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

Canadian sales tax practitioners and companies engaged in the financial services industry are well aware of the proposed amendments to the "financial services" definition in December 2009 which were implemented in Canadian law in the 2010 federal budget.

Now for my Kansas lesson.  In May 2009, the State of Kansas implemented a change to its sale and use tax refund statute on limitations reducing the limitation period from 3 years to 1 year.  They are now reversing that decision.  Effective July 1, 2011, the limitation period is returning to 3 years (retroactively - as if the change never happened).  Kansas had made the change to reduce the workload of government workers who process the refund claims (and to save money by not paying refunds).  The unintended result was that people filed their refund claims.

What can the Department of Finance learn from this? There is nothing wrong with returning undoing an amendment that was a mistake in the first place.  Undoing a bad amendment is a good outcome.

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When a taxpayer appeals an assessment to the Tax Court of Canada, the amount of the assessment can only go down; it cannot go up higher (with the exception of the added interest that accrues after the date of the assessment).  In other words, if the Canada Revenue Agency (CRA) assessed $25,000, the Tax Court cannot undertake a calculation and determine the number should have been $30,000 and then increase the assessment.  The decision of the Tax Court of Canada would have to be to confirm the CRA's $25,000 assessment. 

We are reminded of this in Long Ha v. The Queen (I love the name of this case).  Judge Miller refers to a decision of Judge Thurlow in Harris v The Minister of National Revenue [1964] C.T.C. 562 (Ex.Ct.):
 

On a taxpayer's appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court.

Whether the CRA may issue a second assessment for additional tax will depend on whether the amount at issue is statute-barred.  Often a tax dispute takes more than 4 years to proceed through the objection and appeal process.  The CRA will not be entitled to issue a second assessment unless (1) the limitation period for the assessment has not expired or (2) the error is a misrepresentation attributable to neglect carelessness or willful default or fraud or (3) the taxpayer signed a waiver relating to the period at issue and has not revoked the waiver.

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Non-residents who are doing business in Canada and would like to comply with Canada's Goods and services tax (GST) and harmonized sales (HST) tax laws should review this new gide published by the Canada Revenue Ageny on June 15, 2011. "Doing Business in Canada - GST/HST Information for Non-Residents" is an important document to read.  It is over 38 pages on information that may or may not answer the questions that the non--resident may have about their GTS/HST obligations.

Whether or not a non-resident is actually doing business in Canada is a factual test.  There is no definition of "carrying on business in Canada" in the GST/HST laws.  Pages 7-8 of the CRA's document address the basics and a Canadian sales tax lawyer can help apply the CRA's test in a particular case.

The CRA document addresses many issues, including:

1. Should a non-resident register for GST/HST purposes?

2. How is GST/HST calculated?

3. What are the GTS/HST return filing requirements?

4. What are the place of supply rules for charging HST?

5. How is GST/HST applied on imported goods?

6. How is GST/HST applied on imported services and intangible property?

7. How is GST/HST applied on exported goods, services and intangible property?

8. What are drop shipments and how do the drop shipment rules work?

9. How do non-residents recover GTS/HST by way of a rebate?

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If you cannot find your goods and services tax (GST) / harmonized sales tax (HST) return that the Canada Revenue Agency mailed to you to complete, here is the link to the Goods and Services Tax / Harmonized Sales Tax (GST/HST) Return (Non-Personalized) (Form GST 62E) for you to complete.

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On June 16, 2011, the Canada Revenue Agency released a new version of its Voluntary Disclosure Program (VDP) Taxpayer Agreement form (Form RC 199E).  This form may be used to start the voluntary disclosure process for GST/HST errors (in addition to income tax and other federal tax programs). 

You must use this form to make a no names disclosure - but you have to be careful in filling out the form for the no names disclosure to be complete while holding back the taxpayer's identity.

I strongly recommend that persons concerned about how the Canada Revenue Agency will respond to the voluntary disclosure (e.g., the problem goes back many years and could amount to a lot of money) should ask a tax lawyer (with whom discussions are subject to solicitor-client privilege) to help them complete the form.  Whatever you write in this form may be used against you in the Tax Court of Canada or criminal courts (if you engaged in a criminal offence).

I strongly recommend that persons who do not communicate well or who are not comfortable with their ability to clearly state the facts ask a tax lawyer to help them complete the form.  Would you like to take chances that you will miscommunicate in such an important document?  Mistakes/miscommunications in the completion of this form and resulting misunderstandings may be very costly.

In addition, a lawyer can help you negotiate with the Canada Revenue Agency the parameters of a voluntary disclosure after making a no names disclosure.  A negotiation will be dependent on the facts and, most importantly, if the disclosure is considered to be voluntary.

The benefit of making a voluntary disclosure is that the Canada Revenue Agency will not impose penalties and will merely require the payment of tax and interest.  If the mistake translates into a large payment of tax over a number of years, the penalties savings can exceed the amount of the lawyer's legal fees.  In many cases, having a lawyer act as your Sherpa may be a wise business decision or, if personal finances are at stake, a stress minimization technique.

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On March 8, 2011, the Federal Court of Appeal allowed an appeal by the Canada Revenue Agency (CRA) in Canada Revenue Agency v. Tele-mobile Company Partnership et al. and granted a motion by the Canada Revenue Agency (CRA) in a judicial review to strike the application on the the ground that it is plain and obvious that the application has no possibility of success.  The Federal Court had previously dismissed the CRA's motion to strike.

In short, a number of Telus entities (Telus) filed a judicial review to prohibit the CRA from issuing assessments against Telus for goods and services tax (“GST”) on the international roaming fees charged by Telus to its customers from October 2004. Telus asserts that if it is assessed for GST, unfair and onerous obligations and financial hardships would be visited upon it. 

Justice Stratus held:

" We note that if prohibition is granted because of these alleged consequences, the Minister cannot issue an assessment – in effect, as a matter of law, the Minister will be obligated to forgive a tax liability that he believes is present, solely because of alleged hardships that the taxpayer will suffer.

In our view, that cannot be. The Court cannot stop the Minister from carrying out his statutory duty under the Excise Tax Act, R.S.C. 1985, c. E-15, subsection 275(1) to assess GST payable by law merely because doing so will impose unfair and onerous obligations and financial hardships upon the taxpayer.

To the extent that CRA has exercised its discretion in a manner that has improperly caused TELUS damage, TELUS may have other recourses available to it. To the extent that the exercise of discretion affects the amount of tax owing, TELUS may challenge the assessment in accordance with Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15. Alternatively, it may apply for a remission order under section 23 of the Financial Administration Act, R.S.C. 1985, c. F-11. Further, it may be able to bring an action in tort to obtain compensation for any damages that were caused by CRA."

On May 5, 2011, Telus filed a leave application with the Supreme Court of Canada (SCC File 34244).  Please stay tuned.

This is an important case for taxpayers and I hope the Supreme Court of Canada grants leave.  Under the Excise Tax Act, a debt due to Her Majesty as the result of a GST/HST assessment is immediately due and payable.  Large (and small) assessments must be paid and collections actions are not halted pending the outcome of an objection and appeal.  This means that companies can suffer financial hardship if the Canada Revenue Agency is incorrect in its interpretation of the law. While a taxpayer has other expensive legal options to pursue the CRA if they make a mistake, it the mistake causes financial hardship and the company disappears or an individual taxpayer loses everything important in life, the fact that the battle with the tax man is ultimately successful is of little consolation. 

