Explanatory Notes Relating to the Goods and Services Tax/Harmonized Sales Tax and Excise Levies

Preface

These explanatory notes describe proposed amendments to the Excise Tax Act, the Excise Act, 2001, the Excise Act and related regulations. These explanatory notes describe these proposed amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable François-Philippe Champagne, P.C., M.P.
Minister of Finance and National Revenue

These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Part 1 – Draft Amendments to the Excise Tax Act

Clause 1

Redemption of coupon

ETA
181(5) and (6)

Subsection 181(5) of the Excise Tax Act (the Act) addresses situations where a coupon value is treated as a tax-included amount. If, in full or partial consideration for a taxable supply of property or a service, a supplier that is a registrant accepts a coupon that may be exchanged for the property or service or that entitles the recipient of the supply to a reduction of, or a discount on, the price of the property or service and a particular person makes a payment, in the course of commercial activities of the particular person, to the supplier for the redemption of the coupon, subsection 181(5) allows the particular person to claim an input tax credit in respect of the tax amount included in the total amount redeemed.

Subclause 1(1)

Redemption of coupon

ETA
181(5)

Subsection 181(5) of the Act is amended to clarify that a person must have made a payment for the redemption of a coupon exclusively in the course of commercial activities of the person to be entitled to claim an input tax credit in respect of the payment.

This amendment is deemed to have come into force on the day after Announcement Date and also applies in respect of any payment made by a person on or before Announcement Date to a supplier for the redemption of a coupon if the person has not claimed an input tax credit in respect of the payment in a return under Division V of Part IX of the Act that is filed on or before Announcement Date.

Subclause 1(2)

Redemption – commercial activities

ETA
181(6)

New subsection 181(6) of the Act provides the condition that must be satisfied for a payment to be made exclusively in the course of commercial activities of a person.

• If the person is not a financial institution, all or substantially all of the activities in the course of which the payment is made must be commercial activities.
• If the person is a financial institution, all of the activities in the course of which the payment is made must be commercial activities.

This amendment is deemed to have come into force on the day after Announcement Date and also applies in respect of any payment made by a person on or before Announcement Date to a supplier for the redemption of a coupon if the person has not claimed an input tax credit in respect of the payment in a return under Division V of Part IX of the Act that is filed on or before Announcement Date.

Clause 2

Real property credits

ETA
193

Existing section 193 of the Act allows a registrant that makes a taxable supply by way of sale of real property (as those terms are defined in subsection 123(1) of the Act) to claim an input tax credit under certain circumstances in respect of previously unrecoverable tax relating to the real property and improvements to it. Section 193 is amended by amending subsections 193(1) and (2.1).

The amendments to section 193 apply in respect of any supply in respect of which tax becomes payable — or would become payable in the absence of section 167 of the Act — on or after Announcement Date.

Subclause 2(1)

Sale of real property

ETA
193(1)

Existing subsection 193(1) of the Act generally provides for an input tax credit that can be claimed under certain circumstances by a registrant in respect of previously unrecoverable tax relating to a taxable sale of real property. While subsection 193(1) only refers to taxable sales of real property, subsections 204(3), 205(1) and 205(3) of the Act provide that subsection 193(1) also applies under certain circumstances to allow the claiming of an input tax credit in respect of personal property of a financial institution that is a registrant (as those terms are defined in subsection 123(1) of the Act).

The amount of the input tax credit that can be claimed by the registrant in respect of the taxable sale is generally determined by the formula A x B. Element A of the formula is the lesser of the amount determined for paragraph (a) of element A and the amount determined for paragraph (b) of element A. Paragraph (b) is the tax that is or would be, in the absence of section 167 or 167.11 of the Act, payable in respect of the taxable supply.

