Gary Clement's National Post Cartoon Re HST and Service Providers
I had to share Gary Clement's latest cartoon from the September 30, 2010 National Post. Many service providers will appreciate this one:
Communication of Zero-Rating, HST Point of Sale Rebates and HST on Sales Receipts is Problematic
Retailers are having difficulty communicating information to consumers on a single invoice. Both large and small retailers are having to communicate a single blended HST charge and, at the same time, communicate when goods are zero-rated (HST is charged at 0%), exempt (no HST) and when they are offering an HST point of sale rebate (charging GST at 5%).
The retailers have to segregate the information for consumers on the single piece of paper they provide at the time of sale (the sales receipt). As a result, different lines of information may be shown on a sales receipt that may be confusing. To a consumer that does not bring along a calculator, it may appear that the retailer is charging 13% + 5% tax or undercharged the 13% HST (in Ontario).
The more important problem is for the small retailers who may not be charging the HST correctly and may not be communicating the information correctly. The smaller retailers may not have realized the extent of the systems changes that were required to implement HST.
Small retailers should know that some of the large retailers have been struggling with this issue --- you are not alone. However, both are expected to get it right. Auditors will visit small retailers too.
Can You Rely on Google Search Results in Making Due Diligence Defence?
I have not located a Canadian goods and services tax (GST) / harmonized sales tax (HST) case in which the Tax Court of Canada has been asked to accept a appellant's Google research. So, from a Canadian perspective, it is not possible to say "yes" or "no" with any degree of certainty.
That being said, there is a U.S. case of which Canadians should be aware. In Kenneth D. And Trudi A. Woodard vs. IRS, the United States Tax Court considered whether the Woodwards showed "reasonable cause" (like Canada's exercising due diligence) so that a penalty assessed by an auditor for a mistake would be reversed by the court.
In Canada and the United States, the taxing authorities should not impose a penalty if the taxpayer exercised due diligence or reasonable cause (care) in their reporting of tax. Often a taxpayer must go to court and demonstrate that he/she took steps to not make an error.
It appears that the United States Tax Court has accepted that using Google is an acceptable step in locating information to make accurate tax reportings. However, in the case of Woodward, the taxpayers did not keep their research and, therefore, the United States Tax Court could not find in their favour. The Court said:
Mr. Woodard claims that he relied on information found on unspecified Web sites written by unidentified individuals or organizations,
We recognize that petitioner had not worked as an accountant for years before filing the 2004 return, but his accounting degree, M.B.A., and C.P.A. training, no matter how stale, undoubtedly taught him what sources could be relied upon as definitive; such as, for example, the Internal Revenue Code and the income tax regulations, both of which are readily available on the Internet. From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine. Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice.
Accordingly, we cannot conclude that Mr. Woodard exercised ordinary business care and prudence in selecting and relying upon the information he found on line. As a result, we find that he has not shown reasonable cause for failing to report the distributions from his IRA on the 2004 Federal income tax return. Not having found reasonable cause, we need not consider whether Mr. Woodard acted in good faith. See sec. 6664(c)(1).
I am sharing this case as it may be a good authority to hand to the Tax Court of Canada someday --- especially by persons who have attempted to comply with the HST and who have made mistakes.
The morale of the story is to keep your records. Save electronic copies of your Google searches and the documents you read and on which you rely. You may hope that you will not have to read the document again. But, remember the Woodwards and you may be them someday. You may make a mistake and have to defend your actions/decisions. It is always better to have ammunition (that is, paper) in such a battle with the tax authorities.
MUSH Sector Rebates
A registrant/non-registrant for GST/HST purposes which makes exempt supplies will not be entitled to claim input tax credits (unless the entity also makes taxable supplies). Some entities are not entitled to claim any rebates of the GST/HST paid on business inputs. The MUSH sector may or may not be entitled to claim a rebate depending on the province in which the entity is located.
