The Goods and Service Tax (“GST”) has been in existence in Canada since 1991. Generally the adherence to the GST rules included in the Excise Tax Act (“ETA”) are reasonably straight forward where the proper bookkeeping systems have been established to capture the necessary information to allow for timely compliance. Based on our experience in dealing with GST issues since 1991, a number of situations have been identified where both potential problems and planning opportunities exist. Here are a few of these situations.
Are You Buying or Selling a Business?
A GST election may be available to allow the transaction to occur without GST. To qualify, the purchaser must be acquiring all or substantially all of the property that is needed to carry on a business or part of a business.
All of the conditions for the election must be met and the election form must be filed by the purchaser in order for the election to be valid. A similar election may be made on the death of a registrant on a business transfer to a registered beneficiary of the estate.
If the election is not available, the sale of the business asset will be comprised of multiple supplies for GST purposes and the GST status of each item must be determined in order for the vender to charge and collect GST on the appropriate amounts.
Are You Buying Land and/or a Building?
A purchaser of real property who is a GST registrant is required to remit the tax directly to Canada Revenue Agency and not the vendor. If the real property is used in a commercial activity of the purchaser, an input tax credit can be claimed. Even where the vendor wrongly collects GST in this situation, the vendor still has the requirement to remit the tax, which effectively means the tax would be paid twice. To correct this situation the purchaser can apply for a rebate of tax paid in error. However, be aware that you have only a certain period of time from the time the GST was wrongly paid to claim this rebate.
Do You Have Both Exempt (Typically Investment Income or Residential Rent) Supplies And Taxable Supplies?
GST is not charged on an exempt supply and as well no input tax credits are available for these exempt activities. Where there are both exempt and taxable supplies in the same entity it will be necessary to prorate the input tax credits and claim only the portion relating to the taxable activities. Canada Revenue Agency requires that the proration method used be reasonable and used consistently. This provides an opportunity for planning to determine a “reasonable” position, which is the most advantageous.
Are You the Director of a Corporation or a Non-Profit Organization?
One of the benefits of incorporation is the protection from corporate liabilities for shareholders, directors and officers. There are however, certain corporate debts that directors may be held liable for including:
- GST and other provincial sales tax
- Environmental liabilities
- Payroll source deductions
- Statutory trusts
- Unpaid wages and vacation pay
It is imperative that a director perform due diligence both prior to and after becoming a director to ensure that appropriate processes are in place to ensure regulatory compliance. The failure of a director to meet the due diligence standard could likely result in the director becoming liable for the above obligations. If a director has resigned more than two years prior to the assessment this could prevent the director from becoming liable. Ensure that resignations from a board are properly documented on a timely basis.
As well courts have determined that a director cannot object to an incorrectly calculated corporation GST assessment. The corporation must object. Therefore it is prudent to always object to incorrect GST assessments even if the corporation is insolvent.
Tax legislation and its administration are constantly evolving. Tax payers should ensure that the GST consequences of transactions are understood in order to avoid a future unexpected GST liability.
If you have any questions on GST, call Joe Truscott at 905-528-0234 or email Joe at [email protected].
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