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Exempt or Taxable, That is the Question

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Should you really dispute the CRA’s finding that your supplies are taxable and not exempt?

Many of the “exempt” versus “taxable” cases that we see from the GST/HST perspective put the recipient (the one usually arguing for “exempt” treatment) and the supplier at odds.

In the case of Canadian Imperial Bank of Commerce v. The Queen, 2018 TCC 109, CIBC was arguing, after many years of paying GST/HST on the services that VISA was performing in the payment processing of CIBC’s various credit cards, that the VISA charges ought to have been exempt financial services fees, and not taxable, as VISA had been treating them.  In the result, CIBC tried to make a refund claim to get a windfall of tax back from the CRA.  The CRA resisted and CIBC’s appeal was dismissed.  However, that is only one side of the story.  If CIBC had been successful and prevailed in its view that VISA’s services were actually taxable and not exempt, the “tax loss” would have been passed over to VISA.  This can be understood as follows:

(1) Historically, VISA was entitled to claim full ITCs on its business inputs acquired to produce the taxable supplies it was making to CIBC (since this is the essence of “commercial activities”).

(2) Had CIBC been successful in its refund claim, VISA’s business model would be turned upside down, and it would have been denied the historic and future ITCs that it was claiming (i.e., if it were truly providing “exempt supplies” to CIBC, as CIBC claimed, then VISA would not be entitled to claim any ITCs on its business inputs!).

So there is quite a two-sided story when it comes to the argument over an “exempt” versus “taxable” supply.  The “exempt supply” argument usually benefits the recipient and disadvantages the supplier – so although the case here was only between CIBC and the CRA, there could have been significant financial consequences to VISA, a third party to the litigation.

A similar case can be seen in Applewood Holdings Inc. v. The Queen, 2018 TCC 231, although unlike in CIBC, it was the supplier here that sought exempt status for its supplies.  In this case, a car dealer managed to prevail over an assessment that the CRA made in respect of its supplies of certain services in arranging for insurance at its dealership.  The car dealer successfully argued that these services constituted “arranging for” financial services, such that the compensation it received from the insurance companies in respect of the services was exempt from GST/HST.

While this outcome allowed the car dealer to avoid the CRA’s assessment for not collecting tax on its “arranging for” fees, depending on how it had been dealing with ITCs, the dealer could be opening itself up to future CRA issues.  For example, if the dealer had historically been claiming ITCs for 100% of its commercial rent, it would now be required to apportion that ITC claim based on some reasonable allocation methodology (e.g., the proportion of “taxable supplies” versus “exempt supplies” produced through those same offices).  While this does not feature in the case, it should have, as one wonders if, over time, it would have been more economical for Applewood to have simply accepted CRA’s assessment, paid the applicable interest, and charged to the insurance provider the GST/HST that the CRA said was payable (as it would have been payable by the insurance company, and could have been recovered by Applewood as a debt due under section 224 of the ETA).

As these examples make clear, before disputing the “taxable” versus “exempt” status of supplies, taxpayers should consider whether the benefits of such a determination outweigh the consequential effects on their suppliers/business partners and on their own future tax affairs.

Do you require assistance in this area? If so, contact us here.

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