I have promised to share my MUSH sector rebate chart.
| MUSH Sector Entities | GST Portion Rebate | HST Portion Rebate - Ontario | HST Portion Rebate - BC | HST Portion Rebate - NS | HST Portion Rebate - NB | HST Portion Rebate - Nfld |
| Municipalities | 100% | 78% | 75% | 57.14% | 57.14% | No rebate |
| Hospitals | 83% | 87% | 58% | 83% | No rebate | No rebate |
| School Authorities | 68% | 93% | 87% | 68% | No rebate | No rebate |
| Universities & Colleges | 67% | 78% | 75% | 67% | No rebate | No rebate |
| Charities | 50% | 82% | 57% | 50% | 50% | 50% |
| Qualifying Not-for-Profits | 50% | 82% | 57% | 50% | 50% | 50% |
This chart highlights many important problems for the MUSH sector.
1. The lack of significant rebates for hospitals in British Columbia, Newfoundland/Labrador and New Brunswick will put a strain on provincial budgets due to the unrecoverable health care costs.
2. The lack of significant rebates for school authorities and universities and colleges in Newfoundland/Labrador and New Brunswick will put a strain on provincial budgets due to the unrecoverable education costs.
3. Nova Scotia was able to relieve some of its budget pressures when it signed a CITCA.
4. For Ontario, the effective unrecoverable GST/HST rates (what the entity will not be able to recover by way of a rebate) in respect of purchases for use in exempt activities are:
| MUSH Sector Entity | Effective GST/HST Rate after Rebate |
| Municipalities | 1.76% |
| Hospitals | 1.89% |
| School Authorities | 2.16% |
| Universities and Colleges | 3.41% |
| Charities | 3.94% |
| Qualifying Not-For-Profits | 3.94% |
4. For British Columbia, the effective unrecoverable GST/HST rates (what the entity will not be able to recover by way of a rebate) in respect of purchases for use in exempt activities are:
| MUSH Sector Entity | Effective GST/HST Rate after Rebate |
| Municipalities | 1.75% |
| Hospitals | 3.79% |
| School Authorities | 2.51% |
| Universities and Colleges | 3.40% |
| Charities | 5.51% |
| Qualifying Not-For-Profits | 5.51% |
New ORST Auditors Are Making Big Mistakes - What Can You Do?
Ontario has hired a significant number of new auditors to complete Ontario retail sales tax (ORST) audits before the March 2012 deadline when the Ministry of Revenue staff join the Canada Revenue Agency. What I am seeing is inexperienced auditors who do not know the law issuing large assessments to Ontario vendors and walking away saying that they can file a notice of objection if the vendor disagrees. The audits are being rushed and the new auditors have not allocated themselves enough time to complete the task correctly.
What this means is that assessed vendors must file a notice of objection and pay the full amount of the assessed ORST while they wait for a Ministry of Revenue appeals officer to review the objection (and it takes more than two years for the appeals officer to pick up an appeal). I have an objection that I filed in 2007 that has not been moved forward by the Appeals Branch.
What can vendors do? My best recommendation is to be very prepared for any audit. As soon as you receive the letter or call that an ORST audit is to occur, organize all the relevant documents. Conduct test audit to determine if you have any problems. Find your own mistakes --- in other words, do the auditors job before the auditor. Know what the assessment should be before the auditor does.
If you have a disagreement with the auditor over the application of the law or his/her interpretation of the facts, call in an expert ASAP. Many vendors wait until after the problems have developed too far to call in an expert. If the time clock is running out on the audit, it becomes more difficult to set up a meeting with a supervisor or request that the auditor seek a tax advisory opinion.
Many vendors want to save money and ask a book-keeper or accountant without sales tax expertise to help them during the audit and in preparing notices of objection. Please remember that it may cost more if you are assessed and have to pay the full amount while waiting for an objection to be considered. Once the Ministry of Revenue has your money, they will not want to give it back and will be incentivised to delay.
Ensuring that the assessment is correct when it is issued is the best strategy to adopt. That being said, when you are audited by an inexperienced auditor for the government, it is easier said than done.
