How To File A "Service Complaint" Against The Canada Revenue Agency

In writing this blog post, we are not advocating filing baseless, frivolous, vexatious and retaliatory "service complaints" against Canada Revenue Agency ("CRA") auditors, collections officers and other employees of the CRA. However, we have learned from the experience of our clients that some legitimate complaints arise from time-to-time.  It is in the spirit of transparency and openness that we have decided to write about the CRA service complaints process.  Before we give this information to you, we ask one thing - when you write a service complaint, do not do so in anger.  Take your time to be fair.  After you write the service complaint, do not press "send" right away.  Print what you have written and put it in a drawer for 24 hours.  Then read the service complaint again and make any changes that you feel are warranted and appropriate.  If you send a fair service complaint that is factual, rather than emotional, you increase the chances that the reader will address your concerns.  I have been informed that all service complaints are reviewed and taken seriously.

There is a form for "Service Complaints" about CRA employees. You must complete an RC193 "Service Related Complaint" form.  The form asks for your information - service complaints cannot be made anonymously.  The reason why service complaints cannot be anonymous is that the CRA has to review the alleged treatment of a particular taxpayer and conduct an internal review of the contents of the complaint.  However, service complaints may be filed on your behalf by a representative, such as a lawyer, accountant, bookkeeper, consultant, etc.

The form requires the taxpayer filing the service complaint to describe the actions of the CRA employee giving rise to the service complaint and state the action the taxpayer wishes the CRA to take.

There are many legitimate reasons why a taxpayer may file a service complaint against an employee of the CRA.  The first place to start is the "Taxpayer Bill of Rights" and RC17 "Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer".  The next document to consider when completing a service complaint is the CRA's "Service Standards 2016-2017". The CRA has also prepared a publication on "Complaints and Disputes".  You may also wish to consult your accountant, lawyer or bookkeeper to assist you with the drafting of the service complaint.

For example, if an auditor is acting in a biased manner towards the taxpayer, the taxpayer should make a statement that they are being treated in a biased manner, present the facts in support of the claim and make a requested action, such as the replacement of the auditor with another auditor.  It is not possible to ask that the taxpayer never be audited.  But it is reasonable to request another auditor.

For example, if the auditor does not seem to understand the legal issues involved in the file and fails to consider the issues, you should ask for a meeting with a Team Leader.  If the auditor refuses to arrange a meeting with his/her Team Leader, you should file a service complaint.  The basis for the complaint would be the lack of knowledge and the refusal to arrange a meeting with a Team Leader.  The concern would be that the auditor is not communicating with others within the CRA and using appropriate resources.  It is not uncommon for new auditors to be "in over their heads" when dealing with new and complex issues.  It can be beneficial to raise these issues in order to keep the audit on track and to minimize the risk of the auditor making incorrect assessments.

After the complaint is written, put it away for a day and make appropriate revisions.  The service complaint may be submitted to the CRA electronically (through My Business Account), by fax or by mail. See the Submissions options.

We have filed service complaints on behalf of our clients.  Normally, we receive a letter within a few weeks acknowledging receipt by the CRA of the complaint.  The complaint is forwarded to the Tax Services Office most closely connected to the service complaint.  In every file in which we filed the service complaint, we have received a telephone call about the service complaint.  In every case, there was a requirement that the CRA employee respond to a supervisor who was looking into the service complaint.  In every file, we received a response from the CRA about the steps to be taken.  In every case, the service complaints were taken seriously. In most cases, the matter was resolved satisfactorily.  This is because we were reasonable in how we discussed the issues and were reasonable in what actions were requested.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or email cyndee@lexsage.com.

Taxpayer Interest And Penalty Relief: How Can A Taxpayer Get Some Relief?

Canadian taxpayers are entitled to apply to the Canada Revenue Agency for taxpayer relief of penalties and interest.  All that is required is for a taxpayer who has been assessed to complete and submit an RC4288 form "Request for Taxpayer Relief - Cancel or Waive Penalties and Interest".  This form can be used for goods and services tax ("GST") and harmonized sales tax ("HST") relief in addition to income tax.

The form is relatively simple - however, the devil is in the details.  Section 2 is very important and any taxpayer seeking a significant amount of relief should take care in writing the reasons for the request for relief.  We often prepare a separate document providing the facts and reasons why relief should be granted - we do not limit the written communication to the form.  We also attach relevant documents to show transparency and openness.

It is important to understand that relief is not guaranteed.  While the CRA has broad discretion to grant relief, they also have broad discretion to deny relief. The CRA provides limited information about when they will grant penalty and interest relief.  The CRA indicates that the Minister of National Revenue may grant relief from penalty or interest when the following types of situations prevent a taxpayer from meeting their tax obligations:

