Introduction This story on the salient features of Canada’s GST continues BCAS’s ongoing series discussing GST concepts, and global perspectives and practices on some of the key elements. The Canada example is especially interesting because of Canada’s system of dual taxation at the Federal and Provincial levels (like our proposed dual GST design which will allow for concurrent taxing powers to the Centre and States on all taxable transactions), and because, as we will see, the Canadian GST model incorporates certain concepts that we are familiar with in the context of income tax.
Taxing powers, GST design and levy Like India, Canada levies indirect taxes at two levels – there is a federal GST charged by the Federal Government, and retail sales taxes are imposed at the provincial level. In the early 1990s, there was a move by the Federal Government to replace the dual imposition of taxes with a single national levy called the Harmonized Sales Tax (HST). However, not all provinces are participating in the HST system, and some provinces have retained their sales tax regimes instead of switching over to the revenue- sharing model under the HST. Fortunately, in the latest Constitutional Amendment Bill that is with the Rajya Sabha, the possibility of us having two parallel systems operating has been foreclosed.
GST is imposed on the taxable supply of goods and services made in Canada, and is collected as a transaction tax at each stage of the production and distribution value chain. GST also applies to goods imported into Canada, and to certain services and intangibles acquired from outside of Canada, known as ‘imported taxable supplies’.
In Canada, the GST is administered by the Canada Revenue Authority (CRA) which also collects all other taxes imposed by the Federal Government including income tax. GST on imported goods is administered by the Canada Border Services Agency (CBSA). Provincial sales tax regimes are administered locally.
Taxable events
(i) Supply of goods / property
Interestingly, the GST Act does not generally use the term ‘goods’ and instead uses the term ‘property’ which is defined to mean any property whether real or personal, movable or immoveable, tangible or intangible, corporeal or incorporeal and to include a right, share and chose in action, but not to include money. As we will see later in this discussion, in the Canadian GST context, ‘property’ may be subdivided into real property, goods and intangibles.
A supply of goods is made when goods are provided to another person in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. It is to be noted that a supply takes place regardless of receipt of monetary consideration, and transfers for no consideration are also supplies of goods. Canada also cognizes the concept of deemed supplies of goods (somewhat similar to our “deemed sales” under article 366(29A)) for the compulsory transfer of property, hire purchase transactions etc.
Under the Canadian GST treatment of commissionaire arrangements, an agent is generally not considered the supplier of goods for GST purposes except where the principal is not required to collect GST and the supply is made through a taxable person acting in the course of a taxable activity, in which case the agent is deemed to have supplied goods. In such cases, the agent is deemed not to have supplied agency services to the principal.
Certain transactions that do not attract VAT under the present scheme of taxation in India are treated as taxable under Canadian GST. These include the withdrawal of business goods for personal use where the business is deemed to have made a supply of goods for consideration i.e. a “self-supply”, free-of-charge supplies of goods to third parties (here no GST is payable on the supply in the absence of consideration, yet the supplier can claim input tax credit if the supply is for the purpose of business promotion), situations of change of use of capital goods from taxable to non-taxable activities, cessation of the carrying on of taxable activity, and, importantly, the bringing of goods from one province to another – here, GST may be payable to the extent of the difference in rates between the provinces.
Intangible rights such as the right to use intellectual property, and memberships in clubs and organisations are treated as supply of property and not services.
Special provisions exist in the GST Act for taxing the transaction of a transfer of a business. In an acquisition of all or substantially all of the property necessary for carrying on a business or part of a business, GST does not apply on the consideration attributable to goodwill, and the transfer of each property (and the provision of each service) is deemed to be a separate supply, the tax status of which is required to be determined. However, an option is available whereby the recipient is relieved of the obligation of paying GST where the tax payable on the purchased assets would be fully recoverable through the credit provisions. There are additional relieving rules specific to M&A transactions wherein transfers of property on amalgamation or winding up do not result in a supply of property for GST purposes.