Prescribed Interest Rates for GST/HST
I was recently asked what is the difference between the rates of interest (1) payable by a tax debtor to Canada for GST/HST and (2) payable by the Government of Canada to a taxpayer when an incorrectly assessed amount of GST/HST is refunded. There is a difference.
| Period | Refund Interest Payable By Canada | Arrears and Instalment Interest |
| 2010 | ||
| July 1 - September 30 |
1% Corporate taxpayers 3% non-corporate taxpayers |
5% |
| April 1 - June 30 | 3% | 5% |
| January 1 - March 31 | 3% | 5% |
| 2009 | 5% | |
| October 1 - December 31 | 3% | 5% |
The prescribed rate of interest on refunds and amounts owed to corporate taxpayers recently changed. The Auditor General raised concerns in her Spring 2009 report about interest paid by Canada to corporations regarding overpayments. Simply put, the interest rate payable by Canada to corporations on overpayments of tax was higher than bank interest rates and was costing the Government of Canada.
From the perspective of the taxpayer, the CRA should not be incentivized to make incorrect assessments, force payment and hold on to the taxpayer's money. The change creates a disincentive to the CRA to settle tax disputes.
Was the Director Wearing a White Hat?
I would like to share a quote with you from a recent GST case, Arsic v. The Queen. In this case, the Canada Revenue Agency (CRA) was pursuing a director of a corporation for the GST debts of the corporation. In these circumstances, the director may raise the due diligence defence, which prevents the CRA from shifting the corporation's GST liability (plus penalties and interest) to the director.
Justice Diane Campbell wrote:
In the end, I must attempt the difficult task of determining what a reasonably prudent person should have done or would have done in circumstances comparable to those in this appeal. It remains a question of fact tempered with a good dose of even-handed common sense. It is always easy to criticize the choices of a taxpayer when armed with the benefit of hindsight."
This quote will be helpful to directors. The judge is making it clear that the auditor did not use common sense when assessing the director for the liabilities of the corporation. She accepted the due diligence defence and allowed the appeal. The end result is that the director did not have to pay the assessment relating to the GST debt of the corporation.
More importantly, the quote should help directors. Directors must ask themselves what would the Court expect a reasonably prudent director to do? What should I do to show the Court that I tried to prevent the corporation from getting into GST/HST trouble? I often use the white hat / black hat analogy. The taxpayer needs to help the Court see that they always were the good guy wearing the white hat. The director must not wear a black hat and engage in questionable behaviour. In Court, the bad facts may (will likely) come out.
Bed Bugs and HST
The bed bug extermination business is thriving (not good for renters, home owners, hotel operators and others, but good for pest control service providers).This post is for the pest control service providers. I was recently asked which place of supply rule applies to pest control services. The person asking had incorrectly assumed that the general HST place of supply rule applied.
The correct answer is that the HST place of supply rule for services in respect of real property will apply to most (if not all) pest control services. The service provider must go to a particular building to undertake the actions to rid the place of the bed bugs. The service provider goes to a home, an apartment building, a hotel, a condominium building, a nursing home, or a theatre. These places have particular locations.
Based on the HST place of supply rules, if the place is located in an HST province (e.g., Ontario), HST would apply to the amount charged for the service. If the place is located outside an HST province (e.g., Quebec), HST would not apply (but GST would apply if the place is in Canada) to the amount charged for the service. If the place is located on a reserve, then the point of sale rebate would apply.
Bed bug exterminators should clearly identify on their invoice the location at which the services were performed. This will help the HST auditor apply the HST place of supply rules correctly and assess the correct rate of GST/HST.
For persons located in Ontario and British Columbia, pest control services were not taxable under the provincial sales tax regimes of either province. Many persons who are recipients of pest control services are consumers and, therefore, are not able to recover the HST by way of an input tax credit. Landlords, for example, cannot recover HST paid on pest control services in rental properties. Another good example is a home owners is the final consumer and cannot recover HST paid on bed bug removal - even if the bed bugs arrived from a foreign hotel.
Bed bugs and other pests may carry diseases and cause health issues, but the extermination services are not considered to be health care services. People (and parents) must pay the HST to protect their families from bed bug bites and health issues.