  • extraordinary circumstances:  Penalties or interest may be cancelled or waived in whole or in part when they result from circumstances beyond a taxpayer's control. Extraordinary circumstances that may have prevented a taxpayer from making a payment when due, filing a return on time, or otherwise complying with a tax obligation include, but are not limited to, the following examples:
    • natural or human-made disasters, such as a flood or fire;
    • civil disturbances or disruptions in services, such as a postal strike;
    • serious illness or accident; and
    • serious emotional or mental distress, such as death in the immediate family;
  • actions of the Canada Revenue Agency (CRA): The CRA may also cancel or waive penalties or interest when they result primarily from CRA actions, including:
    • processing delays that result in taxpayers not being informed, within a reasonable time, that an amount was owing;
    • errors in CRA material which led a taxpayer to file a return or make a payment based on incorrect information;
    • incorrect information provided to a taxpayer by the CRA;
    • errors in processing;
    • delays in providing information, resulting in taxpayers not being able to meet their tax obligations in a timely manner; and
    • undue delays in resolving an objection or an appeal, or in completing an audit;
  • inability to pay or financial hardship:  The CRA may, in circumstances where there is a confirmed inability to pay amounts owing, consider waiving or cancelling interest in whole or in part to enable taxpayers to pay their account. For example, this could occur when:
    • a collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship;
    • a taxpayer is unable to conclude a payment arrangement because the interest charges represent a significant portion of the payments; or
    • payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical help, transportation, or shelter; consideration may be given to cancelling all or part of the total accumulated interest; and
  • other circumstances: The CRA may also grant relief if a taxpayer's circumstances do not fall within the situations described above.

The CRA is working to improve its procedures for dealing with Requests for Taxpayer Relief. When a completed form is filed with the supporting documentation, the CRA should send a letter to the requester acknowledging receipt of the Request for Taxpayer Relief.  The file should be assigned to a CRA officer and the taxpayer should receive requests for relevant documentation (unless a full set of relevant documents is provided with the Request for Taxpayer Relief).

If the taxpayer gets a decision that is not favourable - it happens often - then there is the ability to request an impartial review of the CRA officer's decision by the CRA (not the same CRA officer who rejected the request).

If the review procedure ends in a rejection of the requested relief, it is possible to seek a review by the Federal Court of Appeal by way of a judicial review.  However, judicial reviews often are an expensive legal procedure and can cost tens of thousands of dollars (even hundreds of thousands of dollars in some cases depending on the complexity of the issues). There have been judicial review applications filed and the Federal Court of Appeal has in some cases sided with the taxpayer.

I will be honest with you - the Request for Taxpayer Relief Program can be frustrating for persons seeking relief. That does not mean it is not worth the effort and one should not try. Just know that you may feel like you are still stuck in the mud while pursuing a process that may take time.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

15 Stages Of A Canada Revenue Agency GST/HST Audit

If you have never been audited before, you probably have no idea what to expect.  Most audits follow the same 15 stages (more or less).  On the taxpayer's side of things, each stage is stressful.

  1. CRA Selection Process:  The taxpayer usually has no involvement in this process.  It all happens behind the scenes and the taxpayer can only guess why their name was selected. Sometimes the taxpayer is randomly selected.  Sometimes the taxpayer is selected as a result of the industry segment in which they operate.  Sometimes the taxpayer is selected because of something in a filing with the CRA.  Sometimes the taxpayer is selected because of a tip made to the CRA.
  2. The Audit Letter: The taxpayer receives a letter from the CRA notifying them that they are to be audited. Normally, the taxpayer is asked to contact the CRA auditor.  However, sometimes the auditor just shows up at the business premises.
  3. The CRA letter requesting certain documents:  Usually the CRA auditor will send to the taxpayer a letter indicating what documents need to be provided before the initial meeting at the taxpayer's premises or what documents must be available for the first day of the audit.
  4. Initial Meeting:  If the audit occurs at the taxpayer's premises, the auditor will have a meeting at the start of the audit.  The auditor explains what is expected during the audit.  The taxpayer should also communicate to the auditor what is expected.  The taxpayer may indicate that the auditor must deal with a specific person so that the entire organization does not end up working for the auditor.
  5. Fieldwork:  The on-site audit is the fieldwork stage.  The fieldwork can take place over a few days or over a lengthy period of time.
  6. Office work: Usually the auditor will take information back to the CRA offices and work on the audit from the CRA premises.
  7. Follow-up questions: It is common for the CRA auditor to contact the taxpayer after the fieldwork stage of the audit. Sometimes additional documents are requested.  Sometimes additional questions are asked.
  8. Preliminary Report: The CRA auditor will prepare a proposal and send it to the taxpayer for comment.  Usually a proposed assessment number is provided to the taxpayer.
  9. Response Letter: The taxpayer has an opportunity to change the minds of the CRA.  This is the best opportunity to stop an incorrect assessment from being issued.
  10. Notice of Re-assessment: The CRA auditor sends to the taxpayer the Notice of Reassessment setting out how much is being assessed.
  11. CRA Collections: As of the date of the Notice of Re-assessment, a debt is due to Her Majesty.  CRA Collections may start collection activities immediately after the Notice of Re-Assessment is issued.
  12. Notice of Objection: If a taxpayer disagrees with a Notice of Re-Assessment, the taxpayer can file a Notice of Objection.
  13. Objection: The taxpayer will communicate with a CRA Appeals Officer and the re-assessment will either be confirmed, amended to reversed.
  14. Notice of Appeal: Assuming that not all the issues are addressed in the objection stage, a taxpayer may file an appeal with the Tax Court of Canada.
  15. Day in Tax Court: A taxpayer will have their day(s) in the Tax Court of Canada if the appeal is not settled.  A Tax Court judge will listen to the parties and render a judgement.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

Make A List And Check It Twice: Record All Information Provided To A CRA Auditor

One of the most common mistakes we see taxpayers make during a Canada Revenue Agency ("CRA") audit is that they do not record what documents were requested by the auditor, what documents were provided to the auditor, and when those documents were provided to the auditor.  What is common is that documents are requested by the CRA auditor and the taxpayer is so nervous and anxious about the audit that they run around providing everything that is asked without making a list.  The taxpayer wants the audit to happen so quickly (so the auditor will leave) that they do not take time to think about how best to protect themselves.  What could go wrong during an audit?