What is important to remember is that suppliers engaged in commercial activities are not the party ultimately responsible for paying the GST/HST (consumers are).  The suppliers collect the GST/HST from recipients and remit the GST/HST to the Receiver General of Canada.  However, this group is the target of most audits. Telus fits within this group in the case at issue.  A supplier (such as Telus) may have tried to comply with the law and may or may not have made a mistake while acting as the government's collection agent.  There should be a mechanism to stop the CRA from potentially large incorrect assessments of suppliers engaged in commercial activities (including zero-rated activities).

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When I read the article in the Vancouver Sun entitled "Entrepreneur says HST cuts red tape", all I could think is this guy is going to be audited by the Canada Revenue Agency (CRA).  Here is a guy trying to help the B.C. Liberal Government win the HST referendum and is putting out his story for the world (and the CRA) to see.  However, either he does not understand the HST rules regarding meals and entertainment expenses or the reporter does not understand the rules.  What has been written might catch the attention of the CRA.

The Vancouver Sun article states:

• Taneja footed a $429.42 bill for a birthday party of 20 at the Waldorf, then headed with a staff member to meet some friends at 100 Nights, where he spent a further $358.40 on food and booze;
• But HST costs Taneja incurs to do business get refunded, and he supports the harmonized tax as a better alternative to the PST/GST hybrid. Before, businesses could recover the five-per-cent GST, but not the seven percent PST component.

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Recently, on June 6, 2011, the Tax Court of Canada released its decision in Long Ha v. The Queen.  I will admit that I read the case because of the name of the appellant.  The case was actually very interesting (from a factual perspective).

This case involved a sole proprietorship that was assessed income tax and goods and services tax (GST) on a net worth assessment basis.  The main focus of the appeal was the GST assessment.  Interestingly, Mr. Ha was partially successful in showing that CRA's  net worth calculation was incorrect.

Most interesting is how the case began.  On June 8, 2002, Mr. Ha was returning to Canada and was sent to a secondary inspection by the Canada Border Services Agency.  In the secondary search, $40,000 in cash was discovered.  The matter was referred to the Royal Canadian Mounted Police (RCMP) who did not seize the cash.  However, the RCMP were not satisfied with Mr. Ha's explanations as to why he had such a large amount of cash in his possession, the RCMP sent a referral to the Canada Revenue Agency (CRA) who reviewed Mr. Ha's income tax returns.  The CRA found that the $40,000 was not explained by Mr. Ha's income tax returns.  The CRA took the position that Mr. Ha had unreported income from business (Mr. Ha was a salal picker and fisherman).  The CRA conducted a net worth assessment based on a bank deposit analysis, bank statements, mortgage applications and mortgage statements. The schedule for personal expenditures was calculated using Statistics Canada information to estimate the costs for a single individual.  The CRA assessed Mr. Ha income tax and GST.

Mr. Ha conceded that his income was under reported.  However, he disputed the CRA's net worth calculation as too high.  The CRA felt Mr. Ha's calculation of his unreported income was too low.  The Tax Court had to find the right answer.  The Tax Court found that Mr. Ha's evidence was not credible. His explanation concerning the $40,00 changed each time he told it. When he was stopped in the Vancouver International Airport, he told the authorities that the $40,000 in his possession was from his employment as a fisherman and from a restaurant business. On December 12, 2004, he told a CRA auditor that the $40,000 was from his savings, salal picking and a few hundred dollars from friends. At the hearing before the Tax Court, Mr. Ha testified that the $40,000 was a loan or gift given to him.

After determining that Mr. Ha's evidence was not credible, the Tax Court found that the evidence of a number of witnesses was credible.  As a result, the Tax Court reduced the net worth assessment by the certain amounts that, based on the evidence, were not attributable to business activities (e.g. were loans, insurance proceeds, transfer from spouse, a withdrawal from an RRSP, etc.).

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In the recent Excise and GST/HST News No. 80 (Spring 2011)  (GST/HST News 80) published by the Canada Revenue Agency (CRA), the CRA puts on notice a list of health care professionals that it considers to offer TAXABLE services.  Many of these health care professionals are likely not charging goods and services tax (GST) or harmonized sales tax (HST).  This means, if these categories of health care professionals are audited by the CRA, it is likely that assessments will be issued.  In the HST provinces (Nova Scotia (15%), Ontario, Newfoundland/Labrador, New Brunswick (13%), British Columbia (12%)), the assessments may add up to large amounts.

GST/HST News 80 puts health care professionals on notice. 

The CRA's position is:

General Rule: Any basic health care service rendered to an individual by a health care professional that is specifically identified in Part II of Schedule V to the Excise Tax Act are exempt.  In other words, you find the category of health care service or health care professional in that Schedule by name or description.

According to the CRA, the following services by the following provincially regulated (licensed or otherwise certified) health care professionals rendered to individuals/patients are specifically identified in Part II of Schedule V to the Excise Tax Act are as a general rule exempt:

• physicians,
• dentists and orthodontists,
• registered nurses, registered nursing assistants, licensed or registered practical nurses, registered psychiatric nurses,
• optometrists,
• chiropractors,
• physiotherapists,
• chiropodists,
• audiologists,
• speech-language pathologists,
• occupational therapists,
• psychologists,
• podiatrists,
• midwives,
• dieticians,
• social workers, and
• dental hygienists.

Exception to General Rule: Any health care service provided by other therapists and health care workers are TAXABLE.  If you cannot find a category of health care professional or health care worker in Part I of Schedule V to the Excise Tax Act, their service re likely taxable.

While these other therapists and workers may be professionals in their fields and they may be certified in  their province or territory, they are not identified in the Part II of Schedule V to the Excise Tax Act. Therefore the Act’s exemptions do not apply to their services even where, for example, the service is similar to a service performed by an identified health care provider, such as a nurse or physiotherapist. Some examples of therapists and other health care workers whose
services are generally considered by the CRA to be taxable for GST/HST purposes are (this is not an exhaustive list):

• assistants such as physiotherapy and occupational therapy assistants
• social service workers (this is a separate profession from social workers)
• laboratory technicians;
• psychometrists;
• nursing care aides;
• polysomnographic technologists;
• acupuncturists;
• kinesiologists;
• massage therapists;
• naturopaths;
• reflexologists;
• homeopaths;
• reiki therapists;
• sports therapists;
• rolfing therapists;
• traditional Chinese medicine providers;
• phlebotomists;
• personal support workers.

Exception to Exception: Certain services provided by an health care professional or health care worker listed above may qualify as exempt when provided to an individual in an exempt health care setting. For example, supplies made by the operator of a nursing home of services rendered by nursing care aides are exempt when they form part of an exempt institutional health care service rendered to a resident of the nursing home. In addition, services similar to those rendered by the providers listed above may be exempt when rendered by an identified exempt health care provider. For instance, if physiotherapists are entitled under the provincial law that regulates physiotherapy services to perform acupuncture on their clients in the course of
providing physiotherapy services, then their physiotherapy services that involve acupuncture would be exempt.

