsurer to a primary insurer in respect of a reinsurance policy or contract between the primary insurer and the reinsurer where:

1. the reinsurance policy… is recognized as an insurance contract…;
2. the primary insurer pays to the reinsurer and/or affiliates amounts, each…a "fee".. under an SLA that is allowed as a deduction… under the Income Tax Act;
3. …[T]hese fees…[are] exclusively, or almost exclusively… for imported property and services provided by the reinsurer and/or affiliates, which includes the administration of the reinsurance policy or contract, other than amounts attributable to best estimate of losses, ceding commissions/expense allowances and compensation paid by the primary insurer to the reinsurer over and above the "best estimate of losses" to reflect the transfer of risk to the reinsurer for potential future insurance claims;
4. each fee charged…by the reinsurer or an affiliate is commensurate with arm's length pricing…; and
5. the primary insurer is charged, or self-assesses, GST/HST on each of these fees.

Example where there is not an SLA

Example 2

InsurerCan, a Canadian licensed property and casualty insurer, had a 50% quota share treaty (property insurance) in place with ReinsurerUS, a related foreign reinsurer. For 2013, ReinsurerUS was paid a $10 million reinsurance premium (50% of $20 million policy premiums) priced and based on the arm's length principle. A 25% ceding commission of $2.5 million was payable by ReinsurerUS to InsurerCan to compensate for certain property and services acquired or performed by InsurerCan exclusively in Canada in 2013. Documentary evidence indicated that a reasonable allocation of the administrative expenses incurred by ReinsurerUS for the reinsurance policy with InsurerCan was $500,000.

For example, a qualifying taxpayer that is a non‑resident FI has a head office in the United States and a branch in Canada. The qualifying taxpayer acquires insurance from a related corporation outside Canada. Part of the insurance premium it pays is allocated to the Canadian branch and therefore is an outlay made or expense incurred outside Canada under subsection 217.1(2). The amount is also deducted by the qualifying taxpayer under the ITA. The amount is therefore required to be included in Part A of the formula.

The insurance premium is paid to a related corporation, and as such the premium is consideration for a specified non‑arm's length supply and is a permitted deduction under paragraph (k) of the definition of permitted deduction. However, paragraph (k) states that the consideration for the supply does not include an amount that is loading. Therefore, any portion of the insurance premium covering the related corporation's expenses of doing business, profit margins and any of the other items listed in the definition of loading above are not included in the amount for the permitted deduction. But any portion of the insurance premium covering the net premium of the insurance policy is excluded from the amount determined to be loading because of the exclusion in the definition of loading, and therefore would be part of the consideration for the specified non‑arm's length supply that is a permitted deduction.

Generally, the effect of Part A of the formula is that any expense or outlay made outside Canada that would be allowed as a deduction under the ITA, and is reasonably regarded as being applicable to a Canadian activity of the qualifying taxpayer, is included and forms the base for qualifying consideration.

S. 217(b)(i) of the definition of "specified derivative supply" states that the "all or substantially all of the value of the consideration is attributable to any error or profit margin, or employee compensation or benefits, reasonably attributable to the supply" and s. 217(b)(ii) of the definition states that the amounts are not loading. However, under the "loading" definition, "any error or profit margin, or employee compensation or benefits" is "loading". On the text, s. 217(b) of the definition can be interpreted such that no amount would come within s. 217(b)(i) because the amount is loading. This renders s. 217(b) meaningless. Will the CRA read out from the definition of "loading" the amounts referred to in s. 217(b)(i)? CRA responded:

Paragraphs (b)(i) and (ii) of the definition of specified derivative supply could be interpreted as mutually exclusive amounts. Paragraph (b) is the total of the amounts specified in subparagraph (b)(i) and amounts in subparagraph (b)(ii).

The Corporation, which was registered, purchased a hotel through two unregistered nominees and was charged and paid GST, and claimed an ITC therefor. On audit, CRA adjusted the return to add tax payable under s. 228(4) and told the Corporation to apply under s. 261 for tax paid in error.

After noting that the Corporation was required to self-assess under s. 228(4) and that the sellers were relieved under s. 221(2) of their obligation to collect GST, Headquarters found that the Corporation was eligible for the rebate as tax paid in error.

On the 15^th of the month, Aco sell a commercial rental property, on which it had collected the monthly rents at the beginning of the month, to Bco. After noting that under s. 136.1(1), Aco was required to account for the supply of property made by it, CRA went on to state:

If in fact Bco is making supplies in the half-month period for no consideration payable by the lessee or the recipient, then Bco is not required to collect GST/HST from the lessee or recipient unless the non-arm's length rules under [s.] 155(1).

Listing in Appendices of other amounts required to be collected, amounts required to be added to net tax, and other deductions from net tax.

7. A nominee who fails to disclose, to the supplier of an immovable, the fact that the nominee is a mandatary is acting in the nominee's own name and becomes personally bound to the supplier to pay the considerationfor the supply (article 2157 C.C.Q.). The nominee thus becomes a recipient of the supply, within the meaning of section 1 of the AQST, along with the mandator (article 2160 C.C.Q.).

the surrender of a lease to the landlord qualified as a demise of real property, so that s. 221(2)(b) and 228(4) applied to the consideration therefor paid by the landlord.

An Ontario purchaser ("Ontario Co") remitted HST to a Quebec supplier ("Quebec Co") on the basis of its view that the place of supply of a purchase of goods was in Ontario, but Quebec Co (which now is insolvent) did not remit the provincial component of the HST on the basis of a view that the place of supply was in Quebec. In noting that Quebec Co is required to remit the HST, CRA noted that s. 222(1) deemed amounts (other than certain amounts in the case of bankruptcy) collected on behalf of HST to be held in trust for the Crown until withdrawn under s. 222(2); and that all amounts collected by Quebec Co on account of HST are required by s. 225(1) to be included in its net tax.

Can CRA collection agents apply s. 222(3) to pursue arm's length purchasers of the assets of a tax debtor? Before referring to the non-arm's length rule in s.325, CRA stated:

[T]he deemed trust [under s. 222(3)] does not attach to any particular property. Rather, it is similar to a floating charge over all of the property of the person. Consequently, the person is free to sell or otherwise transfer property in the ordinary course of business. Where the person sells or transfers property, the deemed trust will detach from the property and attach to the proceeds of the sale or transfer.