(ii) Supply of services
The term ‘service’ is defined to mean anything other than property, money or the services of an employee. Per this definition, some of the declared services under the Indian service tax law such as non-compete agreements also fall within the aforesaid definition. As mentioned earlier, leases and rentals are not services for GST purposes, as these constitute supplies of goods or real property. A selfsupply of services is generally not subject to GST.
Characterisation of supplies
Under Canadian GST, whether a supply is to be characterised as one of goods or services is to be determined on the basis of general legal principles. Transactions involving a combination of elements (across goods and services) are characterised on the basis of specific provisions and tests developed by case law per which, generally, multiple elements will be considered as a single supply if each of the elements is an integral part of the overall supply. Similarly, supplies of property or services that are incidental to another (principal) supply of property or services are treated as part of the principal supply, if all the properties and services are supplied for a single consideration. Also, a supply of property or services tagged to financial services for a single consideration are deemed to be supplies of financial services, if, among other conditions, the value of the financial services accounts for more than 50% of the consideration. In other words, property can be treated as services (and vice versa) depending upon which is the dominant principal supply. The aforesaid characterisation logic and methodology is in interesting contrast to the tax treatment accorded under the present indirect tax system in India, where we continue to grapple with the challenges of parallel taxation of transactions as sales / deemed sales as well as services.
(iii) Import of goods
Goods imported into Canada are subject to Canadian GST on importation. Complications in tax collection arise on account of the differences in tax rates from one province to another under the HST system, and where there is a separate provincial tax component. In some cases, the CBSA collects the federal and provincial components whereas in others, only the federal component is collected. It is important to note that no tax is payable when a commercial importer imports goods exclusively for use in taxable activities – this idea that that tax need not be paid when credit thereof is available is an important simplification that Canada has applied.
(iv) Imported taxable supply
GST also applies to certain personal property and services acquired from outside of Canada in certain situations, if the recipient in Canada receives the supply otherwise than for use in an exclusively taxable activity (for the reason that credit would not be available).
Place of supply
As stated above, GST is imposed on taxable supplies made in Canada. Like in the Indian scheme of indirect taxation, the taxing jurisdiction covers Canada’s landmass, internal waters, territorial sea the airspace above these, and extends to the EEZ. The rules to determine the place of supply vary according to whether the supply involves property (real property, goods and intangibles) or services.
Supply of real property
In case of supply related to real property, the place of supply shall be deemed to be the place where such property is located. Therefore, the property must be situated in Canada for the place of supply to be in Canada.
Supply of goods
In determining the place of supply vis-à-vis supply of goods, a distinction has been made between supplies made by way of sale and otherwise. Where goods are supplied by way of sale, the place of supply is deemed to be in Canada if the goods are delivered or made available in Canada to the recipient of the supply – this is generally the place where possession is transferred to the buyer. In case of a supply otherwise than by way of sale (e.g. by way of rental), the place of supply shall be the place where possession or use of the property is given or made available to the recipient of the supply.
Supply of intangibles
A supply of intangible property is deemed to be in Canada if the property may be used in Canada or the property relates to real property or goods situated in Canada or to a service performed in Canada.
Supply of services
The general rule is that a supply of service is deemed to be Canada if the service is wholly or partly performed in Canada. Therefore, services will be deemed to be supplied outside Canada if they are performed wholly outside Canada. As an exception, the place of supply of a service in relation to real property depends upon where the property is situated. Telecommunication services have a separate rule under which the service is considered to be supplied in Canada if 2 out of the following 3 tests are met, viz. (1) the telecommunication is emitted from Canada, (2) the telecommunication is received in Canada, (3) the billing location is in Canada. It is important to note that, therefore, unlike in our service tax legislation, the place of establishment of the service provider or service recipient are not relevant.
In case of goods, intangibles, and services (except admissions to places, activities, and events), the aforesaid rules to determine place of supply are subject to an overriding provision per which despite the supply being determined to having been made in Canada thereunder, by a specific carve out, these supplies are deemed to be made outside Canada if the supplier is not resident in Canada, not registered for GST purposes, and the supply is not made in the course of business carried on in Canada. These transactions may nonetheless be liable to Canadian GST, as imported taxable supplies.
