gst/hst and pst issues affecting corporate … · itc eligibility 4. inter-company transactions 5....

MILLAR KREKLEWETZ LLP

GST/HST AND PST ISSUES AFFECTING CORPORATE REORGANIZATIONS,

BUSINESS SALES AND PARTNERSHIPS

May 29, 2011Canadian Bar Association

Tax Law for Lawyers Conference

W. Jack Millar, J.D., LL.M. MILLAR KREKLEWETZ LLP


1

“If I was a young lawyer starting out again now, I would start practising in sales taxes.

GST/HST is where it is at right now.”Richard Montroy

Assistant Deputy CommissionerCompliance Programs Branch

Canada Revenue AgencySeptember 28, 2010


2

PRESENTATION GOAL

You need to know that the GST/HST and PST rules are DIFFERENT from the income tax rules and need to be considered IN ADVANCE of completing any transaction.


3

GST/HST

Place of Supply Rules / “Tax Zones” in Canada– 5% GST (AB, NWT, YK, NU)– 13% HST (ON, NL, NB)– 12% HST (BC)– 15% HST (NS)– 5% GST + 8.5% QST (QC)– 5% GST + 7% PST (MB)– 5% GST + 5% PST (SK)– 5% GST + 10% PST (PEI)


4

TOP TEN GST/HST AUDIT ISSUES (1998 & 2005)

1998 20051. Self-Assessment on Importation 1. Failure to Add Properly2. Bad Debt Recovery 2. Sale of Real Property3. Failure to Register 3. Sale of Business Assets4. ITC Eligibility 4. Inter-Company Transactions 5. Export Issues 5. Exports 6. Inter-Company Transactions 6. ITC Eligibility 7. Sale of Business Assets 7. Failure to Register8. Sale of Real Property 8. Bad Debt 9. ITC Allocation for FI’s 9. Self-Assessment 10. Failure to Add Properly 10. Year End Adjustments


5

CRA 2009 Top 10 Audit Issues(By Dollar Value Assessed)

1. Unreasonable Change of Allocation Method - s. 141.01(5)2. Rebate Denied - s. 261(1)3. Return Errors- s. 225(1)4. ITC Eligibility - s.169(1)5. Failure to Collect GST - s. 221(1)6. Invalid Election - s. 167(1.1)7. Failure to Collect GST (Originally Treated as Exempt) - s. 221(1)8. ITCs Denied – CCAA - s. 296(1)(b)9. ITCs Denied (Documentation Requirements Not Met) - s. 169(4)10. Duplicate ITC Claims - s. 225(3)


6

GST AND PROFESSIONAL NEGLIGENCE

COMMON FACTORS OBSERVED:

• RELATED PARTY TRANSACTIONS

• REAL ESTATE TRANSACTIONS

• CROSS-BORDER TRANSACTIONS

• LACK OF TIMELY REGISTRATION


7

1. SHARE TRANSACTIONS

• TRANSFER OF SHARES IS A "FINANCIAL SERVICE" AND EXEMPT FROM GST (SCHEDULE V)

• NO GST ON CONSIDERATION PAID ON ACQUIRING A BUSINESS THROUGH A SHARE PURCHASE

• BUT WHAT ABOUT THE GST/HST PAID ON THE TRANSACTION EXPENSES?


8

1. SHARE TRANSACTIONS AVAILABILITY OF ITCS FOR GST/HST PAID ON LEGAL, ACCOUNTING AND OTHER ADVISORY SERVICES, ETC.

For Purchaser• Subsection 186(2) Takeovers

– Expenses “relating to” acquisition of all or substantially all outstanding shares

• Subsection186(1) Holdco’s– Expenses “relating to” shares of related subsidiary corporation engaged in

commercial activities• Under general section 169 ITC rules

– Stantec Inc. Case (ITCs for Stock Market Listing)

For Vendor• Section 185

– Financial service must “relate to” vendor’s commercial activities• Under general section 169 ITC rules

– BJ Services Case (Target Co itself)


9

BJ SERVICES CASE

shares

BJ Services SHAREHOLDERS White Knight(Acquirer) $35

Final Price

$35/share

NOWSCO(Target co)

CanadaUS Financial Advice Legal Advice

RBC Dominion Blakes

Simmons $13 Million Plus GST $255 ThousandPlus GST

$6 Million No GST


10

1. SHARE TRANSACTIONS(Cont’d)

• GST DUE DILIGENCE RECOMMENDED ON A SHARE ACQUISITION– Assumption Of Acquired Company’s GST Liability (Purchaser)

• Have GST Returns Been Filed (Previous 4 Years)?• Have GST Collection And Remittance Obligations Been Satisfied

(Past 4 Years)?• Has GST Been Accounted For/ITCs Properly Claimed On Major

Transactions?– Indemnity To Protect Purchaser– Position Of Outgoing Directors– Subrogation Rights (Vendor)


11

1. SHARE TRANSACTIONS(Cont’d)

DUE DILIGENCE: Gillis v. Schurman [2003] G.S.T.C. 139

FACTS: Lawyer Sued For Negligence By Purchaser Of Share

– No Comfort Letter Obtained Re: GST Status

– Subsequent Letter Obtained Stating As Of Date Of Closing, CRA Was Aware Of No Outstanding Balance

