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

Tax Executive, The, Nov, 1998

26. At the CICA's September 1998 Commodity Tax Symposium, a representative from Revenue Canada outlined the Department's current position on the following fact pattern:

   A GST-registered firm leases a vehicle to a lessee who resides initially in
   the province of Nova Scotia. The lessor invoices harmonized sales tax (HST)
   at 15 percent of the value of the lease payments. Six months after the
   inception of the lease, the lessee moves to New York but retains the
   vehicle rather than incur additional financial costs for prematurely
   terminating the lease. The lessee obtains license plates for the vehicle
   from the State of New York. The lessor continues to invoice the lessee the
   GST at 7 percent for the duration of the lease even though the vehicle is
   now licensed in New York.

Please confirm that GST at 7 percent applies on the lessor's invoice to the lessee even though the vehicle is now used in New York. In addition, please explain the basis for the Department's position. If, instead of New York, the lessee moves to a province in Canada (other than Newfoundland and New Brunswick), please confirm whether GST at 7 percent or HST at 15 percent will apply, assuming that the vehicle is subsequently licensed in a non-participating province.

27. Under section 236 of the ETA, where a registrant is the recipient of, or pays an allowance in respect of, a supply of food, beverages, or entertainment and subsection 67.1 of the Income Tax Act applies, 50 percent of the amount of the ITC claimed in a return must be recaptured. Some tax practitioners have approached TEI members (who work for GST-registered companies involved 100 percent in a commercial activity and eligible for full ITCs) suggesting that the companies may claim 100-percent ITCs instead of 50-percent ITCs on reimbursement of employee food, beverage, and entertainment expenses (hereinafter referred to as meals and entertainment expenses (M&EE)). The outside tax practitioners aver that, in order for section 236 to apply, the registrant must be the recipient of, or pay an allowance. Since the word "reimbursement" is not used in the statute, the practitioners argue that ITC on reimbursed employee M&EE is not subject to recapture. In addition, Revenue Canada's Policy Paper No. 75 seemingly supports the position that a reimbursement is not the same as an allowance.

Section 169 provides the general legislative basis for a registrant to claim ITCs. Section 175 provides the legislative basis for a registrant to claim ITC on payment of a reimbursement to an employee. When an employee incurs M&EE, the practitioners suggest that the employee rather than the employer is the recipient of the supply and the employee is liable to pay the GST. Moreover, they argue, section 175 does not deem the supply of M&EE (made initially to the employee) to be made to the employer. The practitioners are of the view that, since the statute does not include a deeming rule, the employer is not a recipient and, hence, section 236 does not apply. If a deeming provision were present in the statute, they say, the employer would be the recipient and the section 236 recapture provision would apply.