As stated above, GST also applies to goods imported into Canada.
Additional rules apply to determine whether a supply is made in or outside of a particular province. Apart from the aspect of taxing jurisdiction, this is important given that the rates of tax are not the same across the provinces.
It is important to understand the connection between place of supply and taxability in the light of the incidence of GST and the person liable for the payment of tax, which is discussed below.
Taxable person and liability to pay tax
GST applies to businesses operating in Canada. Supplies of goods and services are considered taxable only when made in the course of commercial activity, including isolated or infrequent commercial activity. For individuals, partnerships, and personal trusts, taxability requires reasonable expectation of profit. Real property transactions are deemed to be in the course of taxable activity unless specifically exempted.
Whereas small businesses may choose not to register for GST, charities, non-profit organisations and public bodies are subject to GST like all other persons. For some of these, dispensations in the form of different threshold levels and rebates are available.
The liability to remit GST generally attaches to the supplier, other than in cases where the reverse charge mechanism applies. The reverse charge is restricted to situations of commercial real estate sales, and imported taxable supplies which, as discussed earlier, pertain to supplies made by non-residents.
It is to be noted that the test to determine residential status for the purposes of GST is based on the concept of ‘permanent establishment’, similar to the DTAA concept. Accordingly, a place of management, branch, office, factory, workshop, place of extraction of natural resources, etc., from which supplies are made or head trigger resident status for Canadian GST in respect of activities carried out through the permanent establishment. It may also be noted that under some business models, non-residents making sales to customers in Canada are deemed to carry on business in Canada and are required to register for GST – otherwise, registrations by non-residents are optional.
Canadian GST law contains provisions enabling “group treatment” under which related corporations and partnerships who are resident in Canada and registered for GST can elect to deem intra-group transactions to be made for no consideration, subject to the fulfilment of certain conditions.
Time of supply
According to the time of supply provisions, generally, the GST becomes due on the earlier of the following two dates, viz. (1) the date on which consideration is paid, and (2) the date on which the consideration becomes due. Other than in case of property lease or licence transactions where consideration becomes due as per the terms of agreement, as a general rule, consideration becomes due on the earliest of the following three dates, viz. (1) the date on which supplier issues an invoice for taxable supply, (2) the date on which supplier ought to have issued an invoice (in case of delay in issuing invoice), and (3) the date on which recipient is required to make payment of consideration for taxable supply. Per the above, advance payments are liable to tax. However, deposits are not treated as consideration unless so applied by the supplier.
The aforesaid general rule is subject to certain overriding exceptions, among others, such as where in case of conditional sale or hire purchase transactions where the full GST becomes due though payments are spread over a period, and contracts for construction, renovation, etc. to real property and ships where tax cannot be deferred past the month of substantial completion of work. Where consideration is not completely ascertainable on the date GST is payable, the tax becomes payable to the extent that it is ascertainable, and the balance GST is due when only the date that the value is ascertainable.
Unlike the Indian service tax legislation, which provides for payment of taxes on receipt of consideration for certain small businesses, GST in Canada is to be deposited in accordance with the provisions of time of taxation relating thereto.
Valuation for GST
GST is payable ad valorem, and is therefore calculated on the value of consideration paid for a taxable supply. Where the consideration is not expressed in money terms, the fair market value of the consideration forms the tax base. Where there is no actual transaction, e.g. in a situation of a self- supply, the consideration is the base value of the property at the time it was originally acquired, and the tax is the amount that would have been recorded as a tax credit. In transactions between related parties which are not at arm’s length, the supply is deemed to take place at a value equal to the fair market value of the supply – however, this provision is not applied where the customer is engaged in exclusively taxable activity and is therefore eligible to claim all the tax on the transaction as tax credit.
Adjustment of the amount of tax collected (where excess tax is charged) is permitted subject to conditions including a time limit for such adjustment.
Whereas GST is payable on taxable transactions at the appropriate consideration value, where a supplier writes off all or a portion of the consideration and the tax charged, he may claim bad debt relief. There is a 4-year time limit for making such adjustment.