There are many other exceptions to the general rule.  For example, health care services provided by the exempt list of professionals to corporations (not rendered to individuals or patients) are taxable.  Also, certain services (e.g., cosmetic procedures, teeth whitening, etc.) are taxable even when provided by a licensed professional.

GST/HST News 80 has been provided because the CRA auditors need tools when going to audit health care professionals.  There is an increased likelihood that health care professionals will be in the CRA national priority list for audits this year and in the coming years.

If you are not sure whether you are required to charge GST/HST or not, you should contact a GST/HST lawyer or professional. You may also write the CRA for a GST/HST ruling.

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As a general rule, the auditor's assumptions are considered to be correct and it is up to the taxpayer to rebut the assumptions -- that is, prove that the auditor's assumptions are not correct.  If you can knock out the assumptions, you may be able to knock out the assessment.

Taxpayers have said, and I cannot disagree, that this approach means that a taxpayers is considered to be "guilty" of making a sales tax mistake and must prove his/her innocence.

During a typical audit, the tax auditor interviews the taxpayer about his/her business operations and various factors that influence.  The auditor should also review evidence in addition to sales tax journals, sales receipts and other tax documents.  In most cases, the auditor understands the information that is provided.  If the auditor exercises sound judgment, the information provided by the taxpayer to the auditor will be considered to be prima facie evidence. Assumptions based on that information may or may not reasonable in the circumstances.  In any event, these assumptions will form the basis for most audit assessments.  This begs the question - What if the auditor's assumptions are wrong?

Once the auditor makes a judgment call about the assumptions used in making an assessment, the onus (burden) shifts onto the taxpayer to prove the auditor’s assumptions are incorrect. The taxpayer must bring documentation to this exercise.  Mere verbal bald statements will not suffice.  The taxpayer may generate new documents (supported by existing documents/evidence) to explain his/her alternative position --- but their subjective approach (it is always subjective and self-serving) will be scrutinized.  The taxpayer must be reasonable and methodical in disproving an auditor's assumptions. It can be done and is often done.

Sometimes it is possible to show that the auditor failed to gather sufficient information to make “reasonable” assumptions and, therefore, the auditor's assumptions are arbitrary and cannot be trusted.  The key to refuting the auditor’s assumptions is evidence, evidence and evidence.  The correct approach must be reasonable, transparent, and as subjective as possible. If you do not understand what constitute good evidence, an experienced sales tax practitioner can be a useful guide.  Quite frankly, if you cannot sell an experienced sales tax practitioner about the merits of your case, you may not be able to win an objection or appeal.  A fresh set of eyes who want to help may be just what you need.

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Section 323 of the Excise Tax Act (Canada) permits the Canada Revenue Agency to assess a director of a corporation the unpaid and unremitted goods and services tax (GST) / harmonized sales tax (HST) assessed against a corporation if the corporation does not pay the GST/HST debt.  In Boles v. The Queen, a director, Mr. Boles, was assessed $23,000. 

The facts are not succinctly summarized at the start of the case.  It appears that in the 1990s, two men operated a number of businesses together.  Mr. Clark at some point became the primary owner of the company and Mr. Boles what bought out.  However, Mr. Boles completed paperwork to stay on as a director of the corporation that was the operating business.  He may or may not have forgotten about the paperwork he had signed.  Mr. Boles was not involved in the day-to-day management of the corporation.  Mr. Clark died at some point.  The CRA assessed Mr. Boles for the GST debts of the corporation.  The case does not say whether the CRA attempted to collect the tax debt from the estate of the deceased director.

Mr Boles fought the assessment saying that he did not realize that he was a director of the company and had asked, while Mr. Clark was alive, to cease to be a director.  The Tax Court of Canada confirmed the assessment after finding that Mr. Boles (1) was a director of the tax debtor corporation, (2) did not cease to be a director of the tax debtor corporation, and (3) did not exercise due diligence to prevent the tax debt.  The Tax Court also awarded costs to the Crown.  In the end, Mr. Boles must pay the $23,000 and costs.

Judge Boyle writes a short decision.  He summarizes the law at the beginning of the case:

"The most recent pronouncement on the scope of director’s liability for unremitted GST or income tax withholdings and upon director’s possible defences thereto are set out by the Federal Court of Appeal in its recent decision in Canada v. Buckingham, 2011 FCA 142, dated April 21, 2011. In Buckingham the Federal Court of Appeal confirmed that the scope of the director’s liability provisions is potentially broad and far reaching in order to effectively move the risk for a failure to remit by a corporation from the fisc and Canadian taxpayers generally to the directors of the corporation, being those persons legally entitled to supervise, control or manage the management of its affairs. The Court also confirmed that a director seeking to be exculpated for having exercised reasonable care, diligence and skill must have taken those steps “to prevent the failure” to remit and not to cure it thereafter. Further, the standard of care, diligence and skill required is overall an objective standard. Specifically, the Court wrote:

38 . . . Stricter standards also discourage the appointment of inactive directors chosen for show or who fail to discharge their duties as director by leaving decisions to the active directors. Consequently, a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction. . .

. . .

40 . . . In order to rely on these defences, a director must thus establish that he turned his attention to the required remittances and that he exercised his duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.

And later:

52 Parliament did not require that directors be subject to an absolute liability for the remittances of their corporations. Consequently, Parliament has accepted that a corporation may, in certain circumstances, fail to effect remittances without its directors incurring liability. What is required is that the directors establish that they were specifically concerned with the tax remittances and that they exercised their duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts."

What is more interesting in Boles v. the Queen is the short hind-sight being 20/20 comment:

• "... once one is a director, legal steps must be complied with to cease to be a director and Mr. Boles did not make any inquiry or attempt to do that. Apparently, he did not even send a confirmation letter to Mr. Clark asking for him to have the paperwork prepared to remove him as a director."

Note to all the directors out there, follow-up is important. 

The more significant lesson is that a business partner may die and the surviving directors may be required to pay GST/HST debts.  The surviving directors should ask questions of the executors the estate of the deceased director and document their due diligence activities.

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There aren't any cases yet on the new residential real property transitional rebates that were put into effect when Ontario and British Columbia implemented harmonized sales tax (HST).  I would like to share a recent case, Kearse v. the Queen, that deals with the transitional rebate when the GST rate was reduced from 7% to 6% on July 1, 2006.  It may be helpful.

Section 254 of the Excise Tax Act (Canada) provides for a rebate of GST on a new residence bought for occupation by the purchaser or a family member where the selling price of the residential complex is less than $450,000.00.  During transitions (changes to GST/HST rates and rules), the calculation of the rebate amount is complicated.

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The Association of Registered Graphic Design (Ontario) (ORDG) has monitored Ontario retail sales tax (ORST) developments for its members for number of years.  One of the benefits on membership is access to documentation prepared by ORDG relating to ORST for submission to the Ontario Ministry of Revenue.  Go to ORGD website to see more.

