CRA Denies Voluntary GST/HST Registration for Financial Institutions

A Canadian branch of a foreign financial institution that has imported taxable supplies must self-assess GST/HST and file returns. Companies in this situation may seek to reduce their compliance burden and improve their cash flow by applying for voluntary GST/HST registration. However, it seems that the CRA is frequently refusing such applications, even though its position may not be supported by the Excise Tax Act (ETA). If this happens, a taxpayer can become registered by causing mandatory registration to apply—perhaps by generating taxable or zero-rated income.

One reason to seek voluntary registration is to reduce compliance costs. A listed financial institution that is registered for GST/HST can file returns and self-assess tax on imported taxable supplies on an annual basis. By comparison, non-registrants must file monthly GST/HST returns in addition to an annual filing, thus requiring 13 (or more) filings every year instead of one. This takes extra time, expertise, and money. (This is quite different from the normal situation: generally, non-registrants that are not financial institutions have no GST/HST compliance obligations, other than to pay the tax due on taxable supplies acquired.) On the other hand, a registered entity may also have to file an annual information return if it is a "reporting institution" (ETA subsection 273.2(2)). A company in this category may or may not obtain a net compliance-cost benefit by registering for GST/HST.

A second reason to seek voluntary registration is cash flow. While an unregistered entity may have to remit tax on a monthly basis, a registered entity may have to pay tax only once or twice a year. The requirements depend, for example, on the frequency of imported taxable supplies and the type of financial institution.

Given these two reasons, a listed financial institution that is resident in Canada may want to voluntarily register for GST/HST (pursuant to ETA subsection 240(3)). However, the CRA is increasingly refusing such applications; its reason is that the existence of a Canadian branch does not make the financial institution a Canadian resident for GST/HST purposes.

The legal authority for this CRA position is unclear. A Canadian branch of a foreign financial institution with offices in Canada would certainly have a permanent establishment here: pursuant to ETA subsection 123(1), a permanent establishment includes "a fixed place of business . . . including a place of management, a branch, an office, a factory or a workshop." Also, according to ETA subsection 132(2), a non-resident person with a permanent establishment in Canada is considered to be resident in Canada in respect of the person's activities carried on through that establishment; thus, such a company should meet the definition of a listed financial institution resident in Canada (ETA paragraph 240(3)(c)) and should be allowed to register for GST/HST on a voluntary basis.

Furthermore, the CRA's position poses a logical conundrum: if a Canadian branch has a permanent establishment in Canada that is recognized for the purpose of taxing imported supplies, then why is it considered to be a non-resident for the purpose of the voluntary registration provision?

The CRA's decision to not allow voluntary registration in such cases seems contrary to its own interests: voluntary registration provides the CRA with more tools to monitor and enforce compliance (for example, audit powers) and reduces the number of returns it has to process. Indeed, allowing registration may reduce the administrative burden on the CRA and the taxpayer alike. For the CRA, the only disadvantage would be the cash flow cost from reduced frequency of payment.

Andrew Linton and Jillian Adams
Ernst & Young LLP, Waterloo

Canadian Tax Focus
Volume 9, Number 4, November 2019
©2019, Canadian Tax Foundation