HST Place of Supply

Navigating the Rules

Presenters

Bruce Goudy Partner, Indirect Tax

Ernst & Young LLP

Tel: 416 943 2592

Bruce.R.Goudy@ca.ey.com

Mary Anne McMahon National Advisor, Indirect Tax

Ernst & Young LLP

Tel: 613 598 4266

MaryAnne.McMahon@ca.ey.com

Agenda

• Introduction • Legislation • Challenges • Rules, rules and more rules (and exceptions)

– Tangible personal property – Real property – Services – Intangible personal property

• Issues and tips

Legislation

• ETA 144.1 – Supply in Canada is deemed to be made in a particular

province based on rules in Schedule IX • Interpretation rules and particular rules for TPP, IPP, real

property, services (general), transportation services, postage, telecommunication services

Or

Prescribed under draft New Harmonized Value-added Tax System Regulations (s. 2-33)

• Old GST/HST Place of Supply Regulations repealed • New draft regulations are mix of old rules still in effect and

new ones introduced in 2010

Issues

• Characterizing a supply – Service vs. intangible personal property (IPP) – Priority of rules - general services vs. specific services

• Testing the criteria – Contracting, most closely connected, most contact addresses – Primarily in harmonized provinces – Greatest proportion in a particular province – IPP – geographic limitations on usage – Ordinarily situated in a province – Documenting & retaining analysis & support

Sale of Tangible Personal Property

• Legal delivery – Supply made in the province where supplier delivers or makes

the property available to the recipient

• Deemed delivery – Supplier ships property to province specified in contract

for carriage – Supplier transfers possession of property to common

carrier or consignee retained by the supplier on behalf of the recipient to ship to a destination in a particular province

– Supplier sends property by mail or courier to an address in that province

Lease of Tangible Personal Property

Short term leases (< 3 months)

• Same rules as Sales of TPP – tax rate based on where goods delivered or made

available, or sent by mail or courier

• No obligation for lessor to track movement after delivered or made available

Lease of Tangible Personal Property

Long term leases (> 3 months) • Each lease interval is a separate supply • Property other than specified motor vehicles

– Ordinarily located when supply is made – Lessor and lessee can agree on ordinary location

• Specified motor vehicles – Province where vehicle is required to be registered

• Leased railway cars – One time rule based on where property first delivered or

made available – Transitional rule for Ontario & British Columbia

Real Property

• Supply deemed to be made where property situated

• If situated in more than one province, allocate consideration – Deemed separate taxable supplies in each province where

property located

– No “primarily” test

• Deemed supplies for each lease interval

Services – Priority of Rules

MORE SPECIFIC RULES

• Customs brokerage services

• Litigation-related services

• Location-specific events services

• Repair, alteration services

• Trustee services (RRSP, RRIF,

etc)

• 1-900 or 976 services

• Computer-related or Internet

access

• Air navigation services

• Passenger transportation services

• Freight transportation services

• Postage

• Telecommunication services

LESS SPECIFIC RULES

• Services in relation to real

property

• Services in relation to TPP

• Personal Services

GENERAL RULES

• Use where Specific Rules do not

apply

Services – General Rules

Apply in order Rule 1:

Where address obtained in ordinary course of business

– If only one home or business address of the recipient, supply is made in that province

– If more than one address is obtained, supply is made in the province of the address most closely connected to the supply

– If no home or business address obtained but another address in a province is most closely connected to the supply, supply is made in that province (e.g., billing address which is not a known home or business address)

Services – General Rules

Rule 2: If no address obtained and Canadian element of service is performed primarily in participating provinces, supply is deemed to be made in the participating province where the greatest proportion of the Canadian element of the service is performed.

Rule 3: If cannot determine where greatest proportion performed in Rule 2, service is performed in participating province with highest rate.

If provinces have the same rate, use that rate.

Rule 4: Supply is made in a non-harmonized province if

– Rule 1 does not deem the supply of the service to be made in a province, and – the Canadian element of the service is not performed primarily (50% or more)

in the participating provinces

Services – General Rules Issues to consider

• Correct characterization of a supply is key – General service or service with a specific rule

– Measuring primarily in participating provinces

– Measuring greatest proportion in a participating province

• Managing addresses – database for CRA audit purposes - contracting address vs. most closely

connected address vs. other type of address

• Contracting address and most closely connected address

– Per B-103, CRA recommendation - "usually the contracting address" • only administrative guidance

• potential for dispute on audit if a better most closely connected address

Services – General Rules Issues to consider

• Closely-connected

– Per CRA

• business address of the recipient from which the supplier is hired under the agreement for the supply (the contracting address) will generally be considered the address that is most closely connected with the supply.

• If the contracting business address of the recipient is not obtained, the address most closely connected with the supply would be the business address of the recipient that the supplier had the most contact with and that is most used by the supplier in connection with the supply.

