Notes on GST/HST Draft Legislation and Regulations...: 1
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HST Transitional Issues

Leases of Specified Motor Vehicles

Section 354 of the Excise Tax Act (the Act) sets out rules for determining the tax treatment of leases during the transition from the retail sales tax systems to the Harmonized Sales Tax (HST) in the participating provinces. Generally, under these transition rules, lease payments attributable to a period after the implementation date of the HST (April 1, 1997) become subject to the HST and the provincial retail sales tax ceases to apply.

Where a supplier has accepted a trade-in as partial consideration for a lease of a motor vehicle, the value of that vehicle on which the provincial retail sales tax was calculated may not be the same as that on which the provincial component of the HST is calculated. Proposed new section 354.1 of the Act is intended to preserve the benefit to the lessee of the amount initially credited in respect of the trade-in for provincial sales tax purposes under lease agreements entered into before the HST implementation date for the province (April 1, 1997). The proposed section ensures that, in such cases, where a recipient is required to pay the HST on a specified motor vehicle lease entered into before that day, the value on which the provincial component of the HST is calculated will not exceed the value (excluding GST) on which the provincial retail sales tax would have been calculated. The term "specified motor vehicle" is defined in subsection 123(1). Generally, it refers to any registrable motor vehicle.

This amendment is proposed to come into force on March 20, 1997 (the day on which section 354 received Royal Assent) and would apply in respect of any lease of a specified motor vehicle for which a trade-in is accepted where the lease is entered into before April 1, 1997 or, in future, before the implementation date of the HST for the particular participating province.

Payments for Subscriptions

Subsection 352(8) of the Act provides a general HST transition rule applicable to the sale of goods in participating provinces where payment for the goods becomes due, or is made without having become due, on or after February 1, 1997 and before April 1, 1997, but delivery and transfer of ownership of the goods occurs on or after April 1, 1997. Another transition rule, in subsection 352(7), sets out a special rule applicable to sales of newspapers, magazines or other periodical subscriptions and provides that the provincial component of the HST does not apply to any payment for such a taxable supply where the payment is made before April 1, 1997, regardless of when the publications are delivered.

The grandfathering rule in subsection 352(7) is intended to override the general rule in subsection 352(8) only with respect to amounts actually paid before April 1, 1997 for subscriptions. Therefore, subsection 352(8) should still apply to any amount that becomes due, but is not paid, before April 1, 1997. The proposed wording changes to subsection 352(8) are meant to clarify, for greater certainty, that the subsection may apply in respect of a supply to which subsection 352(7) applies, but not to the consideration referred to in subsection 352(7). This amendment is proposed to come into force on March 20, 1997, the day that these provisions were assented to.

RETAIL ISSUES

Disclosure of Tax

Section 223 of the Act sets out the general tax disclosure requirements with which all registrants must comply when making taxable supplies. Recent amendments to subsection 223(1) (enacted by c. 10, S.C., 1997) provided that, where a registrant indicates the HST on invoices, receipts or written agreements, the total amount of the tax or the total of the rates of tax applicable must be shown as opposed to indicating the 7 per cent and 8 per cent components separately. However, the amendments also had the effect of requiring that all invoices, receipts and agreements disclose this information, even where the registrant is complying with the manner of disclosure prescribed by regulations (i.e., using acceptable signs).

The proposed amendments to subsection 223(1) would retain the ability of a registrant to satisfy the disclosure requirements by following the prescribed manner, even if the registrant also issues invoices, receipts or written agreements. In other words, if the registrant is complying with the prescribed manner of disclosure, the registrant's invoices, receipts and agreements need not indicate the tax or the total tax rate, subject of course to subsection 223(2), which requires the registrant to furnish information on the demand of a recipient who requires it for input tax credit or rebate purposes. However, proposed subsection 223(1.1) would retain the existing requirement that, if the registrant does choose to indicate the tax on any invoice, receipt or agreement, whether or not in conjunction with the use of signs, that indication must be such that the total of the amount of tax or of the rates is shown.

An exception is provided under proposed new subsection 223(1.2) in relation to the supply of printed books and other prescribed items for which the supplier has credited the recipient the amount of a provincial rebate at the point of sale. In this case, the supplier may indicate the tax net of the provincial component of the HST.

