The HST Blog : Canada Harmonized Sales Tax Lawyer Cyndee Todgham Cherniak for Assessments, PST & RST Issues in Ontario, British Columbia & Quebec

On January 28, 2011, the Department of Finance released the long awaited harmonized sales tax (HST) rules relating to the calculation of the provincial component (known as the provincial value-added tax or PVAT) of the HST.  In what will be known as the January 28, 2011 Release, the Department of Finance provides a backgrounder, proposed amendments to the Excise Tax Act (which will have to be passed by the House of Commons and Senate) and proposed changes to regulations (which can be promulgated by the governor in Council).

These rules were initially announced in Department of Finance news releases dated May 19, 2010 and June 30, 2010.  The January 28, 2011 Release is said to incorporate modifications and changes as a result of consultations with the affected financial services industry.  A number of issues raised in the consultations require further research, analysis and stakeholder consultations, which will take place until March 31, 2011.

The HST rules for financial institutions remain very complicated.  It is not possible to summarize the 130 pages of new laws and regulations in this blog post.  Suffice it to say, each financial institution in Canada or engaged in business in Canada will need to take a look at the January 28, 2011 Release.  Many commodity tax specialists spent the week-end trying to get their heads around this new package.

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I would like to offer you words of encouragement to make positive improvements towards better goods and services tax (GST), harmonized sales tax (HST) and other sales and local taxes (SALT) compliance.  I would like to motivate you to make your working lives easier if you are blessed with the task of GST/HST/SALT recording and reporting.

The Canada Revenue Agency (CRA) motivates us to act by fear of negative events, such as an audit and/or assessment.  The CRA motivates compliance by threat of penalties and interest assessments.  They are not wrong in approaching GST/HST in this manner as it is a self-reporting system --- follow the rules of suffer negative consequences.  Many businesses are motivated by money and fear and this system works for some. However, it does not work for many. 

Almost all businesses have just completed the task of filing a GST/HST return.  Annual filers filed their first GST/HST by today's deadline.  Quarterly filers have filed their second GST/HST return (for Q4 2010) by today's deadline.  Monthly filers filed their December 2010 GST/HST return by today's deadline. 

How many of you have spent hours of frustration in performing the calculations and rechecking documentation and numbers in order to file the GST/HST return?  How many of you could not verify whether you were to remit GST at 5% or HST at 13% or 12% or 15%?  How many of you had to self-assess GST/HST and were unsure what to do?  How many of you needed to complete documentation for a refund/rebate and were not sure what to do?  How many of you could not trace your point of sale rebates, your exempt sales and your zero-rated sales (sales when you did not charge GST/HST)?  How many of you walked away from the task wanting to scream at assistants and others within your organization?  How many called someone in your organization and "idiot" or other unpleasant name (if you did, go apologize).

Would you like this task to be easier for the next reporting period?  Are there answers you need in order to perform the task better next month or quarter or year? Is there training that you or your employees need? Would you like to take better control over this reporting process?

If you want to make the tasks related to GST/HST reporting easier, you can. Take the negative experience and make a list of why it was a negative experience to file your GST/HST return.  Write down what worked and what did not.  GST/HST compliance will improve if you fix the things you listed as not working properly. 

Did you have difficulties making sure you claimed 100% of you input tax credits? Fix it.

Did you have difficulties making sure you recaptured input tax credits where required? Fix it. 

Did you have difficulty reconciling various reports? Fix it. 

Were you lacking information that you needed to make decisions? Fix it.

Do you need help to fix it? Find people who understand GST/HST to help you. They do exist.

You can do this.  You can improve your job. You can spend more time with family and friends during GST/HST reporting time. You can be the force of positive change and others will be grateful. what are you waiting for --- another SALT return?

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I was recently called by a person who purchased a hotel property from a vendor.  The buyer paid GST/HST to the vendor.  The Canada Revenue Agency (CRA) has denied the input tax credit on the basis that GST/HST was not payable and, therefore, the GST/HST was paid in error.  The CRA has said that since the error was not discovered until after 2 years after the payment, they will not give a refund of tax paid in error.  This real property is used in commercial activities and the Government of Canada gets its GST/HST on accommodations, food sales, etc.

Here is the starting point of the analysis - Subsection 221(1) of the Excise Tax Act provides that every person who makes a taxable supply in Canada must collect GST/HST payable by the recipient in respect of the supply. BUT, paragraph 221(2) of the Excise Tax Act sets out important relief:

"A supplier (other than a prescribed supplier) who makes a taxable supply of real property by way of sale is not required to collect tax under Division II payable by the recipient in respect of the supply where ...  (b) the recipient is registered [for GST/HST purposes] and, in the case of a recipient who is an individual, the property is neither a residential complex nor supplied as a cemetery plot or place of burial, entombment or deposit of human remains or ashes."

What means that the supplier is not required to collect GST/HST when the buyer is registered for GST/HST purposes and purchases certain real property.

This blog post to is intended to help buyers not get themselves into the same mess.

The problem faced by this person should be fixed.  Since solutions are unique, you will have to continue to read The HST Blog to learn how.  When I hear of unfairness like this, I am inspired to help.

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A common issue is highlighted in the recent Tax Court of Canada GST case, Paradigm Ventures, Inc. v. The Queen. Simply put, in this case, the Appellant presented its arguments to the Court and the Court asked to see the EVIDENCE.

Let me help you picture this - remember the movie Jerry McGuire when Tom Cruise was yelling "Show me the money!"  Now picture a judge at the front of a court, wearing black robes and yelling "Show me the evidence!"

The facts in the Paradigm Ventures case are unremarkable.  They key point was that in order to win, the Appellant needed to show that delivery of goods had taken place outside of Canada.  The court wanted to agree with the Appellant, but needed evidence that factually the goods were actually delivered outside Canada.

The representative for the Appellant made bald assertions that the contracts were for delivery outside Canada (without providing any contracts).  This frustrated the judge and prompted him to write in the decision "In effect, he seems to believe that the facts of this situation speak for themselves in the context of the intended relief ...".  The judge on to write:

"Given the background to the amendment and the assurances he received, the Appellant’s representative earnestly believes, in effect, that this acknowledgment of what the Appellant does is a sufficient basis for me to allow its appeal. My repeated cautions to him that such belief may not be a sufficient basis for me to allow the appeal made little impression on him..."