Services in Relation to Real Property Less Specific Rules

• If real property is situated primarily in participating province

– Supply is made in province in which greatest proportion of property is located

– If greatest portions are equally situated in more than one participating province, supply is made in province with highest rate

• If situated less than primarily in participating provinces, 5% applies

Services in Relation to TPP Less Specific Rules

• If TPP situated primarily in participating provinces when the service is being performed – supply is made in province where greatest proportion of that TPP

situated

– If greatest proportions are equal, use highest rate

• If situated primarily in non-participating provinces, 5% applies

• Issues to consider – Meaning of situated primarily – physical size vs. value

– Caution - a more specific rule may apply - legal services, repair services

Personal Services Less Specific Rules

• All or substantially all of the services are performed in the presence of the individual to whom it is rendered

• Excludes advisory, consulting and professional services – In the participating province where the Canadian element is

performed primarily AND – Equal or greater proportion is not performed in another participating

province

• If equal, province with highest rate

• If same rate, business address of supplier

Services rendered in connection with litigation More specific rules

• Services in connection with criminal, civil or administrative litigation • Services relating to litigation under the jurisdiction of a court or

tribunal established under the laws of a province are supplied in that province

• Excludes services performed before litigation begins • Issues to consider

– Includes services related to an appeal to the Supreme Court of Canada from a decision of a court or a tribunal established under the laws of a province

– Includes anything “in connection with” the litigation, e.g., expert’s report

– If lawyer’s services are rendered in connection with litigation and at the same time in relation to TPP situated in another participating province – this rule takes priority over “Services in relation to TPP” rules

– Does not include litigation at the Tax Court, Federal Court, Federal Court of Appeal or Supreme Court where appeal relates to decision rendered by a federal court or tribunal

Services in relation to a location-specific event More specific rules

• Place of supply is province where event will be primarily

(more than 50%) performed

• Location-specific rules take precedence over personal services rules

• Need to carefully differentiate between the two

Repairing, maintaining, cleaning TPP, etc. More specific rules

• No change from current rules – Applies to supply of service of:

• repairing, maintaining, cleaning, adjusting or altering TPP, or

• producing a negative, transparency, photographic print or other photographic-related good

– Based on province where the supplier delivers the TPP to the recipient after the service is performed

• Issues to consider – Supplier must receive TPP of another person

– Definition of “deemed delivery”

– Takes priority over services in relation to TPP

Services More specific rules

• Premium rate telephone services (1-900 or 976) – made in the province in which the telephone call originates

• Trustee services re RRSP, RRIF, RESP, RDSP, etc. – Based on mailing address of annuitant, subscriber or holder

• Computer-related services and Internet Access – Different rules for single vs. multiple final recipients – Whether supplier maintains sufficient information to determine location

where services accessed

• Customs brokerage services – Based on province where goods released

Services More specific rules

• Air navigation services – A supply is made in a province if the leg of the flight originates

in that province

• Passenger transportation – Place of supply determined by

• Whether there is a continuous journey • Whether a ticket or voucher is issued • Location of origin, termination and stopovers

– Special rules for TPP and services supplied during international flights/voyages, baggage and ticketing/reservation services

Intangible Personal Property

• Location of recipient now more important

• Where “Canadian rights” can be used

• Place of negotiation is less important

• Specific rules take precedence over general rules

Intangible Personal Property

Priority of rules

SPECIFIC RULES

• IPP that relates to real property

• IPP that relates to TPP

GENERAL RULES

• No primary location of use

• Primarily in participating provinces

• Primarily in non-participating

provinces

IPP Related to Real Property Specific rules

• Tax rate based on where real property primarily situated – non-participating provinces, 5% applies – participating provinces, HST rate based on province

with greatest proportion of real property – If situated equally in participating provinces, highest

rate – No allocation – Issues to consider

• How to measure primarily • How to measure greater proportion • Whether certain IPP really has limitations

IPP Related to TPP Specific rules

• Ordinary location of property – supplier and the recipient mutually agree

• If “ordinary location” primarily in participating provinces, HST will apply: – HST rate is based on province where greatest proportion

of TPP is ordinarily located

– If ordinarily located equally in participating provinces, use highest HST rate

IPP - Primarily in Participating Provinces General rules

• Where Canadian rights can only be used primarily in HST provinces AND where province of greatest use cannot be determined

Apply rules 1 to 3 in order:

Rule 1 Supply is made in a province if • value is $300 or less, • made through a PE of supplier in the province in the presence of an

individual who is, or acts on behalf of, the recipient, or • through a vending machine situated in the province, and • the IPP can be used in the province.

Rule 2 If Rule 1 does not apply, the province of supply is determined by using the “address” rules applicable to services as long as the IPP can be used in the province in which the address is located.

Rule 3 If Rule 1 and 2 do not apply, the province of supply is the province with the highest rate among provinces in which the IPP can be used.

IPP - Primarily Outside Participating Provinces General rules

• If Canadian rights can only be used primarily outside participating provinces, 5%

IPP – No Primary Location of Use General rules

• Where no limitations on where Canadian rights can be used and primary location cannot be determined

– Same 3 rules Rule 1 Supply is made in a province if

• value is $300 or less,

• made through a PE of supplier in the province in the presence of an individual who is, or acts on behalf of, the recipient, or

• through a vending machine situated in the province, and

• the IPP can be used in the province.

Rule 2 If Rule 1 does not apply, the province of supply is determined by using the “address” rules applicable to services as long as the IPP can be used in the province in which the address is located.

Rule 3 If Rule 1 and 2 do not apply, the province of supply is the province with the highest rate among provinces in which the IPP can be used.

NEXT STEPS

• Implement clear processes to manage place of supply risk

• Document & retain the decision & supporting analyses • Addresses - most closely connected, most contact, other, etc. • Primarily in harmonized provinces • Greater proportion in a harmonized province • Geographic limitations on where IPP can be used • Characterization of supplies – e.g., IPP vs. services • Priority of rules – general vs. less specific vs. more specific • Ordinarily situated in province at a particular time

• Training & support for team members • Periodic review and testing

Disclaimer

(c) 2012 Ernst & Young LLP. All rights reserved.

This presentation contains high-level information in summary form. Please

contact EY or another professional advisor to discuss these matters in the

context of your particular circumstances. We accept no responsibility for any

loss or damage occasioned by your reliance on information contained in this

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