HST: Implications for First Nations’ Governments and Businesses

1. HST: Implications for First Nations’ Governments and Businesses First Nations Tax Administrators Association 17th Annual Forum September 16, 2010 Enoch Cree First Nation, Edmonton, Alberta Heather Mahony and J. Berry Hykin (with thanks to Matt Boulton)

2. Introduction • Ontario and British Columbia harmonized their provincial sales tax systems with the federal GST effective July 1, 2010. • HST already in effect in Nova Scotia, Newfoundland and New Brunswick (as of Apr 1, 2007) • HST levied under Part IX of the Excise Tax Act (“ETA”) • Applies to the same tax base and is subject to the same rules as the GST • some province-specific exceptions, e.g., point of sale rebates on limited range of consumer products; transitional rules temporarily restricting the availability of ITCs for large businesses for provincial portion of the tax Heather Mahony and J. Berry Hykin

3. Legislative /Administrative Framework • Federal Government has passed legislation to amend the ETA to include Ontario and BC as “participating” HST provinces • BC and Ontario have passed amending legislation to wind down the existing provincial sales tax as of July 1, 2010 • Province-specific rules and practices are set out in regulations and in the Federal/Provincial Comprehensive Integrated Tax Coordination Agreements Heather Mahony and J. Berry Hykin

4. Implementation continues to be controversial • UBCIC: “UBCIC strongly opposes implementation of the HST because it stands to increase the poverty of our people and of all poor British Columbians, and because there was no consultation with BC First Nations on implementation of the new tax regime.” (March 2010) • BC: A successful anti-HST petition led to a special legislative committee who voted to refer the tax to a referendum in September 2011 rather than to refer the adraft anti-HST bill to straight to the legislature. Premier Campbell has said he will require only a simple majority before scrapping the HST. • Ontario: First Nations in Ontario successfully lobbied Ottawa to maintain an exemption of the provincial portion of the tax off-reserve. The exemption had been in place for 30 years under the Retail Sales Tax Act, and extends an exemption to Status Indians to eligible goods/property/services purchased off-reserve. Heather Mahony and J. Berry Hykin

5. This presentation examines the implications of the HST on: • taxation by First Nations governments • Indian Act and administrative tax exemptions, and • First Nations businesses. Heather Mahony and J. Berry Hykin

6. Previous PST and GST Tax Bases: • Original base of PST was the sale of “tangible personal property” • Over time this base was expanded to include a number of intangibles • GST, by comparison, is a form of “value-added tax” aimed at taxing the value of all goods and services at the final stage of consumption. Heather Mahony and J. Berry Hykin

7. HST Value-Added Tax Regime: • Under the HST, goods and services are treated in three ways: • Taxable • Exempt • Zero-rated • The HST retains GST exemptions and zero-ratings • B.C. has also required that certain provincial exemptions continue to apply under the HST resulting in tax rebates at the till on certain supplies. • Except where an Indian Act or administrative exemption applies, consumers are subject to immediate cost increases by having the 7% BCVAT (8%OVAT) now added to certain goods/services which were previously PST/RST exempt Heather Mahony and J. Berry Hykin

8. 1. Impacts on First Nations Taxation: • FNT under the Budget Implementation Act, 2000, S.C. 2000, c. 14, part 4. • FNGST under the First Nations Goods and Services Tax Act, S.C. 2003, c. 15 • Unaffected: Real Property Taxation under FSMA and Indian Act s. 83.; Aboriginal Personal Income Tax (where applicable); Cowichan Tribes Tobacco Tax Heather Mahony and J. Berry Hykin

9. First Nation Tax (FNT) Under the Budget Implementation Act, 2000 • The Act allows First Nations listed in the schedule, to tax the on-reserve sale of three commodities – tobacco products, alcoholic beverages and fuel – at the same rate as GST. • Under the HST, wherever the FNT applies, retailers and service providers collect the entire HST from non-exempt consumers, but there are point of sale rebates for the provincial portion of the tax on some items (e.g.: motor fuels). • Where the HST applies, those consumers entitled to an exemption under s. 87 of the Indian Act will pay only 5%. Heather Mahony and J. Berry Hykin