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Subsection 24(3) of the Retail Sales Tax Act (Ontario) (ORSTA) requires that a notice of objection be served on the Minister by sending the notice of objection by registered mail.  Subsection 25(3) of the ORSTA  requires that a notice of appeal be served on the Minister by sending the notice of appeal by registered mail.  However, Canada Post is on strike and is locked out.  An assessed person cannot serve the Minister by registered mail even if they tried.

What should an assessed person do seeing that it is impossible to comply with the ORSTA provisions?  If there is a statutory deadline that must be met during the strike/lockout, the assessed person should send a fax to the auditor or appeals officer informing that Ontario Ministry of Revenue official that they intend to file a notice of objection or appeal.  This step will take away the argument that the Minister did not know the assessed person's intention. 

In that fax, the assessed person should ask for an extension time to serve the Minister by registered mail until after the Canada Post labour disruption has ended.  The assessed person should inform the auditor or appeals officer that he/she will be sending the notice of objection or notice of appeal by courier.   The assessed person should serve the Minister by courier even though that method of service is not technically correct. The assessed person should ask whether additional service by registered mail will be required when the Canada Post labour disruption has ended.  If the auditor or appeals officer says nothing, then the assessed person should send the notice of objection or notice of appeal by registered mail after the Canada Post labour disruption has ended.  If the auditor/appeals officer indicates that the Ministry of Revenue considers the actions taken to be in compliance with the statutory provisions even though the notice was not sent by registered mail, then further action may not be required.

The most important thing is to comply as best you can and document everything. Have paper evidence that you can provide at a later point in time to a Court if necessary.  Take reasonable steps to communicate and comply.  Do not miss the deadline because it will be difficult to distinguish between those assessed persons who forgot about their deadline and those who were impacted by the strike.

I would expect that the Ministry of Revenue will act reasonably - stop laughing!

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It has been the Canada Revenue Agency's position for a long time (since 1993) that a bare trust should not register for GST/HST purposes.  Instead, the beneficiary or beneficiaries should register for GST/HST purposes.

This CRA's position is set out Technical Information Bulletin TIB-068 "Bare Trusts". The CRA believes the following:

• a bare trust (also referred to as a naked trust) exists where a person (the trustee) is merely vested with the legal title to property and has no other duty to perform, responsibilities to carry out, or powers to exercise as trustee of the trust property;
• the sole duty of a bare trustee will be to convey legal title to the trust property on demand by and according to the instructions of the beneficial owner(s);
• the bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property;
• someone other than the bare trustee controls the property, carries on the commercial activity that relates to the property, and is the "real owner" of the property;
• the person or persons with the real ownership of the property may be a "beneficiary", or a "settlor" under trust law;

The CRA states the following administrative policy:

Where a trust is viewed by the [CRA] as a bare trust, all powers and responsibilities to manage and/or dispose of the trust property would be reserved to the beneficial owner. As a result, the beneficial owner, rather than the bare trust, would be involved in commercial activities relating to the trust property. Unless the beneficial owner qualifies for small supplier status pursuant to section 148 of the Act, or under one of the exceptions listed in subsection 240(1) of the Act, registration for purposes of the GST would be required. Where there is more than one beneficial owner within the trust arrangement, the small supplier's threshold will be calculated on an individual basis, each beneficial owner being a separate person under the Act, unless the beneficial owners are associated persons for purposes of the Act.

....

[I]n a bare trust situation, since the beneficial owners are considered to be engaged in the commercial activities relating to the trust property, they would be required to account for the GST to the extent of their share of the trust property, to file GST returns, and generally to comply with the obligations placed on registrants under the Act.

Many real estate transactions involve bare trusts.  Those who not aware of the CRA's position likely have made a structuring mistake.  These mistakes may be corrected by way of a voluntary disclosure.

I have been involved in many real estate acquisition transactions and rental activities in which the beneficial owners of real property want to hide their identity from the world at large.  This becomes complicated despite reasonable reasons for hiding.  For example, many years ago, a client knew that the sellers of a desirable piece of real estate would not sell to my client (for all the wrong reasons) and wanted to purchase the property using a bare trust. 

The issue for the CRA is that the bare trust has nothing.  As a result, if GST/HST mistakes are made, it is difficult to assess the GST/HST owed to the government.  Since bare trusts are often used in the context of real property, the property at issue involves greater amounts of GST/HST. 

When a professional looks at the competing interests, the middle ground shows up as a small area.  There are solutions to this problem in many cases if and only if the beneficial owner is not too demanding.  That being said, if the bare trust registers for GST/HST purposes, the CRA may conduct an audit and issue an assessment.  Their policy is clearly stated in TIB-068.  The policy is restated in many other GST/HST memorandum on real property.  "I did not know the law" is not an acceptable excuse.

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The HST referendum ballots have been mailed and must be returned and received by Elections B.C. by 4:30 p.m. on Friday, July 22, 2011. 

The ballot asks:

Are you in favour of extinguishing the HST (Harmonized Sales Tax) and reinstating the PST (Provincial Sales Tax) in conjunction with the GST (Goods and Services Tax)?

Is this question clear?  It is to me.

"Yes" means that the HST is will be gone (if there are a majority of "Yes" votes).  A "Yes" vote means that British Columbia consumers will go back to a sales tax imposed under the Social Services Tax Act (British Columbia) and regulations passed by the government of British Columbia), which is provincial law.  This means that the Government of British Columbia will have greater control over sales tax policy in British Columbia.  The question ties the hands to the government to go back to the pre-July 1, 2010 provincial sales tax (called social services tax in British Columbia).  However, it does not restrict the government of British Columbia's authority to change the law.

"No" means the HST will stay.  A "no" vote is a vote to keep the harmonized sales tax that is imposed under the Excise Tax Act (Canada) and regulations set by the Government of Canada (actually the Department of Finance bureaucrats write the regulations and the federal Cabinet promulgates the regulations without House of Commons and Senate debate).  The Canada Revenue Agency will continue to administer and enforce the HST in British Columbia.

A "Yes" vote means that the government of British Columbia has the power to reinstate the provincial sales tax  at the rate of 7% (or higher in they choose).  The sales tax base will shrink to the goods and services that were covered under the Social Services Tax Act (British Columbia) and regulations thereto.  However, the sales tax base can be expanded by the Government of British Columbia if the majority of votes in the Legislature approves amendments to the Social Services Tax Act.

A "No" vote means that the HST rate will decrease from 12% (current rate) to 11% on July 1, 2012 and to 10% on July 1, 2014. 

The irony is that with the HST, consumers have greater stability because tax changes must be applied at the federal level.  Under he provincial sales tax system, the government of British Columbia can change the sales tax base and the sales tax rate at will.  Consumers do not know what they will get in place of the HST.  The referendum question says that the provincial sales tax will be reinstated.  After reinstatement of the provincial sales tax, anything can happen.

So, the question is clear in my view.  What will happen next is not clear.  But, the Government cannot run a pro-HST campaign with the message "We can do whatever we want to you after the referendum results are in if you vote 'Yes".  Would you like that? Vote 'No'".