These amendments are proposed to come into force on April 7, 1997, which is the effective date of the latest changes to section 223 (enacted by c. 10, S.C., 1997).

Discount Coupons

Section 181 of the Act sets out rules for the treatment of discount coupons under the GST and HST. Recent amendments to section 181 (enacted by c. 10, S.C., 1997) permit non-reimbursable fixed-percentage coupons (e.g., a coupon offering 10% off the regular price) to be treated in the same manner as non-reimbursable fixed-price coupons (e.g., a coupon offering $10 off the regular price).

The recent amendments also added a reference to reimbursable fixed-percentage coupons in subsection 181(5), which provides for a notional input tax credit in respect of a reimbursement of a tax-included coupon. However, reimbursable fixed-percentage coupons are always treated as reducing the value of consideration for a supply and therefore the GST or HST applies to the price net of the coupon value. Since such a coupon is not treated as tax-included, there is no need to apply subsection 181(5) to it. The proposed amendment therefore deletes the reference in that subsection to a coupon that provides for a price reduction equal to a fixed percentage of the price.

The amendment is proposed to come into force on April 1, 1997 but would not apply where an input tax credit in respect of a reimbursement of a fixed-percentage coupon has been claimed in a return that has been received at a Revenue Canada office before Announcement Date.

Promotional Allowances

Proposed section 232.1 of the Act, announced on March 21, 1997, is intended to apply where a vendor who is a registrant sells goods and, in return for the promotion of the goods by another registrant, pays, credits or allows a discount to the other registrant who acquires the goods, either from that vendor or another supplier, exclusively for resale in the course of commercial activities. In these circumstances, the allowance paid, credited or allowed as a discount would not be regarded as consideration for a supply made by the recipient of the allowance.

Refinements to the draft legislation are proposed to ensure that where the promotional allowance is provided in the form of a credit against the price of property or a service for which tax had already been charged or collected, the consideration for the supply of that property or service is not deemed to be the amount net of the credit. Rather, the supplier is treated as having reduced, after the fact, that consideration for the purposes of subsection 232(2). This preserves the ability of the supplier to choose whether to adjust the tax calculated on that deemed reduction in consideration. If the supplier chooses not to adjust the tax, the allowance would not have any GST or HST consequences.

Alternatively, where the supplier chooses to treat a portion of the allowance as a tax adjustment, a credit note or debit note must be issued and the supplier may deduct the amount of the tax adjustment in determining net tax. In this case, the information requirements prescribed under the Credit Note Information Regulations must be complied with. Reference should also be made to the proposed amendments to those Regulations described under the Regulations section below.

If the promotional allowance is provided as a discount on the price of property or a service for which the supplier has not yet charged or collected tax, the consideration for that supply would automatically be deemed to be equal to the amount that is net of the discount and tax would apply only on the net amount.

As was provided in the draft legislation released on March 21, 1997, if the promotional allowance is paid or credited otherwise than as a discount or credit against the price of property or a service, it is deemed to be a rebate for the purposes of section 181.1 of the Act. Therefore, the payer would have the option of indicating that a portion of the allowance is in respect of tax.

Finally, the description of the circumstances necessary for proposed section 232.1 to apply are reordered so that it is clearer that the first reference to the particular tangible personal property is a reference to the property that is acquired by the recipient of the allowance exclusively for sale for a price in money.

New section 232.1 is proposed to apply to amounts paid or credited, or allowed as a discount on or credit against the price of property or a service, after March 1997 in return for the promotion of goods.

Patronage Dividends

Amendments to section 233 of the Act that became effective April 1, 1997 adapted the GST rules relating to patronage dividends to a harmonized sales tax system. The amendments were intended to take into account the 15-per-cent HST applicable to taxable supplies made in the participating provinces. However, the resulting formulae in paragraphs 233(2)(a) and (a.1) do not determine appropriately the portion of the patronage dividend that represents a price adjustment for tax purposes in a case where the dividend is in respect of both supplies taxable at the rate of 7 per cent and supplies taxable at the rate of 15 per cent.

