Navigating Canadian Business Tax with Jeremy Scott

Meredith: 00:00:40

Welcome to Saltovation.

The Saltovation show is a podcast series featuring the leading voices in SALT where we talk about the issues and strategies to help you make sense of state and local tax.

Meredith: 00:00:52

In part two of our conversation with Jeremy Scott, we look deeper into Canadian tax policy, from Quebec's influence on the Netflix tax to how litigation works across provinces, recent court case shaping GST and real property, and how voluntary disclosure and documentation requirements play out for businesses.

Meredith: 00:01:13

You had mentioned that Quebec was kind of the first kind of jurisdiction to modify that, maybe doing business and kind of create that two pronged test.

Do you find, are they kind of like a leader in tax policy or is there one kind of province or territory that tends to kind of be an outlier from tax, you know, from a tax policy perspective that kind of will pave the way right. In the states. We often find that, you know, our largest states, California, Texas, New York, may, you know, Illinois kind of lead.

They lead the charge. They try to do some things first. Yeah, yeah.

And then, and then other states will kind of fall in line depending upon what those states do decide to do.

Jeremy: 00:01:59

Yeah, yeah, I would say.

I mean, again, now that we've got many of our provinces harmonized into the federal system, there's only four provinces that have sales taxes outside of that option to do so. Quebec, for a whole lot of reasons, has always kind of marched to the beat of a different drum. Quebec is a French language province.

They follow the civil law, not the common law. So there's. Quebec is a very unique and distinct province within the nation. So they have always approached things a little differently.

And I think traditionally, it would probably be fair to say that most tax practitioners in Canada would recognize that Quebec has always kind of approached things a little differently, perhaps a little more aggressively, whether it's from their creation of new tax rules or from their audit and administrative perspectives. British Columbia is also a sizable province that kind of leads the charge on a number of instances.

So I do think when Quebec, the interesting story or the interesting sort of aspect was when Quebec first announced this Netflix tax.

If you really think about what they said, they were saying, hey, we're going to ask these large multinational or large international companies to register for tax in our little jurisdiction of Quebec, in the grand scheme of things. And we're going to ask them to charge our Quebec sales tax, which happens to be like, everything about Quebec is slightly different.

Quebec sales tax rate is 9.975%. Like, they don't even have like a 10% or a 7%, 9.975% rate.

Anyway, they create this legislation, they say, hey, we're going to expect all these multinationals to register and collect the tax when appropriate.

I think in the background, a number of people questioned whether that would really happen, whether compliance would be a viable option or a realistic option. And what in fact happened was it appears for all intents and purposes, that there was a lot of compliance.

So I think, frankly, you probably had a number of organizations where Senior Financial Leadership, CFOs in big companies said, hey, this province is expecting us to register. Like, let's just register and comply. We're not picking a fight, so to speak, as to whether we should be registered.

We'll just register and collect the tax. And one of the other things the Province of Quebec did was they actually published that data.

If you go on the Quebec website today, you can see the list of more than 1,000 companies that are registered under this new, simplified regime.

So that would be the Netflix of the world, the Amazons of the world, the Airbnbs of the world, those sorts of organizations that are making online supplies to consumers in Quebec.

So I think that's when the federal government, the feds took pause and took note and said, wait a minute, Quebec put this law in place, this new set of tax rules in place. I don't know if anyone really expected them to work. And all of a sudden, everybody was registering and they were working.

So after Quebec had that in place for a year or two, the federal government created very similar rules for gst.

And then the other three PST provinces kind of scratched their heads as well and said, well, hey, if those guys are getting some tax dollars out of this, perhaps we should review online sales into our jurisdictions as well.

Meredith: 00:05:28

So then if you were to litigate anything from a tax policy perspective, do you kind of sue? Right. In each of the jurisdictions?

So if they're not part of the GSCHSC or even like the harmonized provinces, do they have kind of their own governing board or kind of tax authority, or is it all kind of part of the federal. Like, how does that kind of.

Jeremy: 00:05:54

Yep.

Meredith: 00:05:54

So tax policy creation work and like the litigation work within Canada.

Jeremy: 00:06:00

Yeah.

So in Canada, if you had an issue with the goods and services tax, the gsthst, typically your issue would be with, you know, the Canada Revenue Agency, the tax authority that administers the tax. You know, if there's an audit that goes sideways or audit results that you don't like, those issues all get heard before the Tax Court of Canada.

