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Finance Canada
Budget 2000 - Budget Plan, Annex 7- 5
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The budget proposes a new regime for export distribution centres.
The GST/HST is a tax on the final consumption of goods and services in Canada. Thus, a key objective of the tax is to fully relieve exported goods and services from the tax. Under the GST/HST system, where an exporter purchases or imports goods, processes them and exports the finished product, the exporter must pay tax on its purchases and importations, which it subsequently recovers through the input tax credit mechanism. While this process involves a financing cost, since unlike most other businesses exporters do not obtain a cash-flow benefit from collecting GST/HST on their sales, it has proven to be the most effective mechanism of ensuring that exports are fully relieved of tax. Alternative approaches, such as single-stage sales taxes, which involve the universal use of exemption certificates, typically result in tax being built into the cost of exports.
However, in cases where there is limited processing in Canada, the cash-flow cost may be significant in relation to the level of value added to goods by the business. Existing measures in the GST/HST that help alleviate this cash-flow cost, such as the Export Trading House Program and the Customs Bonded Warehouse Program, are targeted to particular types of activity, but in some cases do not extend to distribution activities. The budget proposes to address cash-flow issues relating to these activities through legislative amendments and administrative streamlining of existing programs to ensure that cash-flow implications do not preclude Canada as a location for North American distribution centres. The measures proposed in this budget are designed to address this issue in a targeted manner, without threatening the effectiveness of the multi-stage GST/HST system.
The budget proposes a new export distribution centre program that will permit businesses that export substantially all of their outputs, or operate export distribution operations for other businesses, to acquire or import most goods without the payment of GST/HST. This program will be targeted at businesses that provide limited value added in the course of processing goods.
The budget proposes that the legislative proposals regarding the Export Distribution Centre Program come into force on January 1, 2001, so as to allow for consultations this spring.
In addition, a number of legislative enhancements are proposed to:
Finally, the Canada Customs and Revenue Agency (CCRA) will be streamlining administration of some of its processes relating to existing import/export programs.
The budget proposes a new Export Distribution Centre Program that will relieve the cash-flow burden resulting from the imposition of the GST/HST for eligible businesses that acquire or import goods on which they perform limited or no processing before export.
For the purposes of the Export Distribution Centre Program, eligible businesses will be those:
The export revenue threshold is intended to target the new program at export-orientated businesses. For this purpose, export revenue will include both revenue from the sale of goods to be exported and revenue from the provision of services in respect of other persons’ goods that are to be exported.
In addition, since the proposal is intended to address cash-flow problems that exist where limited value-added processing takes place in relation to turnover, there will be defined limits on value added. For those businesses that process their own goods before export, the limit will require that the direct labour content of the cost of the goods supplied by the business not exceed a prescribed percentage. With respect to customers’ goods, a test will apply to ensure that the value of the services provided in respect of those goods does not exceed a prescribed percentage of the total value of those services plus the value of the goods when imported or transferred to the business. In both instances, activities that can presently be undertaken in a customs bonded warehouse will be excluded from the calculation. These prescribed percentages will be determined after consultations on the proposal.
Qualifying businesses will be able to use a certificate to acquire or import on a tax-free basis inventory or parts or components to be used in processing, and to import goods in respect of which processing, storage or distribution services will be performed. However, in order to mitigate the compliance burden on domestic suppliers, relief will not be available for single domestic transactions totalling less than $1,000. Where the export distribution centre is not able to use the certificate (e.g., in respect of soft costs such as rent), the existing GST/HST rules will continue to apply with respect to paying the GST/HST and claiming input tax credits.
The export-revenue test and the value-added test will be applied on an annual basis at the end of the export distribution centre’s fiscal year. Where these tests are not satisfied, or there has been improper use of the certificate, the export distribution centre will be required to make adjustments to its net tax to ensure that no cash-flow benefits are realized from having utilized the certificate. As well, falling short of the export-revenue threshold by more than 10 percentage points or the failure to meet the value-added test will result in the revocation of the authorization to use the certificate.
To complement the Export Distribution Centre Program, the budget proposes that several existing measures dealing with the importation and exportation of goods and services be enhanced and refined.
Relief from tax on importation is currently granted to goods imported into Canada for warranty repair provided the goods are exported after the service is performed. However, where the imported good is replaced rather than repaired, relief from tax on importation does not apply. The budget proposes to extend the relieving rules to cover situations where a replacement good is provided under warranty and is exported in place of the original imported defective good (e.g., where the original good is destroyed). The amendment is proposed to apply to goods imported after February 28, 2000.
