Planning for indirect taxes in a troubled economy
Canadian Indirect Tax News, December 2008 (08-5)
Please download the full PDF version of this newsletter below.
Cash flow issues
In the current economic climate paying attention to indirect taxes can reap bottom line benefits for a large number of businesses. There are a number of issues and opportunities that you might have overlooked but which can provide tangible results. These examples are by no means an exhaustive list and there are other areas of opportunity, but consider the following:
1) Maximizing indirect tax recoveries
Opportunities to maximize your recoveries of indirect taxes range from actions as simple as amending your filing frequency to more involved ideas relating to such things as price adjustments and reviewing purchases for overpayments of taxes. In addition, there are more complex issues to review, such as the implementation of a new input tax credit allocation methodology and a detailed review of accounts payable transactions.
By amending or adjusting your invoicing routines, it is possible to enhance cash flows by extending the time between the remittance and the collection of collectible taxes. Tax planning opportunities exist to push back the time when a business is required to remit tax collectible.
3) Tax return management
In certain cases, there are opportunities to transfer income tax installments to pay off a goods and services tax (GST) remittance requirement or, conversely, to use a GST refund to cover source deductions. This avoids waiting for the Canada Revenue Agency (CRA) to issue a refund and having to remit cash on another account in the meantime.
4) Non-routine transactions
These transactions often produce headaches for businesses because the associated indirect tax implications are usually quite complex. However, with proper planning, problems may be turned into opportunities for direct tax savings or indirect borrowing cost reductions.
There are significant cash flow savings opportunities associated with the importation of goods into Canada. For example, the use of a bonded warehouse to store goods may result in significant savings for importers. In addition, applying less well-known GST provisions, such as the flow-through of input tax credits to the ultimate purchaser and use of drop shipment rules, may significantly reduce GST costs, particularly for non-residents.
Please call your usual Deloitte contact to discuss any of these issues in more detail.
Potential double taxation of computer software
Where your software is stored and used can have a big impact on how much provincial sales tax is payable. Many provinces impose provincial sales tax on software used in their province, regardless of where it is hosted. For example, Ontario imposes its provincial sales tax based on the location of the software and British Columbia on where it is used or consumed. The differences between these taxing philosophies can give rise to double taxation.
For example, if your company has employees in Ontario and British Columbia and they share access to software on one server located in Ontario, your business will be paying tax in two jurisdictions. British Columbia will want its share of the tax for the portion of software used by B.C. employees. Ontario will impose its tax on the full purchase price of the software, because the software is located on a server in Ontario.
Careful planning on the location of your server and software can result in significant cash savings where that software is used across the country.
GST/QST on pre-paid funeral arrangements: Different treatment for interest accrued!
For GST purposes, GST becomes payable with respect to pre-paid funeral arrangements when the supplier is entitled to withdraw the funds held in trust, typically at the time of the funeral. In this case, the application of Quebec sales tax (QST) has not been harmonized with the GST.
Revenue Quebec considers that QST is payable on pre-paid funeral arrangements when consideration becomes due according to the contract, typically much earlier than the funeral.
On the positive side, because the QST is paid up front, no QST is payable on the interest accrued and used towards funding the funeral.
However for GST purposes, as of January 1, 2009, interest accrued on amounts held in trust will be considered as part of the consideration for funeral services and will thus be taxable.
What are you supplying? Avoiding problems by getting it right the first time
Cutting up a deer carcass for a hunter and packaging the resultant meat products is a sale of those meat products, right?
Well no, what has actually been supplied is a butchery service, as the Court decided in the recent Triple G Corp case.* The butcher involved had argued that he was selling basic groceries that were not subject to GST. However, the crucial point was that at no time did the butcher own the carcass he was dressing, and, as a result, he could not be said to be supplying the dressed meat to the hunter, only his services. True, the butcher did add herbs and spices to some of the products he prepared (such as jerky and sausages), but this did not impact the status of the supply he was making.
Why is this particular case relevant? It is important because it demonstrates how the incorrect characterization of a supply can change the application of GST. Carefully reviewing the actual nature of a supply can avoid possible problems down the road.
* Triple G. Corp. v. R. [2008 CarswellNat 1257, 2008 TCC 181, 2008 G.T.C. 516 (Eng),  G.S.T.C. 102]
About Canadian Indirect Tax News
A regular newsletter providing federal and provincial sales tax updates, news, court decisions, legislative announcements and other developments.