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COMMODITY TAX

Recent Papers or Presentations of  Note

Undisclosed Agency Questioned: The iPhone Case

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An undisclosed agency exists if an agent enters into a contract with a third party on behalf of a principal, but does not reveal to the third party either the identity of the principal or the fact that the agent is acting on behalf of any principal.

 

The TCC decision in 2253787 Ontario Inc. (2014 TCC 121) was very suspicious of undisclosed agency, nearly analogizing it to a sham transaction.

 

Two private corporations (the taxpayers) were incorporated for the sole purpose of purchasing Apple iPhones in Canada and reselling them to gray market wholesalers in other regions such as Hong Kong, where the products were not yet officially available. The taxpayers used friends, relatives, and contractors to buy one or two iPhones a day and reimbursed each buyer for the purchase of the iPhone, including HST, and paid a fee in return for proof of payment and the iPhone. The taxpayers couriered the iPhone overseas and resold it in a foreign market. The taxpayers, which were GST/HST registrants, claimed ITCs on the iPhones purchased in Canada. 

 

The CRA disallowed ITCs on the iPhone purchases, arguing that the taxpayers were not the recipients of the supply of the iPhones and that there was no agency relationship between the taxpayers and the buyers. The taxpayers appealed to the TCC on the basis that an agency relationship had existed. 

 

The TCC seemed to rely on Royal Securities Corporation Ltd. v. Montreal Trust (1967 OR 137), which established a three–part test to determine whether an agency relationship exists: (1) consent from both parties, (2) authority from the principal to allow the agent to affect the principal’s rights and obligations as if it had entered the contract itself, and (3) its control over the agent’s actions.  The TCC found that the first and third requirements were met, but not the second requirement. 

 

The TCC observed that it was a term of a contract with Apple (the Retail Store Purchase Policies and Sale and Refund Policy) that only an end user may purchase a product and that resale and export were prohibited. From this the TCC concluded that the taxpayers could not have created or maintained a legal relationship with Apple directly because they intended to export and resell the product.  An agent cannot have a legal capacity that exceeds that of the principal, and thus the TCC found that the buyers could not have been the taxpayers’ agents. 

 

We question the TCC’s analysis of the purported agent-principal relationship, which improperly affiliated the capacity to enter into a contract with the intention to breach a contract. The TCC correctly cited the FCA decision in 1524944 Ontario Ltd. (2007 FCA 74 at para 18) for the legal concept that a principal cannot appoint an agent to enter into a contract for which the principal lacks the legal capacity to enter.

 

However, the TCC in 2253787 Ontario implied that the taxpayers lacked capacity to contract directly with Apple to purchase the iPhones because they intended to breach terms of the contract by exporting and reselling the iPhones: if this proposition were true it would undermine the concept of efficient breach.

 

A corporation’s capacity to enter into legal relationships is found in its constating document and is not affected or limited by any contractual terms to which it may agree. The contractual terms of Apple’s sales, including prohibitions on export, did not affect the taxpayers’ capacity to contract, even if from the outset they intended to breach those contractual terms by exporting and reselling the iPhones. Apple may have a claim for breach of contract, but in our view, the taxpayers had the capacity to contract with - purchase from - Apple directly.   

 

It is also a matter of concern that the TCC was so critical of the fact that the agency relationship was undisclosed to Apple at the time of sale. The court’s conclusion seems to ignore the widely accepted legal concept of an undisclosed agent and implies that the non-disclosure of an agency relationship to a third party is inappropriate even though the common law recognizes the legitimacy of an undisclosed agent. The SCC has said that generally in contracts with third parties the undisclosed principal “has the same rights and liabilities under the contract whether he or she was disclosed to the third party and despite the fact that his or her name did not appear on the face of the contract” (Friedmann Equity Developments Inc. v. Final Note Ltd., 2000 SCC 34: at para 15)

 

John G. Bassindale and Robert G. Kreklewetz

A version of this article appeared in the July 2014 issue of Canadian Tax Highlights.

Ontario PTT on Cigars sold to Indians ?

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The Ontario Ministry of Finance has threatened to turn the Ontario cigar industry upside down, by begining to assess vendors selling cigars and other non-cigarette tobacco to status indians on federal indian reserves for Ontario provincial tobacco tax (PTT). 