The existing formulae employ the factors 100/107 and 100/108. The proposed amended formulae employ the factors 100/115 and 100/107 (in relation to supplies made in participating and non-participating provinces respectively) in circumstances in which the payer of the dividend has elected to track the actual amount of the dividend relating to taxable non-zero-rated supplies instead of using an estimated amount.

Alternatively, where the payer of the dividend estimates the portion of the dividend relating to taxable non-zero-rated supplies by using the amount referred to in the section as the "specified amount", the amended formulae determine the appropriate price adjustments for supplies made in participating and non-participating provinces by multiplying that specified amount by the percentage of the total tax-included value of non-zero-rated supplies for the preceding year (used in determining the specified amount) that is attributable to supplies made in participating and non-participating provinces respectively.

These amendments are proposed to apply to patronage dividends declared after Announcement Date. Reference should also be made to the proposed amendments to the Credit Note Information Regulations as they apply to patronage dividends, which are described under the Regulations section below.

REAL PROPERTY

Deductions from Net Tax in Respect of New Housing Rebate

An amendment is proposed to subsection 234(1) of the Act. Prior to recent amendments (enacted by c. 10, S.C., 1997), the subsection dealt only with deductions from net tax allowed to builders in respect of new housing rebates paid or credited by them. The subsection was amended to broaden its application and allow a deduction to registrants who supply certain installation services and pay or credit rebates of the tax on such services to non-resident recipients. Accordingly, the subsection was amended to refer to a "registrant" instead of a "builder". However, this has the unintended consequence of precluding non-registrant builders from claiming a deduction from the amount of tax that they are required to remit in respect of a sale of a new residential complex. Therefore, the proposed amendment replaces the word "registrant" with the word "person", retroactive to April 24, 1996, the effective date of the previous amendment.

Self-supply Rules for Multiple Unit Residential Complexes

Section 191 of the Act is intended to ensure that GST or HST applies to newly constructed or substantially renovated residential premises where possession of the premises is transferred under a lease of the land or the building, since the subsequent sale of those premises will generally be exempt of tax as used housing. The proposed amendment applies these rules to builders who give possession of a residential unit in a multiple unit residential complex, such as an apartment building, under an arrangement whereby the building or part of the building in which the residential unit is located is sold, but the related land is the subject of a ground lease. Builders in these circumstances would be required to account for tax on the fair market value of the land and building.

A similar amendment is proposed in the case of an addition to an existing multiple unit residential complex, such as where a new floor or wing is added to an existing apartment building, and the related land is the subject of a ground lease. The builder in this circumstance would be required to account for tax on the fair market value of the addition.

These amendments are proposed to come into force on Announcement Date and apply in any case where a builder of a multiple unit residential complex or of an addition to a multiple unit residential complex gives possession of a residential unit in the complex or addition on or after that day unless possession is given under an agreement in writing entered into before Announcement Date for the sale of the building, or part of the building, forming part of the complex.

SEIZURES, REPOSSESSIONS AND TRANSFERS

Seizure, Repossession or Transfer of Zero-rated Property

Subsections 183(6) to (8) and 184(5) to (7) apply to deem a creditor who has seized or repossessed property, or an insurer to whom property has been transferred, to have received a supply of the property and to have paid tax in certain circumstances for the purpose of enabling the creditor or insurer to claim an input tax credit. This avoids double tax where the property is to be used in a commercial activity or resupplied on a taxable basis. However, as a result of recent amendments to reflect the HST, the tax deemed to have been paid is expressly calculated at the rate of 7 per cent or 15 per cent, depending on where the property is situated or where it is re-supplied by the creditor or insurer. This yields an obviously inappropriate result if the property would have been taxable at the rate of zero per cent if in fact it had been purchased by the creditor or insurer (e.g., if the property were zero-rated farm equipment).

Therefore, amendments are proposed, to have effect from April 1, 1997, so that no tax will be considered to have been paid in situations where the supply deemed to have been received by the creditor or the insurer is a zero-rated supply. The proposed amendments to subsection 183(7) and (8) and 184(6) and (7) also clarify that the supply deemed to have been received is a supply by way of sale.