Appraisal/Valuation Issues Re Non-Commercial Jewelry Imports Can Lead to GST/HST Issues
I have many clients who are individuals and business owners who have had their jewelry seized and detained by the Canada Border Services Agency (CBSA) upon return to Canada. Such detentions have a GST and/or HST effect since GST and HST is calculated based on the value for customs duty purposes. If the jewelry is a non-commercial importation by an individual (in other words, an individual acquired the jewelry outside Canada for personal use), then the GST/HST is an additional cost (if the goods exceed the exemption limit).
In many cases (too many cases) the client has a receipt in which a value is stated, but the secondary screening officer does not accept the sales documentation as valid. The CBSA officer believes (often without any probable grounds except the person did not answer questions satisfactorily or "they looked nervous about something") that the invoice understates the value.
In many cases, the CBSA charges the importer criminally with smuggling or providing a false document and a civil penalty. The CBSA officer often detains the jewelry and assesses a penalty of 30%-70% of a value to be determined. The CBSA then sends the seized jewelry to be appraised. As a result, the effect is serious --- and costly to resolve.
In every case that I have seen, the appraisal exceeds the amount of the invoice. This may be because appraisers are used to overstating the value for insurance purposes. This may be because the appraiser is asking the wrong questions - such as what would a willing buyer pay a willing seller in Canada at a retail (B2C) sale? This may be because the appraiser has not been told to include a trade level adjustment (in the case of a commercial importation). In every case, it is the interest of the CBSA to get as high an appraisal as possible in order to collect more duties (including excise duties), taxes (GST (commercial and non-commercial goods), HST (non-commercial goods) or PST (non-commercial goods)) and penalties. It may be because an appraisal is a guess an exact science.
Anyone in these circumstances should look at the Government of Canada auction web-site for surplus and seized goods. The relevant area to review are "What has sold". Look at (1) jewelry, collectors items, arts and crafts, etc. and (2) seized assets (excluding vehicles). If you look at specific items that have sold, you will find many examples of jewelry that was appraised at one high amount and that sold in the government auction for less than half that value. I recently purchased a jade necklace valued at $50 on the auction site and I paid only $25. You will likely find better examples that are closer to the type of goods that have been seized from you. This is good evidence to present that a government appraisal is incorrect.
If you anticipate in advance that the CBSA may question your documentation on the purchase price of a good outside Canada, then improve your evidence. For example, get an appraisal completed by a reputable firm. Bring any sales promotional documents, such as sales catalogers or store advertisements. If an item was purchased at an auction outside Canada, bring the promotional materials. If your jewelry is a family heirloom, take photos of the jewelry and work with a reputable Canadian appraiser before bringing the goods to Canada.
Thought of the Day - Auditors Do Not Know Your Business
Mistakes are made by auditors because they do not know your business. You may think that you have the advantage over an auditor because you know what they do not know. Unfortunately, it does not work that way. What the auditor does not know, he will assume. He is allowed to make assumptions. he is allowed to make incorrect assumptions. If the auditor makes an assessment based on incorrect assumptions, you have the right to provide evidence to rebut those presumptions. However, the cost of going to court often exceeds $100,000. The morale of the story is that it is cheaper to be humble and sit down with he auditor and explain your business. Tell him what he should know to do his job correctly. Treat the auditor like an apprentice and share what you took years to learn and understand.
Alert to Non-Residents - It is a Good Time to Take a Closer Look at Canadian Business Activities
I have helped many non-residents of Canada register for goods and services tax (GST) purposes over the years. These GST registered non-residents must apply the HST place of supply rules to their transactions involving Canadian buyers/clients.
In addition, many of these non-resident clients have filed extra-provincial registrations to carry on business in a Canadian province so that they could open a bank account and pay the Receiver General any GST collected.
These non-resident entities have made two representations to the Government of Canada and/or a provincial government that they are 'carrying on business" in Canada. Many have done so without considering income tax and/or withholding tax consequences.
