Imposition of interest on goods and services tax - Canada

Tax Executive, The, March, 2001

February 14, 2001

On February 14, 2001, Tax Executives Institute submitted the following comments to the Canada Customs and Revenue Agency relating to the imposition interest on the Goods and Services Tax when goods are imported into Canada. The comments took the form of a letter from TEI President Betty M. Wilson to Candace Breakwell, Director, CICA's Trade Incentive Programs Division in the Trade, Policy, and Interpretation Directorate. They were prepared under the aegis of the Institute's Canadian Commodity Tax Committee, whose chair is Glen S. Pye of Nortel Networks Corporation. Contributing substantially to the development of the submission was Carol Felepchuk of IBM Canada Ltd.

Tax Executives Institute is the preeminent membership association of business tax executives in North America. The Institute holds annual liaison meetings with the Canada Customs and Revenue Agency (CCRA) and Department of Finance. During TEI's December 6, 2000, meeting with CCRA, an issue arose concerning the imposition of interest on the Goods and Services Tax when goods are imported into Canada, and the importer subsequently realizes that additional GST is payable. CCRA suggested that we raise this issue with you.

Background

Tax Executives Institute is an international organization of more than 5,200 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,800 of the leading corporations with 53 chapters in Canada, the United States, and Europe.

Interest on GST

During our December 2000 liaison meeting with CCRA, the Institute posed the following example:

   A customs broker periodically provides a Canadian company ("CanCo") with
   Forms B-3, Canada Customs Coding Forms, that specify whether products
   imported into Canada are subject to the Goods and Services Tax (GST). As a
   GST registrant, CanCo is eligible to claim the GST paid on purchases of
   goods or services used in the course of its commercial activities. A few
   entries on the Forms B-3 are incorrectly coded by the customs broker. CanCo
   subsequently realizes that some products imported into Canada should have
   been subject to the GST and voluntarily discloses the error by filing Form
   B-2 (Canada Customs-Adjustment Request). Following CanCo's disclosure, the
   Department of National Revenue forwards Form B2-1 (Canada Customs-Detailed
   Adjustment Statement), assessing GST. In addition, interest is imposed
   under section 214 of the Excise Tax Act (ETA).

In the above example, interest is imposed on the additional GST payable from the date that the goods were originally cleared to the date that the error is declared. In situations where the importer is a GST registrant -- and therefore entitled to a full input tax credit for the GST paid -- charging interest for that period can be punitive.

Because CanCo has voluntarily disclosed its GST liability, TEI believes that the interest in the above example should be waived. This position is consistent with the CCRA_s internal policy that recommends administrative tolerance when items are voluntarily disclosed and with the goals outlined in the Fairness Package, which is aimed at harmonizing the fiscal policies applicable to the GST, income tax, and customs laws.

In its response to TEI's question, CCRA felt constrained from providing relief because section 214 of the ETA provides that GST on imported goods is to be paid and collected pursuant to the Customs Act. The agency's wash transaction policy (GST/ HST Memoranda Series 16.3.1) -- which would permit the interest to be cancelled -- applies only to interest charged under section 280 of the ETA. Because the Customs Branch does not have a similar policy to waive interest when the GST is not paid on imported goods and an input tax credit would normally have been available to the registrant, CCRA suggested that we contact you.

Recommendation

TEI recommends that where the importer is entitled to full GST input tax credits in respect of the imported goods, the correct amount of GST is not paid on the initial importation, and the importer subsequently discloses the transaction, the interest on the GST be waived. We urge the Customs Branch to adopt a policy similar to CCRA's wash transaction and voluntary disclosure policies.

Conclusion

TEI's comments were prepared under the aegis of the Institute's Canadian Commodity Tax Committee, whose chair is Glen S. Pye. If you should have any questions about the submission, please do not hesitate to call Mr. Pye at 905.863.6118, or Sabatino Meffe, TEI's Vice President for Canadian Affairs, at 514.339.4446.