# Archived - Amendments to the Excise Tax Act, the Excise Act, 2001 and Related Acts and the Air Travellers Security Charge Act: 1

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### Preface

The legislation to which the explanatory notes relate mainly implements proposed measures relating to the Goods and Services Tax and Harmonized Sales Tax (GST/HST). The legislation also contains measures relating to the Excise Act, 2001,a new legislative framework for the taxation of spirits, wine and tobacco products. Finally, the legislation contains measures relating to the Air Travellers Security Charge.

The GST/HST measures are principally aimed at improving the operation and fairness of the GST/HST in the affected areas and ensuring that the legislation accords with the policy intent. In some cases, adjustments have been made to the legislation as originally proposed in response to representations from the tax and business communities.

The excise measures implement minor refinements that will improve the operation of the Excise Act, 2001 and more accurately reflect current industry and administrative practices. They also implement related and consequential amendments to the Access to Information Act, the Customs Act, the Customs Tariff and the Excise Tax Act.

The measures pertaining to the Air Travellers Security Charge include previously announced relief provisions as well as technical changes to the Air Travellers Security Charge Act.

The explanatory notes describe the proposed amendments, clause by clause, for the assistance of Members of Parliament and Senators as well as for taxpayers and their professional advisors.

These explanatory notes are provided to assist in the understanding of the proposed amendments. They are for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Clause 1

Short Title

This clause provides that the enactment to which these notes relate may be cited as the "Sales Tax Amendments Act, 2006".

### Part 1 Amendments to the Excise Tax Act

Amendments in Respect of the Goods and Services Tax/Harmonized Sales Tax

Clause 2

Definitions

ETA
123(1)

Subsection 123(1) of the Excise Tax Act (the "Act") defines a number of terms that apply for the purposes of Part IX of the Act and related Schedules.

Subclause 2(1)

Definition "closely related group"

ETA
123(1)

Existing definition "closely related group" refers to a group of corporations each member of which is closely related within the meaning of section 128 of the Act (i.e., generally, there is at least 90 per cent common ownership among the corporations). Members of a closely related group may be eligible to make the elections under section 150 or 156 of the Act in respect of certain intra-group supplies or may file joint applications to offset, under subsection 228(7) of the Act, one corporation’s refunds against another’s tax owing.

Under the current legislation, there may be situations in which two corporations, that are part of a 90 per cent or more common ownership group and that are each a registrant resident in Canada, will not be part of a closely related group because one or more of the corporations that connect them in the ownership structure are either non-residents or non-registrants. An example of this would be two resident and registrant corporations (CanCo1 and CanCo2) each of which is 100 per cent owned respectively by corporations (NR1 and NR2) that are both non-residents and non-registrants, with NR1 and NR2 in turn being 100 per cent owned by another non-resident non-registrant corporation (NR3). In this case, CanCo1 and CanCo2 are not closely related under section 128 and consequently not part of a closely related group, because NR1 and NR2 are not "qualifying subsidiaries" (as defined in subsection 123(1)) of NR3 as they are not resident in Canada. Also, subsection 128(2) does not assist CanCo1 and CanCo2 to be closely related as it does not allow the fact that NR1 and NR2 are not registrants to be ignored. As a result, while CanCo1 and CanCo2 are both registrants and residents in Canada and are part of a 90 per cent or more common ownership group, they are not part of a closely related group (as currently defined) and cannot make the elections provided for under sections 150, 156 and 228.

The definitions "closely related group" and "qualifying subsidiary" and section 128 are amended to move the registration and residency requirements, currently in section 128 and the definition "qualifying subsidiary", to the definition "closely related group" in subsection 123(1). The effect of this change is that the determination of whether a corporation is a qualifying subsidiary and whether two corporations are closely related to each other will be based on the degree of share ownership of the corporations, and of other corporations in the ownership structure, without reference to the registration or residency status of any of those corporations. However, while corporations that are non-resident and/or non-registrant can be closely related to one another, only those closely related corporations that are both registrants and resident in Canada can be members of a closely related group (as defined in subsection 123(1)) and be party to elections provided under sections 150, 156 and 228 open to members of a closely related group. The impact of these amendments in the example above is that CanCo1, CanCo2, NR1, NR2 and NR3 are now all closely related to one another under amended section 128, but only CanCo1 and CanCo2 are members of a closely related group under the amended definition of that expression.

The definition "closely related group" is also amended to include two deeming rules that apply for the purposes of the definition "closely related group". These rules are currently in section 128. Specifically, in subsection 128(1), a non-resident insurer with a permanent establishment in Canada is deemed to be a resident in Canada and, in paragraph 128(3)(a), a credit union and a member of a mutual insurance group are deemed to be registrants. These deeming rules are deleted from section 128 and included in the definition "closely related group". This change has no effect on the ability of a non-resident insurer, credit union or member of a mutual insurance group to be a member of a closely related group.

The amendments are deemed to have come into force on November 17, 2005.

Subclause 2(2)

French Definition "logement en copropriété"

ETA
123(1)

A "residential condominium unit" is a "residential complex" (as defined in subsection 123(1)) that is, or is intended to be, a separate unit within a building registered or described on a condominium or strata lot plan or description, or a similar plan or description registered under provincial law.

As a result, an area of a building that is intended to be a condominium unit would be considered a "residential condominium unit" even though the area is not yet registered or described on a plan.

The current French version of the definition "residential condominium unit" uses the term "censé être" to accomplish the same objective as "intended to be" accomplishes in the English version. However, depending on the context, "censé être" generally means "supposed to be" or "deemed to be". In a particular case litigated in French and involving owner-built condominium units, the Tax Court of Canada concluded that the current wording of the Act did not allow for a GST New Housing Rebate since the units could not be considered "residential condominium unit" before their limits are actually described on a plan even though it was what the appellants intended to do.

The French version of the definition is amended by replacing the term "censé être" by "destiné à être". This new term is consistent with the term used in the French version of the definition "residential complex" that also contains the notion of units that are owned or intended to be owned separately from other units.

The amendment is deemed to have come into force on January 1, 2000.

Subclauses 2(3) and (4)

Definition "basic tax content"

ETA
123(1)

The definition "basic tax content" provides that the basic tax content of a person’s property is generally the amount of tax under Part IX that the person was required to pay on the property and improvements to it, after deducting any amounts (other than input tax credits) that the person was entitled to recover by way of rebate, refund, remission or otherwise and after taking any depreciation in the value of the property into account. The basic tax content includes not only tax that was actually paid but also the tax that otherwise would have been payable when the property (or improvements to the property) was last acquired if not for subsection 153(4) of the Act or section 167 of the Act or the fact it was acquired or brought in for consumption, use or supply exclusively in the course of commercial activities.

Subparagraph (iii) of the description of A in paragraph (a) and subparagraph (iv) of the description of J in paragraph (b) of the definition "basic tax content" are amended to provide that the basic tax content of a property also includes tax that otherwise would have been payable, in the absence of new section 167.11 of the Act, when the property (or improvements to the property) was last acquired.

The amendments are deemed to have come into force on June 28, 1999.

Subclause 2(5)

Definition "qualifying subsidiary"

ETA
123(1)

The definition "qualifying subsidiary" in subsection 123(1) is relevant for the purposes of the definition "closely related corporations" in section 128. The definition "qualifying subsidiary" is amended to delete the requirement that a qualifying subsidiary be resident in Canada, as this residency requirement is now contained in the amended definition "closely related group" in subsection 123(1). These changes are further explained in the commentary on definition "closely related group".

The amendment is deemed to have come into force on November 17, 2005.

Subclause 2(6)

Definition "listed international agreement"

ETA
123(1)

The definition "listed international agreement" is added to subsection 123(1) as a consequence of the amendments to subsections 289(1) and 295(5) and paragraph 328(2)(a). The agreemetn included in the definition is the Convention on Mutual Administratie Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988, as amended from time to time. That Convention provides a framework for governments to combat tax avoidance and tax evasion on a global scale by facilitating the exchange of information between national tax administrations.

The amendment comes into force on Royal Assent.

Definition "Superintendent"

ETA
123(1)

Subsection 123(1) is amended to add the definition "Superintendent". The definition provides that "Superintendent" means the Superintendent of Financial Institutions appointed pursuant to the Office of the Superintendent of Financial Institutions Act. The Superintendent may make orders authorizing a foreign bank to become an authorized foreign bank permitted to establish a branch in Canada to carry on banking business in Canada. Only transfers of property or services made pursuant to an authorized foreign bank reorganization that has been approved by the Superintendent qualify for the tax-free rollover election provided by new section 167.11.

The amendment is deemed to have come into force on June 28, 1999.

Clause 3

Closely Related Corporations

ETA
128

Section 128 of the Act contains rules for determining whether two corporations are considered to be "closely related" for the purposes of Part IX of the Act. This determination is relevant for determining whether a corporation can be a member of a closely related group (as defined in subsection 123(1) of the Act) and thus eligible to make an election under section 150 or 156 of the Act, which effectively exempt or treat as zero-rated respectively transactions between members of the closely related group. It is also relevant for determining whether a corporation is eligible to file joint applications to offset one corporation’s refunds against another’s tax owing.

Subsection 128(1) provides that two corporations are considered to be closely related if they are registrants and resident in Canada and if there is a degree of common ownership of at least 90 per cent. Subsection 128(1) is amended to remove the requirement that the two corporations both be registrants resident in Canada to be considered closely related. However, in respect of the concept of closely related group, this requirement still exists and is now contained in the amended definition "closely related group" in subsection 123(1). This change is further explained in the commentary on that definition.

Subsection 128(2) provides that if two corporations are closely related to the same corporation under subsection 128(1), or would be if all the corporations were Canadian residents, these two corporations are considered to be closely related to each other. Subsection 128(2) is amended to delete the words "or would be so related if all the corporations were resident in Canada" given that those words are no longer needed as amended subsection 128(1) no longer requires that two corporations both be resident in Canada in order to be closely related to each other. Amended subsection 128(2) now simply provides that two corporations are closely related to each other if they are each closely related under subsection 128(1) to a third corporation.

Existing subsection 128(3) contains deeming rules, which apply for the purposes of determining if two corporations are closely related to one another under section 128. Subsection 128(3) is amended to delete paragraph (a) which deems credit unions and members of a mutual insurance group to be registrants for the purposes of section 128. Since a corporation no longer needs to be a registrant in order to be closely related to another corporation under amended section 128, this deeming rule is no longer needed. Subsection 128(3) now only deems an investment fund that is a member of a mutual insurance group to be a corporation.

The amendments are deemed to have come into force on November 17, 2005.

Clause 4

Supply by Small Supplier Division

ETA
129.1(1)

Subsection 129.1(1) of the Act parallels section 166 of the Act and clarifies that, similar to a small supplier, a "small supplier division" of a public sector body designated under section 129 of the Act is not required to collect and remit tax on most of its supplies. Consistent with section 166, subsection 129.1(1) currently does not provide relief for sales of real property by small supplier divisions of a public sector body.

Effective March 10, 2004, section 166 was amended, as a result of the increased rebate for municipalities, to also exclude from its application sales of personal property by a municipality that is capital property of the municipality and sales of "designated municipal property" (as defined in subsection 123(1) of the Act) of a person designated to be a municipality for the purposes of section 259 of the Act that is capital property of the person.

Subsection 129.1(1) is amended to provide parallel treatment between municipalities that are small suppliers and small supplier divisions of a municipality with respect to supplies made by way of sale of capital personal property. Parallel treatment is also extended to small supplier divisions of designated municipalities with respect to supplies made by way of sale of "designated municipal property".

The amendment applies to any supply for which consideration becomes due after Announcement Date or is paid after that day without having become due, but does not apply to any supply made under an agreement in writing entered into before the day following that day.

Clause 5

Election for Exempt Supplies

ETA
150(2) and (2.1)

Section 150 of the Actentitles two corporations that are members of the same closely related group that includes a listed financial institution to make an election to treat certain transactions between them as exempt supplies of financial services. Subsection 150(2) describes transactions that are excluded from the application of this rule.

New paragraph 150(2)(c) excludes certain supplies of services in relation to the clearing or settlement of cheques and other payment items. Specifically, group relief would not apply to a supply of such services if they were acquired, in whole or in part, by the first purchasing group member, or by any subsequent closely related purchaser, for the purpose of making a supply of exempt services (as defined in new subsection 150(2.1)) to an unrelated party (as defined in new subsection 150(2.1)).

This provision applies in circumstances in which the re-supply to the unrelated party were made by a member of the group that is a deposit-taking institution belonging to the Canadian Payments Association (the "CPA"). Further, the unrelated party must be acquiring the services for the purpose of providing services in relation to clearing or settlement.

The result of the amendment is that a corporation that is not itself a CPA member must charge tax on clearing services provided in respect of payment items that are deposited at financial institutions outside the corporation’s closely related group. Group relief continues to apply to services supplied between members of the group for their own use, that is, for clearing payment items deposited at financial institutions that are part of the closely related group.

New paragraph 150(2)(c) comes into force on September 14, 2001. The amendment does not apply to a supply of clearing services that is acquired to make an exempt supply to an outside purchaser where the agreement for the supply to the outside purchaser was entered into before September 14, 2001. If the agreement for the supply to the outside purchaser was entered into after September 13, 2001, then the amendment applies only to those clearing services that are provided after that date. In determining if a supply of clearing services is provided after that date, it should be noted that subsection 136.1(2) of the Act already deems a separate supply of a service to be made for each billing period under the agreement for the supply. A transitional rule for this amendment further divides a supply of services for any billing period that includes September 14, 2001, by deeming the provision of the services before that day and the provision of the services on or after that day to be two separate supplies.

New subsection 150(2.1) adds new definitions that are used throughout new paragraph 150(2)(c).

New definition "exempt services" means services prescribed by section 3 of the Financial Services (GST/HST) Regulations. These services, which are prescribed for the purposes of paragraph (m) of the definition "financial service" in subsection 123(1) of the Act, comprise any service in relation to the clearing and settlement of cheques and other payment items under the national payments system of the Canadian Payments Association that is supplied by the Association or any of its members.

New definition "unrelated party" means, in respect of a supply of services in relation to the clearing and settlement of cheques and other payment items under the national payments system of the Canadian Payments Association, a person that receives a supply of such services, that is not a member of a closely related group (as defined in subsection 123(1)) of which the supplier of that supply is a member of and that acquires those services for the purpose of making a supply of services in relation to the clearing or settlement of cheques and other payment items under the national payments system of the Canadian Payments Association. An example of an unrelated party would be a smaller bank which obtains cheque clearing services from an unrelated larger bank so that the smaller bank can allow its customers to deposit payment items issued by other financial institutions.

The amendment to new subsection 150(2.1) comes into force on September 14, 2001.

Clause 6

Election for Closely Related Persons

ETA
156

Section 156 of the Act allows supplies between certain members (defined as "specified members") of a closely related group of corporations and partnerships resident in Canada to be effectively treated as zero-rated supplies if those member corporations and partnerships are all engaged exclusively in commercial activities (and, therefore, are entitled to fully recover any tax paid on purchases from other members in any event). This is achieved by specified members electing to treat certain supplies between them as having been made for no consideration. The effect is that the members need not account for otherwise fully recoverable tax on the supplies.

Subclauses 6(1) and (2)

Definitions

ETA
156(1)

Subsection 156(1) provides definitions that apply for the purposes of section 156. The amendments to section 156 modify the existing definitions "qualifying group" and "specified member" and add new definitions "distribution", "qualifying member" and "temporary member".

The amendments to subsection 156(1) are deemed to have come into force on November 17, 2005.

Definition "qualifying group"

Existing definition "qualifying group" refers to a group whose members are entitled to make an election under subsection 156(2) if they qualify as "specified members". A qualifying group means a "closely related group", as defined in subsection 123(1) of the Act as being a group of corporations each member of which is a registrant, resident in Canada and closely related (generally, 90 per cent or more common ownership) to each other within the meaning of section 128 of the Act. A qualifying group also means a group consisting of Canadian partnerships, or of Canadian partnerships and corporations resident in Canada, that are all registrants and are closely related to one another, according to the rules set out in subsections 156(1.1) and (1.2).

The definition "qualifying group" is amended so that a corporation no longer has to be resident in Canada or a registrant in order to be a member of a qualifying group. As well, in the case of a Canadian partnership, it no longer has to be a registrant, though members of the partnership still have to be resident in Canada, in order to be a member of a qualifying group. These registration and residency requirements are instead moved to new definition "qualifying member" in subsection 156(1), which determines who is eligible to make the election under subsection 156(2). These changes are further explained in the commentary on that definition.

Definition "specified member"

Existing definition "specified member" refers to persons that are eligible to make an election under subsection 156(2). Currently, the meaning of specified member is limited to corporations and partnerships that are members of a qualifying group of closely related corporations and partnerships and are not party to an election under subsection 150(1) of the Act. Also, the members must meet the condition that all or substantially all of their property was last manufactured, produced, acquired or imported for consumption, use or supply exclusively in the course of their commercial activities or, if they have no property (other than financial instruments), all or substantially all of their supplies were taxable supplies.

The definition "specified member" is amended to provide that a specified member of the qualifying group (as defined in subsection 156(1)) includes a temporary member (as defined in subsection 156(1)) of the group as well as a qualifying member (as defined in subsection 156(1)). The effect of the change is that a corporation which exists to receive a supply made in contemplation of a distribution made in the course of a reorganization described in subparagraph 55(3)(b)(i) of the Income Tax Act, and which prior to that supply never carried on business or owned property, can qualify as a specified member and make an election under subsection 156(2). However, a temporary member only qualifies as a specified member during the course of a reorganization. Once the reorganization is completed, the temporary member must meet the requirements of being a qualifying member or else it will cease to be a specified member and any election previously made by it under subsection 156(2) will cease to be valid.

The conditions that were in existing definition "specified member" are now contained in new definition "qualifying member".

