Tax Focus
After the Fact
Retroactive sales tax legislation is unfair but not uncommon.
FROM: SEP-OCT 2006 ISSUE | BY R. JASON RICHE
Imagine a law decreasing the speed limit from 80 km to 60 km per hour being enacted in September but applied retroactively to May of the same year. Then imagine receiving a speeding ticket in September because you were clocked going 80 in July. Surely, your activity could not be deemed unlawful and you don't deserve a ticket! Yet when it comes to tax legislation, the government regularly travels back in time to change history.
A History of Retroactivity
The issue of retroactivity in federal sales tax legislation is, unfortunately, not a new concept. Some of the many historical instances include:
| (1) |
Amendments to Excise Tax Act (ETA) section 120 affecting the ability of taxpayers to claim federal sales tax inventory rebates, enacted on June 10, 1993, effective retroactively to the introduction of the Goods and Services Tax (GST) in 1991; |
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| (2) |
The addition of ETA section 141.01, which clarified the requirement to apportion GST paid on indirect inputs for registrants that make both taxable and exempt supplies, enacted on May 12, 1994, and also effective retroactively to 1991; |
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| (3) |
Amendments to paragraph (q) of the definition of "financial service" in ETA subsection 123(1), ensuring that fund management and administration services were taxable, enacted on March 10, 1997, and, again, retroactive to 1991; and |
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| (4) |
Amendments introduced in the February 18, 2003, federal budget, effective retroactively to the introduction of the GST in response to the 2001 Des Chênes (Commission Scolaire) v. The Queen decision of the Federal Court of Appeal. |
Changes Pending
And retroactivity continues with the Notice of Ways and Means Motion that was tabled by the Department of Finance on November 17, 2005. This notice proposed amendments to provisions concerning the financial services sector, with two significant changes to take effect retroactively from 1991.
In a convoluted statutory fix, the Department of Finance re-engineered the way financial institutions are to self-assess GST. Proposed changes are designed to override the 2003 Tax Court of Canada decision in the case of State Farm Mutual Auto Insurance Company v. The Queen, which determined that cost allocations in respect of offshore branch employees working in support of a Canadian head office are not considered imported taxable supplies and therefore not subject to a self-assessment of GST.
Clearly unhappy with the decision in State Farm, the Department of Finance has sought to completely rewrite this area of the law. The change would require that such cost allocations be included in GST self-assessment. If the proposal is approved, anyone who did not pay GST on such cost allocations will suddenly be offside, and will have been for 15 years.
The second amendment, which received Royal Assent on June 22, 2006, concerns the taxing of specific collection agency services. The reworded definition of financial service excludes certain debt collection activities, making them subject to GST when supplied in Canada, despite the fact that there had been a strong argument that such services qualify as financial services and should be exempt from GST.
Fair Play?
There is a general presumption in Canadian law that legislation is effective prospectively; however, Canadian jurisprudence has confirmed that Parliament can enact legislation having retroactive effect. The federal government has stated that retroactive legislation should only be supported when the original intent of the legislation is clear, but this requirement is not met in either of the noted amendments.
For example, the Department of Finance has indicated that the change to the definition of financial service reaffirms the longstanding policy intent of the ETA. This is questionable, as the definition of financial service is one of the most complex in GST law, and has led to the publication of dozens of Canada Revenue Agency (CRA) interpretive bulletins and even more court decisions. In the 1999 Tax Court of Canada case of Skylink Voyages v. The Queen, Judge Archambault stated, "I must note that the wording of the definition of that term is far from clear. Even after a number of readings, it is difficult to understand its entire scope. How then can ordinary taxpayers grasp the extent of their tax liabilities?"
And, concerning imported supplies cost allocations, how could the intent of the original legislation be clear if the Department of Finance has had to rewrite this area of the law completely?
Right to Object
Retroactive legislation is particularly offensive when it alters the tax status of an item and turns something that was not taxable into something taxable. Taxpayers are now in the wrong for not knowing that the Department of Finance would make imported supplies cost allocations and some collection agency services taxable.
In addition, retroactive legislation undermines the interpretive process and judicial proceedings that are crucial to the evolution of tax law. The increased volume of retroactive sales tax laws and the anticipation of more changes bring into serious question the right of taxpayers to interpret a provision and to make an objection to an assessment they receive from CRA. This is also true with respect to the role of the courts and the time, energy, and costs taxpayers endure to have a fair hearing on the interpretation of tax provisions.
Tax certainty is a fundamental principle underlying the efficient operation of the Canadian tax system. Retroactive legislation violates this principle, and ignores the fact that sales tax applies at the point in time when a transaction takes place. Altering the tax status after the fact offends the very essence of transacting in a democratic society. This is particularly true of the GST, and any tolerance of such a practice that might have been afforded when the GST was in its infancy has been exhausted. To maintain the core elements of our tax system, the Department of Finance should act in a fairer manner toward taxpayers.
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R. Jason Riche, BA, LLB, CGA, is a senior manager for Deloitte & Touche LLP in Toronto. E-mail rriche@deloitte.ca.
The information appearing in "Tax Focus" is provided for the interest of readers. Neither CGA Magazine nor the column author assumes any liability to persons relying on the information in the article to perform tax planning and/or compliance of any kind.