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

A GST/HST registered supplier must submit its GST/HST returns on time (either monthly, quarterly or annually) and remit (that is pay to the Receiver General) all GST/HST charged on invoices issued during the period for the GST/HST return.  If an invoice has not been paid by the customer/client, the GST/HST must be remitted.  This means that the supplier must take the money from his/her own pocket or even draw on a line of credit.  The Canada Revenue Agency will assess the supplier interest and penalties if the GST/HST is not remitted.

All that being said, the supplier may claim its input tax credits to minimize the impact of the rule.  The net tax calculation may soften the effect of the rule - but it remains that the supplier is on the hook for the GST/HST.

Businesses may have to wait a long time to be paid by their customer/client and are out-of-pocket the GST/HST for some time depending on the situation.  The CRA auditors with whom I have spoken are not sympathetic to the supplier.  On the contrary, suppliers are more often viewed critically and as potential thieves of the government's money.  This is unfair.

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After writing my July 26, 2011 post, I decided that a chart setting out statutory limitation periods for filing notices of objection (in some provinces called a notice of appeal) and notices of appeal (to a Court) may be helpful.  A statutory limitation period is a deadline that taxpayers must meet for their objection or appeal to be considered to be filed on time and valid.  If a notice of objection or notice of appeal is not filed on or before the deadline, the lawyers for the government may not acknowledge it.

It is important to note that some of the filing deadlines require that the document be sent to a relevant governmental authority within the statutory limitation period.  This means that filing may not be sufficient to meet the deadline.  Sometimes you must file the document with the court and send it to the government body who issued the assessment (called "service") within the statutory limitation period.

Note that I have not forgotten Prince Edward Island.  Their process is different than the other provinces and there is a two step informal (not involving a court) appeal process.  The deadlines did not fit within the structure of the chart.

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The question may be asked in connection with the awarding of sole sourced HST consulting services contracts because the British Columbia list of covered entities was filed with the World Trade Organization in March 2010 (at the time of the Buy America Agreement). 

Annex 2 of Appendix I of the WTO Agreement on Government Procurement lists the covered entities in the provinces.  British Columbia covered "All Ministries, Boards, Commissions, Agencies and Committees of the Province" with the exception of the Legislative Assembly.  This means that if the Legislative Assembly hired the consultants, the WTO Agreement on Government Procurement would not provide a remedy.  If a government department hired the consultants, then the WTO Agreement on Government Procurement may cover the consulting contact provided that the value of the consulting agreement was higher than a monetary threshold amount of the services to be provided are listed services.

The monetary threshold is rather high.  The monetary threshold for goods and services (other than construction services) to be provided to a provincial government is 355,000 SDR (Special Drawing Rights).  Special Drawing Rights are a concept at the International Monetary fund that were incorporated in the WTO.  Generally speaking, the currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling).  As on July 26, 2011, one SDR = 1.60949 USD.  few of the HST consulting contracts appear to be in this range of value.

Assuming that one or more contracts exceed the monetary thresholds, then Annex 4 of Appendix I of the WTO Agreement on Government Procurement must be reviewed to determine if the services to be provided under the contract are covered services.  This determination is made on a consulting contract by consulting contract basis.  More than likely the consulting services are covered services.

Assuming for the moment that the the consulting contracts are covered, they may be challenged on the basis that the contracts were improperly sole-sourced (meaning awarded to a party without an open procurement process).  The question will be whether any of the exceptions to the sole-sourcing rules apply.

Now, for the important part - The Canadian International Trade Tribunal (CITT) is Canada's governmental authority to consider government procurement bid challenges.  The bid challenge MUST be filed by the interested party within 10 days of time the basis for the challenge became known.  There isn't much time to consider whether this option is available and write the complaint.  A short letter is not sufficient.  the complaint must withstand scrutiny. The first step in the bid challenge procedure is for the CITT to determine if the complaint sets out a reasonable basis to conduct an inquiry.

For more information, please contact Cyndee Todgham Cherniak at 416-760-8999.