The purpose of the drop-shipment rules under the GST/HST system is to allow an unregistered non-resident person to acquire goods and most services in respect of goods in Canada, without paying GST/HST, where the goods are bound for export and remain in the possession of registered Canadian service providers before being exported. The budget proposes the following amendments in order to ensure that this objective is met.
The drop-shipment rules allow an unregistered non-resident person to acquire most services in respect of goods in Canada without paying GST/HST, provided that all other conditions are satisfied. At present, the service of storing goods is not covered by these rules. The budget proposes to include storage services among those services that can be provided tax-free under these rules. This amendment is proposed to apply to supplies of services for which tax becomes payable after February 28, 2000.
The drop-shipment rules will also be amended to take into account current industry practice with respect to sales of railway rolling stock. Under the current GST/HST rules, a sale of railway rolling stock to an unregistered non-resident person is tax-free only if it is not used in Canada after delivery and prior to export. This means, for example, that a railway car must be shipped empty to its foreign destination. These rules are not consistent with industry practice. The budget proposes to amend the drop-shipment rules so that the use of railway rolling stock in the course of its exportation will not disqualify it from tax-free treatment, provided that the rolling stock is exported within 60 days after delivery to the non-resident. This amendment is proposed to apply to sales for which tax becomes payable after February 28, 2000.
The Exporters of Processing Services Program allows the tax-free importation of goods by a Canadian processor for the purpose of processing the goods in Canada and subsequent export if, throughout the time the goods remain in Canada, they are not the property of the processor or a non-resident person to whom the processor is closely related. However, the program does not apply where a Canadian processor only provides storage or distribution services. The budget proposes to expand the program to allow storage and distribution activities. The amendment is proposed to apply to goods imported after February 28, 2000.
The budget proposes changes to the Export Trading House Program to align the rules with the proposed Export Distribution Centre Program. The Export Trading House Program relieves GST/HST on domestic goods purchased by businesses that are exporters where at least 90 per cent of their domestic inventory purchases, and 90 per cent of their revenue from sales of inventory, relates to goods that are exported without further processing in Canada. To ensure consistency between the two programs, the following changes will be made to the Export Trading House Program:
The amendments to the Export Trading House Program are proposed to come into force on January 1, 2001.
Finally, the CCRA will continue to consult with industry members in its review of customs legislation and administration in order to facilitate the importation and exportation of goods under the Duty Deferral Program. These changes will reduce costs and regulatory burden for Duty Deferral Program participants, and expedite the movement of imported goods.
Proposed changes to the Duty Deferral Program include:
The budget proposes a rebate program for new residential rental accommodation.
Under the existing federal sales tax system, tax applies to new residential rental property when the property is acquired by a landlord from a builder, or, on a self-assessed basis, when the builder is the landlord. For purchaser-landlords, the tax becomes payable upon purchase of the residential complex. For builder-landlords, the tax becomes payable as soon as the first unit in the residential complex is rented. As a result, both purchaser-landlords and builder-landlords finance the tax liability up front and recover the tax over time.
The budget proposes to introduce a New Residential Rental Property Rebate, equal to 2.5 percentage points of tax, for newly-constructed, substantially-renovated or converted residential rental accommodation, payable to the person who paid the tax. This rebate will apply in respect of such property used for long-term rental accommodation. It will also apply to the construction of additions to residential rental property and to the leasing of land that is used for residential purposes. The rebate will apply to construction, substantial renovation or conversions commencing after February 27, 2000. In the case of leased land, the rebate will apply where the lease agreement is entered into after February 27, 2000.
In order to target the rebate to those who provide long-term residential accommodation, the concept of a "qualifying residential unit" will be used. A residential unit is a "qualifying residential unit" if it is a self-contained residence and if it can reasonably be expected that the first use of the unit will be for the purpose of renting it for periods of continuous occupancy of at least 12 months as a primary place of residence, under one or more leases. Generally, a "self-contained residence" refers to a residential unit that contains a private kitchen, bath and living area.
In general, a unit-by-unit test will be used to determine which residential units in a multiple unit residential complex, such as an apartment building, will qualify for the rebate. However, to simplify matters in the case of large multiple-unit residential complexes, the entire complex will be considered to meet the expected 12-month occupancy test if substantially all of the units meet that test.