We have seen cases where the CRA auditor forgets that they did not ask for something, but says it was never provided.  Accusations are easily made against a taxpayer and are sometimes used to justify an arbitrary assessment.  When you have a list, you have evidence that the CRA auditor did not ask for the document or was provided the document.  If you diligently make the list, the CRA auditor may have to think twice about how you should be treated - you are acting professionally and diligently.

We have seen many things happen during CRA audits over the years.  We have seen cases where the CRA auditor asks for documents and loses the documents.  This has happened in too many files. The worst case I remember happened many years ago during an Ontario provincial sales tax audit.  A Ministry of Finance auditor asked a taxpayer for a USB key with all the companies bookkeeping records and was provided with all of the taxpayer's books and records.  After a few months had passed, the auditor admitted to the taxpayer that he had lost the USB key and had no idea where it could be.  The auditor had to ask for the information again and the taxpayer was uncomfortable providing another USB key for obvious reasons.  The auditor had to admit his error because the taxpayer had a list and he had initialed that he had received the USB key.

Recently, a CRA GST/HST appeals officer informed us that no documents provided during the audit had been uploaded in the system and he could not get the auditor's files.  He took the position that our client had not provided the documents. We were asked to provided all the documents again (which amounted to a number of boxes). Luckily, we had the list and we kept copies of all documents that had been provided in audit binders.  When each document was provided, three copies were made.  One copy was made for the CRA auditor, one copy was made for the audit binder and one copy was made for the scanned electronic record.  All documents were stamped confidential before being copied. We were able to provide the list and all the documents within 48 hours.

In another file, the CRA GST/HST auditor started an input tax credit audit and spend months looking through invoices and purchase documents.  The audit changed courses after many months and many requests for documents. An arbitrary assessment was issued because a limitation period was about to expire. We had been preparing the list and keeping copies of the documents.  When we performed the same audit on the same documents, the assessment was almost zero.  We filed a notice of objection and eventually the appeals officer received our analysis.  The objection was successful because we were able to show that we had a list of documents provided and what the correct analysis of those documents showed.

We have developed a template Audit List for taxpayers to use during audits.  This is the same template that we give our clients who ask us to help them during the audit process.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

One Of The Common Objection Mistakes - Missing The Deadline

There have been many times that a potential client contacts me (or any tax lawyer) to discuss filing a notice of objection to challenge a notice of assessment from the Canada Revenue Agency ("CRA"). The potential client seems to have a good legal position.  Then, I ask for the notice of assessment date and --- yikes --- it is more than 3 months ago. 

The deadline to file a GST/HST notice of assessment is 90 days from the date on the notice of assessment.  Three months is a short amount of time that seems to tick by quickly.  Some of that time passes while the notice of assessment is in the mail.  Some of the time is spent looking for a tax lawyer.  Unfortunately, some of the time is spent avoiding the issue of a GST/HST assessment.

If a taxpayer misses the 90 day deadline, is there any chance to still file a notice of objection?  The answer is that it depends..  Section 303 of the Excise Tax Act gives taxpayers an opportunity to apply to the Minister for an extension of time to file a notice of objection within one year of the expiration of the 90 days deadline.  In the application for an extension of time, the taxpayer must:

1) demonstrate that within the 90 day deadline for the notice of objection the taxpayer was unable to act or give instructions to a representative to file a notice of objection OR the taxpayer had a bona fide intention to object; and

2) give good reasons why the Minister should grant the application for an extension of time.

It is not a sure thing that the Minister will grant an extension of time to file a notice of objection.  We have been successful in receiving an extension of time when a client did not receive the notice of assessment, where the client asked for information from the auditor and was waiting for the information, where the client continues to discuss the audit file with the auditor or a supervisor after the date of the notice of assessment (and the T2020 report has recorded this contact), and when the client has communicated with the CRA about a desire to object.

It is important to note that while a telephone call does not constitute a notice of objection, telephone calls can evidence a desire to object.  That being said, if the notice of assessment was issued in 2013 and you contact a lawyer in 2016, the 90 days plus 1 year period for seeking an extension of time will have expired. In this scenario, there is no opportunity to file a notice of objection late.

If the Minister rejects an extension of time request, the taxpayer may appeal to the Tax Court of Canada to have the extension of time reconsidered (see section 304 of the Excise Tax Act). The Tax Court of Canada may dismiss the request or grant the request. The taxpayer must be able to present the Tax Cort of Canada with evidence that they intended to object to the assessment and that it would be just and equitable to grant the extension of time to file the notice of objection.  The Tax Court will not be moved by arguments that the taxpayer forgot about the deadline.

