Sales Tax Special Topics

In the previous instalment of the DT Max blog, we went through some of the basics of sales taxes. In this instalment, we will see more advanced topics, such as determining residence, and other special topics.

Determining residence

Determining residence for the purposes of the sales tax for registrants is essentially the same as those determining residency for individual taxpayers. Determining residency is a question of facts based on social and economic ties. For further guidance see Folio S5-F1-C1. A deemed resident for income tax purposes, as stipulated paragraphs 250(1)(b) to (f) of the ITA is also considered a deemed resident for sales tax purposes [ETA 132(1)(d)].

As for corporations, they are considered residents of Canada if they’re incorporated in Canada or continued operations in Canada and not continued elsewhere [ETA 132(1)(a)]. Even if they don’t meet this criterion, they will still be deemed as residents if the central management and control of the activities of the corporation are exercised in Canada [GST/HST memorandum 3.4].

Concept of permanent establishment

Another factor determining residence is the concept of permanent establishment. A permanent establishment is defined as a fixed place of business, including a place of management, a branch, an office, a factory or a workshop [ETA 123(1)a)].

A permanent establishment can also be a fixed place of business of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the particular person and through whom the particular person makes supplies in the ordinary course of business [ETA 123(1)b)]. The keyword here is “independent agent”. An agent will be considered independent if the he/she is both legally and economically independent of the principal on whose behalf the agent is acting [GST/HST Policy Statement P-208R]. If the agent does not meet this requirement, then the location of the agent is considered a permanent establishment.

Even if the person does not meet the residency factors mentioned above, for the purposes of the ETA, they will be considered a resident for the purposes of the sales tax for the commercial activity carried on from the permanent establishment [ETA 132(2)].

If a non-resident is deemed to have a permanent establishment in Canada, they’re required to register for the GST as a resident person [ETA 240(1)].

Imports and drop-ship rules

Any import of a taxable supply from a non-resident supplier is charged the sales tax, and collected at the border by the Canada Border Services Agency [ETA 212].

If a registrant sells a taxable supply of goods to a non-resident, but ships the goods to a third party (customer of the non-resident for example) in Canada, the registrant must collect the applicable sales tax based on the fair market value, which would include any markup in price from the non-resident [ETA 179(1)].

Special topics

Date a supply is actually “made”

The ETA provides that an agreement to make a supply is deemed to be a supply made at the time the agreement is entered into [ETA 133(a)]. No written agreement is required in order for this rule to take effect.

Deposits

A deposit will be considered as consideration for a supply only when the supplier applies it as such [ETA 168(9)].

Penalties for breach of contract

Any amount paid as a penalty for a breach of contract is considered to be sales tax included [ETA 182(1)]. Certain conditions apply for this rule, such as an agreement being in place for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant to a person [ETA 182(1)]. When applicable, the recipient is deemed to have paid consideration for the supply equal to 100/105 of the amount paid or forfeited [ETA 182(1)(a)]. The supplier is deemed to have collected the same amount of tax [ETA 182(1)(b)]. Because of this, the supplier is required to remit the tax to the Receiver general.

Coupons, rebates and gift certificates

Coupons fall under 2 categories, reimbursable and non-reimbursable. Reimbursable coupons are considered cash, so GST/HST is added before the coupon discount is applied [ETA 181(2)]. For non-reimbursable coupons, the retailer can choose whether to treat the coupon as cash or as reducing the price of the product or service [ETA 181(3)].

Any rebate applied to a supply will reduce the applicable sales tax on that amount [ETA 181.1].

Gift certificates are deemed to be cash, and therefore not considered to be a supply at purchase. [ETA 181.2].

Bad debts

When an amount for a taxable supply becomes uncollectible, then a credit can be claimed against a past remittance made for that supply [ETA 231(1)]. The recipient of the supply has to be at arm’s length from the supplier [ETA 231(1)].