ipt 2017 sales tax symposium san antonio, texas … 2017 sales tax symposium san antonio, texas...

Canadian Sales Taxes v. U.S. Sales and Use Taxes – North of the Border v. South

IPT 2017 Sales Tax Symposium San Antonio, Texas

September 17-20

Presenters

2

Rob Dew Senior Manager

Canadian Sales Tax Canadian Tax Practice Leader Mississauga, Ontario, Canada [email protected]

mailto:[email protected]

Presenters

3

Vanessa Frank Senior Manager

North American Indirect Taxes Fitbit, Inc. [email protected]

Learning Objectives

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• To possess a basic understanding of the concepts behind a value-added tax – in this case, GST and HST

• To be able to identify the basic rules with respect to registration and the application of GST and HST

• To be able to recognize GST and HST issues and how that compares with Sales and Use Taxes’ application in the U.S.

Canadian sales taxes – Who, What, Where and When

INTRODUCTION

Glossary of Terms

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Value Added Tax – VAT Excise Tax Act – ETA Goods and Services Tax – GST Harmonized Sales Tax – HST Input Tax Credit – ITC Quebec Sales Tax – QST Provincial Sales Tax – PST

Question #1

What is the most common misconception about GST/HST?

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Answer #1

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GST/HST is a simple tax – A misconception is that businesses simply have to comply

with certain rules, and it is cash flow neutral because you can claim GST/HST paid back on our next return

– Lack of compliance with all applicable formal and substantial tests may compromise the recoverability of GST/HST

– In certain transactions involving foreign entities, the foreign entity that pays the GST/HST may not be able to recover it

Question #2

Can I claim a reduced amount of GST/HST rate or exemption under a Treaty?

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Answer #2

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GST/HST is not covered by Tax Treaties – GST/HST is a tax imposed on the performance of

certain events or transactions, and not on income. Therefore, it is outside the sphere of Tax Treaties

Question #3

Can I claim a foreign tax credit in my U.S. tax return of any GST/HST that I pay?

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Answer #3

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GST/HST is not a tax on income – GST/HST is a tax imposed on the performance of

certain events or transactions, not on income. Therefore, no foreign tax credit against U.S. income tax of GST/HST or any VAT paid in a foreign country.

Current international VAT environment

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Approximately 150 countries use a VAT system – Out of the world’s major economies, only the USA does not

currently have a VAT system Rates vary dramatically across the globe

– Each jurisdiction will likely have multiple rates – EU standard rate is at least 15% – Canadian rates: from 5% and 15% depending on province

General shift toward taxing transactions at point of consumption – the destination principle

Canada – Federal and Provincial Sales Taxes

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BASIC GST/HST PRINCIPLES

Basic GST/HST Principles – Canada

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What is GST/HST? – Value-added tax – GST – 5% federal tax – HST – where applicable, provincial component added

to GST – Levied on taxable supplies made in Canada

Three categories of supplies – Taxable supplies (at 5%, 13% or 15%) – Zero-rated supplies (taxable at 0%) – Exempt supplies

Canadian GST/HST – Basic Concepts

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Manufacturer Raw Materials Supplier

Retailer

$100

$300 $300

$500 $500

$800

Tax

ITC Net Tax

$15 (5)

$10

$25 (15) $10

$40 (25) $15

$5

$5 $40 + + + =

$15 $25

Canadian GST/HST – Basic Concepts

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GST 5% HST 15%

Canada – What is subject to tax?

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GST/HST applies to the supply of: – Taxable supplies of goods (Property) and

services Includes

– Tangible Personal Property – Intangible Personal Property (rights, patents,

trademarks) – Real Property – Services

Canadian GST/HST registration requirements

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Every non-resident person who carries on business in Canada, other than a small supplier, must register for GST/HST purposes if the non-resident person makes a taxable supply in Canada – SS 240(1) of the Excise Tax Act (ETA).

“Small supplier” is a person, including associated persons whose annual global taxable supplies do not exceed CAD $30,000.

Issue: The term “carrying on business in Canada” is not a defined term.

The Canada Revenue Agency (CRA) has provided guidance regarding the factors to be considered when determining whether a person is carrying on business in Canada.