Definition "distribution"

New definition "distribution" has the same meaning as under subsection 55(1) of the Income Tax Act. A distribution is the direct or indirect transfer of property of a corporation to one or more of its corporate shareholders such that each corporation that receives property on the distribution receives its pro rata share of each type of property owned by the distributing corporation immediately before the distribution.

Definition "qualifying member"

New definition "qualifying member" has a similar meaning to the existing definition "specified member". Therefore, a "qualifying member" is a corporation or partnership that is a member of a qualifying group of closely related corporations and Canadian partnerships and that is not a party to an election under subsection 150(1). The member must also meet the condition that all or substantially all of its property was last manufactured, produced, acquired or imported for consumption, use or supply exclusively in the course of its commercial activities or, if it has no property (other than financial instruments), all or substantially all of its supplies were taxable supplies. However, the definition adds additional requirements, not contained in the existing definition "specified member", that the corporation or partnership be a registrant and that it be either a corporation resident in Canada or a Canadian partnership. The addition of residency and registration requirements is necessary as the same requirements are concurrently being removed from the definition "qualifying group" in subsection 156(1) and from subsections 156(1.1) and 156(1.2).

The effect of the amendments to this definition is that a corporation or Canadian partnership can be a member of qualifying group if it meets the ownership requirements (i.e., to have at least 90 per cent ownership of the corporation’s full voting shares or to hold all or substantially all of the interest in the partnership) despite its residency (in the case of a corporation) or its registration status. However, only those corporations or partnerships in the qualifying group that are both registrants and that are either corporations resident in Canada or Canadian partnerships qualify as qualifying members, which allows them to meet the amended definition "specified member" in subsection 156(1) and to make the election under subsection 156(2). As a result, corporations and Canadian partnerships that meet these residency and registration requirements and that form part of a 90 per cent or more common ownership group, but do not currently qualify as "specified members" because one or more of the corporations or partnerships in the ownership structure do not meet these residency and registration requirements, are now qualifying members and therefore specified members. These amendments parallel similar amendments to the definitions "closely related group" and "qualifying subsidiary" and to section 128.

Definition "temporary member"

New definition "temporary member" refers to a corporation that exists to receive a transfer of property from an existing corporation as part of a transaction undertaken to comply with the requirements of paragraph 55(3)(b) of the Income Tax Act (a "butterfly" transaction). This type of corporation cannot currently qualify as a "specified member" (as defined in existing subsection 156(1)) and cannot make the election in subsection 156(2) in respect of this transfer since, prior to receiving the property, it would not have had any property (other than possibly financial instruments) or made taxable supplies.

Amendments to section 156 allow this corporation, if it falls within the definition "temporary member", to qualify as a "specified member" (as defined in subsection 156(1)) and to make the election in respect of a supply it receives that is made in contemplation of a distribution made in the course of a reorganization described in subparagraph 55(3)(b)(i) of the Income Tax Act. To qualify as a temporary member, a corporation must be resident in Canada and a registrant for the GST/HST. Further, it must receive the supply from a distributing corporation in contemplation of a distribution and its shares must be transferred in the course of the distribution. It must also be a member of the same qualifying group as the distributing corporation making the supply. In addition, the corporation cannot be a party to an election made under subsection 150(1) and, prior to receiving the supply, must not have had any business activities or owned any property other than financial instruments. Finally, if a corporation meets the requirement of being a qualifying member (as defined in subsection 156(1)), it cannot also be a temporary member at the same time.

Subclauses 6(3) to (9)

Closely Related Persons

ETA
156(1.1)

Subsection 156(1.1) contains rules for determining whether two Canadian partnerships, or a Canadian partnership and a corporation resident in Canada, are closely related for the purposes of section 156. Paragraph 156(1.1)(a) provides the rules for determining whether two Canadian partnerships are closely related. Paragraph 156(1.1)(b) provides the rules for determining whether a Canadian partnership is closely related to a corporation resident in Canada. In all cases, however, both persons must be registrants.

Subsection 156(1.1) is amended to remove the requirement that a person be a registrant, and the requirement that a corporation be a resident in Canada, in order to be closely related for the purposes of section 156. These residency and registration requirements are moved to the definition "qualifying member" in subsection 156(1) and are explained in the commentary on that definition.

The amendments are deemed to have come into force on November 17, 2005.

Subclause 6(10)

Persons Closely Related to the Same Person

ETA
156(1.2)

Subsection 156(1.2) provides that, where two persons are closely related to the same corporation or partnership under subsection 156(1.1), or would be so related if the corporation or each member of the partnership were resident in Canada, the two persons are considered closely related to each other for the purposes of section 156.

Subsection 156(1.2) is amended to remove the reference allowing the corporation to be considered resident in Canada for the purposes of determining if the two persons are closely related to the corporation. This reference is no longer needed, as amended subsection 156(1.1) no longer requires that a corporation be resident in Canada in order to be closely related to another corporation or to a Canadian partnership. Subsection 156(1.2) now simply provides that two persons are closely related to each other for the purposes of section 156 if they are each closely related under subsection 156(1.1) to the same corporation or partnership, or if they would be so related to that partnership if each member of that partnership were resident in Canada.

The amendment is deemed to have come into force on November 17, 2005.

Subclause 6(11)

Election for Nil Consideration

ETA
156(2) and (2.1)

Existing subsection 156(2) allows certain members (defined as "specified members" in subsection 156(1)) of a closely related group of corporations and/or Canadian partnerships to elect to treat certain taxable supplies between them as having been made for no consideration. The effect is that the members need not account for otherwise fully recoverable tax on the supplies. Subsection 156(2) excludes from the application of the election supplies by way of sale of real property and supplies of property or services that are not acquired for consumption, use or supply exclusively in the course of the recipient’s commercial activities. Subsection 156(2) is amended to delete these exclusions from section 156. These exclusions are now contained in new subsection 156(2.1).

The amendments also add new subsection 156(2.1), which provides exclusions from the application of the election under section 156. Paragraphs 156(2.1) (a) and (b) contain the exclusions removed from existing subsection 156(2). Paragraph (c) contains a new exclusion that only applies to supplies where the recipient is a temporary member (as defined in subsection 156(1)). This paragraph provides that, in the case of these supplies, the election applies only to supplies received by the temporary member that are made in contemplation of a distribution made in the course of a reorganization described in subparagraph 55(3)(b)(i) of the Income Tax Act.

The amendments apply to supplies made after November 16, 2005.

Clause 7

Supply of Right to Use Coin-Operated Device

ETA
165(3.2)

Former subsection 165(3.1) of the Act sets out the rules for calculating the amount of tax payable on goods or services supplied through mechanical coin-operated devices that are built in such a way that they can accept only a single coin of twenty-five cents or less as the total consideration for the supply. Under these rules, the tax payable for such supply is equal to zero.

Former subsection 165(3.1) covers situations where the device dispenses goods, such as candy, or where a service is rendered through the operation of the device. The latter wording of former subsection 165(3.1) was intended to cover situations where a form of amusement or entertainment, such as the playing of a game, is provided through the operation of the device. However, in some such circumstances, the more accurate description of the supply is of a right to use the device, rather than a supply of a service.

New subsection 165(3.2) is added to the Act for greater certainty only to cover those circumstances and applies for supplies made after April 23, 1996 and before April 1, 1997, the period during which former subsection 165(3.1) was applicable.

Clause 8

Supply of Right to Use Coin-Operated Device

ETA
165.1(3)

Subsection 165.1(2) (formerly subsection 165(3.1)) of the Act sets out the rules for calculating the amount of tax payable on goods or services supplied through mechanical coin-operated devices that are built in such a way that they can accept only a single coin of twenty-five cents or less as the total consideration for the supply. Under these rules, the tax payable for such supply is equal to zero.

The existing subsection covers situations where the device dispenses goods, such as candy, or where a service is rendered through the operation of the device. The latter wording was intended to cover situations where a form of amusement or entertainment, such as the playing of a game, is provided through the operation of the device. However, in some such circumstances, the more accurate description of the supply is of a right to use the device, rather than a supply of a service.

New subsection 165.1(3) is added to the Act for greater certainty only to cover those circumstances. Since the application of the rule under subsection 165.1(2) in these circumstances is consistent with the manner in which the provision has been administered since its introduction, this clarifying amendment is made retroactive to April 1, 1997, the day on which subsection 165.1(2) came into effect.

Clause 9

Supply to Authorized Foreign Bank

ETA
167.11

New section 167.11 of the Act sets out rules that apply to certain supplies of property or services, made to a foreign bank by a related Canadian corporation, where the supply is made in order for the foreign bank to establish a branch and commence business in Canada as an authorized foreign bank (as defined in subsection 167.11(1)). This section permits, in certain circumstances, an otherwise taxable sale of property or a service to be made without tax applying if both parties to the transaction so elect under the rules and conditions set out in this section.

New section 167.11 is deemed to have come into force on June 28, 1999.

Subsection 167.11(1) – Definitions

Subsection 167.11(1) adds new definitions that are used throughout section 167.11.

Definition "authorized foreign bank"

New definition "authorized foreign bank" has the same meaning as under section 2 of the Bank Act. An authorized foreign bank is a foreign bank that has been permitted by the Superintendent of Financial Institutions to establish and carry on banking business through a branch in Canada.

Definition "foreign bank branch"

New definition "foreign bank branch" means a branch as defined in paragraph (b) of the definition "branch" in section 2 of the Bank Act in respect of an authorized foreign bank. That paragraph provides that a branch of an authorized foreign bank means an agency, the principal office or any other office of an authorized foreign bank where that bank carries on its Canadian banking business.

Definition "qualifying supply"

New definition "qualifying supply" means a supply made as part of a foreign bank reorganization where a foreign bank, which previously conducted business in Canada through a Canadian subsidiary but which has since been authorized by the Superintendent of Financial Institutions to establish a branch of the foreign bank in Canada, transfers property or services from a subsidiary to the branch. The definition "qualifying supply" is relevant in determining which supplies qualify for the election, provided for in subsection 167.11(2), which allows a tax-free rollover of certain property and services transferred to the foreign bank branch (as defined in this subsection).

In order for a supply to be a qualifying supply, it must be a supply of property, or of a service, made in Canada under an agreement for the supply. As well, the recipient must be a foreign bank that is, or has filed an application for an order under subsection 524(1) of the Bank Act with the Superintendent of Financial Institutions to become, an authorized foreign bank and the supplier must be a corporation resident in Canada that is related to that foreign bank. Also, the supply must be made after June 27, 1999 (the day on which the foreign bank branching legislation contained in the Bank Act came into force) and must be made before the day that is one year after the day on which the Act enacting this definition receives royal assent. However, if, during the one-year period after the date of royal assent, the Superintendent of Financial Institutions makes an order under subsection 534(1) of the Bank Act approving the foreign bank’s application to commence and carry on business in Canada, then the supply can be made up to the day that is one year after the date of that order.

In addition, to be a qualifying supply, the foreign bank must acquire the property or service for consumption, use or supply for the purpose of the establishment and commencement of business in Canada as an "authorized foreign bank" at one of its branches. Moreover, if the related corporation is a registrant at the time the related corporation and the foreign bank enter into the agreement for the supply, the foreign bank must also be a registrant at that time. New paragraph 240(3)(e) of the Act permits a foreign bank that will enter into an agreement to receive a supply, which would meet the requirements of the definition "qualifying supply" but for the foreign bank not being a registrant, to register for the GST/HST. This ensures that a foreign bank that receives a qualifying supply from a registered related Canadian corporation has the opportunity to make the election under s. 167.11(2) in respect of the qualifying supply even if it is not otherwise permitted by section 240 to register.

Subsection 167.11(2) – Supply of Assets

Subsection 167.11(2) provides that where a corporation resident in Canada makes a qualifying supply (as defined in subsection (1)) to a foreign bank that is related to the corporation, the corporation and the foreign bank may make a joint election that allows a tax-free rollover of certain property and services supplied in the authorized foreign bank reorganization. As a consequence of the election, the related corporation and the foreign bank are deemed to have respectively made and received a separate supply of each property and service that is made under the agreement for the qualifying supply, notwithstanding that these properties and services may be supplied together in a single supply. When attributing the consideration for the qualifying supply to each property or service, no amount should be attributed to goodwill unless section 167.1 of the Act applies to the qualifying supply. If section 167.1 does not apply, any amount that has been allocated to goodwill should instead be attributed to a taxable supply of intangible personal property, in which case subparagraph 167.11(3)(a)(vi) applies to that supply. Moreover, subsections (3) to (6) apply to each deemed supply of property or service to determine the tax, if any, that is payable, any adjustments to net tax that may be made by the foreign bank and the impact of the election on the basic tax content of the transferred property. Under subsection (7), the election is valid only if the foreign bank files the election within the time period and under the conditions provided for in that subsection.

Subsection 167.11(3) – Effect of Election

Subsection 167.11(3) sets out further rules that apply when a foreign bank and a related corporation resident in Canada make the joint election referred to in subsection (2) in respect of a qualifying supply (as defined in subsection (1)) of property or a service.

Paragraph 167.11(3)(a) provides that tax is not payable on the deemed separate supply of property or a service that is made under the agreement for the qualifying supply. However, there are some exclusions from this rule similar to the existing exclusions contained in subsection 167(1.1) of the Act respecting the election for a tax-free supply of assets in the case of the sale of a business. Specifically, subparagraphs 167.11(3)(a)(i), (iii) and (iv) are similar to the existing subparagraphs 167(1.1)(a)(i), (ii) and (iii) in providing that tax continues to be payable on taxable supplies of either services to be rendered by the supplier (i.e., the related corporation), property by way of lease, license or similar arrangement by the related corporation or in the case of a taxable sale of real property where the foreign bank recipient is not a registrant.

In addition, subparagraph 167.11(3)(a)(ii) provides that tax is payable on taxable supplies of services if paragraph 167(1)(a) does not apply to the qualifying supply. Paragraph 167(1)(a) does not apply if the related corporation making the taxable supply of services is not making a supply of a business, or a part of a business, and if the foreign bank recipient is not acquiring ownership, possession or use of all or substantially all of the property that it would need to carry on the transferred business or part as a business.

Subparagraph 167.11(3)(a)(v) excludes from the relieving rule a taxable supply of property or a service that was previously made under an agreement for a qualifying supply if no tax was payable in respect of that previous supply by reason of subsection 167.11(3). As a result, property or a service may only be transferred once on a tax-free basis under these asset rollover provisions.

Also, subparagraph 167.11(3)(a)(vi) excludes from the relieving rule a taxable supply of intangible personal property (other than capital property) if there is a greater than 10% difference between the extent (expressed as a percentage of the total use of the property by the related corporation supplier) to which the related corporation used the property in commercial activities immediately before the qualifying supply is made and the extent (expressed as a percentage of the total use of the property by the foreign bank recipient) to which the foreign bank used the property in commercial activities immediately after the qualifying supply is made. In other words, no relief is provided for a taxable supply of intangible personal property if there is a significant (greater than 10%) decrease in the use of the property in commercial activities as a result of the transfer.

Paragraphs 167.11(3)(b) and (c) deem property that is supplied under the agreement for the qualifying supply, that was capital property of the related corporation supplier and that is acquired for use as capital property by the foreign bank recipient, to have been acquired by that foreign bank for use exclusively in commercial activities (where the supply would otherwise be taxable) or for use exclusively in non-commercial activities (where the supply would otherwise be exempt). These rules are similar to the deeming rules that apply to capital property under subsection 167(1.1) in the case of a supply of a business.

The purpose of these rules is to ensure that, if the foreign bank uses the property in commercial activities to a lesser extent than the related corporation last used the property (i.e., the foreign bank would have been entitled to a lesser input tax credit than the related corporation), the change-in-use rules in Subdivision d of Division II of Part IX of the Act will require the foreign bank to self-assess tax. The foreign bank may conversely be entitled to an input tax credit if the foreign bank uses the property in commercial activities to a greater extent than the related corporation last used the property. Further information can be found in the commentary on new subsections 205(4.1) and (5.1) of the Act.

Finally, paragraph 167.11(3)(d) provides that, if property that was used otherwise than as a capital property by the related corporation supplier before being supplied under the agreement for the qualifying supply, the foreign bank recipient is deemed to have acquired the property for consumption, use or supply in the course of commercial activities and otherwise than as capital property. This rule only applies if, in the absence of the election referred to in subsection (2), tax would have been payable by the foreign bank in respect of the supply of the property. The purpose of this rule is to trigger change-in-use rules under section 196.1 of the Act, if for example, there is an appropriation of property by the foreign bank for use as capital property that was previously inventory of the related corporation.

Subsection 167.11(4) – Basic Tax Content

Subsection 167.11(4) sets out rules that apply to determine the basic tax content of property acquired by a foreign bank recipient under an agreement for a qualifying supply if the property is, immediately before the time the qualifying supply is made, capital property of a related corporation supplier. These rules apply where the property is acquired from the related corporation on a tax-free basis because the joint election referred to in subsection 167.11(2) is made in respect of the qualifying supply. These basic tax content rules may be triggered if the foreign bank is required to pay tax, or may be entitled to claim an input tax credit, if the property is capital property and its extent of use in commercial activities changes following the supply.

The basic tax content, defined in subsection 123(1) of the Act, is generally the amount of tax under Part IX that the person was required to pay on the property and improvements to that property after deducting any amounts (other than input tax credits) that the person was entitled to recover by way of rebate, refund, remission or otherwise and after taking any depreciation in the value of the property into account. In the case of a supply of property, in the absence of special rules, the foreign bank recipient might in certain circumstances (e.g., supply of property acquired by the supplier before 1991 or property that has appreciated in value) be required to self-assess and account for tax based on the fair market value of the property, which tax could be higher than the tax that the related corporation supplier originally paid. Therefore, special rules are proposed to ensure that the supply from the related corporation to the foreign bank is ignored and that the basic tax content of the transferred property remains at the time the recipient acquires the property what it was immediately before the qualifying supply was made. However, in determining the basic tax content of that property after the time the qualifying supply is made, the foreign bank must also take into account any amounts of tax payable and any other tax amounts required to be added (e.g., in the case of improvements to the property acquired by the foreign bank) or deducted under the basic tax content rules subsequent to the supply.