The judge further goes on to add:

"His pleas then for the Appellant’s appeal to succeed on the basis of what he essentially says was the spirit of the amendment, are simply unrealistic. The amendment was understood by most, it seems, as coming with conditions and burdens of proof."

 The judge's words are helpful because we often get caught up in what we want to be the result.

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I read the horoscope for Leo today and it reads:

"They say there is no such thing as a stupid question. Of course that is true, because if you do not know something it's foolish not to ask.  Most of the time, that is.  Right now there is something that you need to know, and you feel like  you should know it already.  You could ask. That would be the easy way. Or, instrad of letting someone in on the fact that you are missing information, you coud seek it out yourself without anyone knowing.  That would give you the upper hand."

Dear Leo - if your questsions relate to harmonized sales tax or Ontario retail sales tax, you can do some research using the HST Library (link is on this blog).  If you still cannot find what you are loooking for, you can go to the CRA web-site of the Ontario Ministry of Revenue web-site.  If you still cannot find what you need to answer your question, please call a specialist (I have been practicing GTS/HST/ORST for 18 years).

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Yesterday, I took the Via1 train from Toronto to Ottawa to watch the Senators Game. I met interesting people on the train.  I met a man and his wife (close to retirement age - but not quite).  They asked what I did for a living and I said that I was a GST/HST lawyer.

We had an interesting discussion that I wanted to share with you. The man had never looked at a law before and he thought that the Excise Tax Act (also known as the GST/HST Rule Book) was (or should be) a list of all things and services under the sun in alphabetical order and that each thing/service had a rule saying whether it was subject to GST/HST.  The woman thought the Excise Tax Act was more like the Book of Oracles where each good and service had a rule as to whether it was subject to GST/HST. Both ideas of what the law should be was a guide for users.

Both thought that the Excise Tax Act was simple to read and held all the answers in an easy format. "That would be really nice" I responded before telling them that the Excise Tax Act was complicated to read.  I went on the Internet and read them the self-supply rules.  They looked at me and said "Really, are you making this stuff up?".  I said no - unfortunately.

This was a very pleasant and sometimes funny conversation that I had on the train.  I learned a valuable lesson that those who do not know as much about GST/HST as I do have different expectations.  The public's expectations that the tax laws are easy for people to follow are genuine and hopeful (but not realistic).

Many clients ask for a simple and short answer - this is in part based they also expect that the answers are easy to find and give (some want to save money too and others think lawyers make tax answers more complicated than necessary).  There is a disconnect and no easy answer. 

Based one my conversation on the train, I am more aware of what is the disconnect between expectations and reality.  Maybe the drafters of the Excise Tax Act, regulations, administrative statements should take a train ride, listen to people and ask themselves what they can do to make it simpler.

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One of the questions that is most often reviewed by business lawyers and accountants is whether a seller of a business is making "a sale of a business or part of a business".  The reason is that a lot of GST/HST may be at stake.  The other reason is that a section 167 election may be available to provide relief to the purchaser (and remove the collection and remittance obligation from the seller).  While many think the test is easy to apply, there are many complicated twists and turns in the analysis.

In December 2010, the Canada Revenue Agency (CRA) released GST Memorandum Series 14.4 "Sale of a Business or Part of a Business" as administrative guidance.  This 11 page document will help in the application of section 167 of the Excise Tax Act (Canada). 

However, since there may be a lot on money at stake if you do not interpret the rules properly, you may wish to refer questions to a commodity tax/sales tax specialist if you are still unclear after reading this CRA administrative guidance.  This is my due diligence tip...

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I often have discussions with clients who are not talented in the record-keeping department.  Usually, the client thinks that their record-keeping is adequate and an auditor informs them otherwise.  Actually, the auditor either issued a large assessment using a net worth methodology or a mark-up analysis methodology - in other words, the auditor assesses an amount equal to what he/she thinks the taxpayer should have made.  Usually, the auditor's methodology inflates the numbers drastically and results in a significant assessment.

In the recent Tax Court of Canada decision in Stanislao v. Her Majesty, the court allowed the appeal because the net worth assessment was adequately challenged.  In this case, the judge restated a succinct description of the net worth audit is found in Bigayan v. The Queen:

The net worth method, as observed in Ramey v. R. (1993), 93 D.T.C. 791 (T.C.C.), is a last resort to be used when all else fails. Frequently it is used when a taxpayer has failed to file income tax returns or has kept no records. It is a blunt instrument, accurate within a range of indeterminate magnitude. It is based on an assumption that if one subtracts a taxpayer's net worth at the beginning of a year from that at the end, adds the taxpayer's expenditures in the year, deletes non-taxable receipts and accretions to value of existing assets, the net result, less any amount declared by the taxpayer, must be attributable to unreported income earned in the year, unless the taxpayer can demonstrate otherwise. It is at best an unsatisfactory method, arbitrary and inaccurate but sometimes it is the only means of approximating the income of a taxpayer.

The Court also restated from Bigayan the ways in which a taxpayer could seek to overturn a net worth assessment:

The best method of challenging a net worth assessment is to put forth evidence of what the taxpayer's income actually is. A less satisfactory, but nonetheless acceptable method is described by Cameron J. in Chernenkoff v. Minister of National Revenue (1949), 49 D.T.C. 680 (Can. Ex. Ct.) at 683:

In the absence of records, the alternative course open to the appellant was to prove that even on a proper and complete "net worth" basis the assessments were wrong.

This method of challenging a net worth assessment is accepted, but even after the adjustments have been completed one is left with the uneasy feeling that the truth has not been fully uncovered. Tinkering with an inherently flawed and imperfect vehicle is not likely to perfect it. …

What this shows is that the Tax Court of Canada will not blindly accept the Canada Revenue Agency's assessment.   As net worth assessment can be refuted. The key is evidence (as it usually is). The problem is the cost to fight the taxman.

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I see a lot of determinations by the Canada Border Services Agency (let's just call them assessments) relating to Harmonized System (H.S.) tariff classifications and valuations relating to imported goods.  When the CBSA decides you used the wrong H.S. tariff classification number and, therefore, the applicable duty rate is actually higher than the duty rate used at the time of importation, the CBSA assesses GST on the new customs duty included value for duty.  Similarly, if the CBSA disagrees with the valuation method that you used such that the value for duty was too low, the CBSA will assess GST on the new customs duty included value for duty. This often means that the GST portion of the assessment is equal to or greater than the customs assessment.