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Per the CRA, the factors indicating that a person is “carrying on business in Canada” include:

– Place of delivery – Place where agents / employees of non-resident are located – Place of payment – Place where purchases are made / assets are acquired – Place from which transactions are solicited – Location of assets / inventory of goods – Place where business contracts are made – Location of bank account – Place where non-resident’s name and business are listed in a directory – Location of branch / office – Place where service is performed, and – Place of manufacture or production


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Administrative position of the CRA: The importance or relevance of a given factor in a

specific case depends on the nature of the business activity under consideration and the particular facts and circumstances of each case.

These have been the most common type of questions to date from clients. Each GST/HST registration question must be reviewed individually so that all the facts and factors can be evaluated.

Canada – place of supply rules

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Federal place of supply rules – Determine whether a supply is made in or outside Canada

HST place of supply rules – Determine the province in which a supply is made (which rate of GST/HST to apply)


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GST/HST applies only to supplies made in Canada – no tax on supplies made outside Canada

5% GST applies to taxable supplies made in Canada Additional provincial component of HST applies where supply is

made in an HST province Goods

– Generally destination based – place of legal delivery / use Services

– Generally based on billing location of recipient


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Nature of supply Made in Canada Outside Canada Goods by way of sale Delivered or made

available in Canada Delivered or made available outside Canada

Goods by of lease or license

Possession or use given or made available in Canada

Possession or use given or made available outside Canada

Services Performed in whole or in part in Canada

Performed wholly outside Canada

Intangibles May be used in whole or in part Canada, or relates to real property or goods situated in Canada

May not be used in Canada, or relates to real property/goods situated outside Canada

Real property Real property situated in Canada

Real property situated outside Canada

To determine whether a supply is made in or outside Canada


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Nature of supply General PoS rules

Goods by way of sale Province where legal delivery is made

Goods by of lease or license Ordinary location of goods

Services Generally based on billing address of recipient (many exceptions)

Intangibles Need to consider • Restriction on use • Province where primarily used

Real property Location of real property

To determine whether a supply is made in a province

Canada – input tax credits

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Input tax credit (ITC) is a refund of GST/HST incurred on inputs to business

Who can claim ITCs – Registrant – Making supplies in course of commercial (taxable)

activity – Time limitation – Must meet documentary requirements – Some restrictions apply

Case #1 – GST/HST recovery

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Case 1: Manufacturer in Canada, head office in the US Processes and smelts iron ore and by-products All accounts payable are processed in Canada except for

specific confidential transactions; in this case, external legal counsel bills

Due to confidentiality of documentation, only a check requisition was submitted to accounts payable

Consulting engagement discovered this anomaly – no sales tax had been identified on check requisition.

Result : $175,000 in tax recoveries

Case #2 – GST/HST recovery

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Case 2: Client is one of the world’s largest distributors of goods over the

internet. Client relies on a global courier for logistical and supply chain services

to ensure that the goods are delivered to the individual customers The invoices for all shipping and import charges are sent to the client

via an upload transmitted by this supplier Consulting engagement discovered an anomaly – the uploaded data

did not break out the GST/HST/QST component of the monthly supplier charges

Data uploads for four years were sent in and the tax information separated and summarized by tax type

Result : $3.1 million in tax recoveries

Canada – GST/HST special situations

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Purchase of business S. 167 election

– Generally, sale of assets of a business are taxable – Use of election results in no tax being payable – Supplier must be selling a business or part of a business – Recipient must be acquiring all or substantially all (90%) of

assets reasonably necessary to carry on the business


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Purchase of real property – Generally, supplier is required to collect tax on all taxable

supplies. – ETA, S. 221 provides that supplier does not collect

GST/HST on taxable sale of real property where the purchaser is registered for GST/HST.

– Rather, ETA, S. 228 requires to purchaser to self-assess the applicable tax. If so entitled, purchaser can claim offsetting ITC eliminating the impact of tax on cash flow


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Damage payments Payments made as compensation for damages:

– Eg., property damage, loss of income, inconvenience – Generally, not considered to be consideration for a supply – BUT – Deeming provision S.182 of ETA – Applies when payment made from recipient to supplier – GST/HST deemed to be included in amount paid – GST/HST liability for recipient of payment, recovery opportunity for

person making payment

Case #3 - Canada – GST/HST special situations

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Case 3: Client is a distributor of educational books located in Pennsylvania Not registered for Canadian GST/HST purposes Client acts as importer of record when goods are imported into

Canada – paying 5% GST on the importation of goods into Canada. Consulting engagement – to assist in recovering the GST paid on the

importation even though the client is not registered (recall that only a registrant can claim an ITC).