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Pursuant to section 285 of the Excise Tax Act (Canada), the Canada Revenue Agency (CRA) may impose a gross negligence penalty when assessing intentional failures. That is, the taxpayer is perceived to have lied (a lie or an omission) by the CRA auditor and must be punished.  Section 285 provides in part:

Every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certification, statement, invoice or answer ... made in respect of a reporting period or transaction is liable to a penalty of ... " [up to 25%].

What the exact penalty will be determined to be depends on the CRA auditor and a calculation.  The formula is set out in section 285.  What you might expect is the assessment plus interest plus another 25% of the assessed amount.

Justice D'Arcy of the Tax Court of Canada recently considered whether the gross negligence penalty applied in Thill v. The Queen (an income tax appeal).  The Income Tax Act (Canada) provision is similar to section 285 of the Excise Tax Act.  Justice D'Arcy confirmed the assessment of a gross negligence penalty.  He wrote:

[32] As Justice Strayer stated in Venne v. the Queen, 84 DTC 6247 (FCTD), [1984] C.T.C. 223:

. . . “Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. . .

[33] On the basis of the evidence before me, it is clear that the Appellant either intentionally failed to report the income at issue, or was completely indifferent as to whether the income should be reported. As a result, she knowingly, or under circumstances amounting to gross negligence, either made, or acquiesced in the making of, a false statement or omission on her tax returns for the 2005 and 2006 taxation years.

The decision is linked to an agreed statement of facts in this case.  I was not there in the courtroom.  Justice D'Arcy stated in his decision that he did not find the appellant to be credible --- this must have influenced his decision.  That being said, I cannot say that I agree that the appellant deserved the application of the gross negligence penalty (my view is based solely on my review of Justice D'Arcy's decision).  However, it is important to note that whether the gross negligence penalty should be applied is determined on a case-by-case basis.  The facts and the issues of the particular case are important in making the determination.

There is other case law that look at a higher level of wrongdoing.  It is beyond the scope of this post to summarize those cases in detail.

The purpose of this post in to warn that this 25% penalty exists and can hurt when applied.  I do not like seeing gross negligence penalties on assessments.  You will likely have to file a notice of objection and later a notice of appeal and appear before the Tax Court of Canada if an auditor assesses a gross negligence penalty.  In other words, the CRA are unlikely to reverse their gross negligence penalty without being told by a judge to reverse the penalty.  You will have to pay the assessment, including the gross negligence penalty, before you have your day in court.  The CRA, Collections, will be knocking on your door soon after the assessment.  In most cases where a gross negligence penalty has been assessed, the CRA, Collections officer has less sympathy and requires payment more quickly and is more likely to take collection actions (e.g. garnishment) because the gross negligence penalty says the assessed person was intentionally bad.  When you get to court, the judge may not agree with your version of the events and may confirm the assessment of the gross negligence penalty.

In the end, your intentional failures or omissions may cost you a lot of money (more than the GST/HST that was the underlying amount owed). When you take a gamble in the GST/HST arena, think about the potential cost of the risk.  If you have been assessed a gross negligence penalty, know that the fight with the CRA will continue to cost you money.

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The Globe & Mail is reporting in an article entitled "B.C. HST 'fix' not enough to save tax in referendum: poll" that an Ipsos-Reid poll released June 12, 2011 says 54% of decided voters will vote against keeping the HST in British Columbia.

If British Columbia backs out of the Comprehensive Integrated Tax Coordination Agreement with the federal government, there will be consequences under that agreement.  Most importantly, British Columbia will have to pay back the two installments (will be three installments are July 1, 2011) of the implementation monies. Businesses will have to change their tax systems again -- to what? It is too soon to tell.

Will B.C. walk away from HST?  We will have to watch for the referendum results.  Could B.C. use the referendum results to negotiate a better HST deal with Ottawa? Maybe (I would try that).  Could B.C. convince the people to accept a revised HST deal after the referendum?  That one will be tricky.  Will a "NO HST" referendum result complicate things for B.C. businesses? Yes - and that is why businesses are coming out in support of HST.

Will B.C. revert back to the social services tax regime?  I am not sure.  However, if I was to bet on an outcome ... it would be that if the "No" vote succeeds, the B.C. government would back out of the HST (the federal sale tax regime under the Excise Tax Act).  The B.C. government would implement the British Columbia sales tax (BCST) under B.C. law that looks a lot like HST (similar to Quebec sales tax in Quebec). British Columbia would enter into an agreement with the federal government to administer BCST (just like with HST).  In other words, things would remain pretty much the same for consumers and businesses.  The difference would be with coordination of changes (just like in Quebec).

I have not talked with anyone in British Columbia about this and do not know what are the actual plans.  What I have written is a guess and nothing more.  Time will tell if it is a good guess.

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This post is likely to get me in trouble with a certain Pierre that I know.  But, as a blogger, I have to be credible.  I have to report on this news story and tell the truth. 

The Canadian Press has reported in an article entitled "Tax agency gives itself 'A' for service, but grading rigged" that:

"The Canada Revenue Agency has been giving itself an A in its report card on service to taxpayers — but a new audit suggests the grading scheme was rigged. The agency says it has been answering written questions about the GST and HST within its self-imposed deadlines more than 90 per cent of the time."

The Globe & Mail reports in a similar article entitled "Revenue Canada gives itself an A for service but auditors say grading rigged" that:

"Since 2006, officials have promised to get responses out within 45 days at least 80 per cent of the time. And in a recent annual performance report to Parliament, the agency said it met the 45-day deadline 93 per cent of the time.  But that claim has withered under the scrutiny of internal auditors, who did their own independent grading — and gave the agency an anemic 74 per cent, well below the minimum standard."

I have to weigh in on this.  Based on my experience, the CRA has given itself marks that are way too high.  I am a sales tax lawyer and an adjunct law professor.  If I allowed my students to mark their own papers, they would not write anything and they would all give themselves and "A+".  It is self-serving to grade yourself.

The CRA report card relates to GST/HST rulings.  That is, the taxpayer writes the CRA for an answer to a GST/HST question.  Some rulings are binding (when they are specific to a taxpayer or transaction).  Some rulings are not binding (called interpretations) are more generic in nature (such as, Do I charge HST when I sell goods to Alberta?)

I have a simple GST/HST ruling that I filed with GST/HST Headquarters last June prior to HST implementation.  I still do not have an answer.  I provided a complete GST/HST ruling request and a binder with supporting documents.  I called GST/HST rulings in January 2011 to find the name of the CRA officer handing the GST/HST ruling request and was told the file had not been assigned, but would be assigned within 5-6 weeks.  I called again in March 2011 and asked about the status of my client's GST/HST ruling request and was informed that the CRA, GST/HST Rulings Directorate was short on support staff and the file would be assigned in 5-6 weeks.  I called again in April 2011 and was told that I would be receiving a call by May 27, 2011.  I called again last week (because I did not receive a call by May 27th) and my telephone call has not been returned.  This is just one example from a GST/HST lawyer.

Other GST/HST lawyers I know have similar stories of GST/HST rulings taking 1-2-3 years.  GST/HST lawyers help businesses that need answers fast.  Apparently our requests for rulings were not included in the CRA's methodology because our requests were sent to GST/HST Headquarters (where the really smart GST/HST CRA officials are located).

