Canadian Sales Taxes on Cross-Border Transactions FROM PRINCIPLES TO PLANNING.

Canadian Sales Taxes on Cross-Border Transactions

FROM PRINCIPLES TO PLANNING

Kal Ruprai, MNP LLP

Canadian Sales Taxes: Cross-Border

Background• HST in 5 provinces 1 left HST (BC) and 1 joined HST (PE)• 5 rates of GST/HST – 0%, 5%, 13%, 14% and 15%

• PST in 3 provinces plus QST in QC

• QST rate went up to 9.975% no longer applies on GST included amount

The Basics• The “place of supply rules” are unique when compared to any other VAT in the world since there are 5 different rates

• The place of supply rules have been around since April 1997; however, there was a major overhaul effective July 1, 2010. Some still subject to interpretation.

• The rules for services are extremely complex 18 rules as compared to 3 in the past


The Basics (cont’d)• The intangible personal property rules have been revamped

• There are even some surprises for a simple sale of goods. (We have an example involving Ontario and Quebec)

• Characterizing the supply (what is it?) and single v.s. multiple supplies


The Basics (cont’d)• “Recaptured input tax credits” for HST paid. This is another concept that is unique to Canada as compared to other VAT countries

• Claim the full “federal component”. Claim the full provincial component and then recapture the “provincial component” of the HST paid on “specified property and services”

• Penalties if not done or if not reported correctly


The Environment• CRA has reinforced its army of GST/HST auditors . Lots of audit

activity right now! • CRA is raising assessments on items accepted in the past -

almost daring you to go to appeals and to court.

• GST/HST now raises more revenue for Federal/Provincial governments than corporate income tax

• For GST/HST audits CRA is becoming more focused on certain types of entities and certain industries, including financial services, the non-profit sector and non-residents


U.S. Companies and Canadian Sales Taxes

Registration

• Do you have a sufficient connection with Canada (nexus) and is there a “supply” made in Canada? The determination is subjective and can be challenged. Do you want to risk it? Customer almost always can claim a credit for G/HST you charge them

• Non-resident over-ride rule a good rule but in some cases can be negative

• It may be beneficial to register. Additional things to consider when registering


U.S. Companies and Canadian Sales Taxes (cont’d)

What to Expect

• GST is paid at the border on all goods entering Canada, other than zero-rated items. Period.

• GST on sales made in Canada by a “registrant”• Yes, GST/HST can apply twice on the same goods• Remember that 5 rates can apply on “supplies” made in Canada

• Where a portion of services are performed in Canada we get a different result than for income tax purposes and what we would expect intuitively

• The world regarding intangible rights and the requirement to register continues to evolve


U.S. Companies and Canadian Sales Taxes (cont’d)

Other Sales Taxes

• QST and provincial sales taxes – is registration required?

• PST 3 provinces – BC, SK and MB

• Intuitively easier to follow than GST/HST

• A cost to customers


Recent Experience

• What have we seen in the last 3 years? Lots of interesting things!

• We have done approximately 30 voluntary disclosures. 90% have been for U.S. clients.

• Save on penalties and almost always the interest is waived.

• Surprisingly, in many cases clients have not kept appropriate records to allow claiming of all available ITCs, so extra costs


Examples• GST “invoiced” to U.S.Co’s customers. But wait, U.S.Co is not

registered for GST/HST and is not even required to register

• U.S.Co GST/HST paid on services acquired in Canada and then “invoiced” to Canadian customers. But wait, U.S.Co is not registered for GST/HST

• GST/HST paid by Canadian customers to U.S.Co. But wait, U.S.Co is not registered for GST/HST and years have gone by without remitting the tax collected in error

• GST paid through its customs broker by U.S.Co at the border when goods enter Canada.


Examples

• U.S.Co has been registered for GST/HST for years but has charged GST/HST only on some sales made in Canada

• U.S.Co sells software, related services and maintenance agreements. Say no more. No company is truly comfortable with sales tax rules for software and related services

• Services rendered by GST/HST registered Canadian SubCo to its U.S. ParentCo. Exceptions to zero-rating provisions


Going Forward

Potential Problems

• Has any of the following occurred?

• A change in legislation or interpretation?• An update to software or other systems?• Employee turnover?• Any structural changes, including a merger,

amalgamation, selling a business or division?


U.S. Companies and Canadian Sales Taxes

The Solution

• Canadian sales tax diagnostic

• Quick, painless, designed to bring all potential issues to the table

• We have started doing Canadian sales tax reverse audits


To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

IRS Circular 230 Disclosure

Questions?

Contact Information

Jerry De Cordova

Canadian Sales Taxes on Cross-Border Transactions FROM PRINCIPLES TO PLANNING.

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