In order to accomplish this, subsection 167.11(4) provides a series of rules that effectively transfer the basic tax content of the property supplied under the agreement for a qualifying supply from the related corporation to the foreign bank by deeming the foreign bank to be in the shoes of the related corporation for the period between the last acquisition of the property by the related corporation and the time the qualifying supply is made.

Subsection 167.11(5) – Adjustment to Net Tax

Subsection 167.11(5) provides for an adjustment to net tax of the foreign bank in the case where a related corporation made a qualifying supply (as defined in subsection 167.11(1)) to the foreign bank but the two parties did not make the joint election under subsection 167.11(2) in respect of that supply until after the foreign bank had already paid tax on that supply. Subsection 167.11(5) provides a mechanism whereby that foreign bank can make an adjustment to its net tax to recover the tax it could have avoided paying if it had made the subsection 167.11(2) election at the time of the supply.

Subsection 167.11(5) provides an adjustment to net tax in respect of a supply of a property or a service, made under an agreement for the qualifying supply, where that supply would not be taxable by virtue of paragraph 167.11(3)(a) if the election referred to in subsection 167.11(2) is made. Subsection 167.11(5) applies to supplies of property or a service made under an agreement for a qualifying supply, but only if that agreement is made before November 17, 2005. This subsection applies to each supply of property or of a service, deemed to have been made separately under subsection 167.11(2), rather than to the qualifying supply as a whole. The amount of the adjustment to net tax that the foreign bank can make in respect of such a supply is the amount of tax the foreign bank actually paid on the non-taxable supply of the property or service minus all amounts of that tax paid, in respect of the property or service, that the foreign bank either recovered through an input tax credit claim, rebate, refund, remission or other means or could have recovered through a deduction from net tax (other than an amount determined under subsection 167.11(5)).

Subsection 167.11(6) – Limitation Period Where Election

Subsection 167.11(6) modifies the normal limitation period that applies for the purpose of making an assessment, reassessment or additional assessment to take into account an amount payable by a foreign bank, or an amount remittable by a related corporation, in the case where the foreign bank and the related corporation make the joint election referred to in subsection 167.11(2) in respect of a qualifying supply (as defined in subsection 167.11(1)). Subsection 167.11(6) provides that the four-year limitation period that applies solely for this purpose begins on the day that is the later of the day on which the foreign bank and related corporation make the joint election referred to in subsection 167.11(2) and the day on which the qualifying supply is made. As a result, the limitation period for an assessment, reassessment or additional assessment may be extended as a result of making the joint election where the election is made some time after the supply of property or service is made.

Subsection 167.11(7) – Validity of Election

Subsection 167.11(7) sets out conditions and time requirements for validity of the joint election referred to in subsection 167.11(2) by a foreign bank recipient and a related corporation supplier in respect of a qualifying supply (as defined in subsection 167.11(1)). If the foreign bank is a registrant at the time the qualifying supply is made, paragraph 167.11(7)(a) provides that the joint election must be filed with the Minister of National Revenue in prescribed form containing prescribed information, no later than the day that is the latest of (i) the day on which the foreign bank was first required to file a return to report tax that would, in the absence of the provisions of section 167.11, be payable in respect of the supply of property or a service made under the agreement for the qualifying supply received by that foreign bank; (ii) the day that is one year after the day on which the Act enacting section 167.11 receives royal assent; and (iii) any later day that the Minister may permit to file the election if the foreign bank so applies. If, instead, the foreign bank is not a registrant at the time the qualifying supply is made, paragraph 167.11(7)(a) provides that the joint election must be filed no later than the latest of the three days described above except that the day provided for in subparagraph (i) is the day that is one month after the end of the reporting period for which tax would, in the absence of section 167.11, have become payable in respect of the supply of property or service supply made under the agreement for the qualifying supply received by the foreign bank.

Paragraph 167.11(7)(b) provides that a joint election can only be made in respect of qualifying supplies made within a one-year period. In other words, a joint election is only valid in respect of a qualifying supply if that supply is made on or before the day that is one year after the day on which the recipient has received for the first time a qualifying supply in respect of which a joint election referred to in subsection (2) has been made.

Finally, paragraph 167.11(7)(c) provides that the joint election referred to in subsection 167.11(2) in respect of a qualifying supply is not valid if, on or before the day on which the election is filed, the foreign bank has made a valid election under subsection 167(1) in respect of that qualifying supply. As a result, if the foreign bank and the related corporation have already chosen to make the election, under subsection 167(1), in respect of the qualifying supply, they cannot then also avail themselves of the election referred to in subsection 167.11(2) that is particular to authorized foreign bank reorganizations.

Clause 10

Acquisition of Used Returnable Containers

ETA
176(1)(a) and (d)

Existing section 176 of the Act deems tax to have been paid by a registrant in certain circumstances where the registrant has acquired used returnable containers from a person not required to charge tax (e.g., where a consumer returns used containers to a redemption centre in exchange for a refund). The effect is that the registrant may be able to claim an input tax credit for the tax component of the amount refunded.

The amendments to subsection 176(1) exclude returnable containers, as defined in amended subsection 226(1) of the Act, from the ambit of section 176 since the effect of the amendments to section 226 is to exclude refundable deposits on beverage containers for taxable products from the GST/HST tax base. Accordingly, section 176 no longer needs to apply to those containers, as there would no longer be any tax component in the refund for them.

The amendments apply to used containers for which consideration becomes due or is paid (i.e., refunds are given) after July 15, 2002,which is 75 days after the implementation date of May 1, 2002for the changes to section 226. There is therefore a 75-day transition period during which registrants may continue to be able to claim input tax credits in respect of the acquisition of used containers regardless of whether any tax was originally charged on the container deposits. This reflects the fact that the deposits on returnable beverage containers already in circulation at the time of implementation of the amendments to section 226 include an amount of tax. It should be noted that, for the purposes of applying section 176 during that 75-day transition period, existing section 226 applies. For example, the meaning of "returnable container" in existing subsection 226(1) continues to apply for the purposes of section 176 throughout the transition period.

Clause 11

Agents

ETA
177

Section 177 of the Act deals with supplies made by agents, including auctioneers, on behalf of principals. The rules stipulate which party is required to account for and remit tax respecting these supplies.

Subclause 11(1)

Election for Agent to Account for Tax

ETA
177(1.1)

Subsection 177(1.1) provides for an election in cases where an agent who is a registrant makes a supply (otherwise than by auction) on behalf of a principal who is required to collect tax in respect of the supply. Subsection 177(1.1) allows the principal and the agent to elect jointly to have the agent report and remit the tax as if it were collectible by the agent.

Paragraph 177(1.1)(a) provides that, if the election under subsection 177(1.1) between a principal and an agent is made in respect of a supply, the tax collectible in respect of the supply is to be included in the net tax calculation of the agent and not of the principal.

This paragraph is amended to also provide that sections 222 and 232 of the Act apply as if the tax, or any amount charged or collected as or on account of tax, were collectible, charged or collected, as the case may be, by the agent and not by the principal. As a result of the addition of the reference to section 222, amounts collected by the agent as or on account of tax are deemed to be held in trust by the agent for the Crown separate and apart from other funds of the agent. The reference to section 232 ensures that, if the agent has charged to, or collected from, a customer an excess amount of tax, or reduces the consideration and tax collectible in respect of a supply, and provides a refund, credit, or adjustment in accordance with section 232, the agent can claim the deduction under that section.

Existing paragraph 177(1.1)(b) provides that the principal and the agent are jointly and severally liable for all obligations arising upon or as a consequence of the tax on the supply becoming collectible or any failure to account for or remit the tax. Wording changes are made, for clarification purposes only, to reflect the fact that there is no obligation for a supplier to remit tax collectible in respect of a supply per se but rather the remittance obligations under the GST/HST are with respect to a positive amount of net tax, or to any repayment required under section 230.1 of the Act of an over-payment of a net tax refund, that is reasonably attributable to the supply.

In addition, paragraph 177(1.1)(b) is amended to provide that the principal and agent are also jointly and severally liable with respect to any claims the agent may make under section 231 or 232 of the Act (i.e., in respect of bad debts or price or tax adjustments relating to the supply).

The amendments to paragraph 177(1.1)(b) ensure that the principal and the agent are jointly and severally liable for all obligations (including any interest or penalty) arising as a consequence of an underpayment of net tax, or an overpayment of a net tax refund, that results from the agent erroneously claiming or over-claiming a deduction under section 231 or 232.

New subparagraphs 177(1.1)(b)(v) and (vi) ensure that, if the agent claims bad debt relief under subsection 231(1) relating to the supply, the principal and agent are jointly and severally liable for a determined amount in respect of the GST/HST on the supply if all or part of the bad debt is subsequently recovered. In the event of a recovery, subsection 231(3) requires the agent to add back to net tax an amount determined by that subsection.

New paragraph 177(1.1)(c) provides that the agent must include the consideration for the supply in the calculation of the agent’s threshold amounts under subsections 249(1) and (2) of the Act, which are relevant to the determination of the agent’s reporting periods. Accordingly, the consideration is not included in determining the principal’s threshold amounts under those subsections.

Subsection 177(1.1) is also amended to harmonize it with the civil law applicable in the province of Quebec by adding a reference to a principal and agent being "solidarily" liable, which is comparable to the common law concept of joint and several liability.

The amendments to paragraph 177(1.1)(a) apply to supplies made after December 20, 2002. The amendments to paragraph 177(1.1)(b) apply to any supply made after April 23, 1996 in respect of which the election under subsection 177(1.1) applies. In the case of supply made before December 21, 2002, in respect of which an election was made before that day, the only amendments to paragraph 177(1.1)(b) that apply retroactively are those relating to the agent’s claims for bad debt relief. This coincides with the retroactive coming into force of the amendments to the bad debt provisions in section 231, which apply to supplies made after April 23, 1996 and allow an agent to claim any deduction under section 231 relating to those supplies (see commentary on amendments to section 231).

New paragraph 177(1.1)(c) applies to supplies made after December 20, 2002.

It should be noted that the rules under new subsection 177(1.11) permitting billing agents to also use the election under subsection 177(1.1) apply only to supplies made after December 20, 2002.

Subclause 11(2)

Election for Billing Agent and Revocations

ETA
177(1.11) and (1.12)

Subsection 177(1.11) – Election for Billing Agent to Account for Tax

New subsection 177(1.11) applies where a supplier engages a registrant to act as a billing agent respecting supplies made by the supplier. The registrant in this case acts as the supplier’s agent in charging and collecting consideration and tax respecting the supply, but does not act as the supplier’s agent with respect to the making of the supply.

New paragraph 177(1.11)(a) deems the billing agent to also act as agent in making the supply just for the purposes of enabling the supplier and the agent to apply subsection 177(1.1). If all other conditions of subsection 177(1.1) are met, the supplier and agent may make an election under that subsection. This amendment gives billing agents the same option for accounting for tax as in the case of agents who make supplies on behalf of suppliers.

The deeming rule under paragraph 177(1.11)(a) does not apply for all purposes of Part IX of the Act. However, new paragraph 177(1.11)(b) provides that, in the event that the supplier and the billing agent do make the election under subsection 177(1.1), the agent is deemed to have acted as agent in making the supply on behalf of the supplier for purposes of all provisions that refer to a supply in respect of which such an election has been made. For example, subparagraph (b)(iii) of the description of A of the net tax formula for charities under subsection 225.1(2) of the Act refers to supplies made on behalf of another person for whom the charity acts as agent and in respect of which the charity has made an election under subsection 177(1.1). That description in the formula would therefore also apply where the charity acted only as a billing agent and made the election.

As a result of a principal and their billing agent making the election under subsection 177(1.1) in respect of a supply, the billing agent must report and remit the tax in respect of that supply and is the only person entitled to claim bad debt relief respecting the supply under section 231 in cases where the supplier writes off the bad debt in the supplier’s books of account (see commentary on amendments to section 231). Similarly, if a price or tax adjustment is made under section 232 of the Act in respect of the supply, only the billing agent is entitled to the corresponding deduction under section 232.

In addition, the supplier and the billing agent are jointly and severally, or solidarily, liable under paragraph 177(1.1)(b) for obligations arising from the requirement to account for or remit net tax attributable to the supply, from the claiming of deductions by the billing agent under section 231 or 232 and from the requirement to account for or remit amounts attributable to the additions to net tax required by subsection 231(3) resulting from a recovery of bad debts in respect of the supply.

Principals and their billing agents may make elections under subsection 177(1.1) only with respect to supplies made after December 20, 2002.

Subsection 177(1.12) – Joint Revocation

New subsection 177(1.12) provides for the joint revocation of an election made under subsection 177(1.1) by a principal and their agent with respect to any supply.

The revocation must be with respect to a particular supply or supplies that are made on or after the effective date specified in the revocation. The principal and agent can backdate a revocation so as to accommodate, for example, a situation where the parties had originally made the election to have the agent report the tax on the supplies in question but the supplier in fact reported the tax.

If an election is revoked with respect to a supply, the election is deemed never to have been made in respect of that supply. Therefore, the agent also thereby revokes the agent’s entitlement to claim bad debt deductions under section 231 and deductions under section 232 with respect to that supply. The principal would instead be so entitled if all the conditions were met by the principal.

New subsection 177(1.12) comes into force on December 20, 2002.

Clause 12

Meaning of "Specified Service" by a Charity

ETA
178.7(1)

Subsection 178.7(1) of the Act defines the term "specified service" for purposes of subsection 178.7(2) and paragraph (d.1) of section 1 of Part V.1 of Schedule V to the Act. Specified services supplied to registrants by a charity that is designated under subsection 178.7(3) are excluded from the general exemption under section 1 of Part V.1 of Schedule V.

Paragraph 178.7(1)(b) of the French version of the Act is amended by replacing the term "bénéficiaire" by the term "acquéreur" (as defined in subsection 123(1) of the Act) to ensure consistency between both official versions of the Act.

The amendment is deemed to have come into force on February 24, 1998, the day section 178.7 came into force, and applies to reporting periods of a charity beginning after that day.

Clause 13

Import Arrangements

ETA
178.8

New section 178.8 of the Act addresses circumstances in which a person (referred to as the "constructive importer") is the recipient of a supply made outside Canada of goods that are imported into Canada for that person’s consumption, use or re-supply and that are not supplied by that person outside Canada before their release, but is not the person by or on whose behalf the goods are accounted for under the Customs Act at the time of their entry. For example, the supplier of the goods might effect the importation and pay any applicable taxes on the supplier’s own account.

New section 178.8 applies to goods imported on or after October 3, 2003 and to goods imported before that day that were not accounted for under section 32 of the Customs Act before that day.

Subsection 178.8(1) – Definition "specified supply"

Subsection 178.8(1) defines the term "specified supply" for purposes of new section 178.8. The rules under section 178.8 apply only to circumstances in which a "specified supply" of goods has been made.

A supply is a "specified supply" if the goods that are the subject of the agreement for the supply are goods that are, at any time after the agreement is entered into, imported into Canada. Alternatively, the goods that are the subject of the agreement might have already been imported into Canada but the agreement was entered into after that importation and before the release of the goods. In that case as well, the supply would qualify as a "specified supply".

Subsection 178.8(2) – Deemed Importer of Goods

Section 178.8 deals with circumstances in which imported goods are for the consumption, use or supply in Canada by the person who is referred to as the "constructive importer". Since it is the constructive importer’s activities for which the goods are immediately destined after they are imported into Canada, it is those activities that should determine eligibility for any recovery of tax on the importation of the goods. However, in some cases, in the absence of new subsection 178.8(2), the constructive importer would not meet all of the conditions for achieving such recovery.

To address this problem, new subsection 178.8(2) deems imported goods that have been supplied outside Canada to be imported by the constructive importer of the goods and not by any other person. The subsection further deems any amount paid or payable as or on account of tax under Division III of Part IX of the Act on the goods to be paid or payable by the constructive importer and not by any other person.

The deeming rules in subsection 178.8(2) ensure that it is only the constructive importer of goods that is considered to have been the person by whom tax in respect of the importation of the goods was paid or payable for purposes of claiming any input tax credit or rebate in respect of the tax, or any tax relief that may be available as a result of the application of subsection 215.1(2) or (3) or 216(6) or (7) of the Act. However, to be entitled to make such a claim, the constructive importer would still have to satisfy the documentation requirements. Therefore, where another person accounts for the goods on their importation, that other person would have to pass on to the constructive importer to substantiate any subsequent input tax credit, rebate, abatement or refund claim made by the constructive importer.

It is important to note that the deeming rules in subsection 178.8(2) do not apply for purposes of determining liabilities or obligations of any person with respect to the payment of tax in accordance with Division III and the Customs Act. Therefore, if a person, such as the supplier of the imported goods, accounts for the goods as the importer for purposes of the Customs Act, that person remains liable to pay any tax on the goods in accordance with the Customs Act, despite the fact that subsection 178.8(2) deems the constructive importer to be the only person by whom the tax is payable for other purposes.

The rules under subsection 178.8(2) constitute the default rules in the circumstances to which they apply. However, the subsection is subject to new subsections 178.8(4) and (7), which provide for elective alternative treatments in certain circumstances.

Subsections 178.8(3) and (4) – Agreement to Treat Supply as Made in Canada

New subsections 178.8(3) and (4) provide a mechanism whereby a GST/HST registrant, who has made a taxable supply of goods outside Canada to the constructive importer of the goods and who accounts for the goods at the time of their entry into Canada, can avoid the need to pass on the import documentation to the constructive importer for purposes of recovering the tax paid on the goods. Under this proposed exception, the supplier and the constructive importer of the goods have the option of entering into an agreement that has the effect of permitting the supplier to claim an input tax credit for the GST/HST payable on the importation. In that case, the supplier would have to charge the constructive importer GST/HST under Division II of Part IX of the Act on the supply of the goods to the constructive importer as if it had been made in Canada. The constructive importer would, in turn, be entitled to claim an input tax credit or rebate for that tax, provided, of course, the constructive importer met all other conditions for claiming the input tax credit or rebate.