The full rebate will be available for rental units valued up to $350,000. For rental units valued between $350,000 and $450,000, the rebate will be gradually phased out. No rebate will be available for rental units valued at $450,000 or more. A similar regime will apply in the case of land that is leased for residential purposes. In the case of leased residential land, the rebate thresholds will be reduced proportionately to reflect the fact that the rebate applies only in respect of the land as opposed to the land and building.
Persons eligible for the New Residential Rental Property Rebate will be landlords who have paid tax on the purchase of a new residential rental property or builder-landlords who must self-assess tax where they have built a new residential rental property or an addition to a multiple-unit rental complex. Persons who are entitled to claim input tax credits in respect of that tax will not be eligible for the New Residential Rental Property Rebate. Generally, the same will be true for persons who are entitled to claim other rebates in respect of the property such as the Public Service Body Rebate or the New Housing Rebate.
Currently, new duplexes qualify for the existing New Housing Rebate where the property is used as the primary place of residence of the purchaser or a relation of the purchaser. Under the budget proposal, where the duplex is rented out, it will qualify for the New Residential Rental Property Rebate. That qualification is contingent on at least one of the two residential units which form the duplex meeting the definition of a "qualifying residential unit". If that condition is met, the New Residential Rental Property Rebate will be available in respect of the duplex and will be determined in the same manner as for a single detached house. The thresholds and the phase-out will apply to the value of the entire duplex as is currently the case under the New Housing Rebate Program.
Where a co-operative housing corporation has paid tax in respect of a residential complex of the corporation and sells a share that gives a right to the purchaser to occupy a new residential unit in the complex, the purchaser is currently entitled to claim the New Housing Rebate as long as the unit is for use as the primary place of residence of the purchaser or a relation of the purchaser. The budget proposes that the corporation be entitled to the New Residential Rental Property Rebate where the unit is a qualifying residential unit. However, that rebate will be reduced by the amount of the New Housing Rebate to which the purchaser is entitled. Further, the budget proposes that where a new qualifying residential unit is first occupied by an individual other than a purchaser of a share of a corporation or a relation of such a purchaser, the corporation will be entitled to the full New Residential Rental Property Rebate for that unit. As is the case currently, there will be no New Housing Rebate available to the individual in that circumstance.
The budget proposes that the builder or landlord of a new qualifying residential unit be entitled to the New Residential Rental Property Rebate where the unit is first leased to an individual as a primary place of residence, notwithstanding that the builder or landlord, as the case may be, intends to sell the unit at the earliest opportunity.
The amount of the rebate plus interest will be subject to recapture where the unit is sold within one year from the time it is first occupied, to a purchaser who is not acquiring it for use as the primary place of residence of the purchaser or a relation of the purchaser.
Currently, landowners who lease land to tenants for residential use must self-assess tax at the time of first lease. The lease to the tenant is exempt from sales tax. Therefore, the lessor finances the tax liability up front and recovers those costs over time through rental receipts. The budget proposes that lessors be eligible for the New Residential Rental Property Rebate in the following circumstances:
Rebate claimants other than co-operative housing corporations will have up to two years from the end of the month in which the related tax becomes payable to claim the New Residential Rental Property Rebate in respect of the tax. In the case of a residential unit leased by a co-operative housing corporation, the corporation will have up to two years from the end of the month in which the lease agreement was entered into to claim the rebate in respect of that unit. However, in both cases, where the end of that month is before the day on which the implementing legislation receives Royal Assent, a transitional rule will ensure that eligible claimants have a full two years from that day to claim the rebate.
There are circumstances wherein the Minister of National Revenue must take immediate collection action in order to preserve the tax base and ensure that evasion practices are not successful. The budget proposes an additional measure to ensure that the Minister is able to take timely action to protect revenues in those circumstances.
Under the GST/HST, registered businesses must file a return and remit tax collected from customers, after deducting any input tax credits to which they may be entitled, after each of their reporting periods. Monthly and quarterly filers have one month following the end of their reporting period to file their return and remit any net tax payable. Annual filers generally have until the end of the third month, and, in some cases, the end of the fourth month, following their fiscal year to remit tax collected throughout the year. This means, for example, that tax collected by an annual filer from a customer in the first month of the registrant’s calendar year might not have to be remitted for another 15 months.