Internal auditors within the Canadian government have determined that the CRA's methodology leaves something to be desired. The news reports indicate that the CRA's methodology for calculating turn-around time starts with the date that the GST/HST request is booked in the system and not the date the request is received by the CRA. The methodology also looks at the turn-around time in local offices and not the GST/HST Rulings Directorate.

The news reports also indicate that the CRA receives 100,000 telephone calls per year and does not monitor the quality of the answers.  A quick turn-around time giving the wrong answer is not helpful to taxpayers who are making an effort to be compliant.  I can give many examples of clients receiving incorrect answers from the CRA (or the clients did not understand the verbal answer provided or the clients heard what they wanted to hear). 

All this being said, I acknowledge that the number of GST/HST questions received by the CRA in the last 18 months created a difficult workload for good workers.  GST/HST implementation in Ontario and British Columbia was difficult on the CRA. I also acknowledge, as a GST/HST lawyer, that the Department of Finance has proposed and passed complex amendments to the Excise Tax Act and regulations thereto.  Some of the questions being asked concerning changes to the financial services rules and the pensions rules are very difficult (and I would even go so far as to say the CRA may not be able to answer the questions because the law is void for incomprehensibility).

That being said, I believe that the CRA should not pat itself on the back with high grades for service.  The CRA is an independent agency and should not mislead the public in its reports.  Taxpayers are expected to be perfect and are criticized by the CRA when they stretch the truth --- the CRA should expect the same scrutiny in return.

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Despite harmonization, Ontario retail sales tax (ORST) continues to be important because auditors are verifying compliance with ORST laws occurred prior to July 1, 2010.  The ORST rate was 8% and the normal audit period is 4 years (but can be longer for sales tax collected and not remitted and any misrepresentation attributable to neglect, carelessness or willful default). As a result ,the assessment period remains open for those who were in the ORST system prior to July 1, 2010 (or should have been in the system).

It is a MUST to resolve as many sales tax issues with the auditor during the audit because it gets REALLY expensive to resolve issues after the audit is finalized AND it takes a REALLY long time. 

First, it is important to know that an assessed taxpayer (including assessed vendors) must pay 100% of the amount assessed or post security for 100% of the amount assessed and then fight to get the money back.

Second, at the present time, if you have to file a notice of objection (an informal appeal), it takes OVER 19 months for the objection to be assigned to an officer.

Third, after the objection gets assigned to an appeals officer, they will do everything in their power to drag the process and cause the taxpayer to spend a lot of money on lawyers.  The Government's strategy is to get the taxpayer to walk away from the collected assessed amount.

Fourth, it regularly takes years for the appeals officer to make a determination and in over 80% of the time, the appeals officer will confirm the assessment stating such things as "I am not a lawyer and do not know the law", I do not know anything about contract law", "If you do not promise to give up your right to an appeal, I will confirm the entire amount", etc.). 

Fifth, the Ministry of the Attorney General's office, which handles formal appeals to the Ontario Superior Court of Justice, does not have lawyers dedicated to Ontario retail sales tax files.  It is not their top priority to move sales tax cases to Court.

In my experience, every attempt is made to extend the length of time the dispute is ongoing because the Government of Ontario has the taxpayers' money.

If you are being audited by the Ministry of Revenue, contact a lawyer to help at the time of the audit.  Otherwise, you will be dealing with the problem of an assessment for a long time.  Please contact Cyndee Todgham Cherniak (416-760-8999) if you require assistance.

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This blog post is for the many people who are not like me.  I spend hours every day reading and writing about goods and services tax (GST) and harmonized sales tax (HST) and Ontario retail sales tax (ORST).  While the world at large may have different advice for me --- I offer the above to you -- "Know and appreciate the value of your time".

It can take hours for the uninformed to find an answer to a question about GST/HST/ORST.  Sometimes, the law is so complex, it is not possible to figure out the answer (even for the seasoned professionals).

Small to medium sized business owners and the bookkeepers, accountants, lawyers, finance professionals in large corporations have a lot of work on their plate.  Many do not appreciate the value of their own time as they focus on the expense side of the balance sheet.  Watching dollars is understandable in the current economy.  However, not focusing enough on the value of your own time results in the efficient use of resources if too much time is spent seeking answers that are not easily located.

A better approach is to seek a professional that can take work off your plate if that professional is more efficient than anyone in your organization to perform the task.  Know what is the value of your time --- Is it $200 per hour.  If you think it will take 10 hours for you to find the answer -- see if someone can answer your questions for under $2000.

Now the self-serving part of this post.  I offer telephone consultations:

$282.50 for 30 minutes ($250 plus HST)

$565 for 1 hour ($500 plus HST)

Usually, I am able to provide guidance on where to find GST/HST/ORST answers or whether the question is simple or complex.  When it comes to a simple answer, I may be able to provide the simple answer during the call --- but I do not promise to answer any and all questions during he telephone call.

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First, I should say, DO NOT CALL WOLF. Asking to include to the auditor's manager or the senior manager at a meeting with you (the vendor or taxpayer) and the auditor should be used in limited (but greater than occasional) circumstances. If you ask for a meeting, the general rule is that a meeting must be arranged.

In this blog post, I focus on Ontario retail sales tax. However, the concept also applies to goods and services tax (GST).

I have asked for a meeting with the auditor's manager or senior manager when there is a fundamental disagreement of the applicability to a taxing provision to a client's situation. I have asked for a meeting when the auditor does not appear to understand the facts (often the facts are complex) and I feel that the auditor is going to raise an assessment incorrectly. I ask for a meeting with the auditor's manager when there is a serious personality conflict between my client and the auditor (it has happened) and I feel that the auditor may be biased and intent on punishing my client.

I do not ask to speak to the auditor's manager to intimidate the auditor - it does not work. I do not ask to speak to the auditor's manager regarding little issues. I do not ask to speak to the auditor's manager on the first day of the audit. I do not ask to speak to the auditor's manager when my client is clearly in the wrong.

In Ontario, if a retail sales tax assessment is issued, then the auditor's job is complete and the only recourse a vendor or taxpayer has is to file a notice of objection. It currently takes over 2 years for a notice of objection to be reviewed by the Ontario Ministry of Revenue Tax Appeals Branch. Usually, the tax assessment must be paid within 18 months and interest continues to accrue. For this reason, I feel it is my role to make sure the auditor gets the assessment correct.

If I receive an audit summary (which is a summary of the auditor's findings), which usually precedes the actual assessment, I ask for the reasons for the assessment. When there is a disagreement over the law or an interpretation of the law, an administrative statement or a court decision, I ask to speak to the auditor's manager, who usually has more discretion and more experience. Sometimes I for the auditor to write Tax Advisory for a ruling and that I will help with the facts so that the answer received is more likely to be correct (does not always happen that way).

There is a fine line between being assertive and aggressive, proactive and reactive. That being said, recently, managers have agreed with me (when I have known that i am correct) and some assessments have been reduced (1) Case 1: from over $1 million to close to $0, (2) Case 2: from approximately $500,000 to about $25,000 and (3) Case 3: by over $300,000. These results obviously depended on the particular circumstances of the file.