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I find it rather odd that the British Columbia Liberal Government would hire ex-political aids to assist with harmonized sales tax (HST) issues and not highly qualified and knowledgeable lawyers and accountants who have practiced in the area during implementation.  Sean Holman reported in today's Globe and Mail newspaper in "Firms with B.C. Liberal ties awarded secret contracts in Pro-HST Campaign" that a number of contracts were awarded to provide advice and guidance regarding HST.  None of those contracts were awarded to law firms or accounting firms or HST specialists who I know. 

According to the Globe and Mail article, the contracts were not awarded after an open solicitation.  Good - I did not miss the opportunity. 

However, this is bad for the B.C. taxpayer because it is not certain that the government received the best value for the money spent.  The B.C. Government would have received knowledgeable and expert advice from an HST lawyer or accountant. Professionals who have advised clients regarding the GST rules since 1991 (and even before) would have valuable insight.  Professionals who have advised clients about the HST rules since the 1997 implementation in New Brunswick, Nova Scotia and Newfoundland/Labrador would have valuable insight.  Professionals who assist clients appeal GST/HST assessments to the Tax Court of Canada would have valuable insights.  Professionals who sit on the Canadian Bar Association, National Sales Tax, Customs and Trade Section (I am the vice-chair) would have valuable insights.  Professionals who meet with the Canada Revenue Agency and Department of Finance about GST/HST provisions, amendments and interpretation would have valuable insights.  Professionals who have advised clients of B.C. social services tax would have valuable insights.  Professionals who actually lived through implementation with clients and have first hand knowledge of the good, bad and ugly elements of HST would have valuable insights. 

So - why not ask for their advice?  Was the government really seeking people who will agree with them and not professionals who would help them with the real issues?

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In the recent case of 208539 Alberta Ltd. v. The Queen, Justice D'Arcy of the Tax Court of Canada held that an importer of record may be entitled to claim an input tax credit (ITC) for GST imposed as a result of an ascertained forfeiture.  An ascertained forfeiture occurs when the Canada Border Services Agency (CBSA) issues a penalty with respect to imported goods after importation.  The CBSA is no longer in a position to seize the goods and charge a penalty to release the goods.  As a result, the CBSA sends the importer of record an assessment of a penalty.

In some cases, the ascertained forfeiture penalty may only include customs duties (or a multiple of the customs duties that would have been payable).  In these cases, the importer of record would not be entitled to claim an input tax credit.

In other cases, the ascertained forfeiture penalty states that an amount is being charged as GST that should have been paid with respect to the importation.  This was the situation in the case at hand.

Judge D'Arcy held that the importer of record was entitled to claim the ITC for the amount that was GST, but not the amount that was penalty or customs duties.

Another interesting aspect of the decision is the discussion on whether the documentary requirements for the ITC had been satisfied.  The CRA was arguing that the documentary requirements in subsection 169(4) of the Excise Tax Act  and Input Tax Credit Information (GST/HST) Regulations was not satisfied.  Judge D'Arcy was correct in holding:

The Appellant satisfied the paragraph 169(4)(a) documentary requirements once it provided the CRA with sufficient information to enable the amount of the input tax credit to be determined. As I noted previously, the First Customs Letter, the Second Customs Letter and Exhibit A2 together evidence the amount of Division III tax that Canada Customs collected from the Appellant ($17,039.93) and the fact that the Division III tax was paid by the Appellant in respect of the imported goods.
 

I would expect that there are a number of importers of record who are engaged in commercial activities who have not claimed their ITCs paid in respect of ascertained forfeitures and detentions penalties.  It will be important to ensure the correct person claims the ITC.  Time limits for claiming the ITC will also be a critical issue.  All that being said, there may be found money - if you have received a notice of ascertained forfeiture or retrieved goods from CBSA detention, it is time to review the documentation.

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The Federal Court of Appeal recently put an end to a case where the taxpayer filed a GST/HST notice of objection filed 11 years after the confirmation of the assessment.  In 2786885 Canada Inc. v. The Queen, the Federal Court of Appeal heard an appeal from a Tax Court of Canada decision dismissing an appeal on the basis that the notice of objection was not filed in time.

The Federal Court of Appeal wrote:

Pursuant to section 306 of the ETA, the appellant had a period of 90 days from the date of the confirmation (i.e. January 21, 1998) to file his notice of appeal. While the appellant could have sought an extension of time, subsection 306(5) of the ETA provides that no such order can be made unless the application is brought “within one year after the expiration of the time otherwise limited … for appealing;”. It follows that the Tax Court Judge had no authority to extend the time and that he properly dismissed the appeal.
 

