Notes on HST and GST Draft Regulations and Legislation : 1
 - News Release 1997-024 - Next - 

Notice of Ways and Means Mation to Amend the Excise Tax Act

That it is expedient to amend the Excise Tax Act in accordance with the proposals set out in the attached notes and accompanying publication entitled "Draft Regulations and Legislation Relating to the HST and GST" dated March 1997.

Notes on HST and GST Draft Regulations and Legislation

Place of Supply of Specified Property and Services

Under section 3 of Part IX of Schedule IX to the Excise Tax Act, a supply may be prescribed by regulation to be made in a particular province for the purposes of the HST. If a taxable supply (other than a zero-rated supply) is made in a participating province by a registrant, the registrant is required to collect the 15 per-cent HST. On the other hand, if a taxable supply (other than a zero-rated supply) is made in a non-participating province by a registrant, the registrant is required to collect the 7 per-cent GST. The Place of Supply (GST/HST) Regulations are introduced to set out the rules for determining when supplies of the following property and services are regarded as made in a participating province:

• the service of arranging for the release of imported goods;
• leased railway rolling stock;
• memberships supplied to individuals;
• repair, maintenance and other services relating to tangible personal property;
• trustee services relating to registered retirement or education savings plans or registered retirement income funds;
• 1-900 telephone services;
• Internet access and remote technical support services and electronic mail services provided by means of telecommunications; and
• air navigation services.

These Regulations will be effective as of April 1, 1997.

Release of Imported Goods

The draft Regulations provide that the place of supply of a service of arranging for the release of imported goods is made in a province if the goods are situated in the province at the time of their release. This would encompass gathering relevant information, completing the appropriate documentation (e.g., documentation for release, the accounting package and any necessary amending documents) and submitting the documentation to Canada Customs. This is a fairer and more effective rule than basing the place of supply on where the service is performed in view of the fact that these services may be performed electronically from centralized locations.

Leased Railway Rolling Stock

For HST purposes, the general rule for determining the place of a supply of tangible personal property by way of lease for more than three months is based on where the property is ordinarily located at the beginning of each lease interval. Under this rule, it would be difficult for lessors of railway rolling stock to determine the ordinary location of railway cars used in interprovincial or international service.

A special place of supply rule is proposed for supplies otherwise than by way of sale of railway rolling stock based on where the property is delivered or made available to the recipient of the supply. If continuous possession or use of a railway car is given by the supplier to a recipient throughout a period under more than one successive agreement, the supply under each of the agreements will be regarded as made where the property was delivered or made available under the first of those agreements.

Memberships Supplied to Individuals

Consistent with the announcement in the October 23, 1996 Technical Paper on the HST, a supply to an individual of a membership that can be exercised otherwise than exclusively in one province will be regarded as made in the province in which the individual's mailing address is located.

Repair, Maintenance and other Services Relating to Tangible Personal Property

The October 23, 1996 Technical Paper set out a special place-of-supply rule for repair and other services in respect of tangible personal property. This rule has been refined and expanded to simplify compliance for service providers.

The draft Regulations provide that where a supplier receives tangible personal property of another person for the purpose of repairing, maintaining, cleaning, adjusting or altering the property, the supply of the service, and of any goods such as parts supplied in conjunction with the service, is made in the province in which the tangible personal property is delivered to the recipient of the supply of the service after the service is performed.

Also, the Regulations provide that where a supplier receives tangible personal property, such as exposed film, of another person for the purpose of producing a negative, transparency, photographic print or other photographic-related good, the supply is made in the province in which the photographic-related good is delivered to the recipient of the supply of the service.

Trustee Services Relating to Registered Savings Plans and Income Funds

The draft Regulations set out a special place-of-supply rule for services supplied by a trustee in respect of a trust governed by a Registered Retirement Savings Plan, Registered Retirement Income Fund or Registered Education Savings Plan.