So there is a separate national Tax Court that Hears matters related to the gsthst, the Canadian income tax. If you don't like the decision of the Tax Court of Canada, you can appeal that to the federal appellate court, the federal Court of Appeal.

And if you don't like the federal Court of Appeals decision, you can appeal those decisions to the Supreme Court of Canada. I had a quick look this morning just to see, and there's currently nothing that's being considered to be heard by the Supreme Court of Canada.

So there will be a handful of cases every year that leave is filed to be heard by the Supreme Court of Canada. They typically don't hear tax court cases, but they occasionally will. So that's for the federal gsthst.

If you've got an issue that relates to one of the provincial sales taxes or the jurisdiction of those provinces to enforce those tax regimes, those would typically be heard in the provincial tax court or, sorry, in the provincial courts of that relevant jurisdiction.

Meredith: 00:07:24

So then there might not be anything in the Canadian Supreme Court, but are there any kind of tax cases out there in Canada or maybe recent rulings that are. That could be of interest to our listeners?

Jeremy: 00:07:38

Yeah, for sure. So there have been lots of. There are many tax court cases at sort of the tax court level. So that sort of court of first instance.

So there are lots of taxpayers who've appealed their tax audit results to the tax court. A small fraction of those get appealed to the appellate court over the last couple of years.

The files that end up at the court of appeal, that, you know, some of them end up there and they're very narrowly focused and I don't know that they add a ton of value to most taxpayers tax positions. The cases that I've followed as of late are typically cases. A number of them involved Canadian banks.

Canadian banks who had like loyalty programs or they might be. This sounds completely different, but follow me for a minute.

They might involve professional services like dentists who perform typically exempt dental services, but also sell taxable dental equipment.

So there have been a number of tax court cases that have gone up through to the federal Court of Appeal that are really sort of focused on trying to answer for taxpayers. How do you sort of slice and dice your business to understand what you're really doing?

How do you understand what supplies you're truly making to figure out are you supposed to be charging tax or not charging tax? And if you charge tax, you obviously get to claim tax credits.

There are a number of tax court cases that have looked at this whole concept of when are you making single supplies versus multiple supplies of different things. And a lot of it is driven by people's desire to claim their input tax credit so to recover the HST they've paid.

So those are the kind of cases that kind of end up at the tax court that I think are probably relevant to most businesses.

So if you had, you know, businesses that are, if you had clients that were involved in some taxable and some non taxable activities, those sorts of the concepts coming out of those tax cases can be pretty relevant to most folks.

e I said, came into effect in: 1990

And I think it's fair to oversimplify the world and say back in the day you really used real estate. If you were putting it into a business use, you used it one of two ways. Right.

You rented hotel rooms by the night or you rented apartments by the month. And the GST legislation worked fine with those two frameworks.

Now that we have things like Airbnb, where you might have your own personal use property that you make short term rentals of, or you might have a property that's short term rentals for two or three months of the year and long term rentals for nine months of the year, the Canadian GST legislation doesn't really apply easily to those sets of facts.

There are a number of court cases that have come out lately that have tried to help people understand how the change in use rules apply for real estate.

The real takeaway and the questions I often get asked by either Airbnb property owners or people that own these sort of unique hostel hotel type businesses where they're renting some short and some long term is the. The GST rules for those organizations are actually really quite complex. And it's complex to figure out, do I have to charge tax on the stays?

But it's also complex to figure out, do I have a tax liability, do I have a building that's changed its use and I now have a deemed sale to myself where I have to report tax to the government. So there are lots of weird and wonderful things that are happening in the short term Airbnb type world.

And they are generating a lot of tax court decisions as well.

Meredith: 00:11:57

So from a remediation standpoint, right? So if there was some taxpayers, maybe they're selling into Canada and they should have registered years ago.

What are some of the options that they have?

Jeremy: 00:12:12

Yeah, So I mean, the biggest option in Canada is. So anytime I've talked to taxpayers, the first thing I always remind them is look, you may have a liability, you may not have a liability.

We probably need to think a little bit about that carrying on business test, but if we get past that for a minute. There are voluntary disclosure programs in Canada.

Obviously, like I said, there's five different jurisdictions and they all have their own voluntary disclosure programs.