For import transactions, the basis of valuation is as provided for in the customs law. The inclusions and exclusions provided for are similar to the adjustments required under India’s customs valuation provisions which follow from our WTO commitments.
Tax rates, exemptions and zerorating
The tax rates range from 5% to 15%, depending upon the province in which the supply is deemed to have been made. The standard rate of the federal GST is 5% for all taxable supplies made in Canada other than those that are zero-rated, and the balance pertains to the provincial tax component where HST applies.
Export transactions and transactions concluded in Canada which pertain to export transactions are zero-rated. This tax treatment is conditional and also requires fulfilment of certain documentation criteria. It may be noted that there is no GST refund or rebate to travellers who export taxpaid goods out of Canada in their luggage.
In addition to exports, certain supplies under the following categories are also accorded the zero-rate, viz. (1) prescription drugs, (2) medical devices, (3) basic groceries, (4) agriculture and fishing, (5) travel, (6) transportation services, (7) supplies to international organisations, (8) financial services.
Like in the case of zero-rated transactions, no GST is also due on exempted transactions – in case of the latter, the supplier cannot claim input tax credits. Exempted transactions include (1) financial services, (2) healthcare services, (3) welfare and socials security services, and (4) education.
Certain transactions of imports of goods into Canada are exempt from the import GST. These include import of (1) crude oil for use in manufacture of exported refined products, (2) precious metals, and (3) imports for repairs.
Input tax credit, and rebates
One of the inherent benefits of a GST system is the noncascading of taxes in the value chain. Following this principle, Canada’s GST provides that a registrant who acquires or imports a property or a service, may claim an input tax credit for the GST paid thereon as a deduction in the calculation of the tax payable on supplies made by him. As follows, if the amount of input tax credit exceeds the GST payable on the supplies made, the registrant is entitled to a refund.
Sufficient documentation is required to be maintained in order to claim input tax credit as stipulated in the regulations formed for this purpose. However, interestingly, the issuance of an invoice is not mandatory and alternatives for evidencing the tax amount are acceptable.
Under the GST Act, a registered person can generally claim input tax credits within 4 years from the reporting in which such person was entitled to claim credit, but in certain circumstances a shorter time period applies.
As stated above, suppliers of exempted supplies are not eligible to take input tax credit of GST paid by them. Even where tax credits are available, the Canadian GST law proscribes full utilisation of input tax in respect of certain transactions. These include the application of property or services for personal use by employees. A “reasonableness” test applies to limit the amount of credit benefit available. Also, similar to our CENVAT credit provisions, there is a separate methodology for credits pertaining to capital goods.
Rebates of GST are granted to various organizations carrying out operations in the interest of the public, such as hospitals, charities, schools, municipalities etc. The rebate ranges from 50% to 100% of the tax borne by such entities.
Special scheme for small businesses
Small businesses have the option to account for GST on a simplified basis, wherein under a “Quick Method”, they can pay GST at a lower rate (ranging between 0% and 12%) without availing input tax credit. There is another option of a “Simplified Method” to calculate input tax credits under which credit may be determined on the basis of a calculation, as opposed to the tracking the GST paid on each purchase invoice. Similar schemes are also available to charities and public bodies.
Anti-avoidance measures and supplies within group entities
Another income tax concept that the Canadian GST law contains is that of GAAR provisions. The most commonly applied provision pertains to supplies being made at prices not at arm’s length. Under the GAAR provision, the fair market value of the transaction is to be applied, unless the receiver is entitled to full input tax credit. There are two defences against the invocation of GAAR – these are showing that the transaction was undertaken primarily for a purpose other than reduction of the amount of tax due, and demonstrating that it may be reasonable considered that the transaction would not result in misuse or abuse.
Concluding thoughts
The foregoing paragraphs provide just a brief overview of the Canadian GST provisions. As may be evident therefrom, there is significant detailing for specific situations, which is oriented toward effective and efficient tax collection. There are also several provisions that ease assessee compliance and assist in cash flow conservation. These are important ideas for us to keep in mind in the drafting of Indian GST law.