How To Find Out What Is In The Canada Revenue Agency's Files About Your Audit

Wouldn't you like to know what is in the Canada Revenue Agency's ("CRA") files concerning your GST/HST audit? This information is very valuable in finding out where the CRA made a mistake or what is the basis for the misunderstanding about your taxes.  We recommend obtaining this information as soon as possible after an assessment is issued AND after an appeals officer makes a decision to confirm an assessment.  The information in your audit file may help you prepare a notice of objection or notice of appeal.  The information in your CRA files may also be very useful during an examination for discovery. During the examination for discovery, your lawyer may use the information to catch the auditor or appeals officer (the usual deponents for the CRA) in a misstatement.  The examination for discovery process sometimes leads to settlements. Most importantly, the information in the auditors own files may be used to contradict assumptions made in making the assessment.

You may obtain information in your CRA files by filing an Access to Information and Privacy (ATIP) request.  The ATIP requester must complete a Form RC378.  Where you may need the assistance of a tax lawyer is to ensure you are asking for the correct information.  If you have no idea for what to ask (e.g., the T2020 form completed by the CRA officer each time she/he spoke to you or a representative or someone in the CRA), you may miss requesting useful information.  This is the most common problem is not knowing what would be in the CRA's audit file.

The filing fee is only $CDN 5.00.

The CRA posts limited information on the Canada Revenue Agency web-site about making an ATIP request - see How to access information at the CRA.

The next problem that arises is that the CRA may withhold information.  There is the right of appeal should the CRA withhold certain information. This will be the subject of a subsequent blog post.

Based on our experience, the ATIP process often results in information being provided that an auditor will not often send to the taxpayer.  For example, if the auditor obtained an appraisal from the CRA, Real Property Appraisal Division, the auditor is often told not to give that document to the taxpayer.  The ATIP process usually results in the release of the appraisal.  Similar,y the auditor often will not share internal emails.  The ATIP process usually results in the release of the internal emails.  At the end of an audit, the auditor prepares a memo for the team leader/supervisor.  The ATIP process usually results in the release of the Auditor's file memo(s).

Based on our experience, it is important to file an ATIP request.  It is a small price to pay to possibly win the tax argument.  It is a small price to pay to potentially save the expense of a hearing at the Tax Court of Canada and years of fighting the tax dispute.  Finally, wouldn't you like to know what the auditor wrote in your file?

If you require assistance, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.  We offer flat rates to file ATIP requests.

How to Appeal a GST/HST Assessment Correctly

If you are in the unfortunate position of having received a Notice of Confirmation of a Reassessment of GST/HST pursuant to the Excise Tax Act (Canada) and would like to continue to fight the reassessment, you MUST file an appeal within the 90 days statutory deadline (See Section 306 of the ETA).  While there is a possibility of obtaining an extension of time from the Tax Court of Canada for filing a Notice of Appeal, it is not a guaranteed right. As a result, when you obtain the Notice of Confirmation, GET OUT YOUR CALENDAR.  Mark on your calendar what date is 90 days from the date on the Notice of Confirmation.  Then, mark on your calendar one month before that date.  Then, mark on your calendar one month before that date.  You should have three dates marked on your calendar.  Use a date calculator because some months have 31 days.

Let's say your Notice of Confirmation is dated July 1, 2015.  This means that your deadline for filing the Notice of Appeal with the Tax Court of Canada is September 29, 2015.  You would mark on your calendar August 29, 2015 and July 29, 2015. I like to file the Notice of Appeal a few days early in case anything goes wrong (So, set a deadline of September 25, 2015 for filing the Notice of Appeal).

What are the other dates for? The first date (July 29 in the example) is the deadline for deciding whether you want a lawyer to assist you with your Notice of Appeal.  It is also the date for gathering documents - you must start by this date.

The second date (August 29 in the example) is the date for having all your documents organized and the outline of the position you would like to take in your appeal.  You must start drafting your reasons for the appeal at this time.

The reasons for the appeal are important.  You must provide the reasons for the appeal in the Notice of Appeal. A Notice of Appeal must set out:

1) Statement of relevant facts in support of the appeal;

2) The issues to be decided by the Tax Court of Canada;

3) the relevant provisions of the Excise Tax Act;

4) Submissions (reasons) in support of the appeal; and

5) Statement of the relief sought from the Tax Court of Canada.

You should also determine if you would like the case to proceed under the informal procedure rules or the general procedure rules.  If the amount at issue is over $50,000 or you wish to claim more than $50,000, the general procedure rules would apply in a GST/HST case.

When you file the Notice of Appeal with the Tax Court of Canada, remember to call ahead to the Tax Court of Canada Registry office to find out the filing fee and the number of copies required.  Bring one extra copy so that you can have the Registrar stamp a copy for your records as having been received on time.  The Tax Court of Canada serves the Crown.

If you ave any questions, please contact Cyndee Todgham Cherniak at 416-307-4168.

 

The ABCs of Harmonized Sales Tax

Canada's federal harmonized sales tax ("HST") is complicated - even for the practitioners who practice in the area.  Here is a fun post about some of the common terms used in HST parlance.

A = Auditors - We hope they do not call.  When they do call, we hope they do not want to come for a visit.  When they come for a visit, we hope they do not stay long.  We are worried about the cost of their visit.

B = Budget - In the federal budget, the Department of Finance often includes changes to the Excise Tax Act (Canada) (the HST legislation).

C = Canada Revenue Agency - The Canada Revenue Agency enforces laws and regulations relating to HST.

