GST Rate Reduction
MILLAR KREKLEWETZ LLP is a boutique Canadian law firm with lawyers who have significant expertise in GST, and other commodity tax, customs and trade matters.
The following is a short introduction to the recent reduction in the federal GST, effective July 1, 2006.
Following that overview are some helpful links to (1) our internal reference materials comprising all available CRA materials on the subject, and (2) a copy of Bill C-13 (as passed) implementing the rate reduction, and related transitional rules.
GST Rate Reduction
The GST Rate reduction from 7% to 6% is now law, with Royal Assent to Bill C-13 (An Act to implement certain provisions of the budget tabled in Parliament on May 2, 2006) given on June 22, 2006. While the reduction from 7% to 6% is straight-forward, the implementation of the reduction involves a number of complex transitional rules.
First and foremost is the application of the GST to supplies made before and after July 1, 2006 (i.e., the technical effective date of the reduction). The general rule for collection of the 7% old rate and 6% new rate will be as follows: where an invoice for goods, services or intangibles is issued before July 1, 2006, the 7% rate will apply; where it is issued on or after July 1, 2006, the 6% rate will apply. Sections 152 and 168 of the Excise Tax Act apply a number of exceptions to the general rule, however, which could trigger the 7% GST if any of the following events occur prior to July 1, 2006: (1) the invoice, issued July 1, 2006 or later, is in fact dated prior to July 1, 2006, (2) the invoice ought to have been issued prior to July 1, 2006, but for undue delay, (3) an agreement in writing requires payment prior to July 1, 2006, or (4) payment of the consideration for the supply is made prior to July 1, 2006.
Special rules under subsection 168(3) will also apply where the supply has effectively been completed in May 2006, but not invoiced for until July 1, 2006 or later. For example, if goods are sold to a recipient in May 2006, with ownership or possession provided at that time, but no invoice issued until after June 2006, these rules will effectively deem the invoice to have been issued on June 30th, and the supply subject to 7%. (The anti-avoidance implications of this type of rule should be clear.) A similar rule exists for real property contracts which have been substantially completed by May 2006, which are similarly deemed to attract 7% GST even if invoiced on July 1, 2006 or later.
Rules on deposits and hold-backs remain as set out in subsections 168(7) and (9) of the ETA, with true deposits (i.e., amounts not yet applied towards the purchase price) made prior to July 1, 2006 gaining the benefit of a 6% rate if applied to the purchase price on July 1, 2006 or after. Holdbacks not otherwise paid, payable or expired prior to July 1, 2006 also get the benefit of the 6% rate.
Leases are treated as under the general rule with payments made or required to be made prior to July 1, 2006 taxed at 7%, and payments required to be made (and paid) on or after July 1, 2006 generally being subject to the 6% rate. Other special considerations may apply.
Imported goods released from customs control on or after July 1, 2006 will be taxed by the Canada Border Services Agency at 6%; if released from customs control prior to that time, the 7% rate will apply.
Special transitional rules also exist for a variety of other situations including deemed supplies, taxable benefits, employee and partner rebates, allowances, change in use situations for capital property, stream-lined methods of accounting situations all well detailed in several Canada Revenue Agency publications, generally available on the CRA website. A special telephone information system is attempting to answer rate reduction-related questions from 8:15 am to 8:00 pm ET, at 1 (866) 959 - 7797.
Finally, the ETA now also boasts two new anti-avoidance rules, in section 274.1 and 274.2, aimed predominantly at related party situations where an attempt has been made to benefit from the GST rate reduction through a tax saving, in certain defined circumstances.
In terms of some practical advice where practitioners (or their clients) have determined that too much GST has been charged, one will first want to be aware of the deeming effect of section 221 of the ETA, which deems anything collected as or on account of GST to be held in trust for Her Majesty in right of Canada, and ultimately remittable to the Crown. There are a number of options available for returning over-collected GST to the recipients (with the simultaneous reduction in the registrants net tax amount), including the process described in section 232 of the ETA, which requires a credit note to be issued, with prescribed information. The recipient, if a registrant, can also simply just choose to take an input tax credit for the full amount charged (permitted under CRA policy), or claim a section 259 rebate for tax paid in error.