HELD: Standard Of Care And Skill Generally Required From Lawyer To:

(1) Advise Re: Difference in Share vs. Asset Purchase; and

(2) Obtain a comfort letter on closing

– But Given CRA’s Indication That As Of Date of Closing It Would Have Advised No Outstanding GST – No Liability For Damages


12

2. ASSET TRANSACTIONS

• SUBJECT TO SECTION 167, GST GENERALLY PAYABLE ON ASSET TRANSFERS

• MUST CONSIDER GST STATUS OF EACH TYPE OF ASSET INVOLVED

• MUST CONSIDER GST STATUS OF VENDOR AND PURCHASER– GST Registrants?– Nature Of Supplies Made

• ITC ENTITLEMENT?– Purchaser – For Use In Commercial Activities (Change Of Use Rules)– Vendor – Any “Suspended” GST To Be Unlocked

• UNLIKE SHARE ACQUISITIONS, NO ASSUMPTION OF VENDOR’S GST LIABILITIES UNLESS RELATED AND CONSIDERATION LESS THAN FMV


13

2. ASSET TRANSACTIONS(Cont’d)

NEW PLACE OF SUPPLY RULES COMPLICATE ASSET TRANSFERS (IF S. 167 ELECTION CANNOT BE USED)

• Transfer of real property/tangible personal property continues to be based on where such property is located

• Transfer of intangibles (e.g. trade marks, goodwill) likely depends on business address of recipient


14

SECTION 167 TAX FREE TRANSFER

• PURPOSE: TO AVOID GST CASH FLOW BURDEN WHERE “SALE OF A BUSINESS AS A GOING CONCERN”

• NOT AVAILABLE WHERE VENDOR IS REGISTRANT AND PURCHASER NOT A REGISTRANT

• USE OF ELECTION NOT AUTOMATIC

• ONCE ELECTION IS MADE NO TAX APPLIES TO THE SALE OF THE ASSETS OF THE BUSINESS


15

SECTION 167 TAX FREE TRANSFER (cont’d)

THE FOLLOWING FOUR CONDITIONS MUST BE MET

1. SUPPLIER MUST SUPPLY A “BUSINESS” OR “PART OF A BUSINESS”

2. THE BUSINESS MUST BE ESTABLISHED OR CARRIED ON BY THE SUPPLIER OR ESTABLISHED OR CARRIED ON BY ANOTHER AND ACQUIRED BY THE SUPPLIER

3. RECIPIENT ACQUIRING OWNERSHIP, POSSESSION OR USE OF ALL OR SUBSTANTIALLY ALL OF THE PROPERTY NECESSARY FOR IT TO BE CAPABLE OF CARRYING ON “THE” BUSINESS OR PART AS “A” BUSINESS

4. VENDOR AND PURCHASER MUST COMPLETE A JOINT ELECTION AND MUST BE FILED BY PURCHASER IF A REGISTRANT


16

SPECIFIC REQUIREMENTS OF S. 167

• SUPPLIES IN ASSET TRANSFER AGREEMENT NOTCOVERD UNDER S. 167 ELECTION:– Taxable Supply Of Services To Be Performed By Vendor (i.e.,

Management/Consulting Fees, Franchise Fees For Services; Non-Compete Covenants)

– Taxable Supply Of Property By Way Of Lease– Taxable Sales Of Real Property To Non-Registrants

• PURCHASER: BEWARE OF “CHANGE IN USE” RULES


17

SECTION 167 ISSUES

• WHERE ONLY "PART OF A BUSINESS" PURCHASED HAVE TO DETERMINE IF IT QUALIFIES UNDER S. 167

• MEANING OF “ALL OR SUBSTANTIALLY ALL” OF THE ASSETS– CRA’S Position – 90% of the Necessary Assets

• Accounts Receivables, Bank Accounts, Cash Not “Necessary”– Are Purchaser’s Assets Prior to Transfer Irrelevant?

• CRA’s Position - Look Exclusively at Assets Acquired under the Agreement

• CINNAMON CITY BAKERY CAFÉ (2001 TCC CASE)


18

RISKS OF RELYING ON SECTION 167

• BENEFITS PURCHASER ONLY (VS. ITA SECTION 22) - IS IT WORTH IT?

• IF VENDOR IS A REGISTRANT, PURCHASER MUST BE A REGISTRANT– Same Issue As With Commercial Real Estate (s.221(2))

• REPRESENTATIONS & WARRANTIES

• UNDERTAKING FROM PURCHASER TO FILE JOINT ELECTION


19

Section 85ROLLOVER

VENDOR NEW COASSETS

SHARES

GST PAYABLE?-BY VENDOR?-BY PURCHASER?

TYPE OF ASSETS VALUE-Real property 50-Inventory 20-Business equipment 30-Computer software 10-IP 10-Goodwill 15-Receivables 10-Debt (30)

Net $115


20

S. 85ROLLOVER

(Cont’d)

• SECTION 167 AVAILABLE? GST PAYABLE ON ANY “NOT COVERED” SUPPLIES?