D = Due Diligence - You want to have documentary evidence to show that you attempted to comply with the HST laws.  Directors can avoid personal liability for unremitted HST of a corporation is the director can show they took steps to prevent the corporation's failure.

E = Exemptions - Some supplies are exempt from GST/HST.  This means that no GST/HST will be applicable.  It also means that the person making the supply cannot claim certain input tax credits.

F = Fairness - If you could not comply with Canada's HST laws due to circumstances beyond your control (e.g., the Alberta flood 2013, the Ontario ice storm 2013), you may be able to apply for fairness.

G = Goods and Services Tax (GST) - GST is a component of HST. The GST rate is currently 5%.

H = Harmonized Sales Tax (HST) - HST is GST + PVAT and is applicable to supplies made in participating provinces,  The HST rate depends upon the province in which the supply is made.

I = Input Tax Credits - If your are a registrant and are engaged in commercial activities, you may be entitled to claim an input tax credit to recover GST/HST paid in connection with business inputs.  Individual consumers cannot claim input tax credits. Input tax credits are good (and a hot audit issue - which can be bad).

J = Judicial Reviews - If you disagree with the CRA (e.g., with a fairness decision), you may be able to file a judicial review to the Federal Court of Canada (which is different than an appeal to the Tax Court of Canada).

K = Keep Records - I cannot stress enough the importance of keeping records.  Auditors, the appeals branch and the Tax Court of Canada all need records and evidence in order to agree with you.

L = Limitation Periods - Always know the limitation period.  Missing a limitation can cost you money or the right to object to or appeal a decision.

M = Misrepresentations - A simple mistake can be considered to be a misrepresentation.  If a person makes a misrepresentation attributable to neglect, carelessness or willful default, the Canada Revenue Agency may assess beyond the 4 year limitation period.

N = Non-residents = Persons outside Canada who may need to know about and comply with Canada's HST laws.

O = Objections - If you disagree with an assessment made by a CRA auditor, you must file a Notice of Objection within 90 days after the Notice of (Re)Assessment.

P = Participating Province - Canadian provinces that have adopted the HST are called participating provinces.  British Columbia, Alberta, Saskatchewan and Manitoba are not participating provinces.

R = Registrants - Registrants are persons who are registered for GST/HST purposes or are required to be registered.

S = Supply - A supply is the provision that is subject to GST/HST. Since not all transactions are "sales", the term used is "supply".  A barter transaction and supplies for no consideration are still supplies for GST/HST purposes.

T = Tax Court of Canada - Appeals of CRA decisions concerning objections are filed with the Tax Court of Canada, which is a specialized court.

U = Underground economy - Many businesses do not register for GST/HST purposes and participate in the underground economy.  Small suppliers are not required to register for GST/HST purposes.  If a consumer hires a contractor and pays the contractor under the table in order to save the HST, they are contributing to the underground economy - which is bad.

V = Voluntary Disclosures - If a business makes a mistake, it may may a voluntary disclosure to correct the mistake.  Usually, the CRA requires the HST and interest to be paid - but will waive the penalty.

W = Written Ruling - If you are unsure about the application of the HST legislation to a particular situation, you can write to the CRA for a written ruling.  A written ruling may be binding if it is an advance ruling and not an interpretation.  In order to obtain a written ruling, it is necessary to provide the CRA with the facts.

X = X-director = A person who was a director of a corporation and ceased to be a director may be held personally liable for the GST/HST liability of the corporation up to 2 years after the person ceased to be a director of the corporation.

Y = Year-End - Most registrants have a calendar year end (but not all).  Businesses may have to self assess GST/HST in connection with year-end adjustments (it all depends).

Z = Zero-rated - Certain supplies are zero rated.  This means that the supply is subject to GST/HST at the rate of 0%.  The supplier should be entitled to claim input tax credits.

What are the Typical Steps in a Tax Court of Canada Appeal?

Most Canadians know about the Tax Court of Canada, but are not aware of the typical steps in a GST/HST appeal proceeding before the Tax Court of Canada. The following is a list of the typical steps in an appeal under the general procedure rules (which is different than an informal procedure appeal - but similar):

1. The Notice of Appeal: The taxpayer (called the Appellant in the appeal) commences an appeal by filing with the Tax Court of Canada a Notice of Appeal and paying the applicable filing fee.  The Tax Court of Canada Rules sets out what must be in a Notice of Appeal.

2. Service of the Notice of Appeal: The Appellant files the Notice of Appeal with the Tax Court of Canada and provides 2 copies of the Notice of Appeal.  If the Appellant would like a stamped copy, they provide three copies.  The Tax Court of Canada serves the Department of Justice (the Department of Justice provides lawyers to Crown Agencies, such as the Canada Revenue Agency and defends the appeal).

3. The Reply: The Department of Justice must file with the Tax Court of Canada the Canada Revenue Agency's reply within 60 days after service of the Notice of Appeal and serve it on the Appellant within 5 days after the 60 day deadline. The Reply must set out information required by the Tax Court of Canada Rules.  Generally speaking, the Reply sets out which facts in the Notice of Appeal that the CRA admits, which facts in the Notice of Appeal that the CRA denies, which facts in the Notice of Appeal that the CRA claims no knowledge and the CRA's facts and assumptions that for the basis of the assessment.