Under these rules, the deemed place of supply in Canada of the goods is generally the place at which the goods are released. However, in the case of a constructive importer that is an individual and to whom the goods are shipped, the place of supply is the Canadian destination to which the goods are shipped by mail or courier or other carrier. This rule is relevant for purposes of determining whether the supply is subject to GST or HST.

If the constructive importer has paid, or has agreed to pay, the supplier the amount of any customs duties or excise tax or duties on the goods that is levied at the time of importation, that amount is added to the consideration for the supply that is deemed to be made in Canada. This is consistent with the fact that such duties or taxes form part of the value on which the GST/HST is imposed in respect of the importation of the goods. However, as in the case of any other supply, subsection 155(1) of the Act may apply to determine the value on which the GST/HST on the supply is calculated in the circumstances of a non-arms length supply described in that subsection.

Paragraphs 178.8(4)(c) and (d) deem the circumstances ensuring that a registrant-supplier of goods, having entered into an agreement under subsection 178.8(3) with the constructive importer of the goods, is the only person that is in a position to claim an input tax credit in respect of the tax payable on the importation of the goods.

It should be noted that, where a constructive importer of goods has acquired the goods under a lease from the supplier with whom they have entered into an agreement under subsection 178.8(3), the constructive importer may subsequently be required to self-assess tax under Division IV of Part IX of the Act in respect of the goods. The constructive importer may become so liable in the event that they cease to be charged tax under Division II on their lease payments due to the circumstance that, while the constructive importer remains the lessee of the goods, the lease is sold or assigned to a new supplier who is an unregistered non-resident person whose supply is deemed to be made outside Canada under subsection 143(1). In that case, the supply to the constructive importer under the new lease, and any succeeding lease that is similarly deemed to be made outside Canada, is defined to be an imported taxable supply by new paragraph 217(b.11) of the Act if the lessee is not acquiring the goods for consumption, use or supply exclusively in the course of a commercial activity of the lessee (see commentary on new paragraph 217(b.11)).

Subsections 178.8(5) to (7) – Agreement Regarding Rebates, Abatements and Refunds

Subsection 178.8(5) deals with importations described in subsection 178.8(2) where the constructive importer and the supplier of the goods have not opted, under subsection 178.8(3), to treat the supply of the goods to the constructive importer as if it were made in Canada. The general rules under subsection 178.8(2) dictate that the constructive importer is the only person entitled to any rebate, abatement or refund to recover amounts paid or payable as or on account of tax in respect of the importation of the goods. This includes amounts paid in error as tax, such as excess amounts resulting from an error in the determination of the value of the goods for GST/HST purposes.

As an alternative, subsection 178.8(5) provides for a mechanism whereby, in the circumstances to which one of the specified tax relieving provisions of Division III apply, the person (referred to as the "specified importer"), who is identified as the importer of the goods for purposes of the Customs Act when the goods are accounted for under that Act, can claim the rebate, abatement or refund that is provided for under that provision, instead of the constructive importer having to do so. Again, this arrangement between the specified importer and the constructive importer may be made only if the constructive importer has not agreed to have the supply of the goods treated as if it were made in Canada.

Subsection 178.8(6) ensures that the specified importer is not able to recover any amount that the constructive importer would not have been entitled to recover because of the restriction under section 263.01 of the Act, in the case of a constructive importer that is a selected listed financial institution.

By virtue of subsection 178.8(7), if the specified importer and constructive importer so agree under subsection 178.8(5), the specified importer may claim any rebate, abatement or refund that may be available as a result of the application of subsection 215.1(2) or (3) or 216(6) or (7), but only if the specified importer issues to the constructive importer a "tax adjustment note" indicating the amount of the rebate, abatement or refund. The consequences for the constructive importer who receives a tax adjustment note are similar to those that result from a person receiving a credit note issued under section 232 of the Act by a supplier for a tax adjustment in respect of a domestic supply. If the constructive importer had already claimed an input tax credit or rebate for the amount, the constructive importer would have to add back the amount to their net tax or repay the amount as if it were an overpayment of a rebate received by the constructive importer.

The amount that is rebated, abated or refunded is deemed to have been tax that was properly payable in the first instance by the constructive importer. This ensures that there is no nullification of any entitlement to an input tax credit or rebate in respect of the amount that the constructive importer may have already claimed. Instead, the rules under subparagraphs 178.8(7)(c)(ii) and (iii) ensure the appropriate recapture of the previous amount claimed.

Also, the amount rebated, abated or refunded is deemed to be an amount of tax that is recovered by the constructive importer, which is to ensure that the amount is appropriately taken into account in applying other provisions of Part IX that reference amounts of tax recovered by a person, such as the definition, in subsection 123(1) of the Act, of the basic tax content of goods. Further, the tax adjustment note is deemed to be a credit note issued under section 232 for all purposes of Part IX (except section 232 itself). An example of one of the consequences of this deeming rule is that paragraph 263(d) of the Act would disallow the constructive importer from claiming a rebate under Part IX in respect of the amount to which the constructive importer might otherwise have been entitled if the constructive importer received the tax adjustment note for the amount before making the application for the rebate.

Subsections 178.8(8) and (9) – Application

New section 178.8 does not apply for any purpose of Division III other than the rebate and abatement provisions under subsections 215.1(2) and (3) and 216(6) and (7). Therefore, the deeming rules in section 178.8 do not alter in any way the liabilities and obligations in relation to the payment of tax under Division III.

Similarly, the deeming rules in section 178.8 do not apply for purposes of sections 220.07, 236.3 or 273.1 of the Act, Schedule VII to the Act, the Non-Taxable Imported Goods (GST/HST) Regulations or the Value of Imported Goods (GST/HST) Regulations, all of which relate to the calculation of tax under Division III. For example, in some cases, whether an imported good is exempt from tax under Division III pursuant to a provision of Schedule VII or the Regulations, or whether the good is subject to tax calculated on a reduced value, depends, among other things, on the status of the importer and the purposes for which the importer brings the goods into Canada. The conditions of those relieving provisions must be met without regard to the deeming rules under section 178.8. In most cases, those conditions are only met by the person for whose consumption, use or supply in Canada the goods are imported and therefore that person must also be the importer in order for the relieving provision to apply.

Section 178.8 also does not apply in circumstances in which subsection 169(2) or section 180 of the Act applies. Those provisions already provide for mechanisms for the recovery of tax imposed under Division III in limited specified circumstances by a person who has paid that tax but who is not the person to consume, use or supply the goods in Canada (in the case of subsection 169(2)) or by a person who has not paid that tax but who is deemed to have done so (in the case of section 180). New section 178.8 is not intended to interfere with the operation of those existing mechanisms.

Subsection 178.8(10) – Limitation Period where Retroactive Agreement

Where a registrant has made a taxable supply of goods outside Canada to the constructive importer of the goods and accounts for the goods at the time of their entry into Canada, the registrant and constructive importer may enter into an agreement under subsection 178.8(3). Under subsection 178.8(4), this agreement has the effect of permitting the supplier to claim an input tax credit for the GST/HST payable on the importation. In that case, the supplier would have to charge the constructive importer GST/HST under Division II on the supply of the goods to the constructive importer as if it had been made in Canada.

Subsection 178.8(10) extends in certain circumstances the limitation period for making an assessment, reassessment or additional assessment to take into account an amount payable or remittable by the registrant or the constructive importer as a result of the registrant and constructive importer entering into an agreement under subsection 178.8(3). Subsection 178.8(10) only applies if the agreement is entered into after the goods have been imported. The limitation period to make any assessment, reassessment and additional assessment is extended until four years after the day on which the agreement is entered into for the purpose of taking into account an amount payable or remittable by the registrant or constructive importer as a result of the application of subsection 178.8(4).

Clause 14

Sale of Real Property

ETA
193(1)(b)

Subsection 193(1) of the Act allows, in certain circumstances, a registrant who makes a taxable supply of real property to claim an input tax credit for previously non-recoverable tax paid by the registrant in respect of the property. The credit is equal to the amount determined by the formula A x B, where the description of A is the lesser of the basic tax content of the property at the time of the supply and the tax that is or would, in the absence of section 167 of the Act, be payable in respect of the taxable supply. The description of B is the percentage of the total use of the property otherwise than in commercial activities of the registrant immediately before the sale.

The amendment adds a reference to new section 167.11 of the Act in paragraph (b) of the description of A of the formula to take into account the tax that would have been payable in the absence of that section.

The amendment is deemed to have come into force on June 28, 1999.

Clause 15

Value of Passenger Vehicle

ETA
201(b)

Section 201 of the Act limits the amount that a registrant is allowed to claim as an input tax credit in respect of the acquisition, importation or bringing into a province of a passenger vehicle to the amount of the maximum capital cost of the vehicle for the purposes of the Income Tax Act. The method of calculating the maximum capital cost of a passenger vehicle is set out in paragraphs 13(7)(g) and (h) of the Income Tax Act, which refer to paragraph 7307(1)(b) of the Income Tax Regulations. Since January 1, 2001, the maximum capital cost of a passenger vehicle is $30,000, exclusive of GST/HST and provincial sales taxes. Section 201 is amended to clarify that the amount of the maximum capital cost of the vehicle is to be calculated exclusive of any federal or provincial sales taxes that may be included in that amount for income tax purposes. This amendment applies to passenger vehicles that are acquired, imported or brought into a participating province after Announcement Date and to any passenger vehicle that is acquired, imported or brought into a participating province on or before that day unless an input tax credit in respect of the vehicle was claimed in a return filed under Division V of Part IX of the Act on or before that day and was determined on the basis that the capital cost of the passenger vehicle for the purposes of the Income Tax Act included federal or provincial sales taxes. Clause 16 Improvement to Passenger Vehicle ETA 202(1) Section 202 of the Act sets out rules governing input tax credits in respect of passenger vehicles and aircraft. Subsection 202(1) provides that if an improvement to a passenger vehicle of a registrant increases the cost to the registrant of the vehicle to an amount that exceeds the maximum capital cost of the vehicle for the purposes of the Income Tax Act, an input tax credit may not be claimed in respect of the tax on that excess. The method of calculating the maximum capital cost of a passenger vehicle is set out in paragraphs 13(7)(g) and (h) of the Income Tax Act, which refer to paragraph 7307(1)(b) of the Income Tax Regulations. Since January 1, 2001, the maximum capital cost of a passenger vehicle is$30,000, exclusive of GST/HST and provincial sales taxes.

Subsection 202(1) is amended to clarify that the amount of the maximum capital cost of the vehicle is to be determined exclusive of any federal or provincial sales taxes that may be included in that amount for income tax purposes.

This amendment applies to improvements to passenger vehicles that are acquired, imported or brought into a participating province after Announcement Date and to any such improvements that are acquired, imported or brought into a participating province on or before that day unless an input tax credit in respect of the improvement was claimed in a return filed under Division V of Part IX of the Act on or before that day and was determined on the basis that the capital cost of the passenger vehicle for the purposes of the Income Tax Act included federal and provincial sales taxes.

Clause 17

Acquisition of Assets

ETA
205

Section 205 of the Act provides that change-in-use rules for capital real property also apply to capital personal property of a financial institution in certain circumstances. For example, these change-in-use rules may apply where, in acquiring all or part of a business of a registrant, a financial institution is deemed by section 167 of the Act to have either acquired property exclusively in commercial activities or, conversely, exclusively otherwise than in the course of commercial activities. Amendments are made to section 205 consequential to the addition of new section 167.11 of the Act.

The amendments to section 205 are deemed to have come into force on June 28, 1999.

Subclause 17(1)

Acquisition of Asset by Foreign Bank

ETA
205(4.1)

New subsection 205(4.1) is similar to existing subsection 205(4) but it applies where an election has been made under section 167.11 rather than under section 167. Subsection 205(4.1) applies if a foreign bank and a corporation related to that foreign bank make the joint election referred to in subsection 167.11(2) in respect of a qualifying supply at the time the foreign bank and the related corporation are both registrants. Subsection 205(4.1) also requires that the related corporation make a supply of capital personal property to the foreign bank under the agreement for the qualifying supply, that subsection 167.11(3) deems that foreign bank to have acquired the property for use exclusively in commercial activities and that, immediately after the transfer, the foreign bank actually uses that property as capital property but not exclusively in commercial activities.

If all these conditions are met, subsection 205(4.1) provides that subsection 193(1) of the Act, which normally only applies to sales of real property, applies to capital property supplied by a related corporation to a foreign bank, which may allow that corporation to claim an input tax credit for previously non-recoverable tax paid by that corporation. As well, the change-in-use rules in subsections 206(4) and (5) of the Act apply to the capital personal property so acquired by the foreign bank requiring the foreign bank to self-assess and pay tax. It should be noted that while subsections 206(4) and (5) normally only apply to capital real property or, in the case of a financial institution, to personal property having a cost in excess of $50,000, there is no cost threshold to the application of subsections 206(4) or (5) where they apply to personal property by virtue of the application of subsection 205(4.1). Subclause 17(2) Acquisition of Asset by Foreign Bank ETA 205(5.1) New subsection 205(5.1) is similar to existing subsection 205(5) but applies where an election has been made under section 167.11 rather than under section 167. Subsection 205(5.1) applies if a foreign bank and a corporation related to that foreign bank make the joint election referred to in subsection 167.11(2) in respect of a qualifying supply at the time the supplier and the registrant are both registrants. Subsection 205(5.1) also requires that a supply of capital personal property by the related corporation to the foreign bank be made under the agreement for the qualifying supply, that subsection 167.11(3) deems that foreign bank to have acquired the property for use otherwise than in commercial activities and that, immediately after the transfer, the foreign bank actually uses that property as capital property in commercial activities. If all these conditions are met, subsection 205(5.1) provides that the change-in-use rules in subsection 206(2) apply to the foreign bank which may entitle that foreign bank to claim an input tax credit. It should be noted that while subsection 206(2) normally only applies to capital real property or, in the case of a financial institution, to personal property having a cost in excess of$50,000, there is no cost threshold to the application of subsection 206(2) where it applies to personal property by virtue of the application of subsection 205(5.1).

Clause 18

Abatement or Refund of Tax as if it were Duty

ETA
215.1(3)

Subsection 215.1(3) of the Act applies to certain persons who have paid GST/HST under Division III of Part IX of the Act on goods in circumstances in which the goods were not subject to customs duty but the persons would have been entitled to claim an abatement or refund of duty under section 73, 74 or 76 of the Customs Act if the tax had been a duty paid under that Act. Such circumstances include where the goods have suffered damage or shrinkage between the time that the tax was paid and the time the goods were released (e.g., while in a bonded warehouse). In the specified circumstances, the cross-referenced sections of the Customs Act may be applied to obtain a refund of the GST/HST as if it had been paid as duty on the goods.

First, subsection 215.1(3) is re-structured and minor wording changes are made for greater consistency with the provision in the French version of the Act and with the wording of the related customs legislation. Second, changes are made as a consequence of amendments that have been made to subsection 74(1) of the Customs Act. Specifically, paragraph 215.1(3)(b) is amended by adding a general reference to any circumstances in which an error was made in the determination under subsection 58(2) of the Customs Act of the value of imported goods (i.e., a self-determination of value by the person who accounts for the goods under the Customs Act) since that is now among the circumstances described in subsection 74(1) of the Customs Act that may give rise to a refund of duty under that subsection. Subsection 74(1) of the Customs Act applies in respect of the value so determined only if that determination has not been the subject of a decision made under any of sections 59 to 61 of the Customs Act, in which event, for GST/HST purposes, subsection 216(6) of the Act would apply to provide for a corresponding GST/HST refund.

The amendments to subsection 215.1(3) generally come into force on January 1, 1998, when the related changes to section 74 of the Customs Act came into force. However, in applying subsection 215.1(3) in determining rebates under that subsection prior to October 20, 2000, paragraph 215.1(3)(c) is to be read without reference to the words "replacement property", which were added only as of that date.

Clause 19

Determinations, Appeals and Refunds in Relation to Tax under Division III

ETA
216(4) to (6)

Subsections 216(4) to (6) of the Act provide for the application of administrative and enforcement rules under the Customs Act in relation to certain determinations, appeals and refunds that relate to tax that is imposed on imported goods under Division III of Part IX of the Act. The purpose of the amendments to these subsections is to update them as a consequence of the re-numbering of related or cross-referenced provisions of the Customs Act. These amendments do not change the substance of the provisions.

The amendments come into force on January 1, 1998, when the related changes to the Customs Act came into force. However before December 12, 2005, the reference to "President of Canada Border Services Agency" in subsection 216(5) shall be read as "Commissioner".

Clause 20

Definition "imported taxable supply"

ETA
217(b.11)

Division IV of Part IX of the Act imposes tax in respect of certain supplies made outside Canada and in respect of other supplies on which the recipient, as opposed to the supplier, is required to account for tax. Section 217 defines the expression "imported taxable supply" for purposes of Division IV.

The amendment to paragraph 217(b.11) adds another type of supply to the definition "imported taxable supply" for the purposes of the tax imposed under Division IV of Part IX of the Act and is related to the addition of new subsections 178.8(3) and (4) of the Act (see commentary on those subsections). Those subsections provide for a mechanism whereby a registrant that has supplied goods outside Canada and then imported the goods for the recipient (referred to as the "constructive importer") can claim a full input tax credit for the tax imposed in respect of the importation but must, at the same time, charge tax under Division II of Part IX of the Act to the recipient as if the supply had been made in Canada. This mechanism ensures that tax is ultimately borne on thegoods if, after being imported, they are not intended for consumption, use or supply in the course of commercial activities.