There is a high degree of voluntary compliance with these reporting and remittance requirements amongst GST/HST registrants. However, instances can arise where allowing a registrant the usual period for the remittance of tax would put those tax revenues at risk. In such cases, the Minister of National Revenue currently has the authority to demand that the registrant file a GST/HST return at any time specified in the demand. This authority, however, does not include the power to require the registrant’s net tax to be remitted prior to its normal due date. Where the Canada Customs and Revenue Agency (CCRA) has sufficient reason to suspect an intention to evade the payment of tax, it has been powerless to proceed with assessment and collection action.
The budget proposes that the Minister of National Revenue be given authority, on an ex parte application to the court, to obtain judicial authorization to assess the amount determined by the Minister to be remittable by a registrant at the time the application is heard and to take actions to recover that amount. Where the court grants the authorization on being satisfied that any delay in issuing an assessment would jeopardize the collection of GST/HST, the CCRA will be permitted to issue the assessment and take immediate collection action.
The requirement for judicial authorization provides the appropriate safeguards to ensure that the exercise of this authority is reasonable and justifiable in the circumstances. In granting the authorization to take immediate action, it will be open to the court to impose any terms and conditions on the exercise of this authority that it considers reasonable. The registrant will have the right to apply for judicial review of the court’s decision.
Section 225.2 of the Income Tax Act contains a similar provision relating to the collection of income tax. The procedural rules relating to the proposed new provision in the Excise Tax Act correspond to those set out in the existing income tax provision.
This amendment is proposed to come into force on the day on which Royal Assent is given to the implementing legislation.
Canada provides one of the most generous tax incentive regimes among industrialized countries for scientific research and experimental development (SR&ED). It is important that this support only benefits those activities to which the program was intended to apply.
In claiming credits for SR&ED (including information technology), three basic criteria must be met:
Technological advancement is a key element of the program. Technological advancement does not include the application of technology that is merely new to a particular taxpayer or industry. In particular, development work that is routine in nature does not qualify as SR&ED. While the definition of SR&ED was amended in 1985 to include experimental development, consistent with international usage, experimental development does not include projects involving only routine engineering or routine development.
This is reflected in the Canada Customs and Revenue Agency’s administrative guidelines for software development, which were developed in consultation with industry.
Nevertheless, the administration of the SR&ED program has come under increasing pressure, particularly in regard to its application to information technology. A disproportionate number of disputes between taxpayers and the Government continue to be in the area of information technology. The Canada Customs and Revenue Agency has been faced with a number of very large and complex claims, many of which are not consistent with its administrative guidelines. These claims are in respect of internal use software, such as management information systems and automated services.
Many of the large claims have been made by corporations whose core business is not software development. CCRA has determined that substantially all of these claims reflect the application of available technology, which result in business improvements but do not embody technological advancement that the SR&ED program is intended to benefit. The Government is committed to rigorously applying the existing well established three basic criteria to address the backlog of SR&ED claims related to information technology.
In addition, the Government will consult with industry representatives to ensure that the guidelines on software development, in particular internal use software, both reflect government policy and provide clarity and certainty of application for compliance purposes as well as administration. Once consultations are completed, the Government will determine whether amendments to the Income Tax Act are required.
The Canadian film and television production industry has achieved considerable expansion in recent years with the support of the federal and provincial governments. Federal support for Canada’s film industry includes two tax credits in respect of qualifying labour expenditures:
In some cases, the CFVPTC may be difficult for Canadian film producers to access, particularly where financing arrangements are complex. The Government therefore intends to review the rules respecting the CFVPTC, in consultation with industry associations, to develop criteria for a streamlined mechanism for delivering the CFVPTC incentive. The objective of these discussions is to design criteria that
The Government is committed to the development of initiatives in support of the restoration and preservation of Canada’s built heritage. Canadian Heritage officials have undertaken discussions with provincial, territorial and municipal government officials with a view to establishing a national register and conservation standards in respect of heritage property. These tools will be instrumental in assessing the necessity of financial support to sustain and ensure the preservation of Canada’s built heritage.
In the 1997, 1998 and 1999 budgets, the Government indicated its willingness to put into effect taxation arrangements with interested First Nations. Since that time, Parliament has passed legislation that enables the Cowichan Tribes, the Westbank First Nation, the Kamloops Indian Band and the Sliammon First Nation to levy a tax on sales of certain products on their reserves. In addition, personal income tax collection and sharing agreements with the seven self-governing Yukon First Nations came into effect on January 1, 1999. The Government is once again expressing its willingness to discuss and to put into effect arrangements in respect of direct taxation with interested First Nations.