The rules for the voluntary disclosure programs have changed over time, but there are disclosure programs depending on the nature of the error and how old the error is and who your customers are. Each situation is approached a little differently.

But in general it is fair to say most Canadian jurisdictions, if you're doing a voluntary disclosure, will expect you to calculate the tax you didn't collect it and remit it with the provincial sales taxes. Sometimes there are provincial purchase exemption certificates that could have been issued to avoid the requirement to collect the tax.

For gsthst, the tax generally has to be collected.

But with any luck, if your clients or customers, if the customers of your clients are involved in a commercial activity, oftentimes they don't even mind paying the gst, even if it's a couple of years late because they will recover it as well. So there is an exercise in sort of tax churn, I'll call it like collecting the tax. You can send it in so that your customers can claim it back.

But there are voluntary disclosure regimes across the country for dealing with sort of errors and taxes that have been mishandled in the past.

Meredith: 00:13:55

Sure. And then is a typical look back like three years, five years. Does it depend?

Jeremy: 00:14:01

It somewhat depends.

The Canada Revenue Agency would note that the Excise Tax act does give the CRA sort of a wide range of tools to look back pretty far, especially if you have never registered for the gst. Typically our audit window is a four year audit window, but it starts from the minute you filed your return.

If you never filed your return because you weren't registered, then the four year clock doesn't necessarily start.

Having said that, because there is a four year window, there are instances when the voluntary disclosure folks may think it's appropriate to look at four years worth of data versus 10 or 15 years worth of data. It's all sort of issue specific and fact driven and may depend in some instances on who your customers are as well.

Meredith: 00:14:58

, I can go back, you know, to: 1990

But if you come forward, we'll only go back you know, that's kind of, I think, standard when you get caught in the states, often they'll go back eight to 10 years. You know, if you had nexus, but then you got approved nexus and blah, blah, blah.

But then under the voluntary disclosure program, it's typically three to four and often mirrors the state statute of limitation on assessment.

Jeremy: 00:15:27

Yep. And we've got, we run into different tax jurisdictions within Canada, have different statutes of limitations.

So some of them look at four years, some of them, Manitoba in particular, is focused on six years. I will say that one of the things we've seen in Canada sort of post Covid, our government's still probably looking for dollars everywhere it can.

And tax rules have changed, but tax administration rules have changed and the Canadian tax authority has been given a number of additional audit tools and they've been given a number of additional financial resour to hire more auditors. Now some of that's rolling back a little bit now, but there are more auditors with more tools. So yeah, it's been challenging to ensure compliance.

Meredith: 00:16:25

So what would you. And maybe this is probably just the idea of like doing business in Canada, but what are some of the most common Canadian tax issues you see?

Kind of trip up businesses.

Jeremy: 00:16:38

Yeah, so there's probably two or three really common sort of issues. So the number one issue, and this one happens even to businesses. So Canada's very geographically large.

So the first issue happens not only for international businesses, but Canadian businesses as well. It's the am I required to be registered for all of these taxes? Some of these taxes, none of these taxes. Right.

So you can have a business located in, you know, Halifax, Nova Scotia, which is thousands of miles from the other coast. And you have questions of, okay, do I need to be registered for British Columbia's provincial sales tax?

So one of the biggest things I often run into is businesses, whether they're inside of Canada or outside of Canada, have simply failed to appreciate that they needed to be registered. So that's the number one issue.

The number two issue is probably even when I'm registered, understanding how the place of supply rules work to figure out what rate of tax to charge.

So again, if we go back to the federal tax, I mentioned the federal tax, the gst, a number of provinces have harmonized their provincial taxes to create the HST, but that essentially means that this one tax, the GSTHST, applies coast to coast, but today it applies at three different rates. So it applies at 13% in the province of Ontario.

It applies at 15% in the Atlantic Canadian provinces, which are Nova Scotia, New Brunswick, Prince Edward island and Newfoundland. And then it applies at 5% in the remainder of the country.

So lots of folks fail to appreciate how the place of supply rules work when they're trying to figure out what rate of tax do I apply.

So as a quick statement, if you're talking about goods sold in Canada, you're typically looking at the place where the goods were delivered or made available to the customer. So, you know, if you, if I, if I buy something and have it shipped to my address in Nova Scotia, I should expect to pay 15% HST.