4. The Answer: The Appellant has 30 days after service of the Reply to file with the Tax Court of Canada the Answer.  It is not mandatory to file an Answer. The Answer identifies new facts that must be provided in light of the Reply by the CRA.  The Answer must set out the information required by the Tax Court of Canada Rules.  Generally speaking, the Answer sets out which facts in the Reply that the Appellant admits, which facts in the Reply that the Appellant denies, which facts in the Reply that the Appellant claims no knowledge and additional relevant facts that will be put forth by the Appellant in the proceedings.  If an Appellant does not file an Answer, then he/she/it is deemed to deny all the allegations of fact put forward in the Reply.

5. List of Documents: Both the Appellant and the CRA file and serve a list of relevant documents within 30 days of the close of pleadings. In practice, the exchange of lists of documents may take longer.  The list of documents is a list and not the documents themselves.  Both the Appellant and the Respondent prepare a list of all relevant documents known to the party at the time which may be used in the proceedings as evidence by the party.  Either side may later ask for the production of any document listed. In practice, the Appellant will review the Respondent's List of Documents and ask for the production of documents that are not contained on the Appellant's List of Documents.  The same holds true for the Respondent.

6. Examinations for Discovery: Both the Appellant and the Respondent (the CRA) are entitled to ask questions to discover the what testimony may be provided in the case 9and to attempt to narrow the issues to be decided in the case).  Often the Department of Justice asks to examine the Appellant (if an individual) or the key personnel (if the Appellant is a business entity). Sometimes accountants and advisors are examined. The Appellant may examine the auditor, the CRA's appraiser, an appeals officer or another relevant person. A court reporter records the examination if it is in oral form.  Sometimes the examination may proceed by way of written questions.  The testimony is given under oath.  There is no timeline for the examinations for discovery.

7. Undertakings: During the examination for discovery, a party may not be able to answer a question or a document may be discussed that has not been exchanged.  The examiner will ask for an undertaking for the answer to be provided in writing or a document be provided. A list of Undertakings is exchanged shortly after the examination for discoveries.

8. Motions and Questions Presented to the Court: Sometimes examinations for discovery may be frustrated by refusals to answer questions and legal issues arising. When problems arise in the process, they are generally dealt with my a motion to the Tax Court.

9. Hearing Date Application: The Appellant and the Respondent jointly apply for a hearing date to be set after the examination for discoveries and the satisfaction of undertakings has occurred. The parties must indicate the number of days that will be required for the hearing,  In practice, the parties discuss lists of witnesses and a litigation plan is created by the Appellant's counsel. Calculating the number of days required for a hearing is not a science, but the litigation plan helps.

10. Pre-hearing Conference and Pre-Hearing Conference Brief:  After the hearing date has been set, the Tax Court of Canada may set a pre-hearing conference date (or the parties may apply to the Tax Court for a pre-hearing conference).  A judge will preside over the pre-hearing conference, but that judge will not ultimately hear the case. The purpose of the pre-hearing conference is to narrow the issues.Often the pre-hearing conference judge will give a first impression of the evidence and this may lead to a settlement because the weaknesses of the case are discussed. The Appellant provides a short Pre-Hearing Conference Brief in connection with the pre-hearing conference setting out the issues, the Appellant's theory of the case and propositions of law to be relied upon at the hearing. Where the parties have requested more than three days for the hearing, the Court may discuss the scheduling of the hearing in order to reduce the number of days needed for the proceeding.

11. Hearing:  This is the big event.  The witnesses testify and the arguments are presented. The Appellant and the Respondent will be required to file documents and books of authorities and detailed arguments prior to the hearing. During this time, settlement discussions may occur.

In addition to the above steps, there may be motions (e.g., the Department of Justice may ask the Court  to strike parts of the Appellant's proceedings, the Appellant may ask the Court  to strike parts of the Respondent's proceedings, either may bring jurisdictional questions to to the court, either may bring a motion to compel production of certain documents, etc) and request examinations of non-parties. Litigation may take many twists and turns.

While Notices of Objection May Be A "DIY" Procedure, You Must Follow The Law

The Excise Tax Act (Canada) has been drafted to allow taxpayers who have been assessed GST/HST to file a notice of objection.  There is nothing in Section 301 of the Excise Tax Act that requires a taxpayer to hire a professional to assist with the filing of a notice of objection.  For this reason, I call it a "Do-It-Yourself" procedure.

However, there have been times when the taxpayer does not follow the instructions in the legislation (usually because the taxpayer did not obtain a copy of the legislative provisions, did not know where to obtain  the legislative provisions or did not understand the legislative provisions). When a taxpayer does not file a notice of objection in the prescribed form and providing the required information, the Tax Court may not be able to help the taxpayer overturn the assessment.

I can help with showing you where to find the prescribed form.  Use a GST Form 189 to file a Notice of Objection. Check to see if the form has been updated (I can post a form, but after my post the document can change).

I can help you find the instructions. GST Memorandum 31 "Objections and Appeals" contains useful information.

Subsection 301(1) of the Excise Tax Act requires:

Any person who has been assessed and who objects to the assessment may, within ninety days after the day notice of the assessment is sent to the person, file with the Minister a notice of objection in the prescribed form and manner setting out the reasons for the objection and all relevant facts.

What this means is that a taxpayer has 90 days to file the notice of objection.  Please put this date in your calendar and circle it is red.  Also, put a reminder in your calendar a few weeks before the deadline to make sure you have the notice of objection on the front burner and under control.

