Apr 01, 1992

Audits and Advance Rulings #184

Apr 01, 1992

Audits and Advance Rulings #184

By Gerry Neely
B.A., LL.B.

It seems like a lifetime, but it is only 15 months since the Goods and Services Tax was implemented. Now that this intensive period of instruction in the intricacies of the legislation has ended, we can expect that the Excise/GST branch of Revenue Canada will be shifting more attention to its audit and collection functions. That means we have to re-examine some of the assumptions we made concerning the method of calculating the tax, because that is what the GST branch itself has been doing. Column 167, which was published in March, 1991, listed a number of calculations of the different fair market values which might result upon the sale of a house at $200,000, depending upon how GST was calculated. One assumption concerning the application of the new home rebate must be altered because of the method of calculation which the branch now applies.

Paragraphs one and two of that column are summarized below for easier comparison to the method of calculation now required by the branch:

Sale price including GST is $200,000, builder to pay GST:

1)  Sale price net of GST is $200,000/1.07      = $186,915.89
2)  GST is $186,915.89 x 7%                         =      13,084.11
3)  Newhomerebateis$13,084.llx36%              =       4,710.28
4)  GSTcosttobuilders$13,084.llorwithrebate   =       8,373.83

The GST branch says that it now accepts the calculation in (I.) above, using 1.07% as the denominator only if: (a) no one is entitled to the rebate, or (b) the purchaser claims it separately, or (c) if the contract price is reduced by the amount of the rebate.

If the builder has the benefit of the rebate, then 1.0448% is to be substituted as the denominator. Where did this come from you may well ask? .0448 is the percentage of GST payable after the rebate is made, that is to say 64% x 7% = 448 to the right decimal. Inserting that denominator in the above calculations obtains the following results:

1) Sale price net of GST is $200,000/1.0448             =    $191,424.20
2) GST is $191,424.20 x 7 %                                    =        13,399.69
3) New home rebate is 13,399.69 x36%                   =          4,823.89
4) GST cost to builder is $13,399.69 or with rebate   =   8,579.69
(36% applies on sales up to $350,000)

A comparison of both examples reveals an increase in the amount of GST and a decrease in the builders net of $205, an insignificant difference except for a builder selling a large number of units. However, the main problem for a builder who is audited is that if the calculations have not been done in accordance with this method, then there is a potential liability for interest and penalty.

Since the majority of rebate transactions involve a builder who pays the GST and credits the rebate to the purchaser, there will be spot audits only of this category of rebate. However, there will be an audit of each rebate claimed in category (21 and (3) above. The audits involve a "paper audit" in which production of the contract of purchase and statements of adjustments may be required.

Obviously, there will still be many questions for which answers are required from the branch. An example of that is the uncertainty surrounding the question of whether the sale of a vacant lot attracts GST. The branch has created a GST ruling service intended "to promote voluntary compliance, uniformity and self-assessment by providing certainty with respect to the interpretation and application of Part LX of the Excise Tax Act (Goods and Ser-vices Tax)." There are two types of rulings, an application ruling which is dealt with locally and an advance ruling for which a draft opinion is prepared locally and which is then sent to Ottawa for approval. These two rulings are binding within the limitations referred to in GST information memorandum 100-3.

In addition to these rulings, the branch will offer interpretation of specific provisions of the law to explain how, in general, the law would apply. Since there appears to be a very fine line between the facts which distinguish an application ruling from an advance ruling anyone interested in obtaining a ruling would be advised to obtain assistance from the branch as to the category in which the facts would fit before submitting a request in writing. There is no charge for a GST ruling, at least at the present time and the rulings are reviewed in the order in which they are received.

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