Previously most industry insiders would have assumed - just from Ontario's acquiescence to wide-spread industry practice of exempting all sales of non-cigarette tobacco sold to Indians - that sales of cigars, pipe tobacco and chewing tobacco to status Indians on federal Indian reserves was exempt of PTT.

No so, perhaps, based on recent Ontario assessment activities.

What makes this so troubling is that there is a special exemption for just these kinds of sales, provided for the exclusive use of the Indian purchaser, and found in section 23(2) to a Regulation under the Tobacco Tax Act.

This change in policy position - if that is what this represents - will be a major thorn in the side of virtually any vendor of non-cigarette tobacco on reserve, as they would seem to risk similar audit and assessment if not beginning to treat their sales as subject to PTT.  Not to mention an imposition for status Indians who would presumably feel entitled to protection from government taxation and molestation under sections 87 and 89 of the Indian Act.

Licensed wholesalers and designated wholesalers on the receiving end of a Notice of Assessment for Ontario tobacco tax (issued under the Ontario Tobacco Tax Act) should consider obtaining independent legal advice, as there are a number of reasons why Ontario's position may not be supportable at law.

Millar Kreklewetz LLP practices in this area, and Rob Kreklewetz and John Bassindale have recent file experience with this particular issue.  Please consider calling on us for advice on this subject:  Rob Kreklewetz (rgk@taxandtradelaw.com) / John Bassindale (jgb@taxandtradelaw.com). 

New and Modified GST/HST Rules for Pension Plans

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New and Modified GST/HST Rules for Pension Plans

 The year 2010 presented a major challenge for many pension plans as several amendments and additions were made to the Excise Tax Act (ETA). Some of these provisions alter the amounts a pension plan must report on their GST/HST return, while others impact the amount of GST/HST that an employer who offers a pension plan must pay to the Canadian government. These new and modified rules can generally be grouped into three headings:

  • New SAM Reporting Requirements
  • New Deemed Supplies Rules, and
  • Expanded Pension Plan Rebates.

Without careful consideration and review of these rules, pension plans and their related employers might find themselves subject to significant tax liabilities on a subsequent audit.

 Note: The significant changes are briefly outlined below, however readers are cautioned not to rely on the descriptions contained herein for a complete statement of the law, and readers are encouraged to seek out tax advice specific to their individual situation.

New SAM Reporting Requirements

Previously, only Selected Listed Financial Institutions (“SLFIs”) – a narrowly defined group – were required to apply the Special Attribution Method (“SAM”) to determine their actual net tax liability or HST purposes. With the varying HST rates across the country after July 1, 2010 changes to the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations were proposed which significantly broaden the test for a SLFI. As a result of these proposed changes, most pension plans will now be classified as SLFIs, and required to use SAM to determine their net tax liability for provincial HST purposes.

 A pension plan will generally be deemed a SLFI if the plan has a “permanent establishment” in an HST province (i.e. Ontario) and in any other province in Canada. The draft regulations have expanded the definition of permanent establishment in a province to any province where any pension plan member lives, at any time during the year.

 There are, however, exceptions for pension plans where nearly all of their plan members live in non-HST provinces, or where the plan is a “qualifying small investment plan”.  

 The SAM calculation itself has also been revised, with the addition of 26 potential adjustments which SLFIs will have to review to determine which adjustments, if any, may be required.

 Pension plans which use the SAM calculation must report these calculations annually and ensure that any additional tax owing is paid. Penalties will apply if the filings deadlines are missed.  

 There are related information disclosure requirements which may require a pension plan, at the request of an investment plan, to disclose certain information about their plan members. Failure of the investment plan to make the appropriate request, or failure of the pension plan to respond in a timely manner, may result in penalties being assessed against the offending party.

 Additionally, recently proposed draft regulations would impose obligations on some pension plans to proactively provide information to investment plans, with penalties for non-compliance.

New Deemed Supply Rules

New rules in the Excise Tax Act will deem a taxable supply in respect of the fair market value of “employee resources” (including staff time) provided to a pension plan for their use, with the exception of certain “excluded resources”.

 This deemed taxable supply will increase the employer’s GST/HST return, irrespective of whether or not the employer has already billed and reported the GST/HST on these taxable supplies.

 Careful compliance is required with these rules and specific tax advice is usually required.

Expanded Pension Plan Rebates

Previously the pension plan rebate under the ETA was only available to Multi-Employer Pension Plans (“MEPPs”). Amendments to the ETA made in 2010 have expanded this rebate so it is now available to all “qualifying pension entities”.

