Canadian Indirect Tax News, February 2006
(06-1)
Non-profit organizations and simplified accounting: The pitfalls!
Non-profit organizations (NPOs) may, and charities must, use simplified/special accounting methods to determine their net tax remittances for GST purposes. All these methods rely on basically the same rules, i.e., collect GST on taxable supplies as usual, but remit a lower amount than was collected; and, in exchange for the lower remittance, forgo input tax credits in favour of rebates.
Most NPOs and charities that use these methods tend to make one or two basic errors in applying them to their activities. We have noted that the most common mistakes are the inclusion in the tax calculation of GST collected in error, and the incorrect determination of the tax base.
For example, in the former case, NPOs often include GST collected on exempt, long-term property rentals. Unfortunately, as NPOs must remit any GST collected in error in full, these supplies must be treated outside the method and cannot benefit the NPO/charity. In the latter case, the tax base for the NPO remittance includes both the taxable revenues and the GST collected. Failure to include the GST in the tax base will lead to an under-remittance of tax. In addition, in many cases, retail sales tax is collected alongside the GST and this can also lead to errors in determining tax due. Not all errors lead to exposures, however, as we have also noted errors in applying these methods that result in overpayment of tax. In summary, because these methods are far from straightforward in operation and can lead to a significant build-up of undetected liability, we recommend that any NPO or charity that uses one of these methods review the application of the method to its activities immediately.
New rulings
A number of rulings have recently been released, the topics including the inclusion of mutual fund redemption fees as financial services, the status of supplies of tobacco and internet sales to Indians, the new housing rebate and the status of certain juices. Please contact your indirect tax practitioner for further details.
Recent Court decisions
When is a branch service a financial service?
This question was addressed recently by the Tax Court of Canada in the Royal Bank of Canada v. The Queen case. The bank had originally classified certain branch services supplied by the bank to a subsidiary mutual fund management company as taxable services and had recovered input tax credits (ITCs) on related expenses. However, the Court dismissed the bank’s appeal against an assessment, holding that the services were in fact financial services exempt from GST and not taxable supplies, with the result that the bank was not entitled to claim ITCs to recover the GST paid on its inputs used to provide the services. In addition, the Court held that the 6% penalty imposed would stand because the evidence presented by the bank was insufficient to establish the defence of due diligence.
The Minister assessed the bank on the basis that the “branch services” fit within the definition of “financial services” because the bank arranged for the “…issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment…” of mutual fund units. The bank took the position that it did none of the foregoing and that the services provided were simply administrative.
It is unfortunate that the reasons for judgment do not include a detailed supply analysis. Nonetheless, the case is well worth a careful read, particularly for GST registrants who supply financial-type services where there may be an administrative element to the services provided. Furthermore, the case serves as a cautionary reminder in connection with the steps a taxpayer takes, or does not take, to determine the correct interpretation of the law, and the potential impact of the choices the taxpayer makes in this regard. We note that the bank has appealed to the Federal Court of Appeal, so watch this newsletter for future developments!
Exported training services: Looking beyond the invoice
In Invera Inc. v. The Queen, the Tax Court of Canada allowed an information and technology company’s appeal, holding that the “training services” provided to its non-resident distributors and customers were zero-rated (i.e., GST at 0%) when they were supplied in Canada.
The principal issue was whether the “training services” were zero-rated as a "...supply of an advisory, professional or consulting service made to a non-resident person…” pursuant to section 23 of Part V of Schedule VI of the GST legislation. The Minister of National Revenue took the position, inter alia, that the “training services” were not “advisory, professional, or consulting” in nature, but rather were simply “training”, as described on the invoices.
On the evidence, however, the Court found that the taxpayer provided consulting and professional services in a highly technical area involving the application of software to a very specific purpose, such that the services fell squarely within the above zero-rating provision. With respect to the use of the term “training” on certain invoices, the Court found that “…to the extent that it implies a mere routine basic educative process in how to use the software in a computer it is a misnomer” and that the term “…obviously in this case encompasses a broad range of advisory and consultative services”.
In our view, this is a sensible decision. It highlights the importance of determining the true nature of the services provided and not placing excessive reliance on individual terms used on an invoice.
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Source: Deloitte & Touche LLP - Canada (English)