Paragraph (b) of element A in the formula in subsection 193(1) is amended so that, where the registrant is a selected listed financial institution (within the meaning of subsection 225.2(1) of the Act) at the particular time of the taxable supply of the real property, the tax that is or would be payable in respect of the taxable supply is adjusted by removing the provincial component of the tax payable and then adding an amount in respect of each participating province determined based on the federal component of the tax payable, the tax rate for the participating province, the federal tax rate and the registrant’s prescribed percentage for the participating province and its taxation year that includes the particular time. As a result, in the case of a taxable supply of real property by a registrant that is a selected listed financial institution, the amount determined for paragraph (b) in respect of the taxable supply would be determined in an analogous manner to the registrant’s determination of the basic tax content of the real property at the particular time (i.e.,  paragraph (a) of element A of the formula in subsection 193(1)).

Specifically, where the registrant is a selected listed financial institution at the particular time of the taxable supply of the real property, the amount determined for paragraph (b) of element A is now determined by new subparagraph (b)(ii) of element A. Subparagraph (b)(ii) provides that the amount determined for paragraph (b) is the amount determined by the formula (C + D) – E.

Element C of the formula is the tax that is or would be, in the absence of section 167, payable in respect of the taxable supply.

Element D is the total of all amounts, each of which is determined for a participating province (as defined in subsection 123(1)), by the formula F x G x (H ÷ I), where

• Element F is the tax under subsection 165(1) of the Act that is, or that would be in the absence of section 167, payable in respect of the taxable supply;
• Element G is the registrant’s percentage for the participating province determined for the purposes of subsection 225.2(2) of the Act (i.e., the special attribution method formula for selected listed financial institutions) for the registrant’s taxation year (as defined in subsection 123(1)) that includes the particular time;
• Element H is the tax rate for the participating province; and
• Element I is the tax rate set out in subsection 165(1).

Element E is the tax under subsection 165(2) of the Act that is or would be, in the absence of section 167, payable in respect of the taxable supply.
In addition, paragraph (b) is amended by deleting the reference to section 167.1, which, because of its time-limited effect, would no longer apply to a taxable supply.

Subclause 2(2)

Limitation

ETA
193(2.1)

Subsection 193(2.1) of the Act applies if a taxable supply of real property in respect of which an input tax credit is claimed under either subsection 193(1) or (2) of the Act is made at a particular time by a public sector body (as defined in subsection 123(1) of the Act) to another person with whom the public sector body is not dealing at arm's length (within the meaning of subsection 126(1) of the Act).

When subsection 193(2.1) applies, the value of element A in the formula in subsection 193(1) or the input tax credit under subsection 193(2), as the case may be, shall not exceed the lesser of the basic tax content of the real property at the time when the sale is made and the amount determined by the formula in paragraph 193(2.1)(b). Element C of this formula is currently the tax that is or  would be, in the absence of section 167 of the Act, payable in respect of the taxable supply.

Element C of the formula in paragraph 193(2.1)(b) is amended so that, where the public sector body is a selected listed financial institution at the particular time that the taxable supply of the real property is made, the tax that is or would be payable in respect of the taxable supply is adjusted by removing the provincial component of the tax payable and then adding an amount in respect of each participating province determined based on the federal component of the tax payable, the tax rate for the participating province, the federal tax rate and the public sector body’s prescribed percentage for the participating province and its taxation year that includes the particular time. As a result, in the case of a taxable supply of real property by a public sector body that is a selected listed financial institution, the amount determined for element C in respect of the taxable supply would be determined in an analogous manner to the public sector body’s determination of the basic tax content of the real property at the particular time (i.e.,  paragraph 193(2.1)(a)).

Specifically, where the public sector body is a selected listed financial institution at the particular time of the taxable supply of the real property, the amount determined for element C of the formula in paragraph 193(2.1)(b) is now determined by new subparagraph (ii) of element C, which provides that the amount determined for element C is the amount determined by the formula (D + E) – F.

Element D of the formula is the tax that is or would be, in the absence of section 167, payable in respect of the taxable supply.

Element E is the total of all amounts, each of which is determined for a participating province (as defined in subsection 123(1)), by the formula G x H x (I ÷ J), where

• Element G is the tax under subsection 165(1) of the Act that is or would be, in the absence of section 167, payable in respect of the taxable supply;
• Element H is the public sector body’s percentage for the participating province determined for the purposes of subsection 225.2(2) of the Act (i.e., the special attribution method formula for selected listed financial institutions) for the public sector body’s taxation year that includes the particular time;
• Element I is the tax rate for the participating province; and
• Element J is the tax rate set out in subsection 165(1).