 Qualifying pension entities are entitled to a rebate of 33% of all “eligible amounts” of tax, which generally include all non-recoverable tax that is paid or payable by the pension entity, including any amounts of tax deemed paid by the pension entity. However, these new rules operate hand-in-hand with the “deemed supply” rules referred to above, and may be subject to certain required adjustments – again usually requiring tax advice before fully implementing them.

Recent Articles of Note

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Recent Articles of Note *

COMMODITY TAX

CUSTOMS & TRADE

INDUSTRY SPECIFIC

TAX & TRADE LITIGATION


COMMODITY TAX

Privilege over Information Disclosed to Accountants ?

(As originally published in Tax For Owner Managers, The Canadian Tax Foundation, March 2006)
Robert G. Kreklewetz & Simon Thang

RBC Taxable Personnel Services or Exempt Arranging For

(As originally published in GST & Commodity Tax Journal, January-February 2006)
Robert G. Kreklewetz & Simon Thang

Membership has it Privileges: Dawn's Place & GST on Website Access

(As originally published in GST & Commodity Tax Journal, December 2005)
Robert G. Kreklewetz & Vern Vipul

Generally Worded Refund Claims Risk Falling Through the Cracks

(As originally published in GST & Commodity Tax Journal, November 2005)
Robert G. Kreklewetz & Simon Thang

Found Money: New Rules for Recovering Taxes paid under ultra vires Legislation

(As originally published in GST & Commodity Tax Journal, September 2005)
Robert G. Kreklewetz

Services or Rentals of Goods ? Substance over Form in Ontario RST.

(As originally published in GST & Commodity Tax Journal, July 2005)
Robert G. Kreklewetz

Robin Aero-Space - "in respect of TPP"

(As originally published in GST & Commodity Tax Journal, March 2005)
Robert G. Kreklewetz & Vern Vipul

New Canadian Sales Tax Policy to Put the Big Bite on U.S. Lessors

U.S. Equipment Leasing Association Newsletter (November 2004)
Robert G. Kreklewetz & Diane Sekula

Derivative Assessments - More Uncertainty

GST & Commodity Tax Reporter, Carswell (November 2004)
Wendy A. Brousseau & Robert G. Kreklewetz

The GST and Motor Vehicle Allowances

Tax For Owner Managers, The Canadian Tax Foundation (October 2003)
Robert G. Kreklewetz & Wendy A. Brousseau

Agent, Principal, or Broker?

Canadian Tax Highlights, Canadian Tax Foundation (October 2003)
Robert G. Kreklewetz

Tax Reporting Obligations for Direct Sellers

DSA Dialogue, Direct Sellers Association of Canada (August 2003)
W. Jack Millar & Robert G. Kreklewetz

Ceasing To Be a Director

Tax For Owner Managers, The Canadian Tax Foundation (July 2003)
Robert G. Kreklewetz & Wendy A. Brousseau
Tax Collection Limitations
Canadian Tax Highlights, Canadian Tax Foundation (April 2003)
Robert G. Kreklewetz

Vendor Collection of RST

Canadian Tax Highlights, Canadian Tax Foundation (August 2002)
Robert G. Kreklewetz

CUSTOMS & TRADE

Privilege over Information Disclosed to Brokers ?

(As originally published in Tax For Owner Managers, The Canadian Tax Foundation, March 2006)
Robert G. Kreklewetz & Simon Thang

Byrds, Pigs, Oysters & Trade Disputes

(As originally published in GST & Commodity Tax Journal, April 2005)
Robert G. Kreklewetz

Apples, Oranges, and Natural Gas

Canadian Tax Highlights, Canadian Tax Foundation (March 2005)
Robert G. Kreklewetz

New Export Reporting Requirements

Tradeweek, Canadian Association of Importers and Exporters (March 2005)
Robert G. Kreklewetz & Vern Vipul

NAFTA Rules of Origin

Canadian Tax Highlights, Canadian Tax Foundation (February 2005)
Robert G. Kreklewetz & Vern Vipul

Customs "Purchaser in Canada" Requirement: Judicially Watered Down

GST & Commodity Tax Reporter, Carswell (October 2004)
Robert G. Kreklewetz

CBSA Makes Barbequing More Expensive

Canadian Tax Highlights, Canadian Tax Foundation (September 2004)
Robert G. Kreklewetz