However, the objective of new subsections 178.8(3) and (4) could be thwarted in the case of a supply by way of lease if, after the importation of the goods, the lease is sold or assigned and the new supply by way of lease to the constructive importer is made by a non-resident unregistered person whose supply is deemed under subsection 143(1) of the Act to be outside Canada. The new supplier would not have to continue charging tax under Division II on the lease payments payable by the constructive importer. To address this situation, the new supply that is deemed to be made outside Canada is defined, under new paragraph 217(b.11) of the Act, to be an imported taxable supply on which the constructive importer must self-assess tax under Division IV unless the constructive importer is acquiring the goods exclusively for consumption, use or supply in the course of commercial activities.

New paragraph 217(b.11) applies to any supply of goods by way of lease, licence or similar arrangement by a non-resident unregistered person in the circumstances in which subsection 143(1) deems the supply to be made outside Canada where the original supply by way of lease, licence or similar arrangement to the recipient had been deemed under new subsection 178.8(4) to be made in Canada. New subsection 178.8(4) applies to goods imported on or after October 3, 2003 and to goods imported before that day that were not accounted for under section 32 of the Customs Act before that day.

Clause 21

Definitions

ETA
220.01

Section 220.01 of the Act defines terms used throughout Division IV.1 of Part IX of the Act, which provides for tax on property and services brought into a participating province. The amendments to section 220.01 add the definitions of the terms "provincial authority", "specified provincial tax" and "specified value".

The term "provincial authority" means any department or agency of a province that is empowered under the laws of that province to collect, at the time when a specified motor vehicle is registered in the province, any "specified provincial tax" (as defined in section 220.01) imposed in respect of the vehicle. This term is used in the definition "specified value".

The term "specified provincial tax" means, in the case of a specified motor vehicle registered in a participating province, the provincial tax imposed in that province on the sale of a vehicle in certain circumstances where the HST is not applicable. This term is used in the definitions "provincial authority" and "specified value".

The term "specified value" means the value, in the case of a specified motor vehicle that a person is required to register under the laws of a participating province relating to the registration of motor vehicles, that would be attributed to the vehicle by the "provincial authority" (as defined in section 220.01) for that province for the purpose of calculating the "specified provincial tax" (as defined in section 220.01) payable if, at the time of registration, that tax were payable in respect of the vehicle.

The amendments are deemed to have come into force on April 1, 1997.

Clause 22

Tax in Participating Province

ETA
220.05(1)(a)

Section 220.05 of the Act provides for self-assessment of the provincial component of the HST in respect of certain tangible personal property brought into a participating province from a non-participating province.

In the case of "specified motor vehicle" (as defined in subsection 123(1) of the Act), subsection 220.05(1) provides that the tax is to be calculated on a prescribed value set out by regulations. The amendment replaces the term "prescribed value" by the term "specified value" following the introduction of the definition of this term in section 220.01 of the Act.

The amendment is deemed to have come into force on April 1, 1997.

Clause 23

Value of Goods

ETA
220.07(3)(a)

Section 220.07 of the Act imposes a requirement to self-assess the provincial component of the HST in respect of most taxable importations of goods into the participating province where the goods are not subject to tax under Division III of Part IX of the Act. Where the property is a "specified motor vehicle" (as defined in subsection 123(1) of the Act), subsection 220.07(3) provides that the tax under subsection 220.07(1) of the Act is to be calculated on a prescribed value set out by regulations.

The amendment replaces the term "prescribed value" by the term "specified value" following the introduction of the definition of this term in section 220.01 of the Act.

The amendment is deemed to have come into force on April 1, 1997.

Clause 24

Exception for Specified Motor Vehicle

ETA
220.09(2)

Subsection 220.09(2) of the Act provides an exception to the general rules regarding the manner in which tax imposed under Division IV.1 of Part IX of the Act must be reported and paid in respect of a "specified motor vehicle" (as defined in subsection 123(1) of the Act). The provincial component of the HST imposed on specified motor vehicles imported or brought into a participating province is not required to be reported in any return, and it must be paid in the prescribed manner at the time the person registers the vehicle or the day on or before which the vehicle is required to be registered, whichever is earlier.

The amendments provide the manner in which that tax is required to be paid. Although the tax is payable to Her Majesty in Right of Canada, the amendment to subsection 220.09(2) provides that the tax shall be paid to provincial authorities (as defined in section 220.01 of the Act) in their capacity as agent of Her Majesty in Right of Canada.

The amendments are deemed to have come into force on April 1, 1997.

Clause 25

ETA
221.1(2)(a)

Existing section 221.1 of the Act sets out the conditions under which the Minister of National Revenue may authorize the use of export certificates. Such certificates may be provided to a supplier in lieu of evidence of export for the purpose of zero-rating a sale of goods.

Subsection 221.1(2) empowers the Minister to authorize a person registered for GST/HST purposes to use an export certificate for the purpose of acquiring goods on a zero-rated basis. One of the conditions for determining eligibility to use such a certificate is that at least 90% of the value of the registrant’s inventory purchases in the twelve-month period following the effective date of the certificate is expected to be attributable to purchases that would be included in section 1 of Part V of Schedule VI to the Act if there were no export documentation requirement. However, existing paragraph 221.1(2)(a) contains an incorrect cross-reference to section 1.1 of Part V of Schedule VI, instead of to section 1 of that Part.

The amendment corrects this cross-reference, effective January 1, 2001, the day on which other related amendments to subsection 221.1(2) came into force.

Clause 26

Net Tax Calculation for Charities

ETA
225.1(2)

Section 225.1 of the Act sets out a streamlined accounting method by which registrants that are charities calculate their net tax.

Paragraph (c) of the description of A in subsection 225.1(2) identifies amounts that a charity must add in determining its net tax remittance for a reporting period under the simplified accounting method. These amounts are in respect of the recovery of a bad debt under subsection 231(3) of the Act involving a taxable sale of real property or capital property or in respect of a tax adjustment under subsection 232(3) of the Act on the acquisition of real property or capital property.

A minor change is made to paragraph (c) of the description of A in subsection 225.1(2) to clarify that in the case of the recovery of a bad debt, the charity is the supplier of the property rather than the recipient.

The amendment to paragraph (c) applies for the purpose of determining the net tax of a charity for reporting periods beginning after 1996, which correspond to the application of subsection 225.1(2).

Under description of B of the net tax formula in subsection 225.1(2), a charity may claim certain input tax credits or deductions from net tax.

Existing paragraph (b.1) of the description of B provides for a charity operating a bottle return depot to claim a net tax deduction in respect of returnable containers for which it pays refunds of deposits where the total amount refunded by the charity includes the provincially-mandated deposit, where applicable, and GST/HST calculated on that deposit. The purpose of this provision is to entitle the charity to a net tax deduction for the tax component of the amount it refunds in respect of the deposit equal to 7% (or 15% where the charity is in a participating province). The circumstances in which the net tax deduction may be claimed and the calculation of the amount of the deduction are set out in existing section 226.1 of the Act.

Paragraph (b.1) is repealed since the effect of amendments to section 226 of the Act is to exclude refundable deposits on beverage containers for taxable products from the GST/HST tax base. Accordingly, paragraph (b.1) is no longer needed, as refunds would no longer include any tax.

The application rule for the repeal of paragraph (b.1) reflects the fact that charities have, in effect, four years to claim a deduction under that paragraph to which they have become entitled. The entitlement, based on the application of section 176 of the Act, extended up to and including July 15, 2002. Since the related amendments to section 226 apply as of May 1, 2002, a 75-day transition period has been provided during which a charity continued to be entitled to claim the deduction in respect of refunds paid on returned beverage containers, regardless of whether any tax was originally charged on the container deposits, provided of course that all other conditions for claiming the deduction were met. This reflects the fact that the deposits on returnable beverage containers already in circulation on May 1, 2002 would have included an amount of tax.

It should be noted that, for the purpose of applying paragraph (b.1) of the description of B of the formula in subsection 225.1(2) during the 75-day transition period, existing section 226 applies. For example, the meaning of "returnable container" in existing subsection 226(1) continues to apply in relation to the transition period for the purpose of determining the amount that may be deducted by a charity under subsection 226.1(1).

Clause 27

Selected Listed Financial Institution Election

ETA
225.2(5)

Subsection 225.2(4) of the Act allows a "selected listed financial institution" (as defined in subsection 225.2(1)) to elect with a closely related supplier to use a cost-based method of determining the value of certain supplies made between them for purposes of the financial institution’s net tax calculation under the HST. Existing subsection 225.2(5) requires the election to be filed with the Minister of National Revenue by a specified time, with no provision for late-filed elections. The amendment gives the Minister discretion to accept an election filed on any later day that the Minister may allow.

The amendment comes into force on October 3, 2003.

Clause 28

Returnable Containers

ETA
226

Section 226 of the Act sets out the GST/HST rules relating to returnable beverage container deposits.

Subclause 28(1)

Separate Supply of Beverage and Container

ETA
226(2)

Existing subsection 226(2) deems the supply of a beverage in a returnable container to be separate from the supply of the container. The purpose of this deeming provision is to segregate the container from the beverage so that the general rule, in subsection 226(3), excluding amounts from the registrant’s net tax applies only to the tax attributed to the container. The purpose of this deeming provision is also to ensure that the general rule, in subsection 226(4), that a registrant may not claim an input tax credit with respect to tax paid or payable on purchases of beverages in returnable containers applies only to the tax attributed to the container.

Subsection 226(2) is amended to specify that the supply of a beverage in a returnable container is separate from the provision of the container only in circumstances in which the supplier typically does not unseal the container when serving the beverage to the customer. This is in accordance with the policy intent that no part of the charge to the consumer for the beverage should be attributed to the container in the circumstance where the supplier unseals the container when serving the beverage since it is one in which the supplier normally retains the container for a refund of the deposit. This is typically the case with eat-in restaurants and bars.

This amendment generally applies to supplies made after 1995 and before May 1, 2002, when section 226 is repealed and replaced. However, this amendment does not apply if the supplier applied, in an application received at an office of the Canada Revenue Agency before February 8, 2002, for a refund of tax the supplier attributed to the container. The amendment also does not apply if the supplier had already accounted for the tax on the supply of the beverage, in a return received by the Agency before February 8, 2002, by excluding an amount that the supplier attributed to the container.

Subclause 28(2)

Returnable Beverage Containers

ETA
226(1)

Section 226 sets out the GST/HST rules relating to returnable beverage container deposits. Under amended section 226, the non-refundable portion of a deposit continues to be subject to tax if the supply of the beverage is taxable. However, the refundable portion of a deposit is excluded from the GST/HST tax base.

Amended section 226 comes into force on May 1, 2002 and applies to supplies for which consideration becomes due on or after that day or is paid on or after that day without having become due. There are, however, two exceptions to this rule. First, existing section 226 continues to apply for the purposes of applying sections 176 and 226.1 of the Act to supplies of used returnable containers for which consideration is paid or becomes due on or before July 15, 2002. Second, new subsections 226(4), (6) and (7) do not apply to supplies for which consideration is paid or becomes due on or before July 15, 2002.

Consequently, a 75-day transition period has been provided during which registrants continued to be entitled to claim input tax credits in respect of the acquisition of used containers regardless of whether any tax was originally charged on the container deposits. This reflects the fact that the deposits on returnable beverage containers already in circulation at the time of implementation of the amendments to section 226 included an amount of tax. As noted, for the purpose of applying section 176 of the Act during that 75-day transition period, existing section 226 applies. For example, the definition "returnable container" in existing subsection 226(1) continues to apply for purposes of section 176 throughout the transition period.

Subsection 226(1) – Definitions

Subsection 226(1) defines the following terms used in amended section 226.

Definition "applicable legislated amount"

In most cases, the "applicable legislated amount" in a province for a returnable container is the "legislated consumers’ refund" (as defined in subsection 226(1)) that is provided for under an Act of the legislature of the province in respect of the recycling of returnable containers. The "legislated consumers’ refund" is essentially the amount that, under that Act, must be paid to a consumer as a refund for a used and empty returnable container.

Paragraph (b) of the definition "applicable legislated amount" alternatively applies if, under an Act of the legislature of the province in respect of recycling, a legislated consumers’ refund for a returnable container of that class is specified as well as an amount referred to as the "recycler’s reimbursement".

The "recycler’s reimbursement" is an amount that must be paid for a used and empty returnable container of that class to a person who paid an amount as the legislated consumers’ refund for the container when acquiring it used and empty. Also, the recycler’s reimbursement must be an amount that is paid otherwise than specifically as a handling charge. Finally, in order for paragraph (b) to apply, there must be no amount specified, under an Act of the legislature of the province, as the amount, or the minimum amount, that must be charged by a distributor in respect of the supply of a filled and sealed container of that class.

Therefore, paragraph (b) applies where the provincial legislation provides for an amount of the refund that must be paid to a consumer returning a returnable container of a particular class but does not provide for the deposit in respect of the sale of a beverage in a container of that class. If the legislation also provides for an amount that must be paid to the person who accepted the container from a consumer, otherwise than as any kind of handling charge, that amount would be the "applicable legislated amount".

As an example, assume a provincial Act stipulates that the refund for a returnable beverage container of a particular class must be at least $0.17 but does not specify any amount of deposit that must be charged in relation to the supply of a beverage in a returnable container of that class. Also assume that the Act stipulates that beverage distributors in the province must pay (aside from any handling charge)$0.20 per container to bottle depots in the province for each returnable container of that class they collect. The "applicable legislated amount" would be $0.20. The term "applicable legislated amount" is used in the definition "refund" in subsection 226(1). Definition "consumers’ recycler" The term "consumers’ recycler", in respect of returnable containers of a particular class, refers to a person who, in the ordinary course of their business, acquires used and empty returnable containers of that class from consumers for consideration (i.e., who pays refunds to consumers for empty containers). It includes, for example, bottle depots and retailers who accept returns of beverage containers. The term "consumers’ recycler" is used in the definition "refund" in subsection 226(1). Definition "distributor" A "distributor" of a returnable container of a particular class refers to a person who supplies beverages in filled and sealed returnable containers (as defined in subsection 226(1)) of that class and who charges a "returnable container charge" (also defined in subsection 226(1)) in respect of the returnable containers. A distributor can be, for example, a bottler, a wholesaler or a retailer of beverages in filled and sealed returnable containers. The term "distributor" is used in the definitions "applicable legislated amount" and "returnable container charge" in subsections 226(1) and is also used in subsection 226(6). Definition "legislated consumers’ refund" The term "legislated consumers’ refund", in a province for a returnable container of a particular class, refers to the amount, or the minimum amount, that, under an Act of the legislature of the province in respect of recycling, must be paid in certain circumstances to a consumer for a used and empty returnable container of that class. The term "legislated consumers’ refund" is used in the definition "applicable legislated amount" in subsection 226(1). Definition "recycler" A "recycler" of returnable containers of a particular class is defined as a person who, in the ordinary course of their business, acquires used and empty returnable containers (as defined in subsection 226(1)) of that class, or the material resulting from their compaction, for consideration (i.e., for refunds). A "recycler" also includes a person who pays consideration to another person in compensation for that other person acquiring used and empty returnable containers of that class and paying consideration for those containers. The term "recycler" is used in the definition "returnable container charge" in subsection 226(1) and in subsections 226(6) and (7). For example, a recycler can be a retailer or a redemption centre operator who accepts empty containers from consumers and pays refunds. A recycler would also include a bottler who buys back used and empty refillable beverage containers. An example of a recycler included in paragraph (b) of this definition is a corporation or provincial board that pays amounts to redemption centres or retailers in compensation for those centres or retailers accepting used and empty returnable containers and paying refunds. Definition "recycling" The term "recycling" refers to the return, redemption, reuse, destruction or disposal of returnable containers (as defined in subsection 226(1)) or of returnable containers and other goods. The term also more generally refers to the control or prevention of waste or the protection of the environment. The term "recycling" is used in the definitions "applicable legislated amount", "legislated consumers’ refund" and "returnable container charge" in subsection 226(1), as well as in subsections 226(6) and (7). Definition "refund" The term "refund" is used throughout new section 226. Under the new rules of section 226, the refundable portion of a deposit on a returnable beverage container is excluded from the GST/HST base. In the case of a taxable supply of a beverage, the GST/HST continues to apply to the non-refundable portion (if any) of the returnable container charge (as defined in subsection 226(1)). The taxable portion of the returnable container charge is the portion that is greater than the refund. The "refund" for a returnable container is defined with reference to a province and a particular time, since this amount may vary from province to province and over time. The term is also defined in relation to a container of a particular class. For example, the refund for a 355ml aluminium can may not be the same as the refund for a plastic beverage container. The term "refund" is defined for purposes of its application in three different contexts. Under paragraph (a) of the definition, the term "refund" is defined in relation to a returnable container of a particular class that is being supplied used and empty, and in relation to a returnable container of a particular class that contains a beverage that is being supplied. Under paragraph (b) of the definition, the term is defined in relation to a returnable container of a particular class in respect of which a supply is being made of a service to which subsection 226(7) applies. Under subparagraph (a)(i), the "refund" for a returnable container that is being supplied used and empty, or that contains a beverage that is being supplied, is the greatest of the amounts described in clauses (a)(i)(A) to (D). The refund is defined as the greatest of these amounts because consumers may receive varying amounts depending on where they return the containers. In the majority of cases, the "refund" for a returnable container that is being supplied used and empty, or that contains a beverage that is being supplied, is the provincially-mandated amount that is paid in the province to a consumer that returns the used container to a retailer or other redemption centre. That amount is referred to in clause (a)(i)(A) of the definition "refund" as the "applicable legislated amount" and, in most cases, it will be the amount defined in subsection 226(1) as the "legislated consumers’ refund". Clause (a)(i)(B) deals with a case of a supply of the beverage in a container of a particular class where the supplier acquires used containers of that class from consumers and pays refunds. The amount under this clause is the usual refund paid to consumers by that supplier for containers of that class, provided it does not exceed the usual returnable container charge that the supplier charges for containers of that class. Clause (a)(i)(C) deals with a case of a supply of a used and empty container by a supplier who accepts used containers of that class from consumers for refunds but who does not sell the beverage in those containers (e.g., a bottle depot). The amount under this clause is the usual refund that the supplier pays consumers for the used containers. Clause (a)(i)(D) could apply in the context of a supply of the beverage in the container or in the context of a supply of the used container. Clause (D) deals with the situation where there is an established industry practice of suppliers charging a common amount as a returnable container charge. However, in the case described by clause (D), consumers can typically obtain varying amounts of refunds for the used containers depending on where they return them (e.g., to a retailer or a bottle depot). The amount under clause (D) is the greatest of those amounts paid to consumers, not exceeding the usual returnable container charge. To illustrate the application of clause (D), assume a regulation under a provincial Act stipulates that the refund for a returnable container must be at least$0.05 and retailers commonly charge $0.10 as a returnable container charge. If bottle depots in the province pay a refund of$0.05 per container but retailers pay $0.10 per container, the "refund" for all such containers in that province would be considered to be$0.10 for the purposes of section 226.