In many cases, importers do not realize that they are paying GST (instead of customs duties).  Some do not review the details.  Some just pay the bill of a customs broker without even receiving the CBSA documentation. In some cases, the documentation goes to the purchasing department and never gets to the person in charge of GST.

I have seen many cases where the importer of record does not claim input tax credits (ITCs) to recover the GST paid to the CBSA in respect of the imported goods.  If the importer of record in a business, they may be entitled to claim ITCs. If the goods are imported by a consumer, they are not entitled to recover the additional GST/HST paid to the CBSA.

Anyone who has been assessed by the CBSA in the past few years should determine whether they have claimed their ITCs.  I would be happy to help you determine what you are entitled to claim as an ITC.

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I am pleased to informThe HST Blog readers that I have been listed in the Canadian list in Who's Who Legal: The International Who's Who of Business Lawyers: Trade and Customs 2010.  See link below

http://www.whoswholegal.com/profiles/40485/0/Todgham%20Cherniak/cyndee-todgham-cherniak/

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The most frequent question that I ask U.S. businesses is "Are you doing business in Canada or doing business with Canadians?"  It is an important GST/HST question.  If a business is merely doing business with Canadians, it is not required to register for GST/HST purposes.  If a non-resident business (also applies to resident businesses) are doing business in Canada, they may be making taxable supplies in Canada and may be required to register for GST/HST purposes.

The phrase "doing business in Canada" is a term of tax art.  The phrase "doing business in Canada"  is not defined in the Excise Tax Act (Canada). The phrase has been considered in many income tax and sales tax cases.  As a result, a determination is made on a case-by-case basis.  The Canada Revenue Agency has issued administrative statements to inform suppliers on factors they consider in making a determination.  In many cases, it is recommended that a non-resident supplier apply for an advance GST/HST ruling (usually in cases where they want a decision that they are not doing business in Canada).

I have been asked to look at this issue more than any other GST/HST issue.  I could give many examples that cross many forms of businesses.  I will give two of my more recent examples.

Example #1: A U.S. company provides specialized services to clients.  They design and develop custom computer programs and implement the program after completion.  Employees of the U.S. company spends months (sometimes over a few years) at the clients' premises.  In recent years, the U.S. company was retained by a few Canadian companies for big and small projects. The U.S. company has established a Canadian bank account in which it was paid for its services.

This company was doing business in Canada and needed to register for GST/HST purposes.  It did not matter that the U.S. company did not have its own offices in Canada and only worked at the premises of its clients.  Given the amount of time that the U.S. company spent in Canada performing services on Canadian soil, it was easy to determine that the company was carrying on business in Canada.

Example #2: A U.S. company with a business location in the United States very near the Canada/U.S.border sold goods.  While Canadians could cross the Canada-U.S. border, buy goods, and be responsible for taking the goods across the border, This was not what usually happened.  The U.S. company regularly delivered the goods f.o.b. Canadian customer's front door.

If the U.S. company delivered the goods infrequently f.o.b Canada, it may have been considered to be doing business with Canadians.  If the U.S. company delivered the goods f.o.b U.S. business and the customer arranged for shipment across the border, the U.S. company may have been considered to be doing business with Canadians.  However, the reality was very different. Based on the actual activities of the U.S. business, they would likely be considered to be carrying on business in Canada.

The facts are always very important.  Even if you have asked this question before and are attempting to NOT carry on business in Canada, it is important that non-residents of Canada ask what is the practical reality.  Based on my experience, non-resident businesses often get into difficulty because employees change the game plan without knowing why things are being done a certain way.

"Are you carrying on business in Canada" is an important question to ask. 

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On July 1, 2010, fire trucks became subject to HST in Ontario.  Previously fire trucks were not subject to Ontario retail sales tax (ORST).  Paragraph 7(1)23 of the Retail Sales Tax Act (Ontario) exempted "fire fighting vehicles, as defined by the Minister, when purchased at a price of more than $1000 per vehicle for the exclusive use of a municipality, university, public hospital, local services board or volunteer group, and repairs for such vehicles."  As a result, the tax rate increased by 8%.

Many of the bodies that purchase fire trucks are engaged in exempt activities.  This means that they do not recover the 8% HST/PVAT by way of an input tax credit.  many of the bodies that purchase fire trucks are entitled to a partial MUSH sector rebate.  However, none get 100% of the HST/PVAT back.  This means fire trucks are more expensive due to unrecoverable HST.

With provincial/municipal/university/hospital and other budgets so constrained, I sincerely hope that McGuinty's decision to collect more tax on fire trucks does not cost any Ontarian their life.

By the way, I disagree with McGuinty's decision to impose HST on fire trucks.  I support our hard working fire men & women who bravely put their lives on the line for us.  Let me know if you agree with me and let McGuinty know that you disagree with his decision.

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Ontario retail sales tax ("ORST") was not imposed on electricity and residential heating fuels.  ORST was imposed on "tangible personal property", which was defined in the Retail Sales Tax Act (Ontario) (ORSTA) as "personal property that can be seen, weighed, measured, felt or touched, or that is in any way perceptible to the senses, and includes ... natural gas and manufactured gas." 

To the extent that the following forms of residential heating were captured by the definition of "tangible personal property, the ORSTA contained a specific exclusion to ensure they were not subject to ORST:

• Gasoline (because it was taxed and remains taxed under the Gasoline Tax Act (Ontario);
• Fuel (because it was taxed and remains taxed under the Fuel Tax Act (Ontario);
• Fuel oil (because it was taxed and remains taxed under the Fuel Tax Act (Ontario);
• Coal;
• Coke (not the soda pop variety);
• Wood;
• Natural gas and manufactured gas (as defined by the Minister);
• natural water (including ice and steam);
• Electricity of all purposes; and
• Ethanol or methanol that is sold and purchased as fuel to generate power by internal combustion.

When HST was implemented in Ontario on July 1, 2010, these exemptions disappeared and the list above became subject to HST.  The increase is tax payable by consumers was the 8% PVAT rate.

What some people do not realize is that the fuel tax and gasoline tax, to the extent it applied before July 1, 2010, continues to apply.  In other words, the amount of tax payable increased because the McGuinty Government did not repeal the Fuel Tax Act or the Gasoline Tax Act.