US Pressures on Canadian Customs Exemptions

Canadian Tax Highlights, Canadian Tax Foundation (November 2003)
Robert G. Kreklewetz
Canada Customs and US Chemicals
Canadian Tax Highlights, Canadian Tax Foundation (May 2002)
Robert G. Kreklewetz

INDUSTRY SPECIFIC

Apples, Oranges, and Natural Gas

Canadian Tax Highlights, Canadian Tax Foundation (March 2005)
Robert G. Kreklewetz

Tax Reporting Obligations for Direct Sellers

DSA Dialogue, Direct Sellers Association of Canada (August 2003)
W. Jack Millar & Robert G. Kreklewetz

New Canadian Sales Tax Policy to Put the Big Bite on U.S. Lessors

U.S. Equipment Leasing Association Newsletter (November 2004)
Robert G. Kreklewetz & Diane Sekula
Canada Customs and US Chemicals
Canadian Tax Highlights, Canadian Tax Foundation (May 2002)
Robert G. Kreklewetz

TAX & TRADE LITIGATION

Rule 14 Motions Near Death ?

Canadian Tax Highlights, Canadian Tax Foundation (March 2005)
Robert G. Kreklewetz

Privilege over Information Disclosed to Accountants ?

(As originally published in Tax For Owner Managers, The Canadian Tax Foundation, March 2006)
Robert G. Kreklewetz & Simon Thang

Found Money: New Rules for Recovering Taxes paid under ultra vires Legislation

(As originally published in GST & Commodity Tax Journal, September 2005)
Robert G. Kreklewetz

Derivative Assessments - More Uncertainty

GST & Commodity Tax Reporter, Carswell (November 2004)
Wendy A. Brousseau & Robert G. Kreklewetz

* Copyright rests with the authors.

Recent Papers or Presentations of Note

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Recent Papers or Presentations of Note *

COMMODITY TAX

CUSTOMS & TRADE

INDUSTRY SPECIFIC

TAX & TRADE LITIGATION


COMMODITY TAX

GST & RST Issues on Professional Corporations

Ontario Bar Association's Fall CLE
(Toronto, ON: November 22, 2006)
Robert G. Kreklewetz

Drafting Effective Notices of Objection

CICA Commodity Tax Symposium
(Ottawa, ON: October 17, 2006)
Robert G. Kreklewetz
(Presentation Slides)

Nine Things for Corporate Counsel to Know About Indirect Taxes

Canadian Corporate Counsel Association's Annual Conference (St. John's, NF: August 15, 2006)
Robert G. Kreklewetz
A Commodity Tax Overview
I.E. Canada's Commodity Tax Conference (Toronto, Canada: May 16, 2005)
Robert G. Kreklewetz

What is New in Commodity Taxes ?

Canadian Tax Foundation's 2004 Annual Ontario Tax Conference (Toronto, ON: October 18-19, 2004)
Robert G. Kreklewetz
(Download includes Parts I and II)
(Presentation Slides)

Partnerships

Presented at the CICA's 2004 Annual Symposium (Ottawa, ON: October 4-6, 2004)
Robert G. Kreklewetz
(Presentation Slides)

Common Commodity Tax Issues in Corporate Reorganizations

Federated Press' Taxation of Corporate Reorganizations Conference (Toronto, Ontario: January 20, 2004)
Robert G. Kreklewetz

Managing the Objections & Appeals Process: Experiences From a Commodity Tax Perspective

Tax Executives Institute's 2003 Annual Conference (Hull, Quebec: May 6, 2003)
Robert G. Kreklewetz & W. Jack Millar

The Top 10 Things Income Tax Practitioners Should Know About Commodity Taxes

Ontario Bar Association Tax Section Meeting (Toronto, Ontario: February 11, 2003)
Robert G. Kreklewetz

Unbundling the Mysteries of Computer Software and Outsourcing Contracts

Tax Executives Institute Montreal Chapter Meeting (Montreal, Quebec: January 15, 2002)
Robert G. Kreklewetz

Five Commodity Tax Traps (Income Tax Practitioners Will Want to Know About)

Ontario Bar Association Tax Section Meeting (Toronto, Ontario: April 4, 2000)
Robert G. Kreklewetz