The "refund" for a returnable container that is being supplied used and empty, or that contains a beverage that is being supplied, is the amount described in subparagraph (a)(ii) if none of clauses (a)(i)(A) to (D) applies, i.e.,

• there is no applicable legislated amount in the province for the returnable container,
• the supplier does not accept used containers of that class from consumers, and
• there is no established industry practice as described in clause (a)(i)(D) with respect to containers of that class.

In that case, the refund for purposes of section 226 is the portion of the refund paid in the greatest number of cases by consumers’ recyclers in the province that does not exceed the returnable container charge that, in the greatest number of cases, beverage suppliers in the province charge for containers of that class.

To illustrate the application of subparagraph (a)(ii), assume a retailer who does not accept used containers sells beverages in filled and sealed containers of a particular class in a province in which there is no applicable legislated amount for a returnable container of that class. Also assume that, in that province, most consumers’ recyclers pay $0.05 as a refund for used containers of that class and most suppliers charge a deposit of$0.05 when selling the beverage in the containers. The refund, in relation to that retailer’s supply of the beverage in the container is $0.05, since it is the amount paid to consumers in most cases and it does not exceed the returnable container charge that is charged in most cases by suppliers in the province. The term "refund" is also defined, under paragraph (b) of the definition, specifically for purposes of applying subsection 226(7). That subsection deals with circumstances such as where a recycling corporation pays a depot consideration for accepting used and empty returnable containers and paying refunds to consumers, but the corporation does not acquire those containers from the depot. In this example, in determining the consideration on which tax applies to the depot’s services, the corporation can deduct the amount of the refund for the containers and, for that purpose, the "refund" is defined as the usual refund paid by the depot to consumers. Subsection 226(7) also deals with a potential case of a recycler who does not accept used and empty containers but who provides services in respect of recycling to another recycler. In that case, the refund amount that is deducted in determining the consideration for the service is taken to be the usual refund paid in the greatest number of cases by persons in the province who accept used and empty containers from consumers. Definition "returnable container" The term "returnable container" is used throughout new section 226 and is defined, in relation to a province, as a beverage container of a class of containers that, in that province, are ordinarily acquired by consumers filled and sealed and are ordinarily returned empty by consumers for an amount of money (i.e., a refund). Accordingly, a container of a particular class (e.g., a 355ml aluminium can) may constitute a returnable container in one province and not in another since it may be sold with a refundable deposit in some provinces and without a refundable deposit in others. Where a taxable beverage in a container is sold without a refundable deposit in a province, that container is not a returnable container for the purposes of section 226. Given that section 137 of the Act deems the container to form part of the beverage, any tax-excluded amount charged in respect of the container will form part of the consideration for the beverage and therefore also be subject to GST/HST. It should be noted that the containers falling within the definition "returnable container" under new section 226 are not restricted to containers for taxable beverages. However, the rule under new subsection 226(2) that treats the container deposit differently from the amount charged for the beverage does not apply when the beverage is supplied on a zero-rated basis. In that case, section 137 continues to apply such that the container deposit for the beverage supplied on a zero-rated basis forms part of the consideration for the beverage and therefore has the same tax-free status. Definition "returnable container charge" The term "returnable container charge" is defined in relation to a returnable container (as defined in subsection 226(1)) containing a beverage that is being supplied or held as inventory by a person. The term is also defined in relation to a returnable container in respect of which a recycler is making a supply of a recycling service to a distributor or to another recycler. In the case of a returnable container of a particular class that contains a beverage that is being supplied in a province, the "returnable container charge" is the total of all amounts charged by the supplier in respect of the recycling (as defined in subsection 226(1)) of returnable containers of that class, or charged by the supplier to recover an equivalent amount that was charged to the supplier for the same purpose. Accordingly, the returnable container charge would include, for example, any provincially-mandated amount such as a refundable deposit, a non-refundable portion of a deposit, an environmental levy or a handling charge. If there is no provincially-mandated amount, the returnable container charge includes any amount in respect of the recycling of the containers that is charged in a particular industry or by a particular supplier. Also, the returnable container charge would include any amounts charged by a supplier to recover amounts previously charged to that supplier in respect of the containers. For example, a provincially-mandated amount in respect of recycling could be required to be charged only on supplies of a beverage by bottlers who are the first vendors of the beverage in the province. Subsequently, a wholesaler will charge the equivalent amount to a retailer to recover the amount paid by the wholesaler to a bottler. This latter amount is referred to in subparagraph (a)(ii) of the definition of "returnable container charge". In turn, the retailer will charge the equivalent amount to a consumer to recover the amount paid by the retailer to the wholesaler. This latter amount is referred to in subparagraph (a)(iii) of the definition. In relation to a filled and sealed returnable container containing a beverage that is held by a person in inventory at any time in a province for the purpose of making a supply of the beverage in that province, the term "returnable container charge" refers to the amount that the person can reasonably expect will be determined to be the returnable container charge in respect of the container when the beverage is so supplied (i.e., the total amount in respect of recycling that will be charged by the supplier). In relation to a filled and sealed returnable container containing a beverage that is held by a person at any time in a province for a purpose other than the sale of the beverage in the container, the term "returnable container charge" means the amount in respect of the container that could reasonably be expected to be paid by the person if they were acquiring the beverage in the container at that time in the province. Finally, paragraph (c) of the definition "returnable container charge" defines this term in relation to a returnable container of a particular class in respect of which a recycler of returnable containers of that class is supplying a service in respect of recycling in a province to a distributor or to another recycler of returnable containers of that class. These are the situations dealt with in subsections 226(6) and (7). In this case, the "returnable container charge" is the amount, or minimum amount, that is required, under an Act of the legislature of the province in respect of recycling, to be paid in respect of the supply of a beverage in a returnable container of that class. In some provinces, there is no such legislated amount for particular classes of containers but there is instead an industry-established container charge for those containers. In that case, the "returnable container charge" is that amount in respect of the container that would reasonably be expected to be charged by a supplier in the province when selling a beverage in a container of that class. Definition "specified beverage retailer" The term "specified beverage retailer" is relevant to subsections 226(3), (9) and (18). The term is defined in relation to a returnable container of a particular class. A "specified beverage retailer" refers to a registrant who, in the ordinary course of their business, sells to consumers beverages in containers of that class in circumstances in which the registrant typically does not unseal the containers when serving the beverages. Further, in order for a registrant to be considered a "specified beverage retailer" it must not be the case that all or substantially all of the used containers that are gathered at establishments at which the registrant makes such supplies of beverages and that are then returned by the registrant to a depot or other recycler are containers that have been returned to the registrant for refunds. For example, an operator of a restaurant that is a combination eat-in, take-out establishment might sell beverages in filled and sealed returnable containers of a particular class but the only containers of that class that the registrant gathers at such establishments and returns are those that are left behind by customers who have chosen to consume the beverages on the premises. In that case, the registrant would be a specified beverage retailer in relation to returnable containers of that class. In contrast, the operator of, for example, a regular grocery store at which the operator sells beverages in filled and sealed returnable containers of a particular class and also accepts returns of used containers of that class from consumers would likely not be a specified beverage retailer in respect of those containers. In that case, it would be expected that all or substantially all of the used containers that the store operator gathers at the store and returns to a recycler would have been acquired from consumers for refunds. Subsection 226(2) – Taxable Supply of Beverage in Returnable Container Subsection 226(2) applies where a supplier makes a taxable supply (other than a zero-rated supply) of a beverage in a filled and sealed returnable container (as defined in subsection 226(1)) in circumstances in which the supplier typically does not unseal the container, and the supplier charges a returnable container charge (also as defined in subsection 226(1)) in respect of the container. Paragraph 226(2)(a) deems the consideration for the supply of the beverage to be equal to the amount obtained by subtracting the returnable container charge from the consideration for the supply as otherwise determined for the purposes of Part IX of the Act. Section 137 of the Act deems the container to form part of the beverage. Therefore, the consideration for the supply determined under Part IX without regard to paragraph 226(2)(a) is the total of the consideration for the beverage and the returnable container charge. For example, if$1.00 is charged for the beverage and $0.10 is charged as a returnable container charge, the consideration for the supply of the beverage would otherwise be determined to be$1.10. Paragraph 226(2)(a) then deems the consideration for the supply of the beverage in the container to be $1.00 (i.e.,$1.10 – $0.10). Under paragraph 226(2)(b), where the returnable container charge exceeds the refund for a returnable container, the supplier is deemed to have made to the recipient, at the time at which the consideration for the beverage becomes due (or would, in the absence of section 156 of the Act, have become due), a taxable supply of a service in respect of the container. The consideration for this deemed supply is considered to be separate from the consideration for the beverage. The value of the consideration for the deemed supply is determined under subparagraph 226(2)(b)(i) or (ii). Paragraph 226(2)(b) results in tax on part of the returnable container charge only when it exceeds the refund (as defined in subsection 226(1)) for the returnable container. Consequently, for every class of container where the refund is equal to the returnable container charge in a province, the returnable container charge will not be taxable in that province. In other words, a fully refundable deposit for a returnable container is not subject to GST/HST. Subparagraph 226(2)(b)(i) applies where the returnable container charge in respect of the container is not provided for under a provincial Act prescribed for purposes of subparagraph 226(2)(b)(ii). The provincial Acts that are intended to be prescribed are those that provide for only partially refundable tax-included amounts, or tax-included minimum amounts, that must be charged in respect of the recycling of containers in the province. As of the introduction of new section 226, the only such provincial Acts are those of the HST participating provinces and therefore subparagraph 226(2)(b)(i) applies everywhere except in those provinces. Subparagraph 226(2)(b)(i) provides that the consideration for the supply of the service deemed to have been made by the supplier under paragraph 226(2)(b) is equal to the amount by which the returnable container charge exceeds the refund for the container. Example 1 illustrates the calculation of the total tax payable in a hypothetical case of a non-HST participating province (i.e., where there is no prescribed provincial Act) where only half of the deposit is refundable.  Example 1 – Non-Participating Province and Half-Back Deposit Taxable beverage sold in a returnable container$1.00 Returnable container charge $0.10 Refund$0.05 Deemed consideration for the beverage [$1.10 –$0.10]: $1.00 Deemed consideration for the deemed supply of a service [$0.10 – $0.05]:$0.05 Total taxable consideration $1.05 Total GST payable[1.05 x 6%]:$0.063

Subparagraph 226(2)(b)(ii) provides the rule for determining the value of the consideration for the supply of a service deemed to have been made by the supplier under paragraph 226(2)(b) in the situation where an Act of the legislature of the province is prescribed under that paragraph. This is the case where, under the provincial Act (including any regulations thereunder), an amount in respect of a returnable container of a particular class must be charged in the province when a beverage in that class of container is sold in the province. In addition, the amount specified must be a tax-included amount.

The intention is to prescribe the following Acts of the Provinces of Nova Scotia, New Brunswick and Newfoundland and Labrador:

• The Environment Act
• , S.N.S. 1994-95 c. 1, under which the Solid Waste-Resource Management Regulations are made,
• The Beverage Containers Act
• S.N.B. 1991 c. B-2.2, under which the General Regulation – Beverage Containers Act is made, and
• The Waste Management Act
• S.N.L. 1998 c. W-3.1, or any subsequent legislation, under which the Waste Management Regulations are made.

Under clause 226(2)(b)(ii)(A), the value of the consideration for the service is equal to the non-tax portion of the amount provided for under the prescribed Act that exceeds the refund for the container.

Example 2 illustrates the calculation of the total tax payable in this instance.

 Example 2 – Participating Province and Half-Back Deposit Taxable beverage sold in a returnable container $1.00 Tax-included legislated amount required to be charged$0.10 Refund $0.05 Deemed consideration for the beverage [$1.10 – $0.10]:$1.00 Deemed consideration for the deemed supply of a service  [Legislated Amount ($0.10) – Refund ($0.05)] x 100/114]: $0.0439 Total taxable consideration$1.0439 Total HST payable[1.0439  x  14%]: $0.1461 Clause 226(2)(b)(ii)(B) provides authority to make regulations to determine the consideration for the deemed supply in respect of the container in the case of a non-participating province should similar need for a formula arise in the case of a non-participating province in the future. Under paragraph 226(2)(c), the recipient is considered to have acquired the deemed service for the same purpose as that for which the recipient acquired the beverage. This completes the deeming rule for purposes of determining the extent to which the recipient may be entitled under section 169 of the Act to claim an input tax credit for the tax calculated on the non-refundable portion of the returnable container charge. Subsection 226(3) – Exception for Specified Beverage Retailer Subsection 226(3) provides an exception to the rule under subsection 226(2) with respect to beverage containers of a particular class for a registrant who is a "specified beverage retailer" in respect of those containers, as defined in subsection 226(1). Specifically, subsection 226(2) does not apply to a supply by such a retailer of a beverage in a container of that class if the registrant elects not to deduct the amount of the returnable container charge in respect of the container in determining the consideration for the supply of the beverage for GST/HST purposes. The registrant may choose to do so to avoid having to later add, under subsection 226(18), an amount to the registrant’s net tax in respect of any returns by the registrant of the used containers that are left with the registrant by the consumers of the beverages. A "specified beverage retailer", in respect of a particular class of returnable containers, refers to a registrant who, in the ordinary course of their business, sells to consumers beverages in containers of that class in circumstances in which the registrant typically does not unseal the containers when serving the beverages. Further, for a registrant to be considered a "specified beverage retailer" it must not be the case that all or substantially all of the used containers that are gathered at establishments at which the registrant makes such supplies of beverages and that are then returned by the registrant to a depot or other recycler, are containers that have been returned to the registrant for refunds. For example, an operator of a restaurant that is a combination eat-in, take-out establishment might sell beverages in filled and sealed returnable containers of a particular class but the only containers of that class that the registrant gathers at such establishments and returns are those that are left behind by customers who have chosen to consume the beverages on the premises. In that case, the registrant would be a specified beverage retailer in relation to returnable containers of that class. The deduction, under subsection 226(2), of the refundable container deposit from the consideration applicable to the sale of the beverage gives the appropriate result where the purchaser of the beverage retains the container in order to obtain the refund of the deposit. This is not the case where the beverage retailer instead retains the container for the refund. Therefore, under subsection 226(18), a specified beverage retailer must add to their net tax an amount of tax calculated on the refund they receive for the container unless the retailer had elected, under subsection 226(3), to charge tax on the entire amount paid for the beverage and the container when the beverage was sold. Subsection 226(4) – Supply of Used Container Subsection 226(4) provides that a supplier (e.g., a retailer who accepts used and empty returnable containers) who supplies a used and empty returnable container (or the material resulting from its compaction) to a person (e.g., a recycling corporation) can deduct the amount of the refund for the container in determining the consideration for the supply for GST/HST purposes. However, if the consideration as otherwise determined exceeds the refund for the container, the supplier is deemed to have made to the recipient a separate taxable supply of a service in respect of the container for consideration equal to that excess amount. It should also be noted that, if two separate supplies are made of the used container (or the material resulting from its compaction) and of a service of handling the container, the rule in subsection 226(4) applies only to the supply of the container or the material. Subsection 226(4) is subject to the exceptions set out in subsection 226(5). Subsection 226(5) – Exceptions Subsection 226(5) describes the situations where subsection 226(4) do not apply, that is, where the refund for a returnable container is not subtracted from the value of the consideration for a supply of the used and empty container or of the material resulting from its compaction. First, subsection 226(4) does not apply for the purposes of section 5 of Part V.1, or section 10 of Part VI, of Schedule V to the Act. In other words, the rule in subsection 226(4) deeming the consideration for a supply of a used and empty returnable container (or the material resulting from its compaction) to be nil does not apply for the purposes of determining if a supply falls into the exemption provision for supplies of property or services ordinarily supplied free of charge by a charity or a public sector body. Second, subsection 226(4) does not apply where the usual business practice of the recipient is to pay consideration for supplies in the province of used and empty returnable containers of the particular class (or of the material resulting from their compaction) that is determined based on the value of the material from which the containers are made, or on any basis other than the amount of the refund or returnable container charge for the containers. For example, if a supply of used and empty aluminium returnable containers were made by a recycler to an aluminium producer for consideration equal to$1.00 per pound, subsection 226(4) would not apply.

Subsection 226(6) – Supply of Recycling Service to Distributor

Subsection 226(6) applies where a recycler (as defined in subsection 226(1)) of returnable containers of a particular class makes a taxable supply in a province of a service in respect of the recycling of returnable containers of that class to a distributor (as defined in subsection 226(1)), but does not sell the containers to the distributor. Where this subsection applies, the distributor is not a recycler who also supplies such services to other distributors. Also, the consideration for the supply must be based in whole or in part on the amount in that province of the returnable container charge in respect of returnable containers of that class or on an amount that a consumer could reasonably expect to receive for a used and empty returnable container of that class.