In addition, HST will apply to services provided by an energy supplier and administrative charges, such as:

• connection or disconnection of a service or equipment,
• installations, inspection, testing, maintenance or repairs,\relocation or upgrades of a service or equipment,
• analysis of the use of an energy product;
• activation or cancellation of an account,
• late payments,
• interest,
• returned or dishonoured payments,
• method of payment,
• account adjustments,
• account information,
• franchise fees; and
• Equipment-related charges, including charges relating to equipment purchased or leased by the person acquiring the energy product.

So, if you are wondering what changed - there you have it.  Premier McGuinty had the option on ensuring that you did not pay more on essentials such as electricity and residential heating - he made a choice not to give consumers a break.  Premier McGuinty and Minister Dwight Duncan had (has) the option in the Comprehensive Integrated Tax Cooperation Agreement (the agreement between Ontario and the Government of Canada re harmonization) to select point of sale rebates (meaning the supplier does not have to collect the PVAT portion of the HST).  McGuinty and Duncan decided Ontarians can and will pay HST on electricity and home heating.

Premier Campbell, who is resigning in part because of HST did agree to a form point of sale rebate (called a Residential Energy Credit) for residential electricity and home heating. Energy products qualifying for the Residential Energy Credit are electricity, natural gas, propane, heating oil (including bio diesel or similar renewable fuel), kerosene, heat and steam.

These are the facts folks ... Please do not shoot the messenger ... use this information instead.

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Most people hire a home inspector to inspect a home before buying a home.  They hire home inspectors to find the problems that they cannot see so that they do not experience large unexpected expenditures after the closing date.

Should businesses (corporations and partners/joint venturers) hire a GST/HST expert to conduct a GST/HST focused review prior to the closing date so that they do not buy GST/HST problems that a Canada Revenue Agency auditor may blame on the buyer?  What I am referring to is due diligence and a private audit of GST/HST books and records.

A GST/HST inspection is prudent if the buyer is buying the shares of a corporation.  The past errors (liabilities) are acquired in a share purchase transaction.  If you find a serious problem with the GST/HST compliance, then a purchase price reduction can be discussed.  The purchase price reduction for the shares may be quantified by way of a pre-closing voluntary disclosure - but that may delay the transaction.  If you do not want to delay the closing of the transaction, an amount of the purchase price may be put in a reserve or escrow account as the voluntary disclosure proceeds.  It is not necessary to conduct a a voluntary disclosure and reserves can be maintained depending what is found in and quantified during the GST/HST inspection.

Similarly, a GST/HST inspection is prudent if the buyer is purchasing a partnership unit or joint venture interest in an existing partnership or joint venture. As discussed with corporations, the buyer would be buying the GST/HST history and the existing problems.

Even if the acquisition is an asset transaction, a GST/HST inspection is prudent.  If the buyer is making offers of employment to existing employees, they will continue to make any mistakes they had been making in their record keeping and reportings. If you would like to stop bad practices, you need to know they exist and take positive steps to teach proper practices.

GST/HST inspections are not usual - yet.  With the implementation of GST/HST in Ontario and British Columbia, the cost of mistakes increased to 13% and 12% respectively, plus additional basis points for interest and penalties.  Depending on the value of the business that is being acquired, there is more money at stake than the cost of replacing a leaky roof or old furnace.

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Seth Godin, a marketing guru, usually is right on the mark.  In today's post, entitled "The Certainty Premium" he writes, in part:

How much would you pay for an envelope that had a 50% chance of containing $10 and a 50% chance of being empty?

Over time and in bulk, probably $4.99. But certainly not more than $5.

Here's where it gets interesting: how much extra would you pay for a plane that was guaranteed to be always on time, or a surgery that was always guaranteed to work? Suddenly, the same math that helped us value the envelope doesn't work so well. That's because we're often willing to pay a significant premium to avoid risk.

In GST/HST, near certainty may be derived from a ruling from the Canada Revenue Agency (CRA).  There are two types of requests that can be made to the CRA, GST/HST Rulings Directorate:

1. Advance Rulings; and

2. Interpretations.

An advance ruling requires that the requested provide their name and all relevant facts relating to the request.  The CRA will consider the request, possibly ask questions, and request more documentation before issuing an advance ruling.  This process takes time and the request is well considered (sometimes a very long time).  However, what the taxpayer receives from the CRA is a letter containing their answer that is binding.  This means that the CRA should not issue an assessment against the person who made the request for the ruling if they requester acts in accordance with their advance GST/HST ruling.  In cases where an auditor disagrees or the CRA's administrative position has changed after the CRA provides the advance GST/HST ruling to a requester (and they have not notified the person to whom the ruling was provided of the change), the CRA generally does not assess GST/HST, penalties and interest for the past, but requests that the person abide by the CRA's current position on a going forward basis.  This can save a person from audit stress and having to pay an assessment in the future.

An interpretation is something less than an advance ruling and it is not binding on the CRA.  An interpretation usually involves a general and generic question and can be made on a no-names basis.  The interpretation provides the CRA's current position relating to the facts and topic set out in the request. If a taxpayer has an interpretation and an auditor disagrees or the CRA's position changes, an assessment may be issued against a requester. Usually, if a person has an interpretation letter from the CRA, the CRA will not assess penalties because the person exercised due diligence by requesting an interpretation.  There are cases where the CRA will restrict the audit period to something less than 4 years if their administrative position changed.  CRA auditors exercise discretion on a case-by-case basis.

That being said, if the CRA discovers during an audit that the request for an advance ruling or interpretation does not set out all relevant facts or that the facts were "spun" and not entirely accurate, they may take the position that the ruling or interpretation is void and may issue an assessment against the requester despite the ruling or interpretation.  For this reason, if there is a significant amount that may be assessed if a future audit covers 4 years, then it is wise to use the services of a GST/HST professional who can help you write your ruling request.  In addition, the GST/HST professional can communicate with the CRA, GST/HST Rulings Directorate personnel to determine what information they require to analyze the advance ruling/interpretation request. 

Businesses often do not know what they do not know and are too afraid to ask the CRA out of fear that contact will cause an audit to occur.  Businesses owners may not know what to say and what not to say.  By working with a professional, the business owner may be shielded from the CRA's view or may find out that their advance ruling request may not be granted and that they are doing something wrong.  If the business is doing something wrong, they can make a voluntary disclosure for past mistakes and correct the errors on a going forward basis. Assessment risk may be reduced.

