Challenges For Indirect Tax In the New Economy in Canada: A Prediction of Tax Litigation Issues

• Author: Jim Vincze/M. Craig Robertson
• Profession: Partner/Firm Director
• Pages: 615-655

Chapter Twenty-Three

Challenges for Indirect Tax in

the New Economy in Canada:

A Prediction of Tax Litigation

Issues*

Jim Vincze and Craig Robertson

A. INTRODUCTION

It has been said that there is nothing new under the sun. Accordingly, the

advent of the new economy, and specifically Internet commerce, probably

does not create fundamentally new issues for Indirect Tax (commonly

referred to as “consumption taxes” or “sales taxes”). Instead, the new econ-

omy only accentuates, in different and sometimes more acute ways, a

number of the pressure points already existing in the Indirect Tax regimes.1

For our purposes, the “new economy” includes e-commerce in particular,

615

* The authors wish to express their appreciation to Jason Riche and Maria Scullion for

their significant effort in the research and writing of this chapter.

1 See for example: “Tax Litigation in the New Economy” by Arthur J. Cockfield in Chap-

ter 20. See also: Organization for Economic Cooperation and Development, Con-

sumption Tax TAG, “Implementation Issues for Taxation of Electronic Commerce,”

issued June 30, 2003 (“2003 Consumption Tax TAG Report”); Canada Revenue

Agency, “Response by the Honourable John Manley to the General Recommendations

in the April 30, 1998 Report of the Minister’s Advisory Committee on Electronic Com-

merce” (September 1998).

but more broadly the whole range of business activity that is based on

information technology, whether or not in an e-commerce environment.

Most readers will be familiar with the income tax applications and

issues respecting the new economy, but may have less involvement and

appreciation of the Indirect Tax world. Our primary objective, therefore, is

to sensitize the reader to those differences, and the issues and concerns

that arise.

There is a large body of material already written about tax, including

Indirect Tax, from the economic, tax policy and tax administrative perspec-

tives from the e-Commerce perspective.2As this book is directed primarily

to a readership interested in tax litigation, rather than policy and adminis-

tration, we will limit our scope to identifying issues that, in our view, are

likely to become the subject of tax litigation either before the Tax Court of

Canada for Goods and Services Tax (“GST”)3or before the provincial courts

for provincial sales tax although, in fact, to date, there is little Canadian case

law directly on point. We intentionally restrain ourselves from entering into

the tax policy debate as to what should be the legislative policy responses.

The issues we believe will likely give rise to litigation are:

• the authority of Canada, and the provinces, to oblige non-resident busi-

nesses to collect GST and provincial sales taxes. This will include a dis-

cussion on the concept of “carrying on business” and the legislative

initiatives of Quebec, British Columbia and Manitoba to impose vendor

obligations on businesses beyond the “carrying on business” test. In this

context, considerations of constitutional capacity arise.

• characterization of supplies for GST alternatively as tangible personal

property (“TPP,” i.e., “goods”) versus services versus intangible personal

property (“IPP”) versus telecommunication services, which can be very

material to the application of the GST.

ADVOCACY AND TAXATION IN CANADA616

2 See for example: A. J. Cockfield, “The Law and Economics of Digital Taxation: Chal-

lenges to Traditional Tax Laws and Principles,” in Centre for Innovation Law and Poli-

cy Working Paper (2002); A. J. Cockfield, “Canada’s GST E-Commerce Policy (or How

to Catch the Big Fish),” (2002) 3 Internet and E-Commerce Law In Canada 1 (“Cock-

field, How to Catch the Big Fish”); J. Li, “Consumption Taxation of Electronic Com-

merce: Problems, Policy Implications and Proposals for Reform,” (2003) 38 Canadian

Business Law Journal 425 (“Li, Consumption Taxation”).

3 Provided for under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15 (“ETA”) includ-

ing in particular Schedules V through X. Technically, there is no mention anywhere in

the ETA to the “goods and services tax,” which is only a popular acronym, perhaps

adopted from the name given to the New Zealand tax, and intended perhaps as well to

distinguish the Canadian tax from the “value-added taxes” (“VAT”) that are common

in Europe.

• parallel, but different concerns regarding the characterization of sales of

electronic and digital products as TPP, taxable services or taxable

telecommunication services for purposes of bringing them within the

scope of provincial retail sales taxes (“RST”).

The Department of Finance is responsible for developing GST policy

and legislative amendments and has not proposed significant amendments

to the GST legislation in response to the development of e-commerce.4The

response of the Canada Revenue Agency5(the “CRA”) that administers the

ETA, has been to develop its administrative response based on the existing

GST legislation, rather than on the basis of possible legislative alternatives.

Accordingly, it can be said that de facto the formal responses have been the

CRA’s specific rulings as well as its publication of Technical Interpretation

Bulletin B-090, GST/HST and Electronic Commerce (“TIB B-090”).6

From an administrative policy perspective as well, CRA officials have

indicated that they generally concur in the consensus expressed in the

reports generated by the Organization for Economic Cooperation and

Development (“OECD”) relating to electronic commerce.7Specifically, the

Challenges for Indirect Tax in the New Economy in Canada: A Prediction of Tax Litigation Issues 617

4 The amendments to ETA ss. 278 and 278.1 relating to electronic bank remittances

and electronic filing of returns, and to ETA s. 286 relating to retention of electronic

records also can be seen as isolated legislative responses. By contrast, the European

Union (“EU”) members have enacted a legislative initiative to require foreign busi-

nesses, effective July 2003, to register for and collect VAT based on their provision of

electronic sales to EU customers, regardless of their place of business. See: Council

Directive 2002/38/EC, May 7, 2002, amending Directive 77/388/EEC, Official Journal

L128, 15/15/2002 P. 0041-0044.

5 Formerly, the Canada Customs and Revenue Agency. On December 12, 2003, the Cana-

da Customs and Revenue Agency became the “Canada Revenue Agency” although at the

time of writing, an Act of Parliament had not yet legislated the change. In addition,

effective December 12, 2003 the customs program, which was formerly part of the Cana-

da Customs and Revenue Agency, became the new Canada Border Services Agency

which is part of the Department of Public Safety and Emergency Preparedness.

6 The CRA preceded TIB B-090 with a discussion paper released November 2001:

“GST/HST and Electronic Commerce — A discussion paper for public comment on

the administration of the Goods and Services Tax/Harmonized Sales Tax in a electron-

ic commerce environment” (“Discussion Paper”). TIB B-090 substantially confirmed

the positions the CRA had set out in the Discussion Paper.

7 In particular, see: OECD, “Consumption Tax Aspects of Electronic Commerce,” A

Report from Working Party No. 9 on Consumption Taxes to the Committee on Fiscal

Affairs February 2001; OECD, “Tax Treaty Characterization Issues Arising from E-

Commerce,” Report to Working Party No. 1 of the OECD Committee on Fiscal Affairs,

February 1, 2001 (“2001 Tax Treaty Characterization Paper”); OECD, “Report by the

Technology Technical Advisory Group,” December 2000; and OECD, “Clarification on

the Application of the Permanent Establishment Definition in E-Commerce: Changes

to the Commentary on the Model Tax Convention on Article 5,” December 22, 2000.