Property Used by Creditor or Insurer

Under sections 183 and 184, where personal property is seized, repossessed or transferred from someone who otherwise would have had to charge tax on a supply of the property (i.e., generally where there would not have been any non-recovered tax on the property) and the creditor or insurer subsequently uses it in a participating province otherwise than in making a supply of the property, the creditor or insurer is deemed to have collected tax at the rate of 15 per cent. The creditor or insurer is also deemed to have paid tax but only at the rate of 7 per cent if the property were seized, repossessed or transferred before April 1, 2000. This unintentionally results in the payment of non-recoverable tax.

As was the case during the first three years of the GST, the intent of the transitional rules for the HST in these particular circumstances is to deem an amount of tax to have been paid equal to the amount deemed to have been collected. An amendment to clause (A) of the description of A in the formula in subparagraph 183(6)(a)(ii) and 184(5)(a)(ii) is proposed to achieve this result. These amendments are proposed to come into force on April 1, 1997.

Property Seized, Repossessed or Transferred Before April 1, 2000

Subsections 183(6) to (8) and 184(5) to (7) refer to property seized, repossessed or transferred "within three years after the implementation date" (i.e., April 1, 1997) of a participating province. The intention is to refer to any property seized, repossessed or transferred before April 1, 2000. It is proposed that the existing reference be replaced, as of April 1, 1997, with the more precise expression "before the day that is three years after the implementation date".

Property Shipped to a Non-participating Province for Export

Subsections 183(7) and (8) and 184 (6) and (7) deal with a case where a creditor or insurer obtains property as a consequence of a seizure, repossession or transfer on or after April 1, 2000 in a participating province from a person who would not have been required to charge tax on a supply of the property. If the creditor or insurer re-supplies the property outside Canada, the creditor or insurer can claim a notional input tax credit in respect of the property, including an amount in respect of the 8 per-cent provincial component of the HST. However, as the rules currently read, if instead the creditor or insurer exports the property by shipping it through a non-participating province (i.e., supplies it in a non-participating province on a zero-rated basis), no notional input tax credit is available for the 8 per-cent provincial component of the HST.

The tax treatment of exports of personal property seized, repossessed or transferred is intended to be the same regardless of whether the property is exported directly from a participating province or routed through a non-participating province. Therefore, amendments to the above provisions are proposed, effective April 1, 1997, to permit the notional input tax credit for the provincial component in these circumstances.

Lease of Property that was Seized, Repossessed or Transferred

Subsections 183(8) and 184(7) allow a creditor or an insurer to claim a notional input tax credit in respect of seized, repossessed or transferred personal property in certain circumstances where the property is subsequently supplied by way of lease, licence or similar arrangement. Where a supply of property is made by way of lease, licence or similar arrangement, subsection 136.1(1) (added by c. 10, S.C., 1997) deems the supplier to have made a separate supply of the property for each lease interval. Consequently, a question may arise as to which lease interval (i.e., supply) the notional input tax credit relates.

As was the case before the introduction of section 136.1, the intent is that the creditor or insurer be allowed to claim a one-time notional input tax credit when first supplying the property by way of lease, licence or similar arrangement based on its fair market value at the time it was seized, repossessed or transferred. Therefore, amendments to subsections 183(8) and 184(7) are proposed, with effect from April 1, 1997, to allow such a one-time notional input tax credit based on where the property was seized, repossessed or transferred and where the supply of the property for the first lease interval is made by the creditor or the insurer.

For example, if a creditor seizes property in a participating province and the place-of-supply rules determine that the supply of the property by the creditor for the first lease interval is made in a participating province, and all of the other conditions in subsection 183(8) have been met, the creditor should be able to claim a one-time notional input tax credit equal to 15 per cent of the fair market value of the property (as that value is determined at the time the property was seized). The creditor would be deemed to have paid this amount immediately before the time at which the supply for the first lease interval is made according to the rules of subsection 136.1(1).

FINANCIAL SERVICES AND INSTITUTIONS

Corporate Take-overs

Subsection 186(2) of the Act applies in situations where a corporation acquires or proposes to acquire all or substantially all of the voting shares of the capital stock of another corporation that is engaged exclusively in commercial activities. In this case, the purchasing corporation is allowed to claim input tax credits for property and services it acquires in relation to the take-over or proposed take-over.

Existing subsection 186(2) refers to tax payable only on supplies made to the purchasing company. The proposed amendment to this subsection reflects the fact that tax might also become payable by the company upon bringing property into a participating province or importing property.

