TEI-Revenue Canada liaison meeting: excise tax questions - Tax Executives Institute

Tax Executive, The, Nov, 1998

December 1, 1998

On December 1, 1998, TEI held its annual liaison meeting with representatives of Revenue Canada on pending excise tax issues. The Institute's agenda for the meeting is reprinted below. The agenda was prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Munir A. Suleman of The Bank of Nova Scotia. Pierre M. Bocti of Hewlett-Packard (Canada) Ltd., the Institute's Vice President-Region I, coordinated the liaison meeting.

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on several pending commodity and excise tax issues, which will be discussed with representatives of Revenue Canada during TEI's December 1, 1998, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either Pierre M. Bocti, TEI's Vice President for Canadian Affairs, at (905) 206-3399 or Munir A. Suleman, chair of the Institute's Canadian Commodity Tax Committee, at (416) 866-4698.

1. Assume the following facts. Company Z contracts with a third-party placement firm (TPPF), a GST registrant that carries on commercial activities, for temporary personnel who will perform clerical or administrative duties for Z either during peak business periods or as substitutes for Z's vacationing employees. The contract specifies that the work is generally performed at a location in Canada (Location L) for an agreed upon labour rate (e.g., $20.00 per hour, plus applicable taxes). In addition, the contract states that Z will pay any supplemental travel and living expenses (other than the daily commuting expenses to L) for TPPF's employees.

Z asks X, a non-registrant individual employee of TPPF, to travel temporarily to a different location where X will incur travel and living expenses. X will receive a T4 slip from TPPF. Z is considering three options in respect of its obligation to pay X's temporary travel and living expenses:

1. X is to submit expense receipts (hotel charges, rental car, gasoline, meals, etc.) directly to Z for which Z will issue a reimbursement cheque directly to X.

2. Z will pay X directly under the expense account reimbursement procedures that Z's employees regularly use and a cheque will be issued directly to X.

3. X submits travel and living expenses to its employer, TPPF, that in turn bills these amounts to Z.

The advantage of options 1 and 2 is to accelerate reimbursement to X (who is working temporarily at Z's premises rather than at TPPF's premises). It also eliminates the administrative procedure of processing X's expenses through TPPF initially for subsequent re-invoicing to Z. In order to evaluate the pros and cons of the three options, please answer the following questions:

1. Under option 1, can Z recover the GST on X's expenses?

2. Under option 2, can Z, in accordance with GST Memorandum 400-1-2, recover the GST on X's expenses processed through an expense account that is normally used by employees of Z?

3. If the answer to 1 and 2 is no, please advise whether the following alternative will enable Z to recover the GST on X's expenses:

   * TPPF processes X's expenses through TPPF's regular employee expense
   account reimbursement procedures;

   * TPPF, in accordance with GST Memorandum 400-1-2, claims back the GST on
   X's expenses;

   * TPPF invoices Z for the value of the expenses (on a net-of-GST-recovery
   basis), plus Division II GST;

   * Z claims the Division II GST paid to TPPF as an input tax credit (ITC) on
   X's net expenses.

2. Section 5, Part V, Schedule VI provides a zero rating for the services of a "sales representative" to a non-resident provided certain conditions are met. One condition is that the supply of goods for which the sales representative is providing service for the non-resident must be made outside Canada. Assume the following facts. A firm (Servco) provides the services of a "sales representative" to a non-resident (NR) as defined in section 123 of the Excise Tax Act (ETA). The supplies that NR makes are of goods and Servco is not an agent of the NR. In addition, NR's sales are made directly to NR's Canadian customers, i.e., Servco does not take title to the goods for resale to Canadian customers. NR requests that Servco act as the importer of record for NR's goods. (Note that Servco is not a licensed custom's broker). As a result, Servco is required under section 218 of the ETA to pay Division III tax on importation of NR's goods into Canada because Servco is the person liable for Customs duties under the Customs Act.

NR believes that Servco can claim the ITC for the Division III GST paid by Servco on importation of the NR's goods because Servco is providing a zero-rated service of a "sales representative" to a non-resident in relation to those goods. Servco, on the other hand, does not believe it is permitted to claim an ITC for the Division III GST paid by Servco on importation of the NR's goods because Servco is not using those goods in Servco's own commercial activity. In other words, even though the sale of goods is attributable to the "sales representative" service provided by Servco to NR, Servco does not believe it is using the goods in the course of providing its services of a sales representative.