Under current law, it is not clear whether taxpayer information can be provided to the police for the purpose of investigating whether the acts of a person against an official of the Canada Customs and Revenue Agency constitute the commission of an offence, unless charges have first been laid or the circumstances constitute imminent personal danger to the official. The Government proposes to amend the confidentiality provisions of the Income Tax Act and the Excise Tax Act to permit an official of the CCRA to provide relevant taxpayer information to the police for the purpose of investigating whether the acts of a person against an official of the CCRA, or against a member of the official’s family, constitute an offence under the Criminal Code. In the case of sales tax, the proposed amendment would also apply in respect of a provincial official authorized to exercise duties and powers under Part IX of the Excise Tax Act pursuant to an administration agreement between the government of the province and the Government of Canada.
The Income Tax Act and the Excise Tax Act make it an offence to hinder, molest or interfere with an official who is performing certain administrative or enforcement functions. The applicable provisions do not apply in the context of an official who is performing a collection duty, nor do they apply to attempts to hinder. Increasingly, some individuals have taken exceptional measures in an attempt to hinder, harass or delay CCRA officials in the performance of their duties.
The budget proposes to amend the Income Tax Act to extend the penalty applying under subsection 231.5(2) of the Act to persons who hinder, molest or interfere with an official who is performing a collection function, and to persons who attempt to hinder, molest or interfere with an official in the performance of a collection function or any other duty to which that subsection currently applies. Similarly, the budget proposes changes to the Customs Act and the relevant provisions of the Excise Tax Act to parallel the penalty proposed for purposes of the Income Tax Act.
In the past, Statistics Canada has been striving to minimize the high degree of overlap between business survey data collected by Statistics Canada and taxpayer information on businesses collected by the Canada Customs and Revenue Agency. Businesses have expressed concern about the response burden placed on them and the resources required to comply with these requests for information. Since 1997, Statistics Canada has obtained from tax records much of the information previously collected through survey questionnaires. Authority for the release of taxpayer information to Statistics Canada is provided in the Income Tax Act.
When Statistics Canada relied on business surveys conducted jointly by Statistics Canada and the provinces, it applied an authority provided under the Statistics Act to share survey business financial information with provincial statistical agencies – which have the statutory authority to obtain this information by means of their own surveys – for purposes of research and analysis. This data sharing helped to reduce the number of surveys and response costs incurred by businesses in completing these surveys. However, the rule which allows the sharing of taxpayer information with Statistics Canada does not allow Statistics Canada to share this information with provincial statistical agencies.
To address this issue and to provide continuity of business data for research and analysis by the provinces, the budget proposes to amend the Income Tax Act to allow Statistics Canada to provide taxpayer information in respect of incorporated and unincorporated businesses for the 1997 and subsequent taxation years to provincial statistical agencies solely for use in research and analysis. This amendment will allow provincial needs to be met while keeping the response burden for businesses as low as possible.
The sharing of taxpayer information between federal and provincial statistical agencies will only be permitted once the enabling legislation receives royal assent. Appropriate measures to safeguard the confidentiality of this information will continue to apply. Also, only business-related information can be shared; thus, for unincorporated businesses, information on the business owner which is unrelated to business activities cannot be shared.
In order to bring Canadian countervailing duty laws into line with recent changes to the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures, it is necessary to repeal certain provisions in the Special Import Measures Act that prevent the application of countervailing duties against imports benefiting from certain types of foreign subsidies. This action will be taken in concordance with similar actions by Canada’s major trading partners so as to ensure reciprocity in the application of WTO subsidy rules.
In 1994, the Government imposed an excise tax on Canadian tobacco exports as part of the National Action Plan to Combat Smuggling. To ensure that Canadian tobacco manufacturers were not denied access to legitimate export markets, several exemptions were provided, including an annual exemption for exports of up to 3 per cent of a manufacturer’s production in the preceding year. The 1999 budget proposed that this threshold be reduced to 2.5 per cent.
The budget proposes that the annual exemption from the excise tax on exports be further reduced from 2.5 per cent to 1.5 per cent of the manufacturer’s production in the preceding year. There is sufficient latitude in this new threshold, along with other exemptions, to enable tobacco manufacturers to meet legitimate demand for their products outside of Canada, while further reducing the risk of smuggling of tobacco products. The Government will be continuing its monitoring of tobacco exports.
It is proposed that the reduced exemption threshold apply to exports after March 2000.
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