On March 28, 2023 ("Budget Day"), the Government of Canada unveiled its budget ("Budget 2023"), which proposes a number of new sales and excise tax measures as well as confirming the Government's intention to proceed with several other significant measures that had been announced previously.

The highlights of Budget 2023 from a sales and excise tax standpoint are set out below.

1. Financial Services: GST/HST Treatment of Payment Card Clearing Services

On January 22, 2021, the Federal Court of Appeal overturned the Tax Court of Canada's dismissal1 of a Canadian bank's appeal in connection with the bank's claim for GST/HST rebates for tax paid in error.2 While the Tax Court had originally found that what was characterized to be a single supply "of a payment platform and facilitating payments on that platform"3 provided by Visa Canada for the credit cards issued by the bank constituted a taxable supply, the Federal Court of Appeal was of the view that such supply was an exempt "financial service" that was not otherwise excluded pursuant to any of the specific exclusionary paragraphs (the "Exclusionary Paragraphs") in the definition of that term in subsection 123(1) of the Excise Tax Act (the "ETA").

In this respect, the federal government appears to be of the view that this decision runs contrary to what has always been the "widely understood" position to the effect "that the services of payment card network operators are excluded from the GST/HST definition of 'financial service'." Budget 2023 accordingly proposes to amend the definition of "financial service" in subsection 123(1) of the ETA to ensure that payment card clearing services rendered by payment card network operators are subject to GST/HST. This objective is achieved through the proposed addition of paragraph (r.6) to the definition of "financial service" as a brand-new Exclusionary Paragraph:

(r.6) a service (other than a prescribed service) that is supplied by a payment card network operator in respect of a payment card network (as those terms are defined in section 3 of the Payment Card Networks Act) and that is

  • a service in respect of the authorization of a transaction in respect of money, an account, a credit card voucher, a charge card voucher or a financial instrument,
  • a clearing or settlement service in respect of money, an account, a credit card voucher, a charge card voucher or a financial instrument, or
  • a service provided in conjunction with a service referred to in subparagraph (i) or (ii),

The proposed amendment specifically refers to the Payment Card Networks Act (Canada) which currently defines (i) a payment card network operator as "an entity that operates or manages a payment card network, including by establishing standards and procedures for the acceptance, transmission or processing of payment transactions and by facilitating the electronic transfer of information and funds," and (ii) a payment card network as "an electronic payment system — other than a prescribed payment system — used to accept, transmit or process transactions made by payment card for money, goods or services and to transfer information and funds among issuers, acquirers, merchants and payment card users."

The Notice of Ways and Means Motion provides that new Exclusionary Paragraph (r.6) would apply to any service rendered under an agreement for a supply if any consideration for the supply becomes due after Budget Day or is paid after that day without having become due. However, it is noteworthy that the proposed transitional rules also specifically provide for a retroactive application to any service rendered under an agreement for a supply if all of the consideration for the supply became due or was paid on or before Budget Day. This retroactive rule will not be applicable for the purposes of Part IX of the ETA (other than Division IV of Part IX) to the extent both of the following criteria are met:

(i) the supplier did not, on or before Budget Day, charge, collect or remit any amount as or on account of tax under Part IX of the [ETA] in respect of the supply, and

(ii) the supplier did not, on or before Budget Day, charge, collect or remit any amount as or on account of tax under Part IX of the [ETA] in respect of any other supply that is made under the agreement and that includes the provision of a service referred to in paragraph (r.6) of the definition financial service in subsection 123(1) of the [ETA], as amended by [Budget 2023]. (our emphasis)

It is still unclear how the proposed transitional rules will be applicable in practice and how existing provisions in the ETA, such as section 133 (providing that an agreement to make a supply is deemed to be a supply made at the time the agreement is entered into), or subsection 136.1(2) (essentially deeming that a separate supply of a service occurs for each "billing period" of ongoing services), could affect the legal analysis.

It is likely that a case-by-case assessment will be required to determine a taxpayer's potential liability for prior periods. For example, if a supplier charged GST/HST in respect of its payment processing services rendered under an agreement before the issuance of the above-mentioned Federal Court of Appeal decision, but subsequently ceased to do so under the same agreement, the taxpayer could potentially be liable under the proposed transitional rules. In certain circumstances, the concept of novation could also be relevant in order to determine whether a new agreement was entered into by the parties to the extent the original agreement has been modified, varied or otherwise materially altered causing such agreement to be terminated.