For example, assume a distributor of a beverage is required, under a provincial act in respect of the protection of the environment, to have a plan for the recycling of the container in which the beverage is sold. In order to fulfil this obligation and be entitled to sell the beverage in the province, the distributor contracts with a corporation having a recycling system in place. Assume further that the corporation does not supply the used and empty containers to the distributor but provides a service in respect of the recycling of the containers and charges a fee equal to the deposit that the distributor is required to charge to its clients when selling the beverage in the province. If the distributor does not also provide such recycling services to other distributors, subsection 226(6) will apply to the transaction between the corporation and the distributor.

Under the formula in subsection 226(6), the consideration for the service is the amount as otherwise determined for purposes of Part IX minus the total of the returnable container charges for all the returnable containers in respect of which the consideration for the service is attributable.

Examples 3 and 4 illustrate the calculation of the total tax payable where a distributor contracts with a recycler for a service in respect of the recycling of the returnable containers that the distributor supplies filled and sealed in a province.

 Example 3 – Recycling Services Supplied to Distributor – per Container Returnable container charge in respect of a filled and sealed container: $0.10 Actual consideration for the service in respect of the container:$0.10 Deemed consideration for the service [Actual consideration – Returnable container charge]: $0.00 Total GST payable[$0 x 6%]: $0.00  Example 4 – Recycling Services Supplied to Distributor – 1000 Containers Returnable container charge per filled and sealed containers:$0.10 Actual consideration for the service (assumed equal to the returnable container charge plus $0.02 handling charges per container):$0.12 Deemed consideration for the service [Actual consideration – Returnable container charge] x 1000: $20.00 Total GST payable[$0.02 x 6%] x 1000: $1.20 It is important to note that subsection 226(6) does not apply for the purposes of section 5 of Part V.1, or section 10 of Part VI, of Schedule V to the Act. In other words, the rule in subsection 226(6) does not apply for the purpose of determining if a supply falls into the exemption provision for supplies of property or services ordinarily supplied free of charge by a charity or a public sector body. It should also be noted that subsection 226(6) does not apply if the distributor is also receiving from the recycler a supply of the empty containers themselves. In that case, subsection 226(4) applies instead. Subsection 226(7) – Supply Between Recyclers Subsection 226(7) applies where a recycler (as defined in subsection 226(1)) of returnable containers of a particular class makes a taxable supply of a service in respect of the recycling of returnable containers of that class without supplying the containers to the other recycler. Also, the consideration for the supply must be based in whole or in part on the amount of the refund (as defined in subsection 226(1)), or the returnable container charge (also as defined in subsection 226(1)), in respect of returnable containers of that class. Under the formula in subsection 226(7), the consideration for the service is deemed to be the amount as otherwise determined for the purposes of Part IX minus the total of all refunds for all returnable containers in respect of which that consideration is paid or payable. Example 5 illustrates the calculation of the total tax payable where a recycling corporation pays consideration to a redemption centre for accepting used and empty returnable containers and paying refunds.  Example 5 – Supply Between Recyclers – 1000 Containers Refund per container:$0.05 Actual consideration for the service per container (assumed equal to the refund for the container plus $0.02 handling charge):$0.07 Deemed consideration for the service  [Actual consideration – Refund] x 1000: $20.00 Total GST payable[$0.02 x 6%] x 1000: $1.20 It should be noted that subsection 226(7) does not apply if the recycler who is the recipient of the service is also acquiring the used and empty containers themselves. In that case, subsection 226(4) applies instead. Subsection 226(8) – Special Rules in the Case of Prescribed Provincial Act Subsection 226(8) sets out special rules applicable in a province in which an Act prescribed for the purposes of paragraph 226(2)(b) applies (see commentary on subsection 226(2)). These special simplifying rules apply in provinces where only a partial refund of the deposit is provided for under the applicable provincial legislation and where the legislated amount of the deposit is a tax-inclusive amount (i.e., Nova Scotia, New Brunswick and Newfoundland and Labrador). Subject to subsection 226(9), subsection 226(8) applies where a registrant purchases a beverage in a returnable container for the purpose of selling the beverage in the province in circumstances in which the registrant will charge a returnable container charge in respect of the container and be required to collect tax in respect of the sale. If the registrant had paid a tax-included non-refundable amount as a returnable container charge when acquiring the beverage, that amount would have been deemed under paragraph 226(2)(b) to have been consideration paid by the registrant for a separate service. In these circumstances, paragraph 226(8)(a) provides that the registrant is not entitled to claim an input tax credit in respect of that amount. The input tax credit is denied because the registrant is concurrently relieved of having to include, in determining the registrant’s net tax, any amount of tax in respect of the returnable container charge when the registrant in turn sells the beverage in the returnable container. For example, if a retailer in a province in which an Act prescribed for the purpose of paragraph 226(2)(b) charged the same tax-inclusive amount of deposit as the retailer paid (e.g.,$0.10), the special rules would apply to the retailer. Assume $0.05 were the amount of the non-refundable tax-included deposit. The retailer would not have to include the HST component of the$0.05 charged to the consumer in the retailer’s HST remittances but would include the HST on the beverage. The retailer would accordingly not be entitled to include the HST component of the $0.05 deposit paid to the retailer’s supplier in determining the retailer’s input tax credit. The retailer would be entitled to claim an input tax credit in respect of the HST paid on the beverage. For registrants using a streamlined accounting method to determine their net tax, the amount determined under paragraph 226(2)(b) as the consideration for the deemed service, as opposed to the HST component of the tax-included non-refundable deposit, is the amount in respect of the deposit that is excluded in determining their net tax. Subsection 226(9) – Non-application of Special Rules Subsection 226(9) describes circumstances in which paragraphs 226(8)(a) and (b) do not apply. The first circumstance is where it is the usual business practice of the registrant to charge, when selling in the province a particular beverage in a returnable container of a particular class, a returnable container charge that is not equal to the returnable container charge that the registrant pays in respect of returnable containers of that class containing the particular beverage. The special rules under subsection 226(8) are meant to apply only where the amount of input tax credits to which a registrant would be entitled in respect of the non-refundable deposits on returnable containers for beverages acquired by the registrant is equal to the amount of the tax component of non-refundable deposits the registrant charges in respect of sales of the beverages in the returnable containers. It is important to note that the ineligibility to use the special rules under subsection 226(8) is determined in respect of a particular beverage sold in returnable containers of a particular class. A registrant may therefore be entitled to use the special rules for some beverages and not for others if the registrant’s usual business practice varies with respect to the different products. For example, if the registrant is the first vendor to charge a returnable container charge in respect of a beverage container in a province (e.g., where the registrant imports a particular type of beverage and does not pay any returnable container charge to the registrant’s out-of-province suppliers), the registrant would not follow the special rules with respect to that product. However, that would not affect the eligibility of the registrant to use the special rules for another beverage for which the registrant pays to the registrant’s supplier the same amount of returnable container charge as the registrant charges to customers. The second circumstance in which paragraph 226(8)(a) does not apply to deny an input tax credit to a registrant for the purchase of a beverage in a returnable container of a particular class is where the registrant is a specified beverage retailer (as defined in subsection 226(1)) in respect of containers of that class. Subsection 226(8)(a) does not apply as long as the registrant elects under subsection (3) not to deduct the amount of the returnable container charge in respect of the container in determining the consideration for the supply by the registrant of the beverage in the container. In that case, the registrant is required to charge the recipient tax on the entire amount paid for the beverage and the container, and the registrant must include the full amount of that tax in the registrant’s net tax. Subsection 226(10) – Change in Practise Subsection 226(10) applies in a province in which an Act prescribed for the purposes of paragraph 226(2)(b) applies (i.e., where the special rules under subsection 226(8) apply). Subsection 226(10) deals with the case where a registrant changes their usual business practise with respect to a particular beverage such that the registrant becomes eligible to use the special rules under subsection 226(8) with respect to that beverage. In other words, subsection 226(10) applies where the registrant starts to charge, when selling the beverage in the province, a returnable container charge that is equal to the returnable container charge the registrant pays when acquiring the beverage. The registrant would have previously claimed input tax credits for tax paid on the tax-included non-refundable portion of the deposit paid on the acquisition of any beverage held in the registrant’s inventory at the time of the change in practise. However, under the special rules that will apply to the sale of that inventory subsequent to the change in practise, the registrant neither includes the non-refundable portion of the deposit charged to customers, nor any tax included in that amount, in determining the net tax of the registrant. Therefore, subsection 226(10) requires the registrant, in those circumstances, to account for tax on each item of that inventory equal to the input tax credit that was previously claimed, or that the registrant would, but for section 156 or 167 of the Act, have been entitled to claim in respect of each item of that inventory. Subsection 226(11) – Change in Practice – Ceasing to Apply Special Rules Subsection 226(11) applies in a province in which an Act prescribed for the purposes of paragraph 226(2)(b) applies (i.e., where the special rules under subsection 226(8) apply). Subsection 226(11) deals with the case where a registrant changes their usual business practice with respect to a particular beverage such that the registrant ceases to be eligible to use the special rules under subsection 226(8) with respect to that beverage. In other words, subsection 226(11) applies where the registrant starts to charge, when selling the beverage in the province, a returnable container charge that is not equal to the returnable container charge the registrant pays when acquiring the beverage. The registrant would not have claimed input tax credits for tax paid on the tax-included non-refundable portion of the deposit paid on the acquisition of any beverage held in the registrant’s inventory at the time of the change in practice. However, since the special rules will not apply to the sale of that inventory subsequent to the change in practice, the registrant will have to include the non-refundable portion of the deposit charged to customers, or any tax included in that amount, in determining the net tax of the registrant. Therefore, as a result of the deemed acquisition and payment of tax under subsection 226(11), the registrant, in those circumstances, is allowed to claim input tax credits in respect of each item of that inventory equal to the input tax credits that were previously denied or that would have been denied if tax had been payable but for section 156 or 167. Subsection 226(12) – Ceasing to be a Registrant While Special Rules Apply Subsection 226(12) applies in a province in which an Act prescribed for the purposes of paragraph 226(2)(b) applies (i.e., where the special rules under subsection 226(8) apply). Where a person ceases to be a registrant, subsection 171(3) of the Act results in the person having to account for tax on all items of inventory then held by the person for sale in the course of a commercial activity. That rule presumes that the person would have been entitled to claim input tax credits for those items. However, in the case of the person’s inventory of beverages in returnable containers, the person would not have been entitled to claim input tax credits for the tax included in the non-refundable portion of the container deposits if the person had been subject to the special rules under subsection 226(8) immediately before ceasing to be a registrant. In this situation, the person is deemed under subsection 226(12) to have received, immediately before ceasing to be a registrant, a supply of a service in respect of each item of that inventory and is deemed to have paid tax in respect thereof. That tax is equal to the tax that was, or would, but for section 156 or 167, have been included in the non-refundable portion of the container deposits. Consequently, the registrant is able to claim input tax credits for that tax, assuming all other conditions for claiming the credits are met. Subsection 226(13) – Supplies Under Section 167 Subsection 226(13) addresses a case where filled and sealed returnable containers are held in the inventory of a business at the time it is sold. Subsection 167(1.1) of the Act sets out the rules that apply when, under an agreement to supply a business or part of a business, the supplier and recipient jointly elect under subsection 167(1) to treat certain supplies made under the agreement as non-taxable. This tax treatment generally does not apply to taxable services that are to be rendered by the supplier. Subsection 226(13) ensures that the supply of a service that is deemed under subsection 226(2) to be made when the supplier sells the beverage is essentially ignored for purposes of applying the roll-over rules in section 167. Therefore, the inventory of filled and sealed returnable containers will be treated the same under the agreement for the sale of the business as is other inventory. Subsection 226(14) – Deemed Tax Collected where Section 156 or 167 Applies Subsection 226(14) applies only in respect of a taxable supply (other than a zero-rated supply) of a beverage contained in a filled and sealed returnable container of a particular class in a province in which an Act prescribed for the purposes of paragraph 226(2)(b) applies (see commentary on subsection 226(2)). It deals with certain supplies of beverages in filled and sealed returnable containers that are not subject to tax because of section 156 or 167. In the cases in question, the supplier would have been entitled to claim an input tax credit in respect of the tax component of the deposit amount included in the total amount paid when acquiring the beverages but the recipient will not have to account for tax in respect of the deposits when re-supplying the beverage because the recipient is subject to the special rules under subsection 226(8). Subsection 226(14) requires the recipient to include tax calculated on the non-refundable portion of the container deposits in determining net tax for the reporting period in which the beverages are acquired. Subsection 226(15) – Deemed Tax Paid where Section 156 or 167 Applies Subsection 226(15) applies only in respect of a taxable supply (other than a zero-rated supply) of a beverage contained in a filled and sealed returnable container of a particular class in a province in which an Act prescribed for the purposes of paragraph 226(2)(b) applies (see commentary on subsection 226(2)). It deals with supplies of beverages in filled and sealed returnable containers that are not subject to tax because of section 156 or 167. In the cases in question, the supplier would not have been entitled to claim an input tax credit in respect of the tax component of the deposit amount included in the total amount paid when acquiring the beverages but the recipient will have to account for tax in respect of the deposits when re-supplying the beverage because the recipient is not allowed to use the special rules under subsection 226(8). Under subsection 226(15), the recipient is entitled to claim an input tax credit, in determining net tax for the reporting period in which the beverages are acquired, equal to tax calculated on the non-refundable portion of the container deposits. Subsection 226(16) – Fair Market Value of Beverage in Filled and Sealed Container Subsection 226(16) specifies how to determine, for the purposes of Part IX of the Act, the fair market value of a beverage in a filled and sealed returnable container in respect of which there is a returnable container charge where that beverage is held at any time by a person for consumption, use or supply in a province in the course of commercial activities of the person. That fair market value is deemed not to include the amount that would be determined as the refund for the container if the beverage were supplied in the province by the person at that time in the filled and sealed container. This rule is relevant to the application of section 171 of the Act where a person ceases to be a registrant and must account for tax based on the fair market value of inventory held at that time. Subsection 226(17) – Basic Tax Content of Beverage in Filled and Sealed Container Subsection 226(17) provides a rule for determining the basic tax content (as defined in section 123(1) of the Act) at any time of a beverage in a filled and sealed returnable container that is held at that time by a person. The rule ensures that the basic tax content of the beverage includes the tax that was payable on the non-refundable portion of the container deposits paid when initially acquiring the containers or when the person was deemed to have made a supply under subsection 226(14) or to have received a supply under subsection 226(15). This rule is pertinent to section 171 where a person becomes at any time a registrant and is entitled to claim input tax credits determined based on the basic tax content of property held at that time. Subsection 226(18) – Addition to Net Tax Subsection 226(18) requires a registrant who is a specified beverage retailer (as defined in subsection 226(1)) to add an amount in determining the net tax of the registrant in certain circumstances. A "specified beverage retailer", in respect of a particular class of returnable containers, refers to a registrant who, in the ordinary course of their business, sells to consumers beverages in containers of that class in circumstances in which the registrant typically does not unseal the containers when selling the beverages. Further, for a registrant to be considered a "specified beverage retailer", it must not be the case that all or substantially all of the used containers that are gathered at establishments at which the registrant makes such supplies of beverages and that are then returned by the registrant to a depot or other recycler are containers that have been returned to the registrant for refunds. For example, an operator of a restaurant that is a combination eat-in, take-out establishment might sell beverages in filled and sealed returnable containers of a particular class but the only containers of that class that the registrant gathers at such establishments and returns are those that are left behind by customers who have chosen to consume the beverages on the premises. In that case, the registrant would be a specified beverage retailer in relation to returnable containers of that class. Under subsection 226(2), a registrant can deduct the refundable beverage container deposit from the consideration applicable to the sale of the beverage. That gives the appropriate result where the purchaser of the beverage retains the container in order to obtain the refund of the deposit. This is not the case where the beverage retailer instead retains the container for the refund. Therefore, under subsection 226(18), a specified beverage retailer must add to their net tax an amount of tax calculated on the refund they receive for the container unless the retailer had elected, under subsection 226(3), to charge tax on the entire amount paid for the beverage and the container when the beverage was sold. Where the registrant so elects, subsection 226(2) does not apply and therefore neither does subsection 226(18) since paragraph 226(18)(b) restricts the application of this rule to circumstances in which paragraph 226(2)(a) applies. Clause 29 Non-application of Exemption ETA 226.01 Section 5.1 of Part V.1 of Schedule V to the Act and section 6 of Part VI of that Schedule describe a supply made by a charity and public service body respectively, that is exempt based on the amount charged for the supply in relation to the "direct cost" of the supply. The direct cost of a supply is essentially the direct material cost, in the case of goods produced by the charity or body, or the purchase price paid by the charity or body, in the case of property or services purchased for resale. The consequence of the exemption is that the supply is not considered to be part of a commercial activity and the supplier, while not having to collect tax on the supply, is not able to claim related input tax credits. New section 226.01 of the Act provides that these direct cost exemptions do not apply to a supply of a used and empty returnable container (as defined in section 226 of the Act) or to a supply of the material resulting from its compaction. In the returnable container recycling industry it is typical for a recycler to acquire used and empty containers for a consideration equal to the refund for that class of container. The recycler will then sell the containers or the material resulting from their compaction for a lesser consideration to another person who will recycle the material. The activity is economic for the recycler because the recycler is typically also in receipt of amounts of deposits in respect of the containers from a distributor or another recycler. New section 226.01 ensures that, when the recycler is a charity or other public service body, its supplies of used and empty containers (or the material resulting from their compaction) are not treated as exempt supplies solely due to the direct cost exemption provisions. Consequently, such a recycler may be able to claim input tax credits for related inputs in the same manner as other recyclers that are engaged in the same activity and that are not charities or other public service bodies, provided their activity is not otherwise an exempt activity and all other conditions for claiming the input tax credits are met. It is important to note that, in the case of charities, the exemption under section 1 of Part V.1 of Schedule V to the Act for the sale of tangible personal property that was used by another person before its acquisition by the charity may still apply. New section 226.01 applies to supplies of used and empty returnable containers (or the material resulting from their compaction) for which consideration becomes due after 1996 or is paid after 1996 without having become due. This application corresponds to the enactment of section 5.1 of Part V.1 of Schedule V. New section 226.01 is not required following the coming into force of new subsection 226(4), which deems the value of the consideration for the supply of a used and empty returnable container (or the material resulting from its compaction) to be nil. Accordingly, the amount charged by the recycler for the supply can reasonably be expected to be greater than zero and thus greater than the direct cost. Consequently, the direct cost exemptions will not apply to a supply of a used and empty returnable container or to a supply of the material resulting from its compaction. Therefore, new section 226.01 will cease to apply to supplies of used and empty returnable containers (or the material resulting from their compaction) for which consideration becomes due, or is paid without having become due after July 15, 2002. Clause 30 Deduction for Charity ETA 226.1 Subsection 226.1 of the Act applies where a charity operates an authorized bottle return depot in a province in the course of exempt activities and refunds a provincially-mandated refundable deposit. In this case, the charity is allowed to claim a net tax deduction (which could result in a net tax refund) equal to 7% (or 15% where the province is an HST-participating province) of the refundable deposit. To be entitled to this deduction, the charity must pay the refundable deposit, plus an amount equal to the deduction, to the person from whom it collects the container. Subsection 226.1(1) is amended to ensure that a charity has the same amount of time to claim the deduction as the charity would have if the amount were instead claimed as an input tax credit. The amendment adds the reference to "or for a subsequent reporting period" in subsection 226.1(1) in the English version of the Act and the reference to "ou pour une période de déclaration postérieure" to the French version of that subsection of the Act. This amendment is for greater certainty as subsection 226.1(2) already explicitly provides for a four-year period to claim the deduction. The amendment applies to any supply of a container made to a charity after March 1998, the date of the coming into force of section 226.1. A second amendment repeals section 226.1 since new section 226 of the Act excludes refundable deposits on beverage containers from the GST/HST tax base. There will therefore be no tax component in the refund paid for the used and empty containers. The amendment applies to supplies for which consideration becomes due after July 15, 2002 or is paid after that day without having become due. The delay of 75 days between the coming into force of the amendments to section 226 (May 1, 2002) and the repeal of section 226.1 reflects the fact that the deposit on returnable beverage containers in circulation at the time of implementation of new section 226 included an amount of tax. This 75-day transition period allowed for those containers to reach a redemption centre and for the operator to claim the related deduction in respect of them. For the purpose of applying section 226.1 during that 75-day transition period, existing section 226 is to be read as if it had not been replaced by new section 226. For example, the meaning of "returnable container" under existing subsection 226(1) continues to apply during the transition period for the purposes of section 226.1. Clause 31 Bad Debts – Deduction from Net Tax ETA 231 Section 231of the Act provides for bad-debt relief when a debt relating to a taxable supply (other than a zero-rated supply) is written off in the supplier’s books of accounts. Subclause 31(1) Bad Debt Deduction ETA 231(1) and (1.1) Existing subsection 231(1) provides that only the supplier can claim bad debt relief respecting a taxable supply and only if the supplier reports the tax payable in respect of that supply and establishes that the consideration and tax payable have become in whole or in part a bad debt. Therefore, under the existing legislation, where the supplier and their agent have jointly elected under subsection 177(1.1) of the Act to have the agent report the tax payable in respect of a supply made by the supplier, neither the agent nor the supplier can claim bad debt relief in respect of the GST/HST on that supply. Subsection 231(1) is amended to deal with the case where the joint election under subsection 177(1.1) has been made by the supplier and the agent (see commentary on amendments to subsection 177(1.1)). In this case, the amendments to subsection 231(1) permit an agent who has reported the tax respecting a supply to claim a deduction for any bad debt relating to that supply that is written off by the supplier. Amended subsection 231(1) repeats the existing condition that it must be established not only that all or part of the debt in respect of the supply has become a bad debt, but also that the supplier has written the bad debt off in its books of account. Amended subsection 231(1) makes it clear that bad debt relief can be claimed if all or any part of the total of the consideration and tax payable respecting a taxable supply becomes a bad debt. If it is only a part of that total that is written off as a bad debt, regardless of whether that part is attributable entirely to tax, entirely to consideration or to a mixture of tax and consideration, a deduction under subsection 231(1) can be claimed equal to a fraction of the amount written off. The reporting requirements under existing subsection 231(1) are set out in new subsection 231(1.1). The rules are amended to provide that the "reporting entity", as defined in new subsection 231(5), must report the tax. If the election under subsection 177(1.1) has been made, the reporting entity is the agent. If the election under subsection 177(1.1) has not been made, the reporting entity is the supplier. New subsection 231(1.1) repeats the conditions found in the existing post-amble to subsection 231(1) with the necessary modifications to reflect the fact that either the supplier or an agent of the supplier may be the "reporting entity" that is required to report the tax in respect of a supply in their return. It is the same reporting entity that must also satisfy the requirement to remit any positive amount of net tax reported in that return. The amendments apply to supplies made after April 23, 1996, the date on which the election under subsection 177(1.1) generally came into force. It should be noted as well that a transitional rule is provided to extend in some circumstances the period allowed for an agent, who has made a supply on behalf of a supplier and who has elected under subsection 177(1.1) with the supplier, to claim a deduction for a bad debt that was written off before December 21, 2002. This extension of the limitation period recognizes that the existing denial of a bad debt deduction to both the supplier and their agent was an unintended consequence of unrelated amendments that were made to the agency rules in section 177 that generally applied to supplies made after April 23, 1996. The agent may claim the deduction for a debt that was written before December 21, 2002 within the usual limitation period set out in subsection 231(4) of the Act except that, if that usual period ends before December 21, 2003, the transitional rule extends the limitation period so that the agent has a full year from December 20, 2002 to file a return in which the agent claims the deduction. Subclause 31(2) Recoveries and Limitations on Claiming Deductions ETA 231(3) to (5) Subsection 231(3) – Recovery of Bad Debt Subsection 231(3) deals with the situation where a person has claimed bad debt relief under subsection 231(1) in respect of a debt relating to a taxable supply and all or part of that debt is subsequently recovered. The subsection requires that an amount be added to net tax equal to a fraction of the amount recovered. The amendments to subsection 231(3) reflect the fact that the supplier who recovers the debt previously written off is not necessarily the same person who claimed the bad debt deduction. The deduction may have been claimed by the supplier’s agent if the supplier and the agent had made an election under subsection 177(1.1) in respect of the supply to which the bad debt relates. The amendments also clarify that, when there is a recovery of a particular amount at any time, the amount that is included in the description of A in the formula for determining the addition to net tax for the period is that amount recovered at that point in time. This clarification reflects the fact that partial recoveries may occur at different times, each of which would result in a separate addition under subsection 231(3). The amendments apply to bad debts relating to supplies made after April 23, 1996. Subsection 231(4) – Limitation Period Subsection 231(4) sets out the limitation period for claiming bad debt deductions under section 231. Amendments are made to this provision to reflect changes to subsection 231(1) that provide that the "reporting entity" for a supply (as defined in new subsection 231(5)) is the person entitled to claim bad debt relief respecting a bad debt that has been written off in the supplier’s books of accounts. The reporting entity is the agent of the supplier where an election under subsection 177(1.1) has been made. The amendment applies to bad debts relating to supplies made after April 23, 1996. However, the reference to "the supplier" in the context of who writes off the bad debt in their books of account is read as a reference to the person claiming the bad debt deduction in the case of a deduction under former subsection 231(2). That subsection dealt with a case where the purchaser of a debt wrote off the debt in its books of account and was entitled to claim the bad debt deduction. Despite subsection 231(4), a transitional rule extends in certain circumstances the limitation period for an agent to claim a bad debt deduction under section 231 in relation to a supply that the agent accounted for pursuant to an election made under subsection 177(1.1) jointly with the supplier/principal. The extension of the limitation period may apply to supplies made before December 20, 2002 in respect of which a bad debt was written off on or before that day. Specifically, the deadline for claiming the deduction is extended to the day that is one year after December 20, 2002 if the usual four-year limitation period under subsection 231(4) either had already expired by December 20, 2002 or would expire earlier than one year after that date. Subsection 231(5) – Definitions "Applicable Provincial Tax" and "Reporting Entity" New subsection 231(5) sets out the definition "applicable provincial tax" for the purposes of the formulae in amended subsections 231(1) and (3). The meaning of this expression is unchanged from its meaning within existing subsections 231(1) and (3). An "applicable provincial tax" is a tax, duty or fee that is imposed under a provincial act and that is prescribed by the Taxes, Duties and Fees (GST/HST) Regulations. The most common of these provincial taxes are the general sales taxes of the provinces. New subsection 231(5) also adds the definition "reporting entity", which defines who (i.e., the supplier or their agent) is required to meet the reporting conditions for claiming a bad debt deduction. The amendment comes into force on April 24, 1996. Clause 32 Net Tax Where Passenger Vehicle Leased ETA 235(1)(b) The purpose of section 235 of the Act is to recapture input tax credits in respect of leased passenger vehicles if the lease costs exceed the maximum lease costs that are deductible under the Income Tax Act. The method of calculating the maximum lease costs is set out in section 67.3 of the Income Tax Act, which refers to paragraphs 7307(1)(b) and (3)(b) of the Income Tax Regulations. Subsection 235(1) is amended to clarify that the maximum lease costs are to be calculated exclusive of any federal or provincial sales taxes that may be included in that amount for income tax purposes. The amendment applies in respect of reporting periods that end after Announcement Date and in respect of any reporting period that ends on or before that day unless an amount was added pursuant to section 235 in determining the net tax for the reporting period, the amount was determined on the basis that the capital cost of the passenger vehicle for the purposes of the Income Tax Act included federal and provincial sales taxes, and the return for that reporting period was filed under Division V of Part IX of the Act on or before that day. Clause 33 Registration Permitted ETA 240(3)(e) and (f) Subsection 240(3) of the Act permits persons engaged in a commercial activity in Canada and certain other specified persons to apply to become registered for purposes of the GST/HST. Subsection 240(3) is amended to add new paragraph (e), which extends voluntary registration to a foreign bank that receives a qualifying supply (as defined in subsection 167.11(1) of the Act), or that receives a supply which would meet the definition "qualifying supply" contained in subsection 167.11(1) if the foreign bank were a registrant at the time of the agreement for that supply. The registration is permitted provided that the foreign bank recipient files a joint election under subsection 167.11(2) with the Minister of National Revenue in respect of the qualifying supply within the time limit set out in paragraph 167.11(7)(a). Subsection 240(3) is also amended to add new paragraph (f), which permits a corporation in certain circumstances to register for the purposes of GST/HST. The corporation must be a corporation that would qualify as a temporary member (as defined in subsection 156(1) of the Act) if the corporation met all the requirements of that definition other than the requirement that the corporation be a registrant. This amendment allows this corporation to meet the registration requirement for being a temporary member, which in turn may, if the other conditions contained in section 156 are met, permit the corporation to make an election under that section to receive a supply on a GST/HST-free basis. The supply must be made in contemplation of a distribution made in the course of a reorganization described in subparagraph 55(3)(b)(i) of the Income Tax Act. This corporation may apply to be registered before it receives that supply so long as it does in fact subsequently receive that supply. The amendment adding new paragraph 240(3)(e) is deemed to have come into force on June 28, 1999, and the amendment adding new paragraph 240(3)(f) is deemed to have come into force on November 17, 2005. Clause 34 Accommodation Rebate ETA 252.1(2), (3) and (8) Section 252.1 of the Act provides a rebate of tax paid on short-term accommodation and camping accommodation that are made available to a non-resident. Subsections 252.1(2), (3) and (8) of the French version of the Act are amended to ensure consistency with the English version in respect of camping accommodation. The amendments apply to campsites not included in a tour package where the campsite is made available after June 1998. These amendments in respect of campsites included in a tour package apply where any accommodation in Canada (whether short-term accommodation or a campsite) that is part of the tour package is first made available after June 1998. Clause 35 Restriction ETA 252.2(g)(ii) Section 252.2 of the Act sets out restrictions on the claiming of rebates under section 252 or subsections 252.1(2) or (3) of the Act. Subparagraph 252.2(g)(ii) of the French version of the Act is amended to ensure consistency with the English version in respect of the rebate of tax paid on camping accommodation that is made available to a non-resident. The amendment applies to rebate applications received by the Minister of National Revenue after June 1998. Clause 36 Rebate Paid by Supplier ETA 252.4(4) Subsection 252.4(4) of the Act allows a supplier in certain circumstances to credit an unregistered organizer or a sponsor of a foreign convention (as defined in subsection 123(1) of the Act) the amount of a rebate under section 252.4 to which the organizer or sponsor would be entitled in respect of supplies made by that supplier. Among the items that qualify for the rebate is short-term accommodation (as defined in subsection 123(1)) and camping accommodation that are acquired by the organizer or sponsor, as the case may be, for supply in connection with the convention. Subsection 252.4(4) of the French version of the Act is amended to ensure consistency with the English version in respect of camping accommodation. The amendment applies in respect of supplies of camping accommodation that are acquired for re-supply in connection with a convention that begins after June 1998 and for which no admissions are sold before February 25, 1998 Clause 37 Nova Scotia First-Time Homebuyers’ HST Rebate ETA 254(2.01) to (2.1) Subsection 254(2.1) of the Act provides for a partial rebate of the provincial component of the HST in respect of the purchase of new homes in Nova Scotia where the purchaser is entitled to a rebate under subsection 254(2) or would be so entitled if the total consideration for the residential complex were less than$450,000. Under existing subsection 254(2.1), the Nova Scotia HST New Housing Rebate is equal to 18.75 per cent of the provincial component of the HST paid (or 1.5 per cent of the pre-tax purchase price), to a maximum of $2,250. The maximum is reached at a pre-tax home price of$150,000.