The implementation of HST should trigger a closer look at a non-resident's Canadian business activities. So far, I am close to 100% in finding mistakes that could be or are already very costly.
A Thought About GST and Imports
Since the implementation of harmonized sales tax ("HST") in Ontario and British Columbia, the Government of Canada should re-think the imposition of goods and services tax ("GST") on imports of commercial goods. In connection with the implementation of HST, the CITCAs include provisions such that HST is not imposed on imported commercial goods. What is the logic of continuing to impose GST on commercial imports? Wouldn't it be better for Canadian businesses and, in particular manufacturers, if the GST cash flow cost on imported commercial goods is removed? If the Canada Border Services Agency can live with the HST regime for imports, why can't they also live with no GST on commercial goods and GST on non-commercial goods? Wouldn't it be a more efficient use of government resources if the Canada Border Services Agency is no longer responsible for collection of GST on imported commercial goods and is not longer shares verification/audit functions with the Canada Revenue Agency? For that matter, wouldn't it be better for businesses if they did not have to be subject to GST audits/compliance verifications by two separate government agencies who do not adequately share information and interpretations? I am just saying ...
A Vendor for ORST Purposes May Judicially Review Collections Action of Minister
A client came to me after the Ontario Minister of Revenue issued a writ of seizure and sale pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario). The writ of seizure and sale instructed the sheriff to seize my client's assets and sell them to satisfy an alleged retail sales tax debt. The alleged debt allegedly arose thirteen years prior to the issuance of the writ. I am using the word "alleged" because there is a disagreement over whether an assessment was ever issued against the person against whom the writ was issued.
On May 13, 2010, the Divisional Court of the Ontario Superior Court quashed the writ. We had filed judicial review of the Minister of Revenue's decision to issue the writ of seizure and sale. In other words, after the decision, there was no writ permitting the sheriff to seize and sell assets.
In Carter v. The Minister of Revenue, the Divisional Court held that pursuant to Rules 67.07(2) and 67.07.1(1) of the Rules of Civil Procedure, "the Minister was required to obtain leave to issue the warrant in question, some thirteen years after the alleged assessment became final and binding." On August 30, 2010, the Ontario Court of Appeal agreed when deciding a motion by the Minister for an extension of time to seek leave to appeal the Divisional Court decision. The Court of Appeal stated:
I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection. The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.
This is an important decision because the economy and the shifting of Ministry personnel to the Canada Revenue Agency (due to HST implementation) has caused the Ministry to look at old assessments that have not yet been collected. The morale of the story is that if the Minister of Revenue issues a writ of seizure and sale (also called a warrant) and the alleged debt is more than six years old (based on the date on the assessment), the Minister must seek leave from the Superior Court of Justice before issuing the writ. The Minister would have to notify the alleged tax debtor and the alleged tax debtor would have the opportunity to dispute the facts and law raised by the Minister. This means that it is possible that the writ would not be issued and the alleged tax debtor would not have to face the potential of having assets seized and sold and then fighting the government to receive damages (if the actions were in error).
I should add a reality check for persons who are at the receiving end of the Minister of Revenue's collection actions - the cost of pursuing a judicial review is expensive. While I cannot give exact details, I can say that a judicial review to the Divisional Court can result in legal fees in the range of $50,000 - $100,000. I can tell you that the lawyers who act for the Minister of Revenue may take legal steps that will cause the legal fees of the applicant in a judicial review to increase. I can tell you that the costs awarded by the court may be a small fraction of the legal fees incurred by a successful applicant. However, I can also tell you that if enough money is at stake and the case has merit (e.g., the Minister did not seek leave to issue a writ or the writ is issued against the wrong person or for an incorrect amount), a judicial review might be worthwhile.
Premier Campbell Will Face B.C. Liberal Leadership Review
On September 5, 2010, Michael Smyth of The Province wrote an article entitled "Party insider wants Campbell gone" in which the call for Premier Campbell's resignation by Scott Nelson is discussed. I picked up on something else in the article - there will be a B.C. Liberal convention in November 2010 and a secret ballot regarding Campbell's leadership.