[Note: I found this quote to be helpful and confusing.  Subsection 306(5) of the ETA does not exist.  The relevant provision is subsection 305(5) of the ETA.]

The Tax Court of Canada decision is not available.  As a result, the facts are not known.  The context of this case may shed light on why the notice of appeal was filed after a 11 year time lapse.

If the appellant merely waited 11 years and filed an appeal after an assessment against a director, it is understandable that the Tax Court of Canada and Federal Court of Appeal rejected the late-filed notice of appeal.  If the appellant waited 11 years and filed an appeal after the collections department started various collections proceedings, it is also clear why the notice of appeal was rejected.

However, if the appellant never received the notice of confirmation of the assessment, then it may be that the appellant recently learned of Canada Revenue Agency's (CRA) position that there is an outstanding tax debt.  In this circumstance, I could understand why the appellant attempted to file an appeal after what appears to be a long time delay.

The over-riding issue is that there are statutory limitation periods in tax legislation.  These statutory limitation periods are used by the CRA to stop further discussion.  Taxpayers must play by the rules when they have a disagreement with the CRA.  One of the key rules is that a taxpayer must adhere to deadlines. 

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I was asked this question this week and there is no easy answer. 

The Ontario government promised eligible Ontario individual taxpayers (or couples) 3 HST rebate cheques  (the transition benefit) to be sent on or about June 2010, December 2010 and June 2011. If you have not received your HST cheque from the Ontario Ministry of Revenue, you should determine whether you meet the eligibility criteria.

Assuming that you meet the eligibility criteria, you should call the authorities to see if they have made an error.  The Canada Revenue Agency (CRA) administers the Ontario Sales Tax  Transition Benefit Program and can be reached at 1-877-627-6645. 

It is possible that the CRA has set off your HST rebate against an income tax or other tax debt.  The good news is that you are still receiving the benefit, just not in the way you had hoped.  Others may find that there is a tax dispute that is outstanding or beginning.  Unfortunately, that dispute may play its course before the cheques will be sent.

Some taxpayers will learn that the CRA has determined that they are not eligible for the HST rebate cheques.  You may be given the opportunity to prove eligibility or you may be informed of the CRA's decision.  Assuming there is a refusal to issue the Ontario HST transitional rebate cheque, there are few great options.

When a government department, body or agency makes an incorrect decision or does not act in accordance with the law, the affected person may file an application for judicial review. In a  judicial review, the court looks at the decision of the government decision-maker.  The problem with a judicial review is that it takes time, is very costly and the court is deferential to the government (meaning they usually agree with the government).  The legal fees could run into the tens of thousands of dollars (will cost much more than the HST cheque amount).  You will need a lawyer to help you prepare and file the application for judicial review on time.  You may only have 30 days from the date you knew of the adverse decision to file the application for judicial review.

Another possibility is bringing a small claims court action against the government.  This option is less expensive, but also takes time and your energy.  There is a cost to filing a small claims court action.

Another possibility is filing a complaint with the Ontario Ombudsman whose job is investigating complaints against the Ontario Government.  There is no cost to filing a complaint.  The Ombudsman may or may not accept the complaint.  If the Ombudsman accepts the complaint (he would likely want others to come forward with the same problem), he will write a report.  It is unlikely that the report will be issued before the Ontario election as the Ombudsman will have to conduct his investigation and then write a report.

Another realistic possibility is calling the candidates running in your riding.  During the Ontario election campaign, incumbents and challengers should be the most interested in resolving the issue.  That being said, they may be busy campaigning and may be reluctant to get involved with a private matter. 

In addition, there is social media and the media.  Many MPPs are on Twitter.  If you start writing about your issue to a real live MPP, then you may find others who have the same problem.  You may get blocked or a visit from the police if your tweets get too threatening - so, keep to the facts and ask nicely for help.  While you may be angry at the CRA or the Ontario Government, the MPPs did not do this to you - so, do not mistreat them.  Remember the old saying "you catch more bees with honey than with vinegar".