This amendment is proposed to come into force on April 1, 1997.

Passenger Vehicles Leased by Selected Listed Financial Institutions (SLFI's)

Under section 235 of the Act, an amount, which includes the provincial component of the HST where applicable, is required to be added to a registrant's net tax in respect of a leased passenger vehicle where the lease costs exceed the maximum lease costs that are deductible under the Income Tax Act. However, the draft regulations under section 225.2 (released March 21, 1997), which set out rules pertinent to the calculation of net tax by SLFI's, also require that an amount in respect of the provincial component of the HST on the lease cost be added to an SLFI's net tax. Therefore, an amendment to section 235 is proposed, with effect from April 1, 1997, so that the amount required to be added to net tax under section 235 by an SLFI is calculated only on the amount of the GST or the 7 per-cent federal component of the HST paid or payable by the SLFI.

Rebates for Selected Listed Financial Institutions (SLFI's)

Proposed section 263.01 of the Act (released in draft form on March 21, 1997) sets out a general rule restricting an SLFI from claiming rebates of the provincial component of the HST paid or payable by the SLFI in respect of business inputs. This reflects the fact that the tax is taken into account in element F of the formula for the adjustment to the SLFI's net tax under subsection 225.2(2). In other words, instead of being rebated, the provincial component of the HST paid or payable is deducted from the net tax remittable by the SLFI.

Proposed section 263.01 obviates the need for existing section 261.5, which also denies certain rebates to SLFIs but is overly restrictive in relation to rebates in respect of personal-use property or services acquired or imported by SLFIs that are individuals. Therefore, it is proposed that section 261.5 be repealed as of April 1, 1997, the effective date of proposed section 263.01.

P&C Insurers: Prescribed Amounts of Tax and Claiming of ITC's

Subsection 169(3) of the Act restricts a person from claiming input tax credits (ITC's) in respect of the provincial component of the HST that becomes payable at a time when the person is a selected listed financial institution (SLFI). This is because, generally, an SLFI deducts such amounts from its net tax in accordance with the rules set out in section 225.2. However, SLFI's are not entitled to make such deductions in respect of prescribed amounts of tax. Specifically, the 8 per-cent component of the HST paid on certain inputs related to the settlement of property and casualty insurance claims is excluded from the adjustment to net tax calculated under section 225.2.

The policy intention is to allow ITC's for tax payable in respect of inputs related to the settlement of such claims to the extent that the settlement is in the course of commercial activities of the insurer (e.g., where the insurance policy is that of a non-resident person and relates to risks that are ordinarily situated outside Canada). Therefore, an amendment to subsection 169(3) is proposed to remove, as of April 1, 1997, the ITC restriction with respect to these prescribed amounts.

Adjustment to Net Tax by an SLFI – Supplies Exempt under Section 150 Election

By virtue of paragraph (b) of the description of A in the formula in subsection 225.2(2) of the Act, a selected listed financial institution (SLFI) that is the recipient of a supply that is deemed under section 150 to be a supply of a financial service must add to its net tax an amount equal to the GST or the federal component of the HST that would have been payable on the supply if it had not been made under the election. There is an exception to this requirement where an election under subsection 225.2(4) has been made, in which case an alternative adjustment is required under paragraph (c) of the description of A.

Paragraph (b) of the description of A and of B in the formula refers to amounts of tax prescribed for the purposes of paragraph (a) of the description of A. However, in both cases, this reference in paragraph (b) is superfluous since only amounts of tax that actually became payable or were paid are prescribed for purposes of paragraph (a) and no tax would have been payable or been paid in circumstances in which section 150 applies. Therefore, an amendment is proposed, with effect as of April 1, 1997, to remove the reference in paragraph (b) of the descriptions of A and B to the prescribed amounts of tax. It is also proposed that the superfluous references be removed in the transitional provisions in subparagraph 363(2)(c)(ii) and paragraph 363(2)(d). These changes are proposed to come into force on March 20, 1997, the day on which sections 225.2 and 363 were assented to. In addition, the superfluous reference is removed from subsection 225.2(2) as it reads for the purpose of determining the net tax of an SLFI for the reporting period of the SLFI that straddles April 1, 1997.