10. FNT – Taxable Sales Non-Exempt consumer – rebate applies (motor fuel, children’s clothing, etc.) Status Indian Consumer – Alcohol, Fuel Tobacco 5% 5% Point of Sale Non-Exempt consumer – no rebate applies Status Indian Consumer – other goods or services 0% 12% Heather Mahony and J. Berry Hykin

11. First Nations GST Under the First Nations Goods and Services Tax Act (the “FNGSTA): • The FNGSTA authorizes First Nations named in the Schedule to impose a law implementing a tax equivalent to the GST on reserve and/or settlement lands. • Applies to consumption by Status Indians and others • Canada vacates GST room • Under tax administration agreement with the First Nation, CRA is responsible for administration, enforcement and collection of the FNGST • CRA remits to the First Nation an amount it estimates to be the net tax revenue attributable to consumption on the lands to which the FNGST applies. Heather Mahony and J. Berry Hykin

12. HST Implications for FNGST First Nations: • Non-exempt consumers acquiring taxable goods and services on the reserve will be liable for the provincial portion of the HST (BC: 7%; Ont. 8%) and the FNGST (5%) for a total of 12%. • Status Indians and First Nations will pay only the FNGST (5%) and NOT the provincial portion of the HST. • Consequently, merchants on FNGST reserves will be back in the business of asking to see status cards in order to apply the exemption Heather Mahony and J. Berry Hykin

13. FNGST – Taxable Sales Status Indian Consumer – (rebate/no rebate Non-Exempt consumer – rebate applies (motor fuel, children’s clothing, etc.) 5% 5% Point of Sale Nisga’a Citizen (e.g.) (unless rebate applies – then 5%) Non-Exempt consumer – no rebate applies 12% 12% Heather Mahony and J. Berry Hykin

14. HST Implications for FNGST/FNT First Nations - Examples: Example 1 – FNT is collected An Indian individual purchases a package of cigarettes and a magazine from a convenience store on a reserve with an FNT in British Columbia. The individual presents their certificate of Indian status card2, at the time of payment for the purchases. The individual will be required to pay the FNT (5%) on the cigarettes. Just the provincial part of the HST (7%) on the cigarettes and the HST (12%) on the magazine will be relieved under TIB B-039. Example 2 – FNGST and the provincial part of the HST are collected A Nisga’a citizen wishes to attend a B.C. Elders gathering being held at a resort located on the St. Mary’s reserve in British Columbia. The St Mary’s First Nation has imposed an FNGST. The registration fee for the gathering includes a 12% tax composed of the FNGST (5%) and the provincial part of the HST (7%). As tax relief under section 87 of the Indian Act no longer applies to the Nisga’a Nation and its citizens, they are required to pay the provincial part of the HST in addition to the FNGST. Example 3 – HST is fully relieved A Tsawwassen First Nation member purchases a new sofa from a store in Delta, British Columbia. The individual presents their INAC issued Indian status card at the time of payment for the purchase. The store agrees to arrange delivery of the sofa to the Tsawwassen member’s residence on Tsawwassen lands that were formerly reserve lands under the Indian Act. The purchase of the sofa is fully relieved of HST as the provisions of TIB B-039 have been met. Although the Tsawwassen are now a self-governing First Nation, members who are Indians are still entitled to a transitional eight-year period of tax relief until April 30, 2017. Source: CRA GST/HST Notice No. 254 (May 2010) Heather Mahony and J. Berry Hykin

15. Is there an argument for re-negotiating tax administration agreements to take into account the 12% rate? • 2006 amendments to the First Nations Goods and Services Tax Act to include Part 2: enables a First Nation listed in Schedule 2 to enact a law that imposes a direct tax like a particular provincial tax, if the particular province agrees and is also listed in the Schedule.  • So far, none of the HST provinces have agreed to vacate their tax room for a First Nation to impose a PST-like tax • Harmonization may give First Nations leverage to lobby these provinces to vacate their tax room to FNGST/FNT First Nations, and to allow the full 12% HST attributable to the reserve to be flowed back to the First Nation • Legislative amendment(s) may be required Heather Mahony and J. Berry Hykin