The law requires that the taxpayer set out the reasons for the objection and all relevant facts.  You cannot merely send a letter stating that you object to the CRA's assessment.

If the taxpayer is a "specified person", the amount of information and detail required by subsection 301(1.1) of the Excise Tax Act is greater.

In a number of cases, the Tax Court has determined that taxpayers have not filed a valid notice of objection.  One of those cases was an income tax case - 870 Holdings Ltd. v Her Majesty the Queen, .  In this case the taxpayer wrote a letter to the CRA requesting more time to provide requested information.  This letter did not constitute a notice of objection. The Federal Court of Appeal agreed - 2003 FCA 460.

In Suganthi Natarajan v. Her Majesty the Queen, the Tax Court also determined it court not hear an appeal because a valid notice of objection.

The notice of objection is am important document in the tax dispute settlement process.  it is the first step in resolving a disagreement with the CRA. The taxpayer files it with the tax authorities and eventually either the taxpayer of the Crown provides a copy to the Tax Court of Canada.  While the Tax Court of Canada understands that the "DIY" appellant may not be perfect in all that they write, the judge needs to see that the taxpayer took the appropriate steps.  It the document is well written, it may leave a positive impression.

At LexSage, we would be please to assist.  Please call 416-307-4168.

Respond To CRA Requests for Information on Due Diligence

Individuals who are directors of corporations may be held jointly responsible for unremitted GST/HST if the corporation fails to pay an assessed amount. Often after the Canada Revenue Agency ("CRA") is advised of a bankruptcy filing by the corporation, the CRA writes a short letter to the directors seeking information. Most letters from the CRA are unwelcome surprises - these letters may be an opportunity.

The letter from the CRA reads something like the following and often causes the recipient to panic:

"Under Section 323 of the "Excise Tax Act", the directors of a corporation may be held jointly and severally, or solidarily, liable together with the corporation to pay the corporations GS/HST arrears.

Based on CRA information, you may be liable for the unremitted GST / HST of [Corporation Name] and we are considering assessing you personally for [amount].

The due diligence provision of subsection 323(3) of the "Excise Tax Act" provides that the directors are not liable if they have exercised the care, diligence and skill expected of a competent person in the circumstances.  If you feel that you are not liable and that we should not issue an assessment, please provide written reasons and supporting documents which, in your opinion show you are not liable and return them to this office in 30 days."

It is important to respond to this letter from the CRA.  If you do not respond, the CRA will in all likelihood issue an assessment against you personally.  They are giving you an opportunity - you should take it.  Rather than fighting an assessment, it is better to prevent the assessment in the first place.

That being said, it is important to carefully write the letter.  Anything you write may be used against you and may be used to support their assessment of you.  You letter may be used against you if you appeal the assessment to CRA and eventually to  the Tax court of Canada.

Similarly, be very careful in what you say to the CRA on the telephone.  The CRA may type notes in their computerized records and may used them against you.

If the assessment is large enough, it may be worthwhile to ask a GST/HST professional to help with the preparation of the letter.  Sometimes it is the manner in which the information is presented that makes all the difference between an assessment and no assessment due to acceptance of due diligence. 

Based on our experience, it costs more to prepare a notice of objection, notice of assessment, reply submissions, list of documents and participate in a hearing than to write a thoughtful and organized letter explaining one's diligence.

Canadian Taxpayers Bill of Rights

Yesterdau. I wrote a post entitled "Do You Have A Complaint About The Canada Revenue Agency?" and mentioned the Taxpayers Bill of Rights.  I provided a link to the CRA web-site.  Here are the Rights:

1. You have the right to receive entitlements and to pay no more and no less than what is required by law.

2. You have the right to service in both official languages.

3. You have the right to privacy and confidentiality.

4. You have the right to a formal review and a subsequent appeal.

5. You have the right to be treated professionally, courteously, and fairly.

6. You have the right to complete, accurate, clear, and timely information.

7. You have the right, as an individual, not to pay income tax amounts in dispute before you have had an impartial review.

8. You have the right to have the law applied consistently.

9. You have the right to lodge a service complaint and to be provided with an explanation of our findings.

10. You have the right to have the costs of compliance taken into account when administering tax legislation.

11. You have the right to expect us to be accountable.

12. You have the right to relief from penalties and interest under tax legislation because of extraordinary circumstances.

13. You have the right to expect us to publish our service standards and report annually.

14. You have the right to expect us to warn you about questionable tax schemes in a timely manner.

15. You have the right to be represented by a person of your choice.

Continue Reading...

General Procedure Cases Before The Tax Court Of Canada And Not Hiring A Lawyer

A taxpayer who has filed an appeal with the Tax Court of Canada that is within the "general procedure " criteria, must seek leave of the court to be represented by a non-lawyer (e.g., an accountant, a book-keeper, an executive, a director, a consultant, etc.).  The recent case of 1069616 Alberta Ltd. v. The Queen addresses this issue.

The Tax Court allowed the company in this case to be represented by a non-lawyer.  However, it was clear that the Tax Court does not grant permission without considering the request.  Asking for leave does not guarantee the requested response. 