Pretty straightforward if you're talking about the acquisition of a service. Services are generally taxed based on the place where the recipient, where the purchaser resides, like what their address is.

So again, that way, if a business based in Ontario buys a service from a service provider anywhere in the country, they will still pay HST at 13%. So those are the two very general rules.

But then there's a whole lot of complex rules for understanding if you're making supplies of intangibles or specified services, how to figure out what rate of tax to apply.

So I've seen lots of instances where people just don't get the tax rate right or they don't understand that, you know, yes, I'm registered for Manitoba pst, but I didn't understand that I had to apply PST on all of these sales that I thought were outside the province.

Meredith: 00:19:40

Yeah, we have that. Similarly kind of, it's almost, I think of it kind of like my income tax hat sits on when you're thinking about sourcing of services.

And it's like, yeah, where's the benefit or where's the customer? And there's a cascading rule of like, well, if for nothing else, the billing address is what resides.

But if it's infrastructure as a service, is it where the server is or is it where the customer is? So it sounds like, you know, maybe it's not per se from an income tax perspective, but maybe it is.

You know, but realistically that, that services and that sourcing of location of delivery, receipt, whatever. Right. It's never just as simple as law where the purchaser resides. What does that mean?

Jeremy: 00:20:27

Yeah, or the purchaser has seven addresses in three different provinces or states and which one is the relevant address? The other thing, I guess, and maybe this would be interesting too for some of your listeners, if you are registered for Canadian gst.

I did mention earlier, you do get to claim input tax credits. So you get to claim credits for, for the GST or HST you've previously paid. Conceptually, that's a simple statement.

There are documentary requirements. So to claim the GST that you've paid in the past, you do need to have documentation to support your claim.

So the documents need to include things like the vendor's name, the vendor's GST number, description of what's been sold to you, the date that it was sold to you. So there are a bunch of documentary requirements that have to be met.

And the Canada Revenue Agency does have sort of a process for, you know, quickly identifying and auditing businesses who've made refund claims to ensure that their documentation is in order. So that is one of the things I do kind of talk to a lot of my clients about is ensuring documentation meets those documentary requirements.

In particular, if you're talking about a client who might be a group of companies, so they might have, you know, three or four operating companies, and you've got documentation that's all issued in the name of one of them. And then input tax credits are claimed across the group.

And in all companies, you could actually be at a risk for losing your input tax credits in that scenario. So that's a big issue that it sounds like a simple one.

Like it sounds like it should be straightforward to claim your input tax credits, but it is important to make sure you meet the documentary requirements and to maintain the documentation for audit purposes.

Meredith: 00:22:24

Is there from a collection standpoint, kind of the concept of like a multiple points of use where if you're billing a customer but you know that the kind of purchaser resides in, you know, Quebec and B.C.

and you know, maybe an HST jurisdiction that you bifurcate that, like if you're a seller and you're registered in all of those jurisdictions to kind of allocate to where those users are or is that, you know.

Jeremy: 00:22:52

Yeah, I would say less so from a GSTHST perspective.

So for the federal tax, it's more so a scenario of, okay, we make a supply in Canada, we'll look at the place of supply rules and determine one instance of, you know, one rate of tax to apply to the transaction.

But I do think if you've got a scenario where you've, where you've got a supplier, vendor selling to a customer and perhaps delivering to a number of provinces, they may have to think about that from a PST perspective. And again, the PST is oftentimes unrecoverable.

So you want to really make sure as a purchaser, if you're paying provincial sales tax, that you're only paying it on the amounts that you should be paying it on because it's like I said, it is unrecoverable. So vendors have a responsibility to figure it out.

And purchasers are probably pretty observant on the invoices coming in the door to make sure they're not paying double or triple provincial sales tax needlessly.

Meredith: 00:23:53

Right. Well.

And I think as we wrap up, is there anything that you can think of that maybe we haven't talked about that would be useful or beneficial to our audience members kind of regarding what you're doing and our friendly neighbor to the north?

Jeremy: 00:24:12

Yeah, so sort of a few things we haven't sort of really touched on but I thought about would be. So number one would be GST in particular is a fairly business friendly tax so long as you manage your tax obligations accordingly and proactively.

