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
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
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