Canada: Tax Letters: 2016 Canadian Federal Budget – Sales And Excise Tax Measures



The Budget proposes a number of GST/HST amendments, including the following.

De minimis financial institutions — Under section 149 of the Excise Tax Act (ETA), a person whose revenues from financial activities exceed a minimum threshold may be considered a financial institution for GST/HST purposes. More specifically, a person earning more than $1 million in interest income from bank deposits in a taxation year is generally considered to be a financial institution for the following taxation year.

To allow a person to engage in basic deposit-making activity without incurring such consequences, the Budget proposes to exclude from the determination of the $1 million threshold, interest earned from demand deposits, term deposits, and GICs with a maturity period of less than one year. This measure applies to a person's taxation years commencing on or after Budget Day. For the purposes of determining whether a person is required to file Form RC7291 (the Financial Institution GST/HST Annual Information Return), this measure applies to a person's fiscal year that straddles that date.

Application of GST/HST to cross-border reinsurance — The ETA requires financial institutions with a branch or subsidiary outside Canada to self-assess and remit GST/HST for certain expenses incurred outside Canada that relate to its Canadian activities.

Amendments to the ETA would clarify that the following components of imported reinsurance services would not form part of the tax base that is subject to these self-assessment provisions:

  • Ceding commissions, and
  • Margin for risk transfer.

In addition, the Budget proposes to set out specific conditions under which the special rules for financial institutions do not impose GST/HST on reinsurance premiums charged by a reinsurer to a primary insurer. These measures will apply retroactively to any specified year of a financial institution that ends after November 16, 2005. Transitional rules would allow a financial institution to request a reassessment to determine its tax owing under the GST/HST imported supply rules for a past specified year, but only for the purpose of taking this measure into account. A financial institution will have one year after the date the enacting legislation receives Royal Assent to request a reassessment.

Closely related test — The ETA allows closely related corporations to make group relief elections under certain circumstances to treat supplies between them as if they were made for no consideration.

Generally, this measure will take effect one year after the Budget Day. However, this measure applies as of March 23, 2016, for determining whether the requirements for the closely related test requirements are met for elections under subsection 150(1) and subsection 156(2) of the ETA, where such elections are filed after Budget Day and take effect after that date.

GST/HST on donations to charities — Under current GST/HST rules, if a person makes a donation and receives property or services in return, GST/HST generally applies on the full value of the donation. In contrast, the Income Tax Act allows for "split-receipting." This allows a charity to provide a donation receipt for the donation amount less any the value of any property or service received by the donor.

The Budget proposes to introduce similar split-receipting rules for the ETA. Specifically, if a charity provides property or services and an income tax receipt may be issued for a portion of the donation, GST/HST applies only to the value of the property or services supplied to the donor. This measure applies to supplies made after Budget Day. However, transitional relief is available for charities that did not collect GST/HST on the full value of donations for supplies made after December 20, 2002, and on or before Budget Day.

Eligible capital property — As noted above (see Business Income Tax Measures — Eligible capital property), the Budget proposes to repeal the ECP regime and replace it with a new CCA class (Class 14.1), effective January 1, 2017. As a result, all ECP will become capital property under the Income Tax Act.

To ensure the application of GST/HST in this area is not affected, the Budget proposes to amend the definition of capital property under the ETA to exclude property in new Class 14.1. Therefore, property that was ECP under the Income Tax Act will continue to be excluded from capital property for GST/HST purposes. The Budget also makes consequential amendments to the Streamlined Accounting (GST/HST) Regulations. These amendments will take effect on January 1, 2017.

Health Measures — The Budget proposes to add the following medical and assistive devices to the list of zero-rated medical devices:

  • Insulin pens and insulin pen needles, and
  • Intermittent urinary catheters, supplied on the written order of a medical doctor, registered nurse, occupational therapist, or physiotherapist for use by a consumer named in the order.

Zero-rating applies to any supplies of insulin pens and insulin pen needles made after Budget Day. In addition, zero-rating applies to any such supplies made on or before the Budget Day, unless the supplier charged, collected, or remitted GST/HST for that supply on or before that date. Zero-rating applies to any supply of an intermittent urinary catheter made after Budget Day.

In addition to the above-listed measures, the Budget amends the ETA to clarify that GST/HST applies to supplies of purely cosmetic procedures provided by all suppliers, including registered charities. This amendment applies to supplies made after Budget Day.

Exported call centre services — Zero-rating will apply to certain exported supplies of call centre services. Specifically, zero-rating will apply to a supply of providing technical or customer support to individuals by means of telecommunications if:

  • The supply is made to a non-resident who is not a GST/HST registrant, and
  • It is reasonable to expect the technical or customer support will be provided to individuals outside Canada at that time.

This measure applies to supplies of such call centre services made after Budget Day. In addition, zero-rating applies to any such supplies made on or before Budget Day, unless the supplier charged, collected, or remitted GST/HST for that supply on or before that date. Zero-rating does not apply to supplies of advisory, consulting, or professional services, or a supply of a service of acting as an agent of the non-resident person.

Reporting of grandparented housing sales — Currently, builders are subject to special reporting requirements for housing sales that were "grandparented" for HST purposes. The Budget proposes to limit such reporting requirements to sales of $450,000 or more. In addition, a builder would be entitled to make an election to report all past grandparented housing sales for which the consideration was $450,000 or more, thereby allowing a builder to correct any past misreporting and avoid potential penalties.

Excise Tax

The Budget contains several amendments relating to excise tax levied under the ETA.

Heating oil — Currently, an excise tax exemption applies in respect of diesel fuel that is consumed to produce heat for any purpose, including industrial processes. The Budget proposes to limit relief to diesel oil consumed exclusively to provide heat to a home, building, or similar structure. This measure will generally apply to fuel delivered or imported after June 2016.

Electricity generation — While excise tax generally applies to diesel fuel consumed for motive purposes, an exemption applies for diesel fuel used in or by a vehicle to generate electricity, if certain conditions are met. The Budget proposes to eliminate this exemption. Excise tax will therefore apply to diesel fuel used to produce electricity in any vehicle, regardless of purpose. This measure will generally apply to fuel delivered or imported after June 2016.

Excise Act, 2001

The Budget proposes to enhance certain security and collection provisions in the Excise Act, 2001.

Security — The Excise Act, 2001 requires manufacturers of tobacco products to hold a license. It also requires stamping for all tobacco products destined for duty-paid entry into Canada, thus indicating that duty has been paid. In order to be issued a license or duty-paid stamps, tobacco manufacturers and other persons that import tobacco products must post security with the Canada Revenue Agency (CRA). Currently, the maximum amount of security required is $2 million.

The Budget proposes to increase the maximum amount of security from $2 million to $5 million. This measure will take effect on the later of:

  • The date the enacting legislation receives Royal Assent, and
  • The date that is three months after Budget Day.

Collection — Currently, if a person objects to or appeals an assessment of excise duty payable, the CRA may not take collection actions while a decision or judgment is pending. The Budget introduces amendments that would allow the minister to require a person to post security for assessed amounts and penalties exceeding $10 million, to the extent the amount remains uncollected. If the person fails to post security, the minister may take collection action to recover an amount equal to the amount of required security.

These measures apply to amounts assessed and penalties imposed after the day on which the enacting legislation receives Royal Assent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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