As announced in Nova Scotia’s 2001 budget, the Nova Scotia HST New Housing Rebate is amended to target the rebate to first-time homebuyers, effective January 1, 2002. Further, the maximum rebate is reduced to $1,500. To qualify as a first-time homebuyer, it must generally be the case that neither that individual, nor their spouse or common-law partner, was an owner-occupant of a home in Canada within the preceding five years. Further, if the new home in respect of which a new housing rebate is claimed is acquired for use as the primary place of residence of a relation of the rebate applicant, but not of the applicant or the applicant’s spouse or common-law partner, then the relation must also satisfy the same condition regarding previous owner-occupant status. It should be noted, however, that an individual would still meet this condition, even if they were an owner-occupant during that preceding five-year period, if the last home in Canada in relation to which they were an owner-occupant during the period was accidentally destroyed during that period. New subsection 254(2.01) provides that an individual is an "owner-occupant" of a home if it is their primary place of residence and they or their spouse or common-law partner own either the home or, in the case of a residential unit in a residential complex of a cooperative housing corporation, a share in the corporation. For purchased homes, new subsection 254(2.02) establishes the end of the five-year period (referred to as the "relevant transfer date"), which is the earlier of the date on which ownership of the new home is transferred to the purchaser and the date possession of the new home is transferred to the purchaser. For purchased homes, the new rebate rules apply where: • the agreement of purchase and sale is entered into after 2001; • the new home is first occupied as the primary place of residence of the purchaser, or a relation of the purchaser, after 2002, in the case of condominium units, or after June 2002, in any other case; or • ownership and possession of the new home are transferred to the purchaser after 2002, in the case of condominium units, or after June 2002, in any other case. Clause 38 Nova Scotia First-Time Homebuyers’ HST Rebate for Building Only ETA 254.1(2.01) to (2.1) Subsection 254.1(2.1) of the Act effectively provides for a partial rebate of the provincial component of the HST embedded in the price of a new building forming part of a residential complex or a residential condominium unit located in Nova Scotia in the circumstances where the land on which the building is situated is being leased to the purchaser of the building. To qualify for a rebate under subsection 254.1(2.1), a purchaser must also qualify for a partial rebate under subsection 254.1(2), or would have so qualified if the value of the complex were less than$477,000. Under existing subsection 254.1(2.1), the Nova Scotia New Housing Rebate is equal to 1.39 per cent of the purchase price attributable to the building, to a maximum of $2,250. As announced in Nova Scotia’s 2001 budget, this rebate is amended to target the rebate to first-time homebuyers, effective January 1, 2002. Further, the maximum rebate is reduced to$1,500.

The eligibility condition relating to previous owner-occupant status under subsection 254.1(2.01) is the same for this rebate as for the Nova Scotia First-time Homebuyers’ Rebate under subsection 254(2.1), as described in the commentary on the amendments to that subsection and on new subsections 254(2.01) and (2.02). However, in the case of the rebate under subsection 254.1(2.1), new subsection 254.1(2.02) provides that the "relevant transfer date" is the date on which possession of the residential complex is transferred to the purchaser of the building.

The new rebate rules apply where:

• the agreement of purchase and sale of the building is entered into after 2001;
• the new home is first occupied as the primary place of residence of the purchaser, or a relation of the purchaser, after 2002, in the case of condominium units, or after June 2002, in any other case; or
• under the agreement for the sale of the building, possession of the residential complex is transferred to the purchaser after 2002, in the case of a condominium unit, or after June 2002, in any other case.

Existing paragraph 254.1(2.1)(a) refers to the value of the complex at which a purchaser ceases to qualify for the rebate under subsection (2). Due to a previous amendment to section 165 in 2006, which reduced the GST/HST rate, subsection 254.1(2) and paragraph 254.1(2.1)(a) were previously amended to reduce the amount referred to in that paragraph from $481,500 to$477,000 to reflect the reduced embedded tax. Since the amendment applies also to cases where the federal component of the HST applied at the higher rate, the amendment first refers to $481,500. Paragraph 254.1(2.1)(a) is subsequently amended to refer to$477,000 where the federal component of the HST applies at the lower rate. The amendment applies in respect of a residential complex in which a residential unit is situated if the possession of the unit is transferred on or after July 1, 2006, unless the tax under subsection 165(1) in respect of the deemed supply of the complex referred to in paragraph 254.1(2)(d) applied at the higher rate.