The place of supply of these services, which include annual administration and set-up and termination services, whether supplied to the trust, to the annuitant or to the subscriber, will be determined based on the annuitant's mailing address or, in the case of a Registered Education Savings Plan, the subscriber's mailing address.

1-900 Telephone Services

As proposed in the October 23, 1996 Technical Paper, the draft Regulations provide that a service provided by telephone and accessed by calling a 1-900 (or 1-976) number will be regarded as made in a particular province if the telephone call originates in that province.

Internet Access and Services Provided by Means of Telecommunications

The draft regulations provide a place-of-supply rule for the following:

• access to the Internet;
• a technical support service, provided by means of telecommunications, that relates to the operation or use of computer hardware or software; and
• a service involving electronic storage of information and computer-to-computer transfer of information.

In general, these will be regarded as supplied where the end-user (i.e., the person who acquires the service or access otherwise than for re-supply) is ordinarily located when accessing the Internet or receiving the service. If the service or Internet access is made available to more than one end-user, the service will be regarded as performed, or the right of access exercisable, in part where each of the end-users is ordinarily located when receiving the service or accessing the Internet. If this results in the service being considered to be performed, or the right exercisable, in more than one province, the place-of-supply rules in Parts III and V of Schedule IX will apply to determine where the supply is made.

If, however, the supplier does not maintain sufficient information to determine the location of the end-user or users and it is not the normal business practice of the supplier to obtain information sufficient to determine that location (e.g., where the supplier sells the service to a person who resells it to end-users unknown to the first supplier), the place of supply will be based on the mailing address of the recipient of the supply (i.e., the mailing address of the re-seller in the foregoing example).

Air Navigation Services

A special place of supply rule is required for air navigation services which air carriers have no choice but to receive and which often span more than one province in respect of a single flight. These services do not lend themselves well to place-of-supply rules based on the place where the service is performed or negotiated.

The draft Regulations provide that a supply of air navigation services, as defined in the Civil Air Navigation Services Commercialization Act, will be regarded as made in a particular province if the flight or leg of the flight in respect of which the service is provided begins in that province.

An amendment to the Excise Tax Act (described below) is also proposed to zero-rate air navigation services supplied to registered air carriers in relation to international flights.

Promotional Allowances

The current GST treatment of a promotional or merchandising allowance in respect of goods is to treat the amount as consideration for a supply of a service provided by a purchaser of the goods who is the recipient of the allowance to the vendor of the goods who is providing the allowance. This treatment could result in additional complexity for businesses under a system where some, but not all, provinces have harmonized their sales taxes with the GST. The complexities relate principally to the need to ascertain where the supply is made for the purposes of determining whether the HST or the GST applies to the allowance.

For example, suppose a promotional allowance is paid by a manufacturer to a national retailer in return for the retailer undertaking certain activities to promote the sale of the manufacturer's products in the retailer's outlets across Canada. In this case, it might not be clear where the service is performed for the purposes of the place-of-supply rules.

In addition, the different treatment of amounts that are regarded as price adjustments, such as volume discounts, certain freight or warehouse allowances, and promotional allowances results in complexity and uncertainty for businesses. The dividing line between the different kinds of allowances is often difficult to draw in practice. Also, in some cases, a single amount may be paid or a percentage deducted from the sale price of the goods for a volume or other price discount as well as for promotional activities relating to the goods.

Proposed new section 232.1 of the Excise Tax Act would apply where a registrant vendor makes taxable supplies by way of sale of goods and pays, credits or allows a discount to another registrant who acquires the goods, either from that vendor or another person, exclusively for resale in the course of the purchaser's commercial activities. In these circumstances, if the amount were paid, credited or allowed as a discount in return for the promotion of the goods, it would not be regarded as consideration for a supply by the purchaser to the vendor.

If the allowance were taken as a discount on, or credit against, the price of any property or a service sold by the vendor to the purchaser, the value of the consideration for the supply of the property or service would be regarded as the price less the discount or credit. Also, the amount of the discount or credit would be regarded as a reduction in the consideration for the property or service for the purposes of subsection 232(2) of the Act. If the allowance were effected by a payment to, or credit in favour of, the purchaser and not credited against the price of any property or service sold by the vendor to the purchaser, the amount paid or credited would be regarded as a rebate for the purposes of section 181.1 of the Act.