For more information on GST/HST Rulings, please look at GST/HST Memorandum Series 1.4 (September 2009) "Excise and GST/HST Rulings and Interpretation Services".  If you need help in analyzing whether to request an advance GST/HST ruling or an interpretation, please call Cyndee Todgham Cherniak at 416-760-8999.

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If you would like to find money in your business, you should conduct an internal compliance verification.  You should undertake a review of your internal controls to ensure that you are recovering every cent of GST/HST that you are entitled to recover under the law. I would be surprised if you do not find something you have missed.  Treat the internal review as a treasure hunt with the same determination as a child with a treasure map, you may just find money.

Your review of your internal controls should also look for your failures to charge GST/HST appropriately and your failures to remit GST/HST collected and/or GST/HST that you must self-assess and remit from your own bank account.  It goes without saying that the same holds true for other sales taxes. This is finding money too and, it is a method to save money as the interest and penalties will cost you if a Canada Revenue Agency (CRA) auditor comes to visit, conducts an audit and finds your mistakes.

I have a list of places in the books and records of a business where I look for additional amounts that have been missed by a business owner and his/her staff or bookkeeper or accountant. I will not give that list out to anyone - but I use my list that has been created from years of experience (often from helping clients through audits and assessments). 

I will share one tip today. 

Since the implementation of HST, have you taken your purchase invoices and checked to see if you have claimed all of the input tax credits (ITCs) that you can to recover GST/HST paid to your suppliers?  This is a good time to take a good sample of those invoices and check to see if the GST/HST has been recorded properly and whether your internal record keeping is working to permit full recovery.  

First, do you have all the invoices?  Are you missing some of the invoices that you remember paying?   Do you remember a good of a service that was acquired and there isn't an invoice in your sample?  If an invoice is missing, you may not have recorded the input tax credit.  Do you have methods to record GST/HST paid when there wasn't a typical invoice (e.g. pursuant to an agreement of purchase and sale or a commercial lease or a license, etc.). Do you record the GST/HST amount included in each check that yo write?  What about bank drafts, wire transfer and other forms of payment?

When you are look at your invoices, check again whether the suppliers properly invoiced you GST/HST?  Do the invoices issued between May 1, 2010 and June 30, 2010 properly record GST/HST charged during the transition period?  Does the invoice reflect the correct amount of GST/HST?  This is also a great time to analyze whether the invoices (and any other evidence relating to payments of GST/HST) meet the documentary requirements of the Excise Tax Act and regulations - inadequate documentation is the top audit issue and reason why CRA auditors reject ITC claims and issue assessments.  Have you ever inquired what information is necessary (and should be maintained) to satisfy the CRA of your entitledment to claim an input tax credit?

Second, have you recorded the amounts of input tax credits in your records? If so, are there any errors? If not, how can you claim the correct amount of an input tax credit if the amounts are not recorded?  Even if they are recorded in your books and records, have you checked to see that the process actually works so that when you press the button for a calculation, that number is correct?

If your business does not claim full input tax credits, do you claim the correct amount of rebates/refunds of GST/HST (e.g. you are engaged in exempt activities in whole or in part)?  The same two steps discussed above can be used to verify that your internal controls record the GST/HST that you are entitled to claim by way of rebate/refund.

If you find previously unrecovered GST/HST, you may be able to amend your GST/HST return for the period (depending on the reporting period in which the error occurred).   You may be able to claim the input tax credit/rebate/refund on your next GST/HST return.  You may be able to file a refund claim. I cannot tell you how you get your hands on that found money without knowing the facts.

You may undertake an internal review by yourself or you may call in a professional to maximize your recovery - you do not know what you do not know and what you have missed  A small number of lawyers and accountants who understand the GST/HST laws and administrative policies may be called to assist you with this internal controls review process.  Most sales tax lawyers and accountants charge an hourly rate for their services.  There are also sales tax consultants who conduct these types of reviews and they sometimes charge you a percentage of what they find (you split the found money).

Since I am a lawyer, I have to mention that the benefit of using a lawyer is that analysis and report is subject to solicitor-client privilege and cannot be obtained by the CRA unless that privilege has been breached.  Everything you say to a lawyer about your lack of attention to internal controls and mistakes cannot be divulged to the CRA or tax authorities.  A lawyer's files should not be obtained by the CRA if they arrive with a warrant or seizure request.  If the CRA does attempt to seize a lawyer's records, the records/files may be placed under seal and reviewed by a court before the CRA can review them (which allows the lawyer to claim privilege and a judge to decide if the claim is appropriate on a document-by-document basis).

Finally, if you conduct periodic compliance verifications of your internal controls, you may have a due diligence defence if at some future point in time you are audited.  If your review process captures most of your mistakes and you miss one or two items, that can be expected. However, if you miss a lot of your errors, there would be the same question by the auditor as to whether you took care in implementing your GST/HST systems.

Good luck searching for money.  Please let us know if you find any.

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It is bad enough to receive a notice of assessment from the Canada Revenue Agency (CRA) or the Ontario Ministry of Revenue or the Canada Border Services Agency (CBSA) or some other tax authority.  You clearly did not want to be in a position that you have to pay an amount of money (especially large assessments) to the government.  However, ignoring the notice of assessment is not the right option to choose concerning what to do next. 

If you do not agree with the amount stated on the notice of assessment as the amount (or the imposition of a penalty amount or the interest calculation) or the basis for the assessment or do not know why you received the assessment and want to have the taxing authority make a correction, you usually must file a notice of objection/notice of appeal/request for redetermination or take a positive step to request further consideration of the matter.  In almost every taxing statute, there are statutory time periods (also called "limitation periods") which are often 30 or 90 or 180 days depending on the tax at issue and the legal route to resolve the dispute.  If you throw the notice of assessment in a drawer, you may miss the filing deadline and lose your opportunity to file a notice of objection, appeal or request for a redetermination. This would be bad for you.

Some tax statutes allow for you to ask the head of the taxing authority or a court or tribunal for an extension of time to file the notice of objection, appeal or request for a redetermination.  However, usually you must make the request within the statutory time period for the objection/appeal/redetermination.  For example, if you have a 90 day period to file a notice of objection, you must ask for your extension of time before the 90 day period expires.  You must explain the reason for needing an extension of time - and saying that you forgot about the notice of assessment is not a good excuse.  You must also demonstrate that you intended to file an objection/appeal/redetermination - and saying that you threw the notice of assessment in a drawer shows that you planned to ignore it.