A group has a louder voice than a single person.  Social media may bring you supporters and fellow refused persons. If hundreds or thousands are being denied the HST transition rebate for no good reason, this could get media attention.

Depending on how large the group of individuals who have been refused HST transition rebate cheques without a reasonable explanation becomes, they may bring a class action law suit - but this is another expensive option.

Please share with us whether you have been refused an HST transitional rebate.

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Today is July 22, 2011.  By midnight tonight, all residents of British Columbia should have their HST referendum ballots to Elections BC.  It is no coincidence that July 22, 2011 is the deadline - On July 23, 2009, the B.C. Liberal Government announced they would implement the HST in B.C. as of July 1, 2010.  The B.C. Liberal Government should have asked the question 2 year ago.  But they did not because a referendum 2 years ago would have decisively rejected the HST.  Two years later, the result is indeterminable.

In light of the fact HST was announced two years ago and the HST has been in effect in B.C. for just a little over one year, the ballot question makes more sense. The actual question on the ballot is: “Are you in favour of extinguishing the HST and reinstating the PST in conjunction with the GST?”

A "Yes" vote means that the voter is making a statement of the B.C. Liberals that the HST should stop and the Social Services Tax (PST) should be reinstated.  Under the old PST regime, most goods were subject to sales tax (exempt goods were not subject to sales tax), only taxable services were subject to sales tax (some services were taxable and many services were not taxable), real property was not subject to sales tax and intangible property was not subject to sales tax. 

A "No" vote means that the voter has accepted the HST should remain and the voter has faith that the B.C. Liberals will reduce the HST rate as promised.  Okay, some of the voters who vote "No" may not believe the B.C. Liberals will keep their promise, that element is not critical to the vote choice.  A "No" vote keeps the HST in place.

Many people have asked me what is the right answer to the referendum question.  As an HST lawyer, I cannot answer that one as the answer does not come from the law. 

The democratic  ideals that Canadians hold dear require the residents of British Columbia to submit a vote on the HST referendum question.  How often are the residents of a province asked for their views on tax policy? -- well, never.  This is an opportunity of a lifetime, appreciate the opportunity.

It is all fine and wonderful that the politicians are now asking for the voters to participate in the democratic process on HST.  The voters know that to vote "No" is to approve actions of the government after the fact.  Some voters will see the "No" vote as an answer to as different question:

• Should I let the government get away with misleading the people of B.C.?
• Should we let Premier Campbell's legacy be that B.C. residents ultimately agreed with his decision to implement the HST?
• Should the government have raised taxes without taking the opportunity to make spending cuts?

Other voters will not be as negative in their approach to the task at hand.  Some of the voters who vote "Yes" will be answering a different question:

• Have I adjusted to the HST?
• Can I afford to pay the HST on a wide range of property and services in order to maintain a strong economy?
• Would I prefer the status quo instead of more changes to the sales/consumption tax regime in Canada?
• Is the devil we know (HST) better than the devils we do not know (the new taxes and fees that the government will impose to raise revenues)?

The residents of B.C. who have lost their jobs because of HST or gained employment after HST implementation will focus on different elements behind the referendum question.  The small and medium sized business owners who have lost B2C business will have to ask if the consumers will return if the tax regime returns to the old PST system.  Small and medium sized businesses will also weigh the administrative ease of compliance with the HST system (ask if it is easier first) and the fact that if they make errors, The assessments that the Canada Revenue Agency will make will be significantly higher and penalties and interest on assessed amounts (also a form of penalty) will be higher.  Audits will be more stressful and fighting the taxman will be just as hard (the amounts at stake in the fight will be higher).  Small and medium sized businesses also need to ask whether they will be increasing their cost of tax compliance leaving less profit.

There are many tough questions.  Take 4 deep breaths and determine what vote is right.  Then continue to breathe as British Columbians wait for the referendum results.  How long before B.C. gets the results? That will depend on how many votes are submitted and all the theatre that will take place as the votes are counted and recounted.

Please comment on how you voted and why (please keep it clean my dear readers).

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I have been talking about director's liability over the posting of this week, I will continue this theme.

On October 10, 2010, Judge Sharlow of the Federal Court of Appeal upheld a decision of the Tax Court of Canada that imposed liability on a director for GST debts of a corporation. Judge Sharlow used to be a tax lawyer before becoming a judge and her decisions on tax matters are worth reading.