It is proposed that this measure apply to supplies for which consideration becomes due after March 31, 1997 or is paid after that day without having become due.

Air Navigation Services

Air navigation services are among the services currently zero-rated when supplied to unregistered air carriers. An amendment to the Excise Tax Act is proposed to also zero-rate air navigation services supplied to registered air carriers in relation to international flights. This measure will ensure that registered and unregistered carriers are placed on an equal competitive footing.

The amendment would apply to services performed after March 1997.

Specified Motor Vehicles

The draft Specified Motor Vehicle (GST/HST) Regulations are introduced, effective April 1, 1997, to:

• prescribe the value of a specified motor vehicle for the purposes of calculating the 8 per-cent provincial component of the HST in circumstances where the vehicle is brought into a participating province either from a non-participating province or from outside Canada; and
• prescribe the manner in which the 8 per-cent provincial component of the HST imposed on specified motor vehicles imported or brought into a participating province is required to be paid.

Prescribed Value

In the case of a specified motor vehicle brought into a participating province from a non-participating province or from outside Canada, the Excise Tax Act provides that the 8 per-cent provincial component of the HST be calculated on a prescribed value.

Under these Regulations, the prescribed value of a specified motor vehicle in these circumstances will be the value that would be attributed to the vehicle by the provincial licensing authority for purposes of calculating the special provincial levy (referred to as "specified provincial tax" in the Regulations) if, at the time of registration of the vehicle, that levy were payable in respect of the vehicle. Generally, the "specified provincial tax" will apply to a motor vehicle in circumstances where the vehicle has been purchased without it being subject to the GST or HST (e.g., where the vehicle was purchased through a private sale). Therefore, the 8 per-cent provincial component of the HST will be collected by the provincial licensing authority which will calculate the tax on the same value as would be the case had the vehicle been subject to the special provincial levy.

Prescribed Manner of Payment of Tax

The 8 per-cent provincial component of the HST imposed on specified motor vehicles imported or brought into a participating province is required to be paid to the Receiver General in a prescribed manner. These Regulations provide that the prescribed manner in these circumstances is by payment of the 8 per-cent provincial component of the HST to the provincial licensing authority. This is the provincial department or agency with which the vehicle is registered and that is authorized to collect a specified provincial tax in respect of motor vehicles acquired by way of private sale. The provincial authority will collect the 8 per-cent provincial component of the HST in its capacity as agent of the federal government.

Automobile Operating Expense Benefit

An automobile operating expense benefit represents the portion of operating expenses, such as gas, repairs and insurance, that is paid by an employer to an employee, or by a corporation to a shareholder, and is attributable to the employee's or the shareholder's personal use of an automobile. While the benefit must be included in the employee's or shareholder's income for income tax purposes, the GST calculated on the benefit is required to be remitted by the employer or the corporation.

In the December 10, 1992 Department of Finance press release, it was announced that the GST treatment of the automobile operating expense benefit would be simplified for the 1993 and subsequent taxation years. Under the simplified method, an employer or a corporation is able to calculate the GST on the total benefit by applying a prescribed percentage of 5 per cent, as opposed to the normal rate of 7 per cent. The lower percentage reflects the fact that a portion of the total automobile operating expense benefit reported for income tax purposes relates to GST-exempt expenses, such as insurance.

The draft Automobile Operating Expense Benefit (GST/HST) Regulations, which were originally released on March 30, 1993, are amended to provide for a prescribed rate of 11 per cent in circumstances where the HST applies. The HST rate is 15 per cent as of April 1, 1997. The prescribed rate of 11 per cent reflects the fact that a component of the benefit includes HST-exempt supplies, such as insurance. For the 1997 taxation year, a special transitional rate of 9.5 per cent is prescribed since the HST will be in effect for only three-quarters of 1997.