Element F is the tax under subsection 165(2) of the Act that is or that would be, in the absence of section 167, payable in respect of the taxable supply.

Clause 3

Filing of returns

ETA
238

Section 238 of the Act provides for the filing of GST/HST returns by registrants (as defined in subsection 123(1) of the Act), as well as by certain non-registered persons, and provides for filing-due dates for those returns.

Section 238 is amended by amending subsection 238(2.1) and by adding new subsection 238(3.1).

Subclause 3(1)

Filing by certain selected listed financial institutions

ETA
238(2.1)

Existing subsection 238(2.1) of the Act requires a selected listed financial institution (within the meaning of subsection 225.2(1) of the Act) that is a monthly or quarterly filer to file an interim return for each reporting period (as defined in subsection 123(1) of the Act) within one month after the end of the reporting period and to file a final return for each reporting period within six months after the end of the fiscal year in which the reporting period ends.

Subsection 238(2.1) is amended to address an ambiguity and clarify that it applies (i.e., it imposes an obligation to file both interim and final returns for a reporting period within the time limits set out in subsection 238(2.1)) to a selected listed financial institution in respect of a reporting period of the financial institution where the reporting period is any period other than a fiscal year (as defined in subsection 123(1)).

The amendment to subsection 238(2.1) applies in respect of reporting periods of a person that end after announcement date.

Subclause 3(2)

Return – deceased individual

ETA
238(3.1)

New subsection 238(3.1) of the Act provides an exception to the filing-due dates for returns required to be filed under any of subsections 238(1), (2), (2.1) or (3) of the Act in the case where an individual (as defined in subsection 123(1) of the Act) has died. It generally provides for a minimum six-month period following the death of the individual during which no return for a reporting period of the individual or of the estate of the individual is required to be filed.

Specifically, subsection 238(3.1) applies in respect of a reporting period of an individual or the estate of the individual where

• the individual dies on a particular day; and
• a return, interim return or final return for the reporting period would, in the absence of that subsection, be required to be filed under any of subsections 238(1), (2), (2.1) or (3) on or before a day that is both
• on or after the particular day; and
• less than six months after the particular day.

Where subsection 238(3.1) applies in respect of a reporting period of an individual or the estate of an individual, it provides that the estate of the individual must file the return, interim return or final return, as the case may be, with the Minister of National Revenue on or before the last day of the sixth month after the month that includes the particular day of the individual’s death.

It should be noted that subsections 228(2) and (2.3) of the Act generally provide that the net tax (within the meaning of subsection 225(1) of the Act) for a reporting period of a person is required to be remitted to the Receiver General on or before the day that the person’s return or final return, as the case may be, is required to be filed with the Minister and that subsection 228(2.1) of the Act provides that the interim net tax (within the meaning of paragraph 228(2.1)(a)) for a reporting period of a person is required to be remitted to the Receiver General on or before the day that the interim return for the reporting period is required to be filed. As a result, where subsection 238(3.1) applies to extend the time to file a return, interim return or final return for a reporting period of a person, it will have the effect of extending the time to remit net tax or interim net tax for the reporting period.

Subsection 238(3.1) applies in respect of returns, interim returns and final returns that, in the absence of that subsection, would be required to be filed under any of subsections 238(1) to (3) on or before a day that is after Announcement Date.

Clause 4

Financial institution annual information return

ETA
273.2

Existing section 273.2 of the Act requires a reporting institution (within the meaning of subsection 273.2(2)) to file an information return for a fiscal year of the institution with the Minister of National Revenue.

Section 273.2 is amended by amending subsection 273.2(3) and by adding new subsection 273.2(3.1).

The amendments to section 273.2 apply in respect of information returns that, in the absence of new subsection 273.2(3.1), would be required to be filed under subsection 273.2(3) on or before a day that is after Announcement Date.