CUSTOMS & TRADE

Ten Thing You Absolutely Need to Know about NAFTA Trade with Canada

International Trade Center Certificate Series (Dallas, TX: October 17, 2007)
Robert G. Kreklewetz

Drafting & Improving Customs Policies & Procedures: Thing You Absolutely Need to Know

I.E.Canada's Emerging Issues Conference (Toronto, Ontario: April 24, 2007)
Robert G. Kreklewetz

Nine Things for Corporate Counsel to Know About Indirect Taxes

Canadian Corporate Counsel Association's Annual Conference (St. John's, NF: August 15, 2006)
Robert G. Kreklewetz

Customs Compliance & Corporate Governance: What You and your Upper Management Need to Know

I.E.Canada's Western Canada Conference (Calgary, Alberta: February 21, 2006)
Robert G. Kreklewetz & Lindsay B. Meyer

Export Controls - And Your Trade with the United States & Abroad

Canadian Corporate Counsel Association's 2005 Spring Conference (Toronto, Canada: April 18, 2005)
Robert G. Kreklewetz & Lindsay B. Meyer

Voluntary Disclosures & Mandatory Corrections

I.E.Canada's Western Canada Conference (Calgary, Alberta: February 6, 2005)
Robert G. Kreklewetz & Lindsay B. Meyer

Importing Toys Into the U.S. & Canada

American Toy Association's Annual Conference (Chicago, IL: July 18, 2004)
Robert G. Kreklewetz & Lindsay B. Meyer

The Top 10 Things You Should Know About Cross Border Trade with Canada

American Petroleum Institute's Annual Conference (Charleston, SC: March 23, 2004)
Robert G. Kreklewetz & Lindsay B. Meyer

Export Controls - And Your Trade with the United States & Abroad

I.E.Canada's National Seminars (Various Locations: January 2004)
Robert G. Kreklewetz & Lindsay B. Meyer

Dealing with NAFTA Verification & Other Compliance Reviews

I.E.Canada's National Seminars (Various Locations: January 2004)
Robert G. Kreklewetz & Lindsay B. Meyer

Navigating NAFTA: Managing your Duty Free Trade with the U.S.

I.E.Canada's Canadian National Update Seminars (Nationally: May & June 2003)
Robert G. Kreklewetz & Lindsay B. Meyer

Customs Valuation Issues - A Spirit Discussion with the CCRA

I.E.Canada's Emerging Issues Conference (Toronto, Ontario: April 9, 2003)
Robert G. Kreklewetz & David Dubrule (CCRA)

The Latest Customs & Cross Border Issues

Tax Executives 2002 International Conference (Toronto, Ontario: October 22, 2002)
Robert G. Kreklewetz & W. Jack Millar

An Overview of Canadas Customs Law Regime (With Specific Discussion on Customs Bill S-23)

CICAs 2001 Customs Duty & International Trade Course (Toronto, Ontario: November 26, 2001)
Robert G. Kreklewetz

INDUSTRY SPECIFIC

Four Things to Know About Establishing an MLM Business in Canada

MLMIA Association's Annual
Conference (Las Vegas, NV: March 24, 2007)
W. Jack Millar & Robert G. Kreklewetz

Nine Things for Corporate Counsel to Know About Indirect Taxes

Canadian Corporate Counsel Association's Annual Conference (St. John's, NF: August 15, 2006)
Robert G. Kreklewetz

Ten Things to Know about GST & PST

Ontario Private Campgrounds Association's Annual Conference (Huntsville, ON: November 21, 2005)
Robert G. Kreklewetz

Importing Toys Into the U.S. & Canada

American Toy Association's Annual Conference (Chicago, IL: July 18, 2004)
Robert G. Kreklewetz & Lindsay B. Meyer

The Top 10 Things You Should Know About Cross Border Trade with Canada

American Petroleum Institute's Annual Conference (Charleston, SC: March 23, 2004)
Robert G. Kreklewetz & Lindsay B. Meyer

The Top 10 Things Income Tax Practitioners Should Know About Commodity Taxes

Ontario Bar Association Tax Section (Toronto, Ontario: February 11, 2003)
Robert G. Kreklewetz

TAX & TRADE LITIGATION

Drafting Effective Notices of Objection

CICA Commodity Tax Symposium
(Ottawa, ON: October 17, 2006)
Robert G. Kreklewetz
(Presentation Slides)

* Copyright rests with the authors.

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