PUBLIC SERVICE BODIES

Streamlined Accounting Method for Charities under Section 225.1

Section 225.1 of the Act sets out a streamlined accounting method by which registrants that are charities (within the meaning of subsection 123(1)) calculate their net tax. Under this method, the charity includes in its net tax only 60 per cent of the tax collectible on "specified supplies" (which includes most taxable supplies other than sales of capital and real property). The inclusion of only 60 per cent of that tax is in lieu of claiming input tax credits on most inputs. The charity also includes in net tax 100 per cent of the tax collectible on sales of capital and real property and other specifically enumerated supplies.

Tax collectible on supplies deemed under subsection 177(1) or (1.2) to be made by a charity acting as an agent should be included in full in the charity's net tax. To achieve this, amendments are proposed to exclude such supplies from the definition "specified supply" and to add references to the supplies under subparagraph (b)(iii) of the description of A in the formula in subsection 225.1(2). These amendments are proposed to apply for the purpose of determining net tax for reporting periods ending after Announcement Date.

As well, a proposed amendment to the formula in subsection 225.1(2) would enable a charity to claim certain input tax credits in two additional circumstances. Where the charity as principal sells property through an auctioneer and that sale is deemed to be made by the auctioneer, the auctioneer is required to include 100 per cent of the tax collectible on the sale in the auctioneer's net tax. The charity should not be denied an input tax credit for tax payable by it in respect of the property if it acquired, imported or brought the property into a participating province for the purpose of the sale. It is proposed that subsection 225.1(2) be amended to enable the charity to claim the input tax credit in that circumstance. This amendment would apply, for the purpose of determining the net tax of a charity for reporting periods beginning after 1996, to any property deemed under subsection 177(1.2) (as enacted by c.10, S.C., 1997) to have been supplied by an auctioneer acting as agent of the charity (i.e., generally to supplies made after April 23, 1996).

The other additional circumstance in which the charity would be entitled to claim an input tax credit is where the charity acts as agent in making a supply of property in circumstances in which subsection 177(1) or (1.2) applies and the charity is deemed to have acquired the property and to have paid tax by the operation of paragraph 180(e). This amendment would likewise apply, for the purpose of determining the net tax of the charity for reporting periods beginning after 1996, in relation to property deemed under subsection 177(1) or (1.2) (as enacted by c.10, S.C., 1997) to have been supplied by the charity (i.e., generally to property deemed to have been supplied after April 23, 1996).

Direct Cost Exemption

Section 5.1 of Part V.1 of Schedule V to the Act , and section 6 of Part VI of that Schedule, each describe a supply, made by a charity and public service body respectively, that is exempt based on the amount charged for the supply in relation to the "direct cost" of the supply. The expression "direct cost" is defined in subsection 123(1) of the Act.

The direct cost of a supply includes provincial taxes, duties or fees prescribed under section 154 of the Act (e.g., the provincial sales taxes). It is proposed that the definition be amended to exclude any portion of such provincial tax, duty or fee that is recovered or recoverable by the charity or body. An exception to this exclusion would be made where the provincial tax is the Québec Sales Tax (QST) and the charity or body is a QST registrant at the time that the QST became payable.

This change in how prescribed provincial taxes, duties and fees are taken into account in computing the direct cost of a supply would apply to supplies made after Announcement Date. Its application to supplies made on or before Announcement Date would depend on whether the charity or body treated the supply as taxable or exempt. Since the exclusion of recoverable provincial tax from the definition of "direct cost" would have the effect of lowering the direct cost of a supply, it is relieving in nature to any charity or body that wished to treat its supplies as taxable and avoid being caught by the exemption. Such a supplier's prices would not have had to have been as high as they otherwise would to exceed the exemption threshold. On the other hand, this change would have a non-relieving effect in the case where the charity or body wished to treat the supply as exempt (i.e., did not charge or collect tax ) since the lower direct cost would mean that the charity or body might have had to charge lower prices than were actually charged to fall below the exemption threshold.