• ITC’s CLAIMABLE?

KEY: IF NO SECTION 167, MUST DE-AGGREGATE TRANSACTION AND ANALYZE EACH ASSET SEPARATELY (GST STATUS, PLACE OF SUPPLY AND VALUE!)

$135 For Taxable Supplies+ $ 10 Receivables- $ 30 Assumed Debt

$115 Net Consideration

NOTE: If Section 167 Not Applicable and Place of Supply in Non-HST Province, GST Due On $135 (The Value Of Consideration For The Taxable Supplies).


21

S. 156 – CLOSELY RELATED CORPORATIONS / CORPORATE

PARTNERSHIPS• JOINT ELECTION PERMITS GST-FREE TRANSFERS BETWEEN

CLOSELY RELATED PARTIES

• “CLOSELY RELATED” CORPORATIONS AND PARTNERSHIPS OF SUCH CORPORATIONS– Common Holding Of 90% Of Number And Value Of Voting Shares– Corporation Or Partnership Must Be A “Specified Member”– Must be Resident in Canada

• ALL OR SUBSTANTIALLY ALL OF SPECIFIED MEMBER’S PROPERTY USED IN COMMERCIAL ACTIVITIES OR IN TAXABLE SUPPLIES– Does Not Apply To A Sale Of Real Property

• NEITHER CORPORATION PARTY TO A S. 150(1) ELECTION


22

S. 156 – CLOSELY RELATED CORPORATIONS /

CORPORATE PARTNERSHIPS (Cont’d)

• USEFUL IN RESTRUCTURINGS (E.G. BUTTERFLIES, ASSET ROLLDOWNS)

• NO FILING REQUIREMENT

• RETROACTIVE ELECTION PERMITTED


23

S.156 RELATED CORPORATIONS AND

BUTTERFLY TRANSACTIONS• S.156 AMENDED AS OF NOVEMBER 17, 2005 TO ACCOMMODATE

BUTTERFLY REORGS

• NEW CONCEPT OF “TEMPORARY MEMBER” (NEWCO)

• MUST BE A CANADIAN RESIDENT AND BE A REGISTRANT (NEW (S.240(3)(f))

• RECEVIES A SUPPLY OF PROPERTY MADE IN CONTEMPLATION OF A DISTRIBUTION MADE IN COURSE OF S.55(3)(b)(i) REORGANIZATION

• BEFORE RECEIVING THE SUPPLY DOES NOT CARRY ON BUSINESS

• LIMITED TO S.55(3)(b)(i) REORGANIZATIONS


24

OTHER CORPORATE REORGANIZATIONS

AVIVA CANADA CASE

• GST ISSUES STILL EXIST WITH RESPECT TO NON-BUTTERFLY CORPORATE REORGANIZATIONS

Underwriters Insurance Co.

NN Life (NewCo) Aviva

TM ($5M)

ISSUE: Imbedded GST at NewCo Level

CURRENT APPROACH – Get A Ruling

GST??

“Commercial Activity”??

TM ($5M)GST Payable


25

AMALGAMATIONS/WIND-UPS

• S. 271 AMALGAMATIONS (S.87 ITA)

• S. 272 WIND-UPS (S.88 ITA)

• DEEMED NOT TO BE A SUPPLY

• NO ELECTION NEEDED

• FLOW THRU OF MOST GST ATTRIBUTES OF PREDECESSOR COS TO AMALCO (AMALGAMATION) AND OF 90%+ SUBSIDIARY TO PARENTCO. (WIND-UP)


26

PARTNERSHIPTRANSACTIONS

• PARTNERSHIP IS DEFINED TO BE A PERSON UNDER ETA

• SPECIAL “COMPLETE CODE” RULES IN S. 272.1:1. Acts Of Partners “In The Course Of Activities Of The Partnership”

Deemed Acts Of Partnership

2. Purchases By Partners For Use “In The Course Of The Activities Of The Partnership” Deemed Partnership’s Purchases (ITC Implications)

3. Supplies By Partners To Partnership

4. Partnership Rollover


27

PST AND BULK SALES TRANSACTIONS

• Purchaser Liability if No Clearance Certificate Obtained

• Provision Still in Force in Ontario and BC

• Section 6 of Ontario Retail Sales Tax Act Expanded to Cover Vendor Liability Under:– Alcohol and Gaming Regulation and Public Protection Act, 1996– Fuel Tax Act– Gasoline Tax Act– Race Tracks Tax Act– Tobacco Tax Act


28

CONCLUSION

• GST/HST (AND PST) A “TRAP FOR THE UNWARY”

• GST/HST RULES DO NOT EQUAL INCOME TAX RULES

• A SEPARATE ANALYSIS REQUIRED FOR EACHTAX, FOR EACH TRANSACTION & FOR EACHCOMPONENT OF THE TRANSACTION

• GST/HST ANALYSIS MUST NOT BE A “LAST MINUTE” THING

• OTHERWISE…


29

gst/hst and pst issues affecting corporate … · itc eligibility 4. inter-company transactions 5....

Documents