16. 2. The HST and Tax Exemptions to Indians, First Nations and Band-Empowered Entities (BC). • General: Unless an Indian Act or CRA administrative exemption applies, First Nations and their members will pay more for some goods and services because the HST will apply to some purchases that were exempt from provincial sales tax. • E.g., off-reserve (in BC), First Nations and their status members will pay more for such items as hair care, drycleaning, telephone service, some professional services (e.g., accounting) • Consumers will not see an increase on items eligible for a point of sale rebate on the provincial portion of the tax (in BC, e.g., motor fuels, books, children’s clothing, car seats) Heather Mahony and J. Berry Hykin

17. Tax Exemption impacts (cont’d) • Aboriginal Persons and entities may qualify for tax exemptions from two sources: • Section 87 of the Indian Act • Administrative Exemptions under CRA’s policy re: s. 87 of the Indian Act 87. (1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83 and section 5 of the First Nations Fiscal and Statistical Management Act, the following property is exempt from taxation: (a) the interest of an Indian or a band in reserve lands or surrendered lands; and (b) the personal property of an Indian or a band situated on a reserve. (2) No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (1)(a) or (b) or is otherwise subject to taxation in respect of any such property. Heather Mahony and J. Berry Hykin

18. Tax Exemption impacts (cont’d) • HST will follow the same rules and policies as the (federal) GST. • Primary benefit: CRA’s administrative policy interprets the entities to which a tax exemption applies more broadly than the provincial governments’ administrative policies. • For example: • Pre-HST exemption to provincial sales tax applied only to Indians, Indian Bands, (and Band Councils – Ont.). CRA’s administrative policy also includes exemptions for incorporated Band-Empowered Entities acquiring goods/services for band management activities • CRA’s policy re: leases of tangible goods is broader. (discussed further below) • CRA’s policies provide a tax exemption to Indians, Indian Bands, and Band-Empowered Entities for purchases from a remote store, whereas the provincial policies did not provide for this exemption, and such purchases were subject to provincial sales tax. (see GST/HST Policy Statement P-246) Heather Mahony and J. Berry Hykin

19. Tax Exemption impacts (cont’d) • CRA’s interpretation of exemption entitlements, for the purpose of determining the application of GST and HST, includes: • Indians, Indian Bands, or unincorporated band-empowered entities may acquire property on reserve without paying the GST/HST, provided they have the appropriate documentation. • Corporations not generally eligible for relief from the GST/HST but the tax does not apply to incorporated band-empowered entities acquiring goods/services for Band management activities. • Indians, Indian Bands and unincorporated and incorporated band-empowered entities purchasing for band-management activities may acquire property off reserve without paying GST/HST provided the property is delivered to a reserve. • Bands and Band-empowered entities may claim an exemption for services acquired on- or off-reserve for either band management activities or real property on-reserve • Intangible personal property will be considered to be situated on a reserve where there are sufficient factors to connect it to the reserve. • Memberships are exempt if the rights under them are exercised on reserve • See CRA Technical Interpretation Bulletin B-039 Heather Mahony and J. Berry Hykin

20. Specific Cases: a) Rebates for Travel Expenses; Conference Fees • If travel expenses relate to band management activities or real property on reserve, then the band or band-empowered entity can claim a rebate for eligible expenses • Conference fees for officials or employees of Bands or band-empowered entities engaged in band management activities are exempted from paying tax so long as a certificate is supplied to the conference organizer. Heather Mahony and J. Berry Hykin

21. b) Legal Services (BC) • PST exemptions only available when legal services were: • performed on reserve, • related to real property, or • were provided in respect of consultation or treaty or land claims negotiations (SSTAct Reg. 84/58 s 8.5) • GST/HST exemption available to bands and band-empowered entities when purchasing legal services on- or off-reserve for band management activities. • A considerably broader exemption Heather Mahony and J. Berry Hykin