This is interesting in light of the strong opposition to harmonized sales tax (HST). The Campbell government is facing potential recall campaigns or a referendum on HST. The British Columbia Supreme Court has heard a judicial review of the procedure followed/not followed in implementing HST in British Columbia. Based on my experience, it is easy to dismiss a judicial review application from the bench and it takes longer to write a reasoned decision (in favour of the petitioner or the respondent). There is a democratic uprising that continues to move forward.
It is possible that Premier Campbell will be at the receiving end of more calls for his resignation. It is possible that the leadership review will not be favourable to Premier Campbell. It is possible Premier Campbell will be succeeded by someone who does not want to carry the HST baggage into the next election. The conditions in British Columbia are such that the continuation of HST in that province is unpredictable. That being said, I would be willing to place a bet on the end to HST in British Columbia.
I should let readers know that I studied history at university before admission to law school. The current Canadian events in British Columbia in the context of HST are fascinating - when will it become history?
Motion Denied - Justice Was Not Delayed
On August 30, 2010, the Ontario Court of Appeal denied a motion brought by the Minister of Revenue for an extension of time to file an appeal in respect of a judicial review of a retail sales tax writ that was quashed by the Ontario Divisional Court. A copy of the decision in The Minister of Revenue v. Robert Carter is available in The HST Library.
This is an important case. Robert Carter brought a judicial review (in Robert Carter v. Minister of Revenue) of writ issued by the Minister pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario). The Ontario Divisional Court quashed the writ on the basis that the Minister did not follow the process set out in Rules 60.07(2) and 60.07.1(1) of the Rules of Civil Procedure, which required the Minister to seek leave of the Court to issue the writ (due to the fact the alleged assessments were issued thirteen years earlier). This Minister did not file leave to appeal within the 30 day time limit. The Minister brought a motion to the Ontario Court of Appeal seeking an extension of time to file leave to appeal. Mr. Carter opposed the motion on two grounds:
(i) the Minister did not meet the test for an extension of time; and
(ii) the Minister had not paid Mr. Carter the cost previously awarded by the Divisional Court.
The Court of Appeal agreed with Mr. Carter.
The overarching principle that is applied by the Court in such cases is "whether the 'justice of the case' required that an extension be given". The Court of Appeal has consistently applied four factors in exercising its discretion:
1) Whether the Appellant formed an intention to appeal within the relevant period;
2) The length of the delay and the explanation for the delay;
3) Any prejudice to the respondent; and
4) The merits of the appeal.
The Court of Appeal ultimately decided these questions in favour of Robert Carter, the respondent. The Court was satisfied that Mr. carter demonstrated prejudice and the Minister did not show that he has a meritorious appeal.
There are many quotable statements in the decision:
- The Ministry of Revenue wields considerable power and discretion that can affect the lives of residents in Ontario in profound ways. Insofar as the Ministry's bureaucracy is unable to comply with the Rules of Civil Procedure in doing so, it seems to me that the answer to this problem is for the Ministry to review its internal decision making processes, not for this Court to make accommodations for the Ministry that are not available to other litigants.
- Aside from indemnifying the winning party, costs are also used as a tool to encourage settlement, deter frivolous actions and defences, and discourage unnecessary steps in the litigation process. And, because they offset some of the outlays incurred by the winner, they make litigation more accessible to litigants who seek to vindicate a legally sound position.
- Certiori is a broad and flexible remedy. Generally speaking, it is available in most situations where a government decision has an effect on an individual's rights or legitimate expectations. On its face, s. 37(1)(b) gives the Minister degree of discretion in the choice of enforcement measures. This choice will have a serious effect of the rights and obligations of individuals subject to an assessment. I am not persuaded that this exercise of executive discretion is sheltered from judicial review simply because it can be described as routine.
- I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection. The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.
I will comment further on some of these points in other postings on this blog.
I must admit that I am pleased with this result for my client. I will keep readers posted on whether the Minister files an appeal to the Supreme Court of Canada.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