Pulling the notice of assessment out of the drawer one week or one day before the statutory objection/appeal/redetermination deadline is problematic as you will have to find someone to help you file your objection/appeal/redetermination under extreme stress and you will forget important facts and potentially winning arguments.  You will reduce your likelihood of success when you do not leave yourself and your advisors enough time to do a good job.

Finally, I hear from many clients who pull the notice of objection out of the drawer years after the limitation period for filing an objection/appeal/redetermination has expired.  At that point in time, they are being pursued by the collections department of the taxing authority and the amount of interest after time can double the liability.  At some time, it will catch up with you.  When you are pursued by collections officers or receive a director's liability assessment for the original assessment amount plus interest compounded daily at 6% or more, you will wish that you did not thrown the original assessment in a drawer.  At that stage, there is even less a professional can do to correct any mistakes made by the auditor.

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Effective January 1, 2011, the Quebec sales tax (QST) rate increased from 7.5% to 8.5%.  Have you updated your computerized systems to reflect this change? Are you charging the right amount of QST to your Quebec based customers/clients?

For more information about the QST rate increase, please go to the Quebec Ministry of Revenu e web-site.  Quebec has issued statements that may be helpful to you.

Please note that the QST rate is nominally 8.5%, but is also applied to federal 5% GST. The effective QST rate is 8.925%.  The QST rate will increase to 9.5% (effective provincial rate 9.975%) on January 1, 2012.

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Michael Lewis has written a great article about "What happens in bankruptcy".  It is a helpful article to many, including individuals who get themselves into trouble with the Canada Revenue Agency and/or the Ministry of Revenue (Ontario).

Recently, I have received a number of calls from individuals with GST/HST or ORST liabilities from a past assessment.  Each story is different.  Some people can work out payment arrangements with the collections authorities and we help them negotiate a workable arrangement.  Some people have been incorrectly assessed or the collections authorities have taken steps that are not authorized by the law - we help them using legal avenues that are available.  Some people are just not able to pay their debt and we discuss filing for bankruptcy. 

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Harmonized sales tax ("HST") is complicated.  I get asked easy and hard questions every day.  What I am seeing is that many business owners want to be correct on all maters HST, but do not ask the right questions.  A business owner must ask:

• What am I supplying?
• Am I making a single or multiple supply?

Many business owners start with a different question.  Unfortunately, they do not take sufficient time to analyze what they actually supply (or may be seen by a Canada Revenue Agency Auditor to supply) as a first step.  BUT, if you do not know what it is that you are supplying, then you may not property apply other HST rules (such as the place of supply or transition rules).

For example 1: A number of years ago, I had a client tell me that they license computer programs.  I asked to see the licenses that allowed users to use their computer programs.  They looked at me blankly and said none of their customers had signed a license agreement.  When we dug into what they actually supplied, they ran a web-site that allowed persons to access information via the Internet.  They had developed a computer program for their own use in order to run their web-site and process information received from Internet users.  They never gave the Internet users the ability to download this computer program.  The actual deliverable was a list of names and useful information that the Internet user could then use to contact one of the supplied names to acquire an unrelated service from a third party.

This client thought that they provided tangible personal property when in fact they performed a service or provided intangible personal property.

For example 2: Another client is an interior designer.  The interior designer said she provided interior design services.  However, for many clients, the interior designer bought and resold paint, tiles, wall paper, furniture, etc. and chargde a 15%-25% mark-up.  The interior designer actually provided tangible personal property and services.

For example 3: Another client is an exterminator (of pests).  The exterminator thought he performed a valuable service.  In the world of HST, he actually performed a service in respect of real property.

The list of examples could go on and on.  My point is that unless you look at the question of "What Am I Supplying?" from an HST perspective, you may not apply the other HST rules properly.  There are many other HST rules to apply properly.

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Harmonized sales tax ("HST") is here to stay in Ontario for 5 years due to the arrangement between Premier McGuinty and the Government of Canada.  The provincial portion of the rate (currently 8% and called PVAT to those in the know) may be altered on or after July 1, 2012.

Now for something serious and not so serious at times - the ABCs of HST:

A is for Almost Everything - HST covers almost everything;

B is for Bookkeeping - Registrants need to keep detailed records and maintain books are records that can be audited by the Canada Revenue Agency Auditors;

C is for Canada Revenue Agency - The CRA enforces the HST (both the GST and PVAT portions);

D is for Documentary Requirements - A top 10 audit issue is that registrations do not maintain adequate information to support input tax credit and refund claims;

E is for Exemptions - Exempt means that HST/GST is not charged, but the supplier is not entitled to claim input tax credits - so GST/HST is passed on in the price of the property/services;

F is for Filings - Registrants must file their GST/HST returns on time and large businesses must recapture ITCs on time and builders must report certain information in their filings or face costly penalties;

G is for Government Contracts - Suppliers to the Ontario, British Columbia and Nova Scotia Governments must charge GST/HST (previously Ontario and BC did not pay GST or PST);

H is for HST - should have expected this one - or I could have written "Hated Sales Tax";

I is for Input Tax Credits - ITCs are good for businesses engaged in commercial activities who get to recover GST/HST on business inputs (good until they get audited and mistakes are found);

J is for Judge - If you disagree with the CRA about an assessment, file a notice of objection and notice of appeal and take the dispute to a Tax Court of Canada judge;

K is for Knowledgeable - While it is self-serving, you need to talk to a knowledgeable practitioner as the HST rules are complicated;

L is for Legislation - the Excise Tax Act needs to be updated - we have not had a good review since 1997;

M is for MUSH Sector - The MUSH (Municipalities, Universities, Schools, Hospitals) sector have a rebate scheme and difficult rules;

N is for Non-Residents - Businesses outside Ontario (e.g., in other Canadian provinces, the United States and overseas) may be required to charge, collect and remit HST and do not know or understand it;

O is for Ontario Retail Sales Tax - HST replaces ORST, but ORST is still applicable on used car sales and certain insurance premiums;

P is for Place of Supply Rules - Whether you charge HST depends in part on the application of the place of supply rules, which determine if the supply takes place in an HST province and which HST province;