22. c) Restaurants on Reserve • required to collect the full 12% HST from non-Status customers (restaurant meals previously PST-exempt). • Status-Indian customers are exempt from paying HST on restaurant bills. • Where FNGST is in effect: • Non-Status customers pay: FNGST (5%) and BCVAT(7%)/OVAT(8%) - 12% total • Status customers pay only the 5% FNGST Heather Mahony and J. Berry Hykin

23. d) Liquor Sales on Reserve • Where FNT/FNGST applies to alcohol sales on reserve: • Status customers pay: 5% • Non-Status customers pay 5% + 7%BCVAT = 12% • Indian Act tax exemptions still apply Heather Mahony and J. Berry Hykin

24. e) Hotels on Reserve (BC) • Hotel rooms previously PST-exempt, but subject to a provincial hotel room tax (8%) • Hotel room tax eliminated to coincide with HST implementation, but 2% Municipal and Regional District Tax still applies (where in effect) • Transitional rules apply to purchases of short term accommodation – See: Ministry of Finance HST Notice #9 • Exemptions for Status individuals, bands, and band-empowered entities still apply • Hotel owning First Nation corporations have the advantage of being able to collect ITCs on the full HST amount of supplies used to bring the service tocustomers. Heather Mahony and J. Berry Hykin

25. f) Tobacco Sales on Reserve (BC) • Provincial tobacco tax continues. • HST is now applied to the price at the till. • increase of 7% in the price of tobacco products for non-exempt customers • FNT/FNGST First Nations charge 12% to non-exempt customers; 5% to exempt customers. • First Nations who have released their exemptions (e.g., Nisga’a) will have to charge their citizens the full 12%. Heather Mahony and J. Berry Hykin

26. g) Land Leases and Rentals on Reserve (BC) • Leases of reserve lands to non-exempt entities and individuals subject to full HST (previously PST-exempt) • Transitional rules apply – CRA info sheet GI-092 • FNGST: status Indians pay 5% tax • Long-term residential rentals are HST exempt. • Lessors unable to collect input tax credits for the cost of building or acquiring the property, therefore those qualifying for Indian Act exemptions retain an advantage Heather Mahony and J. Berry Hykin

27. h) Equipment Leases on Reserve • Leases for tangible personal property subject to HST. • CRA’s policy: • if the tax exemption applies when the purchaser acquires the lease (e.g., purchaser is an Indian, band, band empowered entity leasing for band management activities; property delivered to reserve), then the exemption applies for the duration of the lease • If the tangible good becomes situated on reserve during the lease term, then the HST will not apply to the remaining lease payments (as in when Indian moves to reserve) • See CRA Policy P-230R Heather Mahony and J. Berry Hykin

28. i) Gasoline Sales on Reserve (BC) • A point of sale rebate applies to motor fuels. • The provincial 7% (BCVAT) portion of the HST does not apply to gasoline, ethanol, diesel and biodiesel when used in motor vehicles. • Indians, Bands and unincorporated Band entities still exempt (except where FNT/FNGST, or exemptions released by agreement) Heather Mahony and J. Berry Hykin

29. 3. Impact on First Nations Businesses - Input Tax Credits • ITCs available on both the federal and provincial portion of the HST (note transitional rules for large businesses) • Un-incorporated businesses whose purchases previously qualified for PST exemptions lose this competitive advantage, as other businesses now able to claim ITCs for the full HST paid • Sales to Indians, Bands and band-empowered entities are treated as taxable sales, even when subject to Indian Act or administrative exemptions, and the supplier is entitled to input tax credits. Heather Mahony and J. Berry Hykin

30. Conclusion: • exemptions will likely expand for First Nations governments and band-empowered entities to match more expansive CRA policies • First Nations’ businesses will benefit from increased availability of ITCs, but may lose some previous business advantages • Will not be any windfalls for First Nations collecting the FNGST or FNT; however, the introduction of the HST may create leverage for these First Nations to argue for a share of the provincial portion of the HST Heather Mahony and J. Berry Hykin

31. Thank you!! heather@woodwardandcompany.com berry@woodwardandcompany.com Heather Mahony and J. Berry Hykin