Changes to Wash Transaction Rules Coming Soon
The Canada Revenue Agency is close to releasing a revised wash transaction policy for goods and services tax (GST) and harmonized sales tax (HST). A "wash transaction" occurs when a supply that is taxable at 5% or 12% or 13% is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant who would have been entitled to claim a full input tax credit (ITC) if the tax had been correctly applied. In other words, the supplier makes an error in not charging the correct amount of GST/HST when the recipient is entitled to a full input tax credit. As a result, the Government of Canada is not deprived of tax revenues as a result of the error.
The old wash transaction policy in GST Memorandum 16-3-1 "Reduction of Penalty and Interest in Wash Transaction Situations" granted a concession to suppliers. The CRA did not collect interest, but did impose a 4% wash penalty.
This 4% penalty may be gone under the new policy. Please stay tuned for what we are told is good news.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