The rate of 9.5 per cent for 1997 and 11 per cent for subsequent years applies where, in the case of an employee, the last establishment of the employer at which the employee ordinarily worked or to which the employee ordinarily reported in the year in relation to that employment is located in a participating province (i.e., New Brunswick, Nova Scotia or Newfoundland), and, in the case of a shareholder, the shareholder is resident in a participating province at the end of the year.

The 5 per-cent rate will continue to apply in any other case where the GST is required to be remitted by the employer or the corporation in respect of an automobile operating expense benefit.

Input Credit Information Requirements

The Input Tax Credit Information (GST/HST) Regulations prescribe the information requirements necessary to support an input tax credit claim.

Subparagraph 3(b)(iv) of these Regulations is modified to ensure that, effective April 1, 1997 where the amount paid or payable for supplies includes the amount of tax payable, the information requirements also include a requirement to indicate the rate at which tax has been paid or is payable. This additional information will enable the recipient to determine the actual amount of tax charged.

These Regulations also reflect previously announced amendments, which permit an invoice or receipt issued by an intermediary who has made a supply on behalf of a principal to suffice as evidence to support an input tax credit claim of the recipient.

Transitional Rules Under the HST

Change of Reporting Periods

Sections 246 and 247 of the Excise Tax Act set out the rules that permit registrants who are reporting on an annual or quarterly basis to elect to file on a quarterly or monthly basis. Under these rules, such a change in reporting period must take effect on the first day of a fiscal year of the person.

It is proposed that any person who is registered as of April 1, 1997 and is a quarterly filer resident in a participating province be able to make an election to file on a monthly basis without having to wait until the beginning of their next fiscal year. An election to file on a monthly basis could take effect on the first day of any fiscal quarter of the registrant that begins on or after April 1, 1997 and before April 1, 1998.

Similarly, any person who is a registered annual filer as of April 1, 1997 and who is resident in a participating province could elect to file on a quarterly or monthly basis as of the first day of any fiscal quarter that begins on or after April 1, 1997 and before April 1, 1998.

In the case of an annual filer who elects to change to a quarterly or monthly reporting period effective after the beginning of the person's fiscal year, the period beginning on the first day of that fiscal year and ending immediately before the fiscal quarter in which the election becomes effective will be deemed to be a separate reporting period for which the person would be required to file a separate return within one month following the end of that period.

All elections to file quarterly or monthly would have to be made in the usual prescribed form and manner and be filed within the same time frames as required under existing section 250 except that, in these cases, they would specify the effective date as the first day of a fiscal quarter or fiscal month as opposed to a fiscal year.

This transitional measure will allow registrants in participating provinces who are generally in refund positions (e.g., farmers and fishermen) to accelerate the receipt of refunds and mitigate any possible cash-flow implications of harmonization.

New Housing Rebate for Residences in Nova Scotia

The Excise Tax Act provides for a partial rebate of the provincial component of the HST paid by a purchaser of a qualifying new residence that is for use in Nova Scotia as the primary place of residence of the individual or a relation of the individual. A partial rebate of the provincial component of the HST is also provided to an individual who purchases a share in a co-operative housing corporation for the purpose of using a new residential unit in a residential complex of the corporation that is situated in Nova Scotia as the primary place of residence of the individual or a relation of the individual.

Amendments are proposed to clarify that the rebate in respect of a new residential building situated on land leased by the purchaser of the building from the builder will only be available where the builder was required to self-assess the provincial component of the HST. This means that possession of the residence was transferred to the purchaser after March 1997 otherwise than under a written agreement between the builder and purchaser entered into on or before October 23, 1996 (the announcement date of the HST). In the case of an individual who has purchased a share in a co-operative housing corporation, the partial rebate would only be available where the co-operative housing corporation paid the provincial component of the HST in respect of a taxable supply to the corporation of the complex.