273.2(3) —  Information return for reporting institution

Existing subsection 273.2(3) of the Act requires a reporting institution to file an information return for a fiscal year of the reporting institution with the Minister of National Revenue in prescribed form containing prescribed information within six months after the end of the fiscal year.

Subsection 273.2(3) is amended to provide that it is subject to new subsection 273.2(3.1) of the Act.

273.2(3.1) —  Information return — deceased individual

New subsection 273.2(3.1) of the Act provides an exception to the filing-due date for information returns required to be filed under subsection 273.2(3) of the Act in the case where an individual (as defined in subsection 123(1) of the Act) that is also a reporting institution has died. It generally provides for a minimum six-month period following the death of the individual during which no information return for a fiscal year of the individual is required to be filed.

Specifically, subsection 273.2(3.1) applies where

• an individual is a reporting institution within the meaning of subsection 273.2(2) of the Act throughout a fiscal year of the individual;
• the individual dies on a particular day; and
• an information return for the fiscal year would, in the absence of subsection 273.2(3.1), be required to be filed under subsection 273.2(3) on or before a day that is both
• on or after the particular day; and
• less than six months after the particular day.

Where subsection 273.2(3.1) applies in respect of an information return for a fiscal year of an individual, it requires that the estate of the individual file the information return for the fiscal year with the Minister of National Revenue on or before the last day of the sixth month after the month that includes the particular day of the individual’s death.

Part 2 – Draft Amendments to the Excise Act, 2001

Clause 5

Removal – certain vaping products

EA, 2001
158.42

Existing section 158.42 of the Excise Act, 2001 (the Act) is amended to add new subsection 158.42(4) to provide an additional exception to the prohibition on removing vaping products from the premises of a vaping product licensee, as set out in subsection 158.42(1). Under subsection 158.42(4), the Minister of National Revenue may authorize a vaping product licensee to remove a vaping product described in paragraph (a) of the definition of vaping product in section 2 of the Act from their premises, even if it is not packaged or stamped, provided the following conditions are met:

• the vaping product licensee applies to the Minister in the prescribed form and manner for an authorization to remove, or have another person remove, the vaping product;
• the Minister grants the authorization specifying the manner in which the vaping product may be removed; and
• the vaping product is removed in accordance with the terms of the authorization.

This amendment comes into force on royal assent.

Part 3 – Draft Amendments to the Excise Act

Clause 6

Waiving or reducing penalty

EA
99

Existing section 99 of the Excise Act (the Act) sets out various forfeiture and penalty rules related to returns under the Act, including a penalty under subsection 99(4) for failing to make a return within the required time.

Section 99 of the Act is amended to add a new subsection 99(5) that allows the Minister of National Revenue to waive or reduce a penalty payable under subsection 99(4). This authority may be exercised on the Minister’s own initiative on or before the day that is 10 calendar years after the end of the period for which a return is required, or upon application, on or before that day, by the person that is required to make the return.

This amendment comes into force on royal assent.

Clause 7

Waiving or reducing penalty or interest

EA
110.1

Existing subsection 110.1(1) of the Act provides for penalties and interest for the late payment of amounts of duties and penalties payable under the Act.
Section 110.1 of the Act is amended to add a new subsection 110.1(3) that allows the Minister of National Revenue to waive or reduce any penalty or interest that is payable under subsection 110.1(1) on an amount that is not paid when required. This authority may be exercised on the Minister’s own initiative on or before the day that is 10 calendar years after the amount is required to be paid, or upon application, on or before that day, by the person that is required to pay the amount.

This amendment comes into force on royal assent.

Part 4 – Draft Amendments to Various Regulations

Division 1 – Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations

Clause 8

Amounts not included in net tax adjustment formula

Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations
40

Section 40 of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the Regulations) determines which amounts are prescribed amounts of tax for the purposes of both paragraph (a) of the description of element A and paragraph (a) of the description of element F in the formula in subsection 225.2(2) of the Excise Tax Act (the Act). This formula is the special attribution method formula that a person uses to determine an adjustment to its net tax in respect of the provincial component of the Harmonized Sales Tax for each reporting period during which it is a selected listed financial institution (within the meaning of subsection 225.2(1) of the Act).