In Jarrod v. The Queen, Judge Sharlow would not grant the Jarrod's request.  Unfortunately, there isn't much in the decision regarding her reasoning.  That being said, Judge Sharlow clearly held the self-represented Jarrod could be assessed under section 323 of the Excise Tax Act regardless of the fact that the CRA waited over 10 years and even if the delay put Mr. Jarrod at a disadvantage (significant interest was owing).

It is necessary to look at the Tax Court of Canada decision for the key facts. The company, Jarrold and Associates, was responsible for unremitted net GST owing by the Company to the Minister for the years in question.  Keeping collected GST is one of the worst forms of action on the part of a supplier.

The company did not pay the assessment of unremitted net taxes of $8,027.21 together with the related penalties and interest for the periods in issue.  Jarrod was the sole director of Jarrod and Associates and, therefore, had complete control over GST remittances - so nobody would have been in a better position that he would be to know what was going on.

The Tax Court of Canada held that the CRA was justified in making its assessment against Jarrod as a director of the company after so many years.  The Tax Court stated:

[35] With respect to the question about whether or not the Minister acted reasonably and responsibly in waiting for 10 years before making this assessment, the Court has no control over that. The Minister was within his rights to wait as he did, but apart from that, certainly there was substantial evidence before me as to why there was the delay that there was. Part of it had to do with the Appellant himself in not filing returns. The returns were filed late. The Minister attempted to get him to file documentation, to send in information so that he could conclude whether the offer that he was making to settle the matter was reasonable or not. All of those things accounted for some of the delay. So overall, the Court is satisfied that the delay has been explained.

[36] The Court is satisfied the Minister acted reasonably in any event. It accepts counsel for the Respondent’s position that the Minister had the right to decide as to how he was going to collect this debt. It is satisfied that the Minster waited part of the time because one of the agents on the file did not think they would be successful in processing the claim because there were no assets to attach. But subsequently, another officer had come in and, through her research, found that there may have been assets there which were capable of satisfying the account. It was reasonable, then, for the Minister to make the assessment that he did.

[37] This Court has no jurisdiction to question the Minister’s decision to proceed as he did. This Court is satisfied the Minister had the option to proceed as he did and there was nothing wrong with proceeding the way he did. The Minister had the right to assess the penalties that he did and to assess the interest that he did. There was nothing wrong in the manner in which he acted. 

With this information, one can see why the courts have held Jarrod to pay.  Whether the result would be fair if another director is assessed, will be a question for another day.  What will be necessary to show in any future case is that the CRA's actions are wrong.  Even then, there would be no guarantee that a court would grant an appeal and vacate the assessment.  The question may be that of fairness.

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The posts of July 18 and July 19, 2011 discussed the recent Tax Court of Canada decision in Siow v. the Queen.  On July 18th, in a blog posting entitled "The CRA Must Prove That A Notice Of Assessment Was Sent", I discussed the finding of the Tax Court that the Canada Revenue Agency (CRA) did not prove that the underlying assessments were actually sent to the corporation in respect of which Siow was the sole director.  on July 19th, in a blog posting entitled "Director's Liability Provisions in GST/HST Law Is Not Restricted To 4 Year Limitation Period", I discussed the finding of the Tax Court that director's liability assessments do not have an end date for a limitation period, except that a director cannot be assessed after 2 years from the date he/she ceases to be a director.

Siow argued that since the Tax Court had held that the underlying assessment against the corporation was invalid, the corporate debt was nil and, therefore, he should not be assessed even though the limitation period for Siow, as a director, was still open.  Siow argued that if the Minister has no rights to proceed against the Corporation for any amount then it must have no rights to proceed against a director of the Corporation assessed under the directors’ liability provisions of the Act; namely section 323 of the Excise Tax Act.

The Tax Court disagreed with Siow.  The Tax Court consider principles of statutory interpretation and held:

The clear wording of [subsection 323(1) of the Excise Tax Act] crystallizes a director’s liability to pay the net tax not remitted by the Corporation “at the time the corporation was required to remit or pay, as the case may be, the amount. . .”