So for example, if you're a US based business and you're thinking you might sell into Canada being registered for GST in advance to make sure you can claim all your tax credits and to make sure that you understand what rate of tax to charge your customers, handling that all on the front end is so much easier for you as a business if you can get that handled on the front end. That would be the big sort of piece of advice I could give my international friends, colleagues and potential clients.

The other thing would be is that Canada over the last few years has been fairly proactive in using tax for public policy purposes. So you do have to be careful in Canada that there isn't a new tax that might be of relevance to you that you didn't hear about before.

So over the last five years I would say we've introduced for example, a luxury vehicles tax. So if you're buying or selling or importing expensive cars, boats or planes, there's a new luxury tax that's quite substantial.

The federal government created what we call the underused housing tax.

So if there are properties that are being purchased, purchased in cities across Canada by non residents and they're not being used at capacity, you may be subject to an underused housing tax by being a property owner in Canada. The goal of that one was there's in theory a housing crisis in Canada.

We don't seem to have enough housing for the number of individuals in our cities. So that was one of the, the levers the federal government used was creating this underused housing tax.

We've also seen for the first time ever over the last couple of months. So between December and February of this year that just passed There were some tax holidays for certain things purchased in Canada.

The big one being GST was removed from meals purchased in restaurants. So it was the first time ever we had a temporary tax holiday for GSTHST purposes.

So whether you're a business in Canada making supplies to your customers, or whether you're in Canada paying for things and then claiming tax credits, you do have to be careful because there does seem to be a lot of appetite in Canada to use tax for policy reasons outside of simply just raising tax dollars. So there is a lot going on in. In the. In the market around that.

Meredith: 00:27:26

Are there any potential other tax changes that you're following that you think might come down the pike?

Jeremy: 00:27:35

The. The. The one that's sort of inevitable is there has been an announced gst hst. Like, there's a rate change in one of our provinces.

So the province I reside in, Nova Scotia, is currently a 15% jurisdiction. It's going to 14%. So I think there's sort of always.

There's always a discussion in Canada about or thought at the policy level about how tax is being applied and whether we're competitive internally in the country and externally, internationally. So I think there's probably some activity or some thought being put into that. That's kind of what I'm watching for over the next few years.

I mean, there's a counterbalance between provinces and the feds needing cash resources and trying to be competitive. So it is a balance, but it seems to be front of mind for a lot of politicians right now.

Meredith: 00:28:31

Okay, so sounds nothing too dissimilar as what we're dealing with at the federal level in the states and then also in the states and where Stacey and I live, in our local cities that have the authority and autonomy to do whatever they want from a tax policy perspective. Ish. Right. Like our cities in Colorado have to have.

They can't, you know, increase taxes without a vote of the people, but that's, you know, that's something unique to the Colorado Constitution.

So, you know, as much as people may say we're different, like, everything you're saying is very much relating to, you know, what we're experiencing in the states, which is why you're a wonderful guest, to kind of identify our similarities, build our relationship, and also just educate the populace on what they're doing. And $30,000 is sticking out. In my mind, that's a third of our economic nexus threshold.

Jeremy: 00:29:33

And I should point out, too, that's $30,000 Canadian, which at 70 cents on the dollar is probably closer to 24,000 U.S. something like that.

So, yeah, I've told almost every potential business client that I run into, I worry less about the $30,000 because typically an American company coming to Canada is coming to Canada for a sizable contract. Like they're not coming here.

I mean, I guess some do sell, do sales by mail order, but you know, typically organizations are coming here for their, you know, multi hundred thousand dollar contract or million dollar contract. Like the $30,000 threshold gets blown out of the water pretty, pretty quickly.

It's usually a question of are we carrying on business and if we're not carrying on business, are we meeting those rules for the simplified regime? But yeah, the $30,000 is pretty low and I don't expect that's changing anytime soon.

Meredith: 00:30:34

Okay. No. Well, and we certainly know who to reach out to if we do hear anything. And so, Jeremy, thank you so much for your time. It was great to have you.

We love kind of building that relationship and so we're happy to know you. So thank you for being here.

Jeremy: 00:30:51

Thank you so much for having me. It was a. It was great to join you.

Meredith: 00:30:54

All right, thanks. This is another episode of Saltovation. Til next time.

This podcast is for educational purposes only and is not intended, nor should, should it be relied upon as legal, tax, accounting or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.