If an amount of tax is described by section 40 of the Regulations, the amount is not included in elements A or F of the formula. Furthermore, where an amount of tax that became payable under either subsection 165(2) or section 212.1 of the Act is described by section 40 of the Regulations and consequentially a prescribed amount for purposes of paragraph (a) of the description of element F, subsection 169(3) of the Act does not prevent the person from including the amount in determining an input tax credit of the person. (Subsection 169(3) generally does not allow a person to claim an input tax credit in respect of tax payable under either subsection 165(2) or section 212.1 of the Act while the person is a selected listed financial institution; however, subparagraph 169(3)(a)(ii) provides that this restriction does not apply in respect of tax that is a prescribed amount for purposes of paragraph (a) of the description of element F.)

Section 40 of the Regulations is amended by adding new paragraph 40(a.1). Paragraph 40(a.1) is tied to section 184.1 of the Act, which relates to “performance bonds”. A “performance bond” is a three-party agreement constituting a type of guarantee given by the issuer of the bond (i.e., the surety) to an obligee who has entered into a contract with a contractor (i.e., the principal). The surety agrees that, if the contractor defaults (i.e., fails to fully perform the contract), the surety will remedy that default. Section 184.1 applies where the surety remedies the default by stepping into the shoes of the defaulting contractor and carrying on the construction. In certain situations, paragraph 184.1(2)(c) will generally permit the surety to claim input tax credits with respect to certain direct inputs when the surety is considered under paragraph 184.1(2)(a) to be making a taxable supply in respect of that construction.

On October 8, 1998, when section 184.1 of the Act was released in draft form, it was also announced that where the surety was a selected listed financial institution and where tax payable by the surety on certain inputs related to the carrying on of construction by the surety in satisfaction of its obligations under a construction performance bond to which new section 184.1 of the Act applies, this tax payable would be excluded from the special attribution method formula used by the selected listed financial institution’s subsection 225.2(2) net tax adjustment and the selected listed financial institution would not be barred from claiming an input tax credit in respect of the provincial component of this tax payable. Paragraph 40(a.1) of the Regulations, in providing that tax payable on these inputs by a surety is a prescribed amount for purposes of paragraph (a) of the description of element A, and paragraph (a) of the description of element F, in the formula in subsection 225.2(2) of the Act, implements this measure announced on October 8, 1998.

Specifically, paragraph 40(a.1) of the Regulations describes any amount of tax that

• became payable, or that was paid without having become payable, by a surety (described in paragraph 40(a.1), as it is in subsection 184.1(2) of the Act, as a person acting as a surety under a performance bond in respect of a contract for the supply of construction services relating to real property situated in Canada); and
• is in respect of property or a service acquired, imported or brought into a participating province (as those terms are defined in subsection 123(1) of the Act)
• exclusively and directly for consumption, use or supply in the course of carrying on, or of engaging another person to carry on, construction that is undertaken in full or partial satisfaction of the surety’s obligations under the performance bond, and
• otherwise than for use as capital property (as defined in subsection 123(1)) of the surety or in improving capital property of the surety.

Paragraph 40(a.1) of the Regulations applies in respect of any amount of tax that becomes payable, or that is paid without having become payable, during a reporting period of a person that

• ends after Announcement Date; or
• ends after October 8, 1998 and on or before Announcement Date, unless the amount of tax is included by the person in determining the positive or negative amounts that the person is required to add, or may deduct, under subsection 225.2(2) of the Act in determining the net tax of the person for the reporting period.

Division 2 – Regulations Respecting Excise Licences and Registrations

Clause 9

Extension of licence period

Regulations Respecting Excise Licences and Registrations
4

Existing section 4 of the Regulations Respecting Excise Licences and Registrations stipulates that an excise licence is valid for the period specified in the licence and sets out the maximum duration for various types of excise licences.

Paragraph 4(b) is amended to add spirits licences, wine licences and user’s licences to the list of excise licences for which the duration must not exceed three years (previously, the maximum duration for these licence types was two years).