The provision makes no reference to any requirement for assessment or that the amount must be related to an assessed amount. The “amount” referenced is clearly the “amount of net tax as required under subsection 228(2)”, applicable here, which subsection requires a registrant to remit net tax. There is no ambiguity in the textual wording of subsection 323(1).

The Tax Court then looked at subsection 299(2) of the Excise Tax Act, which reads as follows:

Liability under this Part to pay or remit any tax, penalty, interest or other amount is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

The Tax Court held that the result following from subsection 299(2) is that tax may be considered to be owing even if a valid assessment has not been issued.

The Tax Court then looked at the federal Court of Appeal decision in Beaupré v. Canada (2005 FCA 168, 2005 G.T.C. 1420 (FCA), Létourneau J.A.) which confirmed that “The tax debt arises not from the assessment but from the Act: . . .”

The Tax Court reviewed other cases and ultimately held:

To make an assessment against the corporation a precondition to proceeding against a director under subsection 323(2) would render subsection 299(2) meaningless, which would be a ridiculous result. Parliament intended such subsection to have meaning and the Appellate Courts have confirmed its application as the basis for a director’s liability. Clearly, the right of the Minister to proceed against a director is not based on a purely derivative action, as supposed by the Appellant’s counsel in argument, but on the basis that due to sections 323 and 299 of the Act, a director is jointly and severally liable for an unremitted amount, regardless of whether there was an assessment against the corporation.

The facts may have been important in bringing the Tax Court to this conclusion.  Siow had filed the GST/HST returns for the corporation and had had discussions with the CRA.  Siow knew the amounts of the assessments because they were based on GST/HST returns that had been filed and not an arbitrary assessment by the CRA.

In the end, the Tax Court recognized that the effect of the decision in terms of collecting the monies from the director needed to be stated:

Whatever limitations the Minister may have in enforcing collection against a corporation for lack of valid assessment do not limit the Minister in enforcing against a director unless specifically set out in the legislation. The only limitations apparent to me are that the Minister cannot collect more than owed in the first place as subsection 323(6) limits the amount collectable from a director to be the amounts not paid by the corporation, which is clearly a bar against double recovery, itself a principle of natural justice, and the principles of natural justice entitling a director to challenge the underlying amount owing, regardless if assessed against the corporation or not, unless of course a director can successfully argue he or she was assessed more than two years after ceasing to be a director pursuant to the limitation period of subsection 323(5) or has a due diligence defence under subsection 323(4) of the Act, neither of which are applicable here.
 

It will be interesting to watch whether this case will be appealed.

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Yesterday I wrote about the Tax Court of Canada decision in Siow v. The Queen and about the appellant's winning arguments.  Today, I will talk about the elements of the case that the appellant, a director of the corporation, lost.  in the final analysis, the Tax Court of Canada found that the director, Siow, was liable under the director's liability provisions.  This decision was made after the Court found that the underlying notice of assessment against the corporation had not been sent.

The director argued that since the underlying assessment against the corporation was invalid and that he should not be assessed as the director because the 4 year limitation period had expired (to assess the corporation).  The Tax Court of Canada disagreed as said:

I cannot agree that such provision limits the period for assessing a director under section 323 to the same four-year limitation period applicable against the Corporation for two reasons.

The Court's reasons included:

1. The Federal Court of Appeal had previously determined subsection 298(1) of the Excise Tax Act does not apply to directors’ liability assessments (Kern v. Canada, 2006 FCA 257, 2006 DTC 6502 (FCA));

2. The Federal Court of Appeal recently held that a director’s liability assessment made over ten years after the underlying Corporation was assessed was acceptable (Jarrold v. Canada, 2010 FCA 278, [2010] G.S.T.C. 158 (FCA));

3. The Federal Court of Appeal recently held the only statutory time limit imposed on the Minister for assessing a person under section 323 of the Excise Tax Act is found in subsection 323(5), two years after the person last ceased to be a director of the corporate tax debtor (Jarrold v. Canada, 2010 FCA 278, [2010] G.S.T.C. 158 (FCA)); and

4. The rules of statutory interpretation would support the finding subsection 323(1) of the Excise Tax Act has its own limitation period and is clear in not identifying any other period.