Q is for Quick Method - really a misnomer because it is not quick and some people using it will have to apply special transition rules;

R is for Recaptured ITCS - Large businesses (those that make over $10 million is sales per annual alone or with affiliated entities) must pay back certain ITCs claimed relating to PVAT and must report on monthly GST/HST return;

S is for Small Suppliers - Small supplier do not have to register for GST/HST purposes;

T is for  Technology - Technology helps capture and report GST/HST information - this cannot be done manually;

U is for Unhappy Consumers - Consumers are paying more on electricity, home heating, bikes, services, etc because of HST;

V is for Voluntary Disclosures - If you make a mistake and have not been contacted by a CRA auditor, you may consider making a non-names voluntary disclosure via a practitioner so save paying a penalty;

W is for web-site - go to www.thehstblog.com for information on HST or www.cra.gc.ca;

X is for Xerox - you need to keep good records as evidence to show auditors - you need to invest in a good scanner or photocopier;

Y is for Yikes - This is what a person says when they hear they will be audited for HST (probably say something else - but this is a clean web-site); and

Z is for Zero-rated - If property or services are zero-rated, you pay GST/HST at a rate of 0% and the supplier gets an input tax credit (therefore, health care and educational services should be zero-rated instead of exempt).

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Some individuals register for GST/HST purposes for their business activities.  When "Bob Smith" registers for GST/HST purposes as a sole practitioner or as a partner in a partnership or as the operator of a joint venture or as a trustee of a trust, he may expose himself to assessment risk for failure to collect GST/HST on all supplies.  When Bob Smith has a garage or contents sale, he is making taxable supplies and should be collecting and remitting GST/HST.  In 99.9% of the cases, the registered Bob and Jane Smith's of Ontario (or Canada for that matter) do not realize they must charge GST/HST.

The rest of us who are not registered for GST/HST purposes (in our individual capacity) do not charge GST/HST at garage and content sales because they do not have a reasonable expectation of profit.  As a result, they do not need to voluntarily register for GST/HST purposes (unless they sell goods on EBay and other web-sites and their sales exceed $30,000 per year).

Bob Smith would say that he does not have a reasonable expectation of profit with respect to the sales of the old kitchen appliances, books, clothes, etc. sold at the garage sale.  He is probably correct.  But, since he is already in the GST/HST system because he has a reasonable expectation of profit in his business activities, the collection and remittance obligations arise. 

If you think about it, the rule IS NOT that a sole practitioner/partner/joint venturer/trustee charges GST/HST when the sale is a profitable sale and does not charge GST/HST when the sale is not a profitable sale.  The sole practitioner charges GST/HST on all sales.

Many individuals have registered for GST/HST purposes for a number of reasons.  these registrants should consider the wider ramifications of that registration --- including their personal activities that may give rise to GST/HST collection and remittance obligations.

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The Canada Revenue Agency (CRA) offers a voluntary disclosure program that allows taxpayers to come forward and admit mistakes and pay outstanding GST/HST owing.  If the disclosure meets the requirements of the voluntary disclosure program, the taxpayer will not have to pay the penalty (the CRA waives the penalty).

Often, the CRA takes the position that a disclosure is not voluntary because the taxpayer was going to be audited (you cannot come forward after the auditor calls and says he/she is coming to conduct an audit).  At this point in time, the taxpayer knows that their mistakes will be found.

In a recent judicial review in an income tax case, the Federal Court did not agree with the CRA's characterization that a particular disclosure was not voluntary.  In Amour International Mines d'Or Ltee v. the Attorney General of Canada, the Federal Court determined that the Minister's failure to exercise his/her discretion to treat a disclosure as voluntary was not reasonable.  The Minister had relied on an internal CRA memo that indicated that the taxpayer would be audited (in circumstances where the taxpayer would not be aware of the memo).  The Federal Court also did not believe that a request for information sent to the taxpayer by the CRA PRIOR TO THE DISCLOSURE would not preclude the particular disclosure from being voluntary in nature.

The Federal Court granted the judicial review, but could not say the disclosure was voluntary and could not order the CRA to refund the penalties collected.  The judge did write that "I will, however, state that the decision was based on an erroneous finding of fact, made in a perverse or capricious manner or without regard for the material before the decision-maker."  Hint, hint, refund the penalty - please.

The morale of this story is that where enough money is at stake and the CRA refuses to treat a disclosure as voluntary, a judicial review may be an option.  A judicial review can cost over $100,000 if counsel for the CRA/Attorney General brings procedural and jurisdictional motions and if there is are problems relating to the release of relevant documents by the CRA.  It is not an option if only a small amount is at stake unless you want to fight for the principle of taxpayer fairness.

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On April 28, 2010, the Canada Revenue Agency (CRA) issued Headquarter Letter (Ruling) No: 120360 in which it ruled that the taxpayer should be entitled to claim an input tax credit (ITC) for the amount of goods and services tax (GST) (can substitute HST here too) paid on the purchase of the goods for resale that were subsequently stolen from the taxpayer's store.  The taxpayer would be required to meet the other ITC documentary requirements.

In this case, the taxpayer filed a claim for recovery against its insurance and the insurance company denied that portion of the claim that was GST because the insured taxpayer could recover those amounts by other means.  This did not bother the CRA.

This is a fair ruling in the circumstances. 

Other taxpayers should rely on CRA rulings at their own risk as their factual circumstances may be different.  A taxpayer should seek a binding ruling from the CRA if they wish certainty.

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A waiver is a document that a Canada Revenue Agency (CRA) auditor asks you to sign that allow the auditor to continue an audit and potentially assess tax, penalties and interests for mistakes made further back in time than what is allowed by the GST/HST laws.  Once you sign a waiver, you have extended what is called a "limitation period".  If the statutory limitation period is four years, the CRA auditor cannot normally assess amounts prior to the start date of the four year period (counting back from the date of the assessment) unless the taxpayer makes a misrepresentation attributable to neglect, carelessness or willful default or signs a waiver.

Often, the auditor asks the taxpayer to sign a waiver in the form of GST Form 189. This allows the auditor to continue to dig for the mistakes and the ultimate assessment may be higher.  On the other hand, it also allows the discussions to continue and takes the "rush" out of auditor's job (meaning the auditor can take the time to issue the correct assessment).  I have seen situations where an auditor says he/she will issue an assessment for $1,000,000 (which immediately becomes a debt due to Canada unless a waiver is signed) or will continue discussions to potentially resolve the issues.