Sections 178.8 & 180 of the ETA allow the Canadian customer (assumed to be registered) to claim an ITC for import GST paid by a non-registered, non-resident. The non-resident flows the tax charges to the Canadian customer. As the customer can claim the tax back themselves, they are indifferent when asked to pay it

Result : $250,000 in tax recoveries

Case #4 – GST/HST special situations

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Case 4: Company is a manufacturer of chewing gum in the US Not registered for Canadian GST/HST purposes Canadian subsidiary is a sales and distribution company that is registered for

GST/HST All Canadian sales and supplier invoices are processed at US head office CRA audit assessed Canadian sub for claiming ITC’s on invoices issued to US

head office for processing Consulting engagement – Assist company too recover CRA assessment CRA applying “recipient of the supply” rules strictly – US HO was identified as

recipient on supplier invoices Review of underlying contract supported Canadian company as the de facto

recipient Result : $1.0 million reversal of tax assessment (including interest)

CANADIAN PROVINCIAL SALES TAXES

Canada – Provincial sales taxes - Quebec

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Quebec Sales Tax (QST) Basic Concepts Similar rules to GST/HST except

administered by the province of Quebec – Provincial value-added tax – Generally harmonized with GST/HST – Taxable, zero-rated, exempt – Input tax refunds (ITRs) – Documentation requirements

Canada - Provincial sales taxes (PST) – other provinces

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QST 9.975%

PST 8% PST 6% PST 7%

Canada - Provincial sales taxes (PST) – other provinces

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What is Retail Sales Tax? Similar rules to many US sales taxes Administered by the province

– Single stage tax – Tax on use / consumption within the province – Tax paid by the end user/purchaser/consumer – Tax base on Fair Value/Purchase Price – as defined – Tax applies to:

Tangible personal property (TPP) as defined Specific Services – as listed

– Various Exemptions are available

CANADA – GST/HST/QST/PST BEST PRACTICES

Canada – Best Practices

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– Remember: Almost any transaction carried out in a GST/HST jurisdiction will have GST/HST consequences; assume that there will be consequences until otherwise confirmed

– Always bring GST/HST/QST/PST to the table in any new Canadian transactions, especially asset deals. Key points for discussion: Purchase price allocation for assets (GST/HST/QST/PST

Implications) Factor-in GST/HST in the financing negotiations May need to form a Canadian legal entity to purchase /operate

the assets Goodwill and its GST/HST adverse tax consequences IPP and its GST/HST consequences


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– Bring the GST/HST/QST/PST specialists on board early in the process when necessary

– Ask for as many details of the transaction as possible (GST/HST has many, many moving parts)


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For taxpayers – Make sure ERP is GST/HST/QST/PST capable – Transaction mapping should be automatic (identify and

book transactions at the different rates) – Routinely reconcile GST/HST/QST/PST balances per books

vs. receivables, payables and bank account statements – Routinely evaluate any GST/HST/QST recoverable

balances and feasibility of a GST/HST/QST cash refund claim, or look for alternative mechanisms for recoverability


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For taxpayers – Make sure you have all documentation and work papers in

order related to GST/HST/QST recoverable balances (CRA scrutiny can reach molecular levels)

– Discuss with your vendors and customers any changes in the form of conducting business to make sure all parties are aware of the GST/HST/QST/PST consequences

Canadian Sales Taxes

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Canadian Sales Taxes vs US Sales Taxes

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South of the Border – US Sales Taxes

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FUNdamentally different Nexus, compliance, taxability, situs

complexity Cities, counties, & or parishes have a right to

levy their own sales taxes – May not follow the State – May be significant

Use taxes – Special considerations

QUESTIONS

ipt 2017 sales tax symposium san antonio, texas … 2017 sales tax symposium san antonio, texas...

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