Therefore, in all cases where the charity or body charged or collected tax in respect of the supply, the amendment to the definition "direct cost", including the exception made for the QST, is proposed to apply to supplies made after Announcement Date, as well as to supplies made on or before Announcement Date, for which consideration becomes due after 1996. In the case where the charity or body did not charge or collect tax on the supply, it is proposed that this change generally not apply to supplies made on or before Announcement Date. The exception is for supplies invoiced between January 1, 1997 and April 1, 1997. In those cases, the exclusion from the definition of "direct cost" for recoverable provincial tax (without the exception for the QST) does apply pursuant to a previous amendment (enacted by c. 10, S.C., 1997).

Amendments to the exempting provisions themselves are also proposed. The amendments ensure that it is the amount of direct cost minus both the QST and the GST or HST that is compared with the tax-excluded selling price to determine if that price exceeds the exemption threshold in the case where the supplier has treated the supply as taxable. For example, if a non-profit organization charged or collected tax on a sale of an item of inventory but the pre-tax price charged by the organization were below the QST and GST/HST-excluded direct cost to the organization of acquiring the inventory, the supply nevertheless would be exempt. As a result, the tax collected by the organization in this case would have been collected in error and the organization would not be entitled to claim an input tax credit for the tax paid on the acquisition of the inventory.

Since this change to the treatment of the QST in determining whether the exemption criterion is met is only applicable in cases where the supplier chooses to treat the supply as taxable, it has a relieving effect because it lowers the threshold for the exemption and thereby makes it easier for the supplier to avoid falling under the exemption. Therefore, this change is proposed to apply retroactively to all supplies for which consideration becomes due after 1996.

Rebates for Public Service Bodies

Section 259 of the Act provides for partial rebates of tax to public service bodies, including provincial government emanations such as hospital and school authorities, municipalities, universities and public colleges. These rebates were introduced at the inception of the GST to offset the budgetary impact that would otherwise have resulted from moving from the manufacturers' sales tax to the GST.

In the case of the transition from the provincial retail sales taxes to the HST in the participating provinces, the impact on the budgets of these bodies will vary from one entity to another and among participating provinces, depending on such factors as the retail sales tax rate and exemptions that existed under the former sales tax system and the provincial funding arrangements in each province. Consequently, for purposes of a rebate in respect of the provincial component of the HST, the government of each participating province established the eligibility and rebate rate for each category of public service body in that province, which is reflected in subsections 259(4.2) and (4.3) of the Act (added by c.10, S.C., 1997).

Under the existing legislation, no rebate of the provincial component of the HST is provided to hospital or school authorities, universities, colleges or municipalities in Newfoundland and Labrador (except in the case of certain designated municipalities as set out in subsection 259(4.3)). An amendment is proposed to enable such entities in that province that also qualify as charities, public institutions or qualifying non-profit organizations (within the meaning of section 259) to claim a rebate, as of April 1, 1997, equal to 50 per cent of the otherwise non-recoverable provincial component of the HST incurred in respect of inputs related to any exempt activities they undertake otherwise than in the course of fulfilling their responsibilities as a local authority or operating a public hospital, school, university or public college, as the case may be.

For example, a hospital authority in Newfoundland that is a charity or satisfies the definition of "qualifying non-profit organization" might also operate a nursing home. The proposed amendment would entitle the authority to a 50 per-cent rebate of the provincial component of the HST incurred on expenses related to the nursing home. This rebate would parallel the existing 50 per-cent rebate of the federal component that is already provided in respect of the same activities. The hospital authority would continue to be eligible for the 83 per-cent rebate under section 259 only in respect of the 7 per-cent GST or the federal component of the HST incurred in respect of inputs related to the operation of the public hospital.

A consequential amendment is proposed to restructure subsection 259(4.2) so that the exceptions to the general rule of excluding the provincial component of the HST from the calculation of "non-creditable tax charged" and "total tax charged" are set out in a separate new subsection (subsection (4.21)). That new subsection explicitly refers to charities and qualifying non-profit organizations that are not selected public service bodies (within the meaning of section 259).

Another proposed amendment adds new subsection 259(4.01), which provides, for greater certainty, that any rebate based on the formula in subsection 259(4) is calculated on amounts of otherwise unrecoverable total tax charged. This amendment would apply to rebates claimed in applications received at a Revenue Canada office on or after Announcement Date.