If you are in the middle of a bad audit, please contact Cyndee Todgham Cherniak at 416-760-8999.

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First, it is important to note that not all payments made by a limited partnership to the general partner are taxable from a goods and services tax (GST) / harmonized sales tax (HST) perspective.  The determination of whether GST/HST is payable/collectible can only be determined based on the facts. 

That being said, the belief that any and all payments from limited partnership to the general partner are outside the reach of GST/HST is incorrect.  The reason why it is important to consider the GST/HST status of such payments is that the general partner may be assessed by the Canada Revenue Agency (CRA) for failure to collect and remit GST/HST (or the limited partnership may be assessed by the CRA for failure to pay GST/HST) on certain amounts.  With the implementation of HST, the failure to consider the GST/HST status of payments increased from a 5% error in Ontario to a 13% error (from a 5% error in British Columbia to a 12% error and from a 13% error in Nova Scotia to a 15% error).

As discussed in my post on June 7, 2011 "Partners & Partnerships: Transfers Are Tricky", partners are required to charge, collect and remit GST/HST in respect of supplies of property or a service to the partnership otherwise than in the course of the partnership’s activities. Partners are not required to charge, collect and remit GST/HST in respect of supplies property or a service to the partnership that are provided in the in the course of the partnership’s activities.

The CRA takes the position that with respect to certain amounts of consideration paid by the limited partnership to the general partner, the general partner may be considered to provide property/services "otherwise than in the course of partnership activities".

The CRA also takes the position that the structuring of payments by the limited partnership to the general partner is important.  There are many payments/distributions/amounts of consideration that the CRA may look at in this context and it is beyond the scope of this blog article to address every one detail.  That being said, the CRA has seen structures whereby the general partner is paid amounts prior to the determination of profits and losses of the partnership and scrutinizes these payments.  The issue is whether any amount paid in such a manner is an expense for property provided or services rendered otherwise than in the course of partnership activities.

As discussed in my June 7, 2011 blog article, if a partner (in this context of this blog post, a general partner) performs a type of service in the marketplace or to more than one limited partnership/entity, the CRA may take the position that the services rendered otherwise than in the course of partnership activities.  For example, if a general partner provides management services to more than one entity, it may be considered to be a management services company and the amounts paid by the limited partnership to the general partner may be considered to be taxable.

General partners who did not seek GST/HST advice in connection with the structuring of the limited partnership may have missed this issue and should revisit the GST/HST status of the various payments of consideration.  This is especially important if the limited partnership/general partner operates in the financial services sector, health care sector, residential real estate sector or MUSH sector because it is less likely that the mistakes will be in the context of wash transactions (that is, there is an offsetting input tax credit to reduce the exposure).

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Ontario businesses (primarily vendors) are being audited for Ontario retail sales tax (ORST) compliance as the ORST program is being wound down.  The auditors move to the Canada Revenue Agency (CRA) in March 2012.

When business is audited they receive an audit summary setting out the auditor's findings and the proposed assessment amount.  As the time of the assessment, they receive (1) an assessment letter and (2) the assessment (often sent separately and sometimes of different days). result The assessment letter continues to state (incorrectly):

"Failure to comply with the above-noted requirements of the Retail Sales Tax Act in the future may in the application of a 25% penalty under section 20(7) and/or 20(4) under the Act."

The Ministry of Revenue have forgotten to tell the auditors that vendors must now comply with the provisions of the Excise Tax Act (Canada) and not the Retail Sales Tax Act (Ontario) (with the exception of insurance companies and buyers of used cars).

If a vendor is audited by the Ontario Ministry of Revenue and receives an assessment, it does not mean that they now (after July 1, 2010)  must charge ORST or remit ORST in respect of own use or pay ORST on purchases of tangible personal property and taxable services.  Vendors are not required to charge 13% HST and 8% ORST as the assessment letters suggest.

Failure to update the assessment letters may lead to confusion and unjust enrichment of Ontario.

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Partners and partnerships are different legal entities for goods and services tax (GST) / harmonized sales tax (HST) purposes. Pursuant to subsection 123(1) of the Excise Tax Act (Canada), a partnership is a "person".   This is different than many tax statutes which do not treat partnerships as persons.  As a result of a partnership being a person, a partnership is obligated to register for GST/HST purposes (unless it is a small supplier), charge GST/HST, claim input tax credits and comply with the provisions of the Excise Tax Act (Canada). 

One provision that must be highlighted when one talks of partnerships is section 272.1 of the Excise Tax Act (Canada), which contains specific rules that are applicable to partnerships. It is important to note that the other rules in the legislation are also applicable. 

Subsection 272.1(3) is very important for GST/HST planning for partners and partnerships.  I often see tax structures where partner of a partnership receives consideration from the partnership and does not collect GST/HST.  This is often incorrect and a sign that a GST/HST professional has not been involved in the tax planning.

Subsection 272.1(3) of the Excise Tax Act addresses when a partner is considered to make supplies to a partnership and provides as follows:

Where a person who is or agrees to become a member of a partnership supplies property or a service to the partnership otherwise than in the course of the partnership’s activities

(a) where the property or service is acquired by the partnership for consumption, use or supply exclusively in the course of commercial activities of the partnership, any amount that the partnership agrees to pay to or credit the person in respect of the property or service is deemed to be consideration for the supply that becomes due at the time the amount is paid or credited; and

(b) in any other case, the supply is deemed to have been made for consideration that becomes due at the time the supply is made equal to the fair market value at that time of the property or service acquired by the partnership determined as if the person were not a member of the partnership and were dealing at arm’s length with the partnership.

What this means is that partners are required to charge, collect and remit GST/HST in respect of supplies of property or a service to the partnership otherwise than in the course of the partnership’s activities. Partners are not required to charge, collect and remit GST/HST in respect of supplies property or a service to the partnership that are provided in the in the course of the partnership’s activities.

What is "otherwise than in the course of partnership activities" is the point of contention between the Canada Revenue Agency (CRA) and partners/partnerships.  The concept is not defined in the Excise Tax Act (Canada). Advisors must look at a number of administrative statements and Q&As to understand what will be the CRA's position concerning planned activities.  If a taxpayer would like certainty, they may apply for a GST/HST ruling.

The following example may help:  I am a GST/HST lawyer.  If I was to become a partner of a partnership (or my firm) and if I was to provide GST/HST advice to the partnership, I would be required to charge, collect and remit GST/HST in respect of the consideration I received for that advice.  The CRA would take the position that my GST/HST advice was not provided "in the course of partnership activities" because I provide GST/HST advice to others outside of my partnership activities.

It is beyond the scope of this blog post to provide a complete answer to all questions relating to partnerships and partners.  Tax planning must be reviewed on a case-by-case basis. 

I should note that have seen CRA auditors assess directors of corporations who are members of a partnership under the director's liability provisions in situations where the partner (corporation) does not collect GST/HST when required and the corporate partner does not pay the GST/HST liability.  The directors do not consider that the activities of the partnership or the tax structuring could get them into GST/HST trouble.

