Budget 2013: GST/HST and customs tariff measures 


March 2013

Tax Bulletin

Budget 2013 proposed a number of GST/HST and customs changes, including changes to (i) relieve the GST/HST compliance burden for employers who participate in pension plans, (ii) exempt certain publicly funded personal care services from GST/HST, (iii) provide the Canada Revenue Agency ("CRA") with new tools to combat the use of "zapper" software to evade taxes, and (iv) customs duties on certain imports.

changes to GST/HST Pension Rules

Under current GST/HST rules (the "Pension Rules"), an employer who participates in a pension plan is deemed to have made a taxable supply to the relevant pension entity, and to have charged and collected GST/HST, where it acquires, uses or consumes property or services in activities relating to the pension plan, and is required to account for such deemed GST/HST. There can be overlap or duplicate GST/HST accounting to the extent that the employer also charges and collects GST/HST on actual taxable supplies made to the relevant pension entity. In such case, the employer is allowed to make a "tax adjustment" to its net tax position in its GST/HST returns to avoid double taxation on essentially the same taxable supply. In order to reduce compliance costs and eliminate the need to make such "tax adjustments", Budget 2013 proposes two new measures.

First, Budget 2013 proposes to allow employers to make a joint election (a "Joint Election") with the relevant pension entity to deem any actual taxable supplies made by the employer to have occurred for no consideration where the employer accounts for and remits tax on the corresponding deemed taxable supplies under the Pension Rules. Such an election eliminates the need for employers to make tax adjustments to their net tax position in their GST/HST returns.

Second, Budget 2013 proposes to relieve employers from the obligation to apply the Pension Rules for a fiscal year where the GST (and the federal component of the HST) that the employer would otherwise be required to account for and remit in the previous year is less than (i) $5,000 and (ii) 10% of the total net GST (and the federal component of the HST) paid by all the pension entities of the particular pension plan in the preceding fiscal year. This exemption is not available where the employer has made the Joint Election.

Employers who do not qualify for this exemption may still be entitled to limited relief in respect of their internal pension activities (e.g., time spent by a payroll employee determining pension contribution deductions). Specifically, an employer would be relieved from applying the Pension Rules in respect of its internal pension activities if the amount of GST (and the federal component of HST) that the employer would have had to account for and remit in the previous fiscal year in respect of those activities alone was less than the $5,000 and 10% thresholds described above. This limited exemption would be available even where an employer had made the Joint Election.

expansion of GST/HST exemptions for home care services

Basic health care and health-related services are generally exempt from GST/HST. As a result, suppliers of such services do not charge GST/HST (and cannot claim input tax credits to recover GST/HST on their related business inputs).

Currently, certain publicly subsidized or funded homemaker services, such as cleaning, laundering, meal preparation and child care rendered to individuals who, due to age, infirmity or disability require assistance in their home, are exempt from GST/HST. However, the current exemption from GST/HST does not apply to publicly subsidized or funded personal care services provided to such individuals, such as bathing, feeding, and assistance with dressing and taking medication. In light of the increasing significance of such services, Budget 2013 proposes to extend the GST/HST exemption for homemaker services to publicly funded or subsidized personal care services to individuals who, due to age, infirmity or disability, require assistance their home.

new measures to combat the use of "zapper" software

In recent years, the CRA has been increasingly aggressive in pursuing taxpayers who use electronic suppression of sales ("ESS") software (commonly known as "zapper" software) to delete or modify sales transactions from their point-of-sale systems in order to evade the payment of GST/HST and income tax.

In order to further deter the use of "zapper" software, Budget 2013 proposes new administrative monetary penalties ("AMPs") and criminal offenses under the Excise Tax Act and the Income Tax Act (Canada) to combat this form of tax evasion. AMPs of $5,000 will be imposed on the first infraction for the use of ESS software or for the possession or acquisition of such software and $50,000 on any subsequent infraction. Similarly, it is proposed that AMPs of $10,000 will be imposed on the first infraction for the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software, and $100,000 on any subsequent infraction. Because AMPs can generally be imposed by government agencies, such as the CRA, without court approval and typically provide limited defenses (Budget 2013 proposes that taxpayers will have a limited due diligence defence in certain circumstances), this change will provide the CRA with a significant new power to penalize taxpayers who use, possess, develop or distribute ESS software.

Budget 2013 also proposes the introduction of new criminal offense for the use, possession, acquisition, manufacture, development, sale, possession for sale, offer for sale or otherwise making available of ESS. A person convicted of such an offense on summary conviction could be liable for a fine of up to $500,000 (and not less than $10,000) and/or imprisonment of up to 2 years. A conviction by way of indictment will be punishable by a fine of up to $1,000,000 (and not less than $50,000) and/or imprisonment of up to 5 years.

The combination of new AMPs and new criminal offenses provides the CRA with significant new weapons in its arsenal against tax evasion, over and above existing civil and criminal remedies. In order to allow businesses to ensure that they do not possess ESS software, Budget 2013 proposes that these measures will not come into effect until the later of (i) January 1, 2014; and (ii) the day on which the relevant enacting legislation receives Royal Assent.

customs changes

Budget 2013 proposes to eliminate Canadian customs duties on imported baby clothes and sports and athletic equipment effective April 1, 2013. Furthermore, after consultation with stakeholders, it is proposed that the General Preferential Tariff for 72 "higher-income and export-competitive countries", including Brazil, India and China be eliminated. These amendments are to take effect on January 1, 2015.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013