An amendment is also proposed to replace the reference in paragraph 259(4.1)(d) to a single amount determined by the formula in subsection 259(4) by a reference to the total of all amounts determined by the formula. This change is consequential to the recent amendments (enacted by c. 10, S.C., 1997) to subsection 259(4) and would come into force on April 1, 1997.

Finally, a minor wording change is proposed for subsection 259(5). That subsection sets out the application requirement for the rebates under section 259. The change removes the reference to "non-creditable tax charged" since that expression is not used in subsection 259(4). This correction would apply as of January 1, 1991, the effective date of the amendments to section 259 that added the concept of "non-creditable tax charged" and introduced the separate rebate provision for designated municipalities under subsection 259(4).

MISCELLANEOUS ISSUES

Employee and Partner Rebates

An amendment is proposed to correct an editorial error that appears in paragraph 253(1)(a) of the English version of the Excise Tax Act, as amended by the Act that implemented the HST (c. 10, S.C., 1997). As explained in the technical notes to that amending Act, Part II of that Act amended paragraph 253(1)(a) only for the purpose of adding a reference to property brought into a participating province. However, in so doing, all of paragraph (a) was inadvertently repealed as opposed to only the portion before subparagraph (i) thereof, resulting in an incomplete provision in the English version as presently worded (the French version is correct). Therefore, subparagraphs 253(1)(a)(i) and (ii) of the English version are being added back as of April 1, 1997, the day the amendment to paragraph 253(1)(a) came into force.

Osteopathic and Speech Therapy Services

Pursuant to chapter 10 of the Statutes of Canada, 1997, osteopathic and speech therapy services were scheduled to be removed, as of January 1, 1998, from the list of services that are exempt in all provinces from the GST or HST under section 7 of Part II of Schedule V to the Excise Tax Act. One of the bases for this exemption is that the service is rendered in the practise of a profession that is regulated as a health care profession by the governments of at least five provinces.

An amendment is proposed to continue this exemption for osteopathic services, reflecting the fact that the profession is currently regulated in at least five provinces. An amendment is also proposed to defer for one year the removal of speech therapy services from this exemption. While the speech therapy profession is currently regulated in only four provinces, this proposed amendment recognizes that the regulation of speech therapy is under active consideration in at least one additional province. In the event that speech therapy becomes regulated in a fifth province by January 1, 1999, a further amendment would be introduced to ensure that these services continue to be exempt in all provinces after that date.

Provincial Product Taxes

Section 154 of the Act provides that the consideration for a supply of property or a service includes certain federal and provincial taxes, duties and fees (other than those prescribed by regulation) payable by the recipient or payable or collectible by the supplier. The reference to taxes collectible by suppliers is intended to ensure that the provision applies equally to supplies of taxable products by persons who act as collection agents in respect of the taxes.

Some specific taxes (such as tobacco and fuel taxes) that are imposed under provincial statutes depend on a collection mechanism that imposes obligations on wholesalers of the products. However, the various provincial statutes vary in the wording used to describe the amounts collectible by wholesalers in their capacity as collection agents.

To avoid any ambiguity in the application of section 154 to the specific product taxes imposed in different provinces, an amendment is proposed to clarify that the consideration for a supply of property or a service includes amounts collectible by suppliers that are equal to or are collectible as, on account of, or in lieu of, a tax, duty or fee that is imposed by a provincial statute in respect of the supply, consumption or use of the property or service. This amendment would apply for the purpose of determining the consideration for supplies made after Announcement Date.

Foreign Conventions

Subsection 252.4(1) of the Act provides a rebate to a sponsor of a foreign convention for tax paid in respect of certain inputs relating to the convention. Paragraph (1)(c) was amended (by c. 10, S.C., 1997) to add a reference to property brought into a participating province. At the same time, the previous reference to "services that are imported" was replaced with the more appropriate reference to an imported taxable supply (within the meaning of section 217) of services, since the concept of importation in the Act generally applies to tangible property. However, the amendment failed to encompass intangible personal property as well as services. Therefore, it is proposed that the paragraph be amended to refer to an imported taxable supply of property or services. Since the former change was not intended to narrow the scope of the provision, this amendment is proposed to apply as of April 1, 1997, the effective date of the former change.

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