As  result, the Tax Court held that the CRA was not bound by the 4 year limitation period.  A director may be assessed any time (except a director cannot be assessed more than 2 years after he/she ceased to be a director).

This is an important lesson for director's to learn --- and is a warning.  Director's can be chased for years and, therefore, it is important to exercise due diligence in ensuring corporations pay their GST/HST debts.

Tomorrow's post will discuss the Court's position on why a director can be assessed when the corporation cannot be assessed.

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It is a basic concept - The Canada Revenue Agency (CRA)  (on behalf of the Minister) must send a taxpayer a notice of assessment for the assessment to be valid and, therefore, cause a tax debt to be owed to the Crown.  In the recent case of Siow v. The Queen, the Tax Court of Canada found as a fact the CRA had not issued a notice of assessment to the corporation within the 4 year limitation period. 

The facts of this case are not unique.  The CRA is going through past records and collections officers are charged with the task of collecting recorded tax debts.  Due to the passage of time, records on the part of the CRA and the taxpayer are not available.  In the Siow case, the CRA could not produce a notice of assessment for the Tax Court of Canada.  Due to the fact that no notice of assessment could be produced, the Tax Court had no option but to conclude that a notice of assessment had not been issued with respect to the original debt against the corporation.  The Court wrote:

The Respondent, on the other hand, produced no evidence or copies of any of the three Notices of Assessment it refers to in its Reply above, let alone any evidence of their mailing or even electronic summaries of the assessments to show they had even been issued.

The Court later stated:

In the case at hand, the Minister pleaded in his assumptions that in fact three assessments were sent and cannot produce even one, let alone prove any of them were mailed.

The CRA tried to use circumstantial evidence to show that an assessment had been issued.  The CRA filed with the Court a letter from the CRA to the corporation's accountants concerning the alleged assessments.  The Court could not rely on the letter from the CRA as proof of the assessments.  The Court stated:

There was no dispute that a Notice of Assessment is deemed to have been sent when mailed, not received. However, I have some difficulty with the Respondent’s arguments that the Court should accept that the Notices of Assessment were issued simply because of the cursory wording of [...a letter] or because the Appellant and his accountant held discussions with the CRA.

The CRA had asked the Court of blindly accept that the CRA had mailed the notices of assessments to the corporation.  However, the Court could not and stated:

I find the Respondent’s suggestion that the passage of time would make it difficult to prove the Notices of Assessment were mailed to be unacceptable considering the ease with which the Act allows a Minister to submit evidence of such procedure by affidavit evidence ‑ without the official in charge of mailing even attending to testify.

The Court found in favour of the appellant (on this point) because the CRA had not met its burden of showing that the notices of assessment had been issued and sent to the corporation.  Usually, the burden of proof in a tax case is with the appellant. However, where an allegation of fact is challenged by an assessed taxpayer, the burden can shift to the CRA.  The Court held:

I find that the Minister has not satisfied its onus of proving any of the three assessments were mailed and hence, four years have, regardless of which quarterly return is in issue, expired from the date such returns have been filed and the Minister is statute barred from assessing the Corporation for any of the reporting periods within the Assessment Period.
 

The Court ultimately found in favour of the CRA with respect to the director's liability provisions.  This will be discussed in tomorrow's post.

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The Globe and Mail newspaper is reporting that the Canada Revenue Agency (CRA) has obtained Court orders from the Federal Court of Canada ordering 146 Quebec municipalities to provide records on payments to outside contractors and consultants.  In the article entitled "CRA seeks court orders to open books of 146 Quebec municipalities", the Globe and Mail reports that based on affidavits filed with the Federal Court, the CRA is focusing on unreported income of persons to whom the municipalities make payments.  The report indicates that the CRA has obtained Court orders previously in respect of 88 municipalities in and around the Eastern Townships and Department of Justice lawyers are scheduled to be back in Federal Court in Montreal on Monday to obtain similar orders for the towns in and around the Quebec City’s north and south shore.

I have concerns that the CRA's Court orders set a precedent.  The CRA may be emboldened to obtain similar Court orders for municipalities everywhere.  It sounds (and smells) like a fishing expedition on the part of the CRA.  The CRA believes (rightly or wrongly) that certain illegal activity is happening in the area of Quebec municipal contracting (there are news reports of mob activity in Quebec in the construction industry) and yet the CRA affidavits that accompanied the motion filed with the Federal Court is not focused on named companies.  Based on the news reports, the affidavits seek information on "unnamed persons" and are extraordinarily broad in scope (meaning large volumes of documents and information are required to be provided by municipalities to the CRA).