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Amalgamations are the combining of one or more corporation to form a new entity.  For example, Corporation A and Corporation B can amalgamate under corporate laws to form Corporation AB.  The assets and liabilities are transferred to the newly amalgamated entity.  The question arises whether there are GST/HST consequences.

The answer is found, in part, in paragraph 271(c) of the Excise Tax Act (Canada), which provides that:

Where two or more corporations (each of which is referred to in this section as a “predecessor”) are merged or amalgamated to form one corporation (in this section referred to as the “new corporation”), ... for the purposes of this Part, the transfer of any property by a predecessor to the new corporation as a consequence of the merger or amalgamation shall be deemed not to be a supply.

The rest of the answer is overlooked by many advisors.  Paragraph 271(a) of the Excise Tax Act (Canada) provides that for some purposes the new corporation is deemed to be a separate person form each of the predecessor corporations. Paragraph 271(b) of the Excise Tax Act (Canada) provides that for the purposes of applying certain prescribed provisions, the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation. The list of prescribed provisions is contained in the Amalgamation and Winding-up Continuation (GST/HST) Regulations. The list includes

1. Section 120
2. Definition “builder” in subsection 123(1)
3. Section 134
4. Section 148
5. Section 148.1
6. Subsection 149(1)
7. Section 150
8. Section 156
9. Section 160
10. Section 166
11. Section 181.1
12. Section 182
13. Subsections 183(2) and (4) to (8)
14. Subsections 184(2) to (7)
15. Subsection 186(1)
16. Section 194
17. Section 219
18. Section 222
19. Subsection 223(2)
20. Section 224
21. Section 225
22. Section 227
23. Section 228
24. Section 229
25. Section 230
26. Section 230.1
27. Section 232
28. Section 233
29. Section 237
30. Section 238
31. Section 261
32. Section 263
33. Section 263.1
34. Section 264
35. Section 265
36. Section 266
37. Section 273
38. Section 274
39. Divisions VIII and IX of PART IX

Two additional provisions that are affected by an amalgamation are sections 231 and 249 of the Excise Tax Act.

It is beyond the scope of this short blog article to address each of these provisions in detail. I would like to highlight that the past GST/HST liabilities (and entitlements) continue in the new corporation.  for this reason, it is important to undertake due diligence of GST/HST accounts before agreeing to an amalgamation because the new corporation may end up saddled with old GST/HST debts and the new directors may ultimately be assessed if the GST/HST debts cannot be recovered from the new corporation.

There is another important issue that is overlooked - registration numbers.  Often, the advisors forget to notify the government authorities (including the Canada Revenue Agency (CRA) for GST/HST purposes) about the amalgamation and continue with one of the registration numbers of a predecessor corporation.  This is wrong.  Technically, the the new corporation needs to obtain a new GST/HST registration number.  It is possible to ask the CRA if one of the GST/HST numbers of a predecessor entity may be continued and the other registration numbers canceled.

An amalgamation is an event for GST/HST purposes that has consequences.  For more information, please contact Cyndee Todgham Cherniak at 316-760-8999.

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Section 273 of the Excise Tax Act (Canada) authorizes one participant in certain types of joint venture (called the "operator") to account for GST/HST on her behalf and on behalf of the other co-venturers.  For example, if A (25%), B (25%), C (25%) & D (25%) enter into a joint venture, they can appoint A as the operator and A charges, collects, and remits GST/HST and files GST/HST returns on behalf of the joint venture. A also claims input tax credits, refunds, rebates and other GST/HST relief in respect of the activities of the joint venture (to the extent permitted). If the joint venture election is not in place, A, B, C, and D would each have to charge, collect and remit 25% of the GST/HST, take 25% of the input tax credits and other relief, and file separate GST/HST returns.

The bad news is that not all joint ventures are entitled to take advantage of this election option.  Only oil and gas exploration joint ventures and prescribed joint ventures can benefit at this time.  That being said, the list of prescribed joint ventures was recently amended (after 20 years) and the Department of Finance is willing to consider making additions in the future.  The list of prescribed joint ventures is set out in the Joint Venture GST/HST Regulations:

• the construction of real property, including feasibility studies, design work, development activities and the tendering of bids, where undertaken in furtherance of a joint venture for the construction of real property;
• the exercise of the rights or privileges, or the performance of the duties or obligations, of ownership of an interest in real property, including related construction or development activities, the purpose of which is to derive revenue from the property by way of sale, lease, licence or similar arrangement;
• the marketing by the operator of a joint venture, under any agreement between the operator and a co-venturer, of all or part of the co-venturer’s share of the output of the joint venture provided that the output arises from an activity conducted under the agreement referred to in subsection 273(1) of the Act;
• the transportation of natural gas liquids by means of a pipeline that operates as a common carrier of natural gas liquids;
• the operation of a facility that is used to generate electricity;
• the operation of a transmission line that is used to transmit electrical power;
• the processing of output (in this paragraph referred to as the “refinement”) that arises from the exploration or exploitation of a timber resource, including any jointly conducted exploration or exploitation activity of which the output is processed under the agreement referred to in subsection 273(1) of the Act in respect of the refinement and the marketing of the processed or unprocessed output that arises from that activity;
• the production of a fertilizer and its marketing;
• the disposal of waste, including the collection and transportation of waste that is in furtherance of that disposal;
• the exercise of rights or privileges, or the performance of duties or obligations, of ownership of an interest in an animal for the purposes of deriving revenue from prizewinning, stud service fees or sale;
• the maintenance of a road, other than maintenance that is an exempt supply;
• the operation and maintenance of the North Warning System;
• the operation of a farming business within the meaning of the Income Tax Act;
• the production of liquid methanol from natural gas;
• the generation and recording of seismic data; and
• the operation of a lumber, plywood, shake and shingle, pulp, paper or similar wood processing facility.

With respect to commercial real estate, there are certain restrictions in the activities that are prescribed above.

There are a number of rules that must be followed.  Some of the most important (but not all the rules) are:

1. There MUST be a written joint venture agreement;

2. The co-venturers MUST complete the joint venture election forms (GST Form 21 and GST Form 355); and

3. The parties to the joint venture are jointly and severally liable for all GST/HST obligations of the joint venture.

The structuring of joint ventures can be complicated and meeting the requirements of the Canada Revenue Agency requires strategic planning.  There are great benefits, but also pitfalls.

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Normally, using the word "avoidance" in the presence of the Canada Revenue Agency (CRA) is a bad move.  They jump to negative conclusions that the taxpayer is doing something illegal or that the CRA is not receiving its fair share of tax.

However, I have been thinking about compliance in a different light.  GST/HST compliance is "assessment avoidance".  A taxpayer or registrant "avoids" a negative experience (and most taxpayers think of an audit as a negative experience) by complying with tax laws.  A taxpayer or registrant who does not make any miskates avoids and assessment.  A taxpayer or registrant who obtains an advance GST/HST ruling avoids an assessment if the taxpayer/registrant acts in accordance with the ruling.  A taxpayer/registrant avoids an assessmnet by monitoring the CRA's administrative policies on relevant subjects.

Will it be possible to give the word "avoidance" a positive meaning?  I am not sure.  But, it will be fun trying to take a positive approach for a change.

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