Sometimes it is a difficult decision whether to sign the waiver and give up certain legal rights.  Depending on the circumstances and facts, I have recommended to some taxpayers that they not sign the waiver.  In other circumstances, I have recommended that the taxpayer sign the waiver and ultimately the results of the audit were better for the taxpayer.

In many cases, I have helped the taxpayer restrict the scope of the waiver.  A blanket waiver (just signing) may not be the best approach and the CRA auditor is not going to limit his/her assessment options by helping the taxpayer place restrictions on him/her.  A waiver, like any written agreement, can be tailored to suit the needs of the parties involved.

In every case, it is worth having a discussion with a professional whether the waiver should or should not be signed.

what some taxpayers do not realize is that a waiver can be revoked by filing a GST Form 146. Whether this form should be signed and how to document the revocation are also subjects for discussion with a professional.

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If you have been assessed harmonized sales tax (HST) (or goods and services tax (GST)) and/or interest and penalties by a Canada Revenue Agency (CRA) auditor (that is, you have received a Notice of Assessment), you owe money to the Government of Canada and the CRA wants to collect that money as soon as possible.  The bad news is that the Excise Tax Act (Canada) does not suspend or delay collections actions when a taxpayer files a Notice of Objection within the 90 day limitation period or appeal (after a denial of the objection).  An assessed taxpayer (or supplier in the case of an assessment of a penalty for failure to collect tax) must still respond to the requests made by CRA Collections.  Collections will request (1) payment in full ASAP, (2) you enter into a collections/payment arrangement with the CRA, or (3) you post security satisfactory to the Minister of Revenue (actually the CRA Collections officer).

I have been asked many times in my career if there is anything that can be done to stop CRA Collections. The answer is 'Not Really".  I have discussed the payment obligations with many clients over the years.  The GST/HST laws are different from income tax laws and do not stop the Collections clock when the taxpayer disputes the CRA's assessment.  Sorry to be the one to tell you this.

CRA Collections has a number of mechanisms at their disposal to collect any GST/HST assessment.  They may garnish wages,  They may intercept monies owed by an assessed taxpayer by other persons (called garnishments).  They may place liens on real property and/or tangible personal property.  They may issue writs to the sheriff to seize and sell certain of your assets.  The authority for these actions are contained in the Excise Tax Act.

Even when you have a legitimate legal argument to dispute the GST/HST assessment, the debt is still due and owing.  Actually, the moment the Notice of Assessment is issued and sent to the assessed taxpayer, the CRA Collections department can start collections actions.

As a result, the assessed taxpayer must consider whether they can pay the amount in full.  The upside with this option is that CRA Collections does not take control over your cash flow and there can be no surprises.  The downside is that if the taxpayer has a legitimate legal argument to dispute the assessment and files a notice of objection/appeal, the dispute resolution process may be slower because the Government of Canada has the money and little incentive to give it back quickly (except that it must pay minimal interest when they are wrong).

Alternatively, the assessed taxpayer may enter into a payment arrangement with CRA Collections (usually the CRA wants their money within 18 months) or may post security (such as a irrevocable letter of credit).  When an assessed taxpayer wishes to engage in such discussions with the CRA, it may be helpful to work with a lawyer.  Often CRA Collections asks for information about the assessed taxpayer's ability to pay (and may request information about a spouse's ability to pay when the assessed taxpayer is an individual or the directors' and officers' ability to pay when the assessed taxpayer is a corporation or the partners' ability to pay when the assessed taxpayer is a partnership) before accepting any payment arrangement.  The CRA may go on a fishing expedition to get information in order to make directors' liability assessments or consider more serious tax evasion criminal charges. 

The arrangement often is put into contract form and the failure to make a payment may void the agreement and cause all amounts to be payable immediately.  As a result, it is important to negotiate an realistic arrangement.

Each situation is unique to the taxpayer and parties involved.  What is the same in all cases is that when the CRA issues an assessment of GST/HST (even when the auditor knows the assessment is incorrect), CRA Collections job is to collect the money ASAP.

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A pet (dog or cat or other) will cost more because he veterinarian bills are subject to HST.  Prior to HST, you would have paid Ontario retail sales tax (PST) to the pet store when you purchased your pet and you would have paid PST on the food and toys.  However, prior to July 1, 2010, you would not have paid PST on the vet exams and tests.  Now, you will pay HST on virtually every charge by the vet.

On December 28, 2010, I took my dog to the vet as she had bloody sores on her back and was in pain. She cried most of the night and could not get comfortable.

The vet charged me $77.00 (plus HST) for the examination and made decisions to run tests.  The hospital cytology cost $66.00 plus HST, the skin scraping (which is actually gathering a little skin to analyze) cost $51.50 plus HST and the culture and sensitivity aerobic (which is testing the goopy matter for the type of infection so that the correct antibiotics are prescribed) cost $129.50 plus HST.

After the analysis, antibiotics were prescribed at $64.60 plus HST (the same antibiotics are not subject to HST when prescribed to a human), a medicated topical spray to calm skin cost $50.46 plus HST (again a similar treatment would be exempt if prescribed to a human patient).  I also purchased some skin sensitivity dog food that was subject to HST.

My poor dog was still very uncomfortable, so I took her back to the vet for a medicated bath (and that really helped).  The medicated bath was $65.00 plus HST.  The vet also prescribed another medicine to be added with food or to be injected in my dogs mouth with a syringe (without needle tip).  This cost another $49,32 plus HST.

I still need to purchase a three month supply of Invermectin to solve the real issue - demodex (the second incidence in the last two years and my dog is 10 years old).

In addition, I still need to take my dog for her annual physical in 2011, pay for her annual shots and her heart worm medication.  I also will take her for her semi-regular groomings and nail clippings.  I buy rawhide bones for her weekly teeth cleaning.  I should not forget to mention that I will continue to buy her dog food and pay HST.

All totaled, I will pay over $250 in HST in the first year of HST on my dog.

While I can make sacrifices to pay the HST, some cannot and should consider the ongoing costs of pets, including HST, when making purchasing decisions.  If I had to choose between relieving my dogs pain and treating her infection or not, it would be a hard decision.  my vet tells me that many pet owners since July 1, 2010 could not afford treatment for their pets and either the pet suffered or was euthanized.

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