I have concerns that the CRA's Court orders are not limited to just income tax and failures by contractors and consultants to pay income tax.  What about goods and services tax ("GST") and Quebec sales tax ("QST")?   If there is unreported income tax, there is surely unremitted GST and QST.  If municipalities and townships paid contractors and consultants "under the table", there could be assessments against the municipality/township for failure to pay GST and QST.  These assessments could get quite large if there are indeed "payment issues".  Municipalities already have budget deficit issues - large assessments may prove to be financially problematic (not to mention that the provincial government and federal government (depending on whether federal or provincial taxes are assessed) would receive a penalty and interest payment from the municipalities.

What is ironic is that the recent judicial review applications (e.g., Tele-Mobile) have been denied by the Federal Court on the basis that the Tax Court of Canada has jurisdiction over tax matters and tax statutes contain a complete code.  A resolution will be tabled at the Canadian Bar Association meeting in Halifax in August to expand the jurisdiction of the Tax Court of Canada.

Municipalities throughout Canada should watch these cases carefully and any municipality could be next (the Department of Justice lawyers have the motion materials precedent ready amend and file).  There should be a cause for concern not only to municipalities, but also businesses.  If the CRA would go to the Federal Court and ask for broad access to the books and records of municipalities, would they not make similar requests against businesses?

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It is better to help the auditor get the right answer (that is, assess the right amount) than to watch the auditor arrive at the wrong answer and then spend months or years fighting to convince someone else to overrule the auditor and lower the assessment.  If you believe that the auditor will make a mistake and do not give the auditor the information he/she needs to make a correct calculation, then the auditor will make a mistake. If you think the auditor does not understand your business and do not explain your business, then the auditor will not understand your business.  If you think the auditor does not understand the law and you do not explain the law to the auditor, then the auditor may make an error in law.

However, if you take a positive approach from the start of the audit to help the auditor make the correct assessment, it is more likely the auditor will make the correct assessment.  If you take time to educate the auditor concerning your business, the auditor is more likely to understand your business.  If you undertake the effort to explain the facts in a simple and organized manner, it is more likely that the auditor will see the facts from you point of view.  If you take the time to know the law, it is more likely that you and the auditor can productively discuss the law.

For example, in a recent case, a client called saying that the auditor had informed the client that she would be coming with a significant assessment in a few days.  After a little positive effort on our client's part, she was informed last week that there would be no assessment.  The client had prevented the incorrect assessment by taking steps to correct misunderstandings.  Merely saying to an auditor that she/he is stupid will not stop the assessment.  The client worked with us to organize the facts, research the law, and come up with valid arguments that the auditor (and her supervisor) could accept.

If the client had not acted quickly to become as prepared as possible, the assessment would have been issued. If the client had not taken a positive attitude and approach to change the outcome, the assessment would have been issued.  If the client had not believed she could stop an incorrect assessment, it would not have happened.

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I have been informed (and have not been able to independently confirm) that a number of CRA auditors are planning on auditing municipalities and hospitals because they understand that budgetary contraints within the MUSH (municipalities, universities, schools and hospitals) sector has potentially reduced compliance with goods and services tax ("GST") and harmonized sales tax ("HST") rules.  While compliance with Canada's laws is important and the MUSH sector is not exclused from scrutiny, it would be disappointing if the intention of auditors is take advantage of the difficult financial circumstances of these public sector bodies.

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It was one year ago today that Ontario (13%) and British Columbia (12%) implemented harmonized sales tax (HST").  It was one year ago that Nova Scotia raised the HST rate in that province to 15%.

Under the Comprehensive Integrated Tax Coordination Agreements signed by the provinces with the Government of Canada, the HST rates cannot be changed for one more year (on the 2 year anniversary date).

British Columbia has their referendum and the HST may not see another anniversary in that province.

How should we celebrate/commiserate?  Please send us your comments on how the HST has affected your business.

How am I celebrating? I am on vacation.

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