Residences Sold Under Pre-announcement Date Agreement

Amendments are proposed to subsections 351(1) and (2) of the Excise Tax Act, effective April 1, 1997. These provisions grandfather from the provincial component of the HST sales of new residences under agreements in writing entered into on or before October 23, 1996, the announcement date of the HST. The wording is modified to clarify that the grandfathering applies equally to sales of only the building in which the residential unit is located, which occurs when the purchaser leases the land on which the building is situated from the builder instead of also purchasing the land. In these circumstances, the sale of the building itself is exempt but, absent this grandfathering rule, the builder would have to self-assess the provincial component of the HST under section 191 of the Act upon giving possession of the residential unit to the purchaser after March 1997. It is proposed that subsection 351(1) to be amended to ensure that where possession is given under an agreement in writing between the builder and the purchaser entered into on or before October 23, 1996, the builder will not have to self-assess the provincial component of the HST.

It is also proposed that paragraph 351(1)(c) be amended to ensure that grandfathering is available in the above circumstances where the builder is deemed under subsection 191(1) to have made a supply of the complex in which the unit is situated at any time as a consequence of giving possession thereof to the purchaser of the unit. The existing wording refers only to a deemed supply under that subsection made "before" such possession is given.

A consequential amendment is also proposed to subsection 351(2) to delete the specific reference to the sale of a single unit residential complex so that it also refers to a sale described above.

Transfer of Goods Before Implementation Date

Amendments are proposed to subsections 352(1) and (2) of the Excise Tax Act, which are intended to grandfather from the provincial component of the HST sales in Canada, and imported taxable supplies, of goods that are delivered to the purchaser or the ownership of which is transferred to the purchaser, before April 1, 1997 (the implementation date of the HST) in accordance with a written agreement entered into before that day. It is proposed that the subsections be amended to refer to this day as opposed to the "announcement date", which is October 23, 1996. This is consistent with the transition rules set out in the Harmonized Sales Tax Technical Paper released on October 23, 1996.

An amendment is also proposed to add new subsection 352(1.1) to the Act to ensure that if provincial retail sales tax applied prior to the implementation date for a province to a sale of goods resulting from the exercise after that implementation date of an option to purchase the goods contained in a lease, the provincial component of the HST does not also apply to the sale.

Leases Provided Together with Services

The Excise Tax Act provides generally that, where a taxable supply by way of lease, licence or similar arrangement is made in a participating province or, in some cases, in a non-participating province to a person who is resident in a participating province and consideration for the supply is attributable to a period after March 1997, the provincial component of the HST will apply. However, the provincial component of the HST is not payable where the payment is attributable to a period that begins before April 1, 1997 and ends before April 30, 1997.

The latter exception could lead to some difficulty where a supply of a service is provided together with a lease of property. The transitional rules generally provide that HST is payable on the portion of the payment attributable to services performed after March 1997. However, the payment relating to the lease of the property for the period ending before April 30 would not be subject to the provincial component of the HST but may be subject to provincial retail sales tax (PST).

An amendment is proposed that where a lease of property is provided together with a supply of a service and the charges for the lease and for the service are included in the same invoice, HST is to be applied to the portion of the lease payment attributable to the period after March 1997, to be consistent with the application of the HST to the portion of the payment relating to the services performed after March 1997. For example, if a person were billed, in advance, in March 1997 for the rental of a telephone and for a telecommunication service for the period of March 15, 1997 to April 14, 1997, the applicable PST would be charged on the portion of the payment relating to the period in March and HST on the portion of the payment relating to the period in April.

Delivery Upon Exercise of Option

An amendment to the Excise Tax Act is proposed to provide, for greater certainty, that where a person who is a lessee under a lease of goods exercises an option contained in the lease to purchase the goods while retaining physical possession of the goods, the place and time of delivery of the goods in relation to the purchase is the place and time at which the person begins to have possession as purchaser and not as lessee. This general rule would apply, as of April 1, 1997, for all purposes of Part IX of the Act.

 - News Release 1997-024 - Next -