The Notice of Ways and Means Motion also proposes to extend the normal reassessment period provided for in section 298 of the ETA in respect of any amount payable or remittable by a person in respect of a supply of a service

referred to in new Exclusionary Paragraph (r.6), at any time on or before the later of the day that is (i) one year after the day on which the legislation enacting new Exclusionary Paragraph (r.6) receives royal assent, and (ii) the last day of the period otherwise allowed under section 298 for making the assessment, reassessment, or additional assessment. Potentially affected taxpayers should therefore closely monitor the legislative process involving this proposed modification to the ETA.

In summary, both the potential retroactive effect of the proposed amendment and potential extension to the normal reassessment period as part of the proposed transitional rules may present substantial risk for payment card network operators and their clients.

Finally, payment card network operators should also determine the impact of the proposed modification with respect to input tax credit claims in relation to their payment processing activities (including for past periods).

2. Treatment of Credit Unions

Subsection 137(6) of the Income Tax Act ("ITA") defines a "credit union" as a corporation, association or federation incorporated or organized as a credit union or cooperative credit society that meets certain requirements, including a "revenue test" aimed at determining whether an entity earns more than 10% of its revenue from sources other than specified sources. Such definition used in the ITA is also used for GST/HST purposes under the ETA.

Budget 2023 proposes to eliminate the "revenue test" in the ITA definition for taxation years ending after 2016 to accommodate credit unions that have evolved to become "full-service financial institutions that offer a comprehensive suite of financial products and services." This would allow such financial institutions to avoid unforeseen income tax and GST/HST consequences.

3. Alcohol Excise Duty

Budget 2023 proposes to temporarily cap the inflation adjustment for excise duties at 2% rather than the automatic indexation to total Consumer Price Index as provided by the Excise Act and the Excise Act, 2001. The proposed measure would come into force on April 1, 2023. The proposed alcohol excise duty rates would be as follows:

  • Sprits – $13.303 (instead of $13.864 without the cap);
  • Wine – $0.702 (instead of $0,731); and
  • Beer – $35.516 (instead of $37.014).

4. Cannabis Taxation: Quarterly Duty Remittance

While Budget 2022 initially proposed to allow smaller licensed cannabis providers to remit excise duties on a quarterly rather than on a monthly basis, Budget 2023 now proposes to extend this measure to allow all licensed cannabis producers to remit excise duties on a quarterly basis, starting from the quarter beginning on April 1, 2023.

5. Air Travellers Security Charge

Budget 2023 announces new Air Travellers Security Charge ("ATSC") rates for air transportation services that include a chargeable enplanement on or after May 1, 2024. The ATSC rates were last increased in 2010, at which time they were raised by 52.4%. The proposed new ATSC rates would be as follows:

  • Domestic (one-way) – Increase from $7.48 to $9.94;
  • Domestic (round trip) – Increase from $14.96 to $19.87;
  • Transborder – Increase from $12.71 to $16.89; and
  • Other international – Increase from $25.91 to $24.42.

6. Customs Tariff Measures

Budget 2023 proposes to renew the General Preferential Tariff and Least Developed Country Tariff programs until the end of 2034. These programs were to expire on December 31, 2024. Budget 2023 also announces updates to these programs including the creation of a new GPT+ program, as well as certain new benefits for certain import categories, and a simplification of administrative requirements for importers.

7. Previously Announced Measures

Budget 2023 finally confirms the government's intention to proceed with a number of notable previously announced measures:

  • Legislative proposals relating to the Goods and Services Tax/Harmonized Sales Tax, excise levies and other taxes and charges announced on August 9, 2022.
  • Legislative proposals released on February 4, 2022 with respect to the Goods and Services Tax/Harmonized Sales Tax treatment of Cryptoasset mining.
  • Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
  • Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election.

Footnotes

1. Canadian Imperial Bank of Commerce v Her Majesty the Queen, 2018 TCC 109.

2. Canadian Imperial Bank of Commerce v Her Majesty the Queen, 2021 FCA 10.

3. Supra note 1, para. 75.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.