Tax Focus
Reflecting Back
The only constant was change in 2006.
FROM:
JAN-FEB 2007 ISSUE | BY
R. JASON RICHE
Changes in the indirect tax landscape often have a significant impact on the business community. Accordingly, it is very important to stay on top of recent developments, and 2006 was a very eventful year for Canada’s indirect taxes. Here are some reflections on the changes and what they could mean for the year ahead and beyond.
Tax Reductions
The paramount event for 2006 was undoubtedly the reduction of the GST to six per cent from seven per cent, which came into effect on July 1 (in New Brunswick, Nova Scotia, and Newfoundland and Labrador, the GST, referred to as HST, decreased to 14 per cent from 15 per cent). The Conservative government has also promised a further rate reduction this year, which is interesting given most countries that currently impose a Value Added Tax (VAT) such as the GST have been increasing their rates and have relied on VATs as a key source of revenue. Why is Canada moving in the opposite direction?
In September, proposals were also announced to eliminate various GST rebates for
non-resident tourists, convention sponsors/organizers, and exhibitors. These changes will take effect on April 1, though certain transitional measures will extend rebates to April 1, 2009. How much will these changes impact Canadian tourism?
In addition, the 2006 federal budget proposed to overhaul the current penalty and interest regime, effective
April 1. Specifically, the penalty that now accumulates at an annual rate of six per cent on outstanding balances will be replaced with a failure to file penalty equal to one per cent of the overdue amount, plus
0.25 per cent per month to a combined total maximum of
four per cent per year. In addition, interest will apply to unpaid balances at a rate tied to
90-day Treasury Bill rates plus four per cent. Neither will be deductible for income tax purposes. It is interesting to consider how these changes will impact the Canada Revenue Agency’s current voluntary disclosure program, which allows taxpayers to have penalties waived if they voluntarily report errors. However, with these changes, it remains to be seen whether the GST voluntary disclosure program will continue to be as popular as it is today.
On the provincial front, perhaps the most interesting change occurred in B.C. where, as part of the province’s 2006 budget, all
software-related services became exempt from Social Services Tax (SST) (i.e., B.C.’s PST). This is a very significant development for the computer software industry, which has historically been dealt a heavy (and confusing) hand at the provincial level. Are other provinces taking note?
In what was also a rather surprising move, Saskatchewan reduced its PST to five per cent from seven per cent in October. In a press release, Premier Lorne Calvert stated, “we are enjoying prosperous times in Saskatchewan, affording us the opportunity to provide this tax relief.” Will the rate go back up if the economy starts to falter?
Court Cases
In addition to the significant legislative changes, 2006 also marked a relatively busy year in the courts for matters concerning indirect tax.
On October 27, the Federal Court of Appeal (FCA) delivered its judgment in
Dawn’s Place Ltd. v. The Queen, an appeal by the Crown on the November 10, 2005, judgment of the Tax Court of Canada (TCC). Dawn’s Place operated an adult content website and sold subscriptions to customers primarily outside Canada. It was assessed for failure to charge GST to these customers on the basis that fees for such subscriptions constituted a taxable supply of intangible personal property.
The TCC overturned the assessment on the basis that the supplies made to these
non-residents were
zero-rated for GST purposes on the premise that they were intellectual property. Justice L.M. Little of the TCC determined that Dawn’s Place held the copyright for the content and that it was supplying a right, licence, or privilege to use it, and, as a result of that, fell squarely within the zero-rating provision. However, the FCA disagreed with and overturned the TCC decision, stating that this provision could not be used to
zero-rate the use of material that was under copyright but only the supply of some or all of the bundle of rights that comprise the actual copyright. This decision potentially has wide application (even outside the adult content community) and brings a certain degree of clarity to the interpretation of this
zero-rating provision.
On the provincial side, the Supreme Court of Canada (SCC) on May 18 granted the province of B.C. leave to appeal the B.C. Court of Appeal (COA) decision of
Christie v.
British Columbia. That decision marks the latest in the continuing saga concerning whether B.C. can legitimately apply SST to legal services, a measure it first enacted in 1992.
This case began in 1999 when a B.C. lawyer filed a petition seeking a declaration that the 1993 SST legislation was
ultra vires the B.C. Legislature to the extent that it impedes the ability of those with a low income to obtain legal representation. This line of reasoning was accepted by Justice Koenigsberg of the B.C. Supreme Court. On appeal to the COA, that court went even further and held that the tax on legal services was unconstitutional to the extent that the services related to the determination of rights and obligations by courts or independent administrative tribunals. This holding would appear to apply regardless of who the legal services are provided to. Specifically, the COA reasoned that the tax on legal services violated the rule of law because it impeded access to the courts. What is, perhaps, the most interesting factor here is the impact the SCC’s decision will have on whether other Canadian indirect taxes should apply to such services. Several other provincial sales taxes (notably in Manitoba, Saskatchewan, PEI, and Quebec) currently apply to legal services along with the GST. On this point, it is noteworthy that the federal government will intervene in the Christie appeal, and it is expected that the provinces will as well.
The past year has indeed been a busy one for indirect taxes, and 2007 promises
to be equally eventful. We will likely see further rate changes, and there is a plethora of very interesting issues making their way through the courts. Stay tuned as more changes unfold.
[
TOP ]
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.