The appellant must seek leave of the Tax Court and cannot merely show up with their chosen non-lawyer representative.  The Tax Court of Canada Rules, General Procedure apply and must be followed.  Many small taxpayers are not aware of these rules, which are important procedural rules for general procedure appeals (which are the larger appeals and different than informal procedure appeals).

In 1069616 Alberta Ltd., the Tax Court of Canada carefully reviews the history of the applicable rule as to when a non-lawyer can represent a party in a general procedure appeal.  It is worth reading to ensure that the Tax Court will grant the request if and when asked.

Informal Tax Court of Canada Procedure & Limitation Because of Amount Assessed

I wanted to find something to share with you when I read the case name - Pink Elephant Inc. v. The Queen (Tax Court of Canada decision issued August 31, 2011).  This case deals with income tax deductions for catering services purchased by a training course provider. 

What is applicable to both income tax and GST/HST taxpayers with small amounts at issue is the rules relating to the use of the Tax Court of Canada Informal Procedures (no lawyers necessary).  In this case, the taxpayer appealed a number of CRA assessments on a single notice of appeal relating to a number of taxation years.  We know that there was a preliminary matter raised with which that the Tax Court had deal.  Judge Webb wrote in the decision:

The Appellant had also raised the issue of the limitation on amounts in dispute in an appeal under the Informal Procedure. Section 2.1, subsection 18(1) and section 18.1 of the Tax Court of Canada Act provide as follows:

2.1 For the purposes of this Act, "the aggregate of all amounts" means the total of all amounts assessed or determined by the Minister of National Revenue under the Income Tax Act, but does not include any amount of interest or any amount of loss determined by that Minister.

18. (1) The provisions of sections 18.1 to 18.28 apply in respect of appeals under the Income Tax Act where a taxpayer has so elected in the taxpayer’s notice of appeal or at such later time as may be provided in the rules of Court, and

(a) the aggregate of all amounts in issue is equal to or less than $12,000; or

(b) the amount of the loss that is determined under subsection 152(1.1) of that Act and that is in issue is equal to or less than $24,000.

18.1 Every judgment that allows an appeal referred to in subsection 18(1) shall be deemed to include a statement that the aggregate of all amounts in issue not be reduced by more than $12,000 or that the amount of the loss in issue not be increased by more than $24,000, as the case may be.

[16] Counsel for the Appellant stated that the amount of income tax reassessed under the Act for 2006 that was in issue was less than $12,000 and that the amount of income tax reassessed under the Act for 2007 that was in issue was less than $12,000 but the aggregate total for both years that was in issue was more than $12,000. No penalties were assessed under the Act.

[17] In Maier v. The Queen, [1994] T.C.J. No. 1260, Justice Garon (as he then was) held that the aggregate of all amounts in dispute means the aggregate amounts in dispute under a particular assessment (or reassessment) and not under a Notice of Appeal. When a Notice of Appeal relates to more than one assessment (or reassessment) the issue is not whether the total amounts in dispute under the Notice of Appeal exceed $12,000 but whether the total amounts in issue in relation to any particular assessment or reassessment exceeds $12,000. Therefore, the limitation of $12,000, if applicable, will apply to each assessment (or reassessment) that is the subject of the appeal. In this case, since the amount of taxes reassessed under the Act for each reassessment that is in issue (as there was one reassessment for 2006 and a separate reassessment for 2007) is less than $12,000, the limitation will not apply.

Hopefully this will help small taxpayers with small assessments know when they can use the Informal Procedure.

Tax Court of Canada Does Not Have Jurisdiction To Fix All Problems

The Tax Court of Canada is a specialized court with jurisdiction to hear most tax-related matters.  That being said, some tax-related matters and some forms of remedy are not within the Tax Court of Canada's jurisdiction.  For this reason, the Canadian Bar Association, Taxation Section (excluding crown lawyers who cannot take a position), the National Sales Tax, Customs and Trade Section (same limitation re crown counsel) and the Tax Court Bench & Bar Committee have put forward a resolution to support enhancing the jurisdiction of the Tax Court of Canada.  I seconded the resolution in August at the Canadian Bar Association Annual Meeting in Halifax.  The resolution was tabled for further discussion at the mid-year meeting in February 2012.

I spoke to the issue of "access to justice" and that taxpayers need to be able to resolve their disputes with the Canada Revenue Agency ("CRA") simply and quickly.  In the past week, a case has been reported that is on point.  In Frenna v. The Queen, the taxpayer appealled the CRA's denial of his Goods and Services Tax Credit ("GSTC") in the amount of $248 claimed on his income tax return.  I am not missing any zeros.  There was a small amount at stake and the taxpayer pursued the case on principle.

In the end, Mr. Frenna was not successful.   But, that is not what I wish to highlight.  Judge Sheridan added a few paragraphs at the end of the decision to highlight the Tax Court's restrictions in making a just disposition in this case.  Judge Sheridan wrote for the benefit of the father of the taxpayer's spouse (Mr. Testani), who represented Mr. Frenna at the hearing:

"At the conclusion of the hearing of this appeal, I addressed certain other points Mr. Testani had made during his submissions to the Court. Although Ms. Testani noted my comments for her father’s benefit, because of his hearing difficulty, I indicated I would repeat my comments in these Reasons. His submissions and my responses thereto are summarized below:

1. Mr. Testani was understandably distressed that the Canada Revenue Agency had failed to provide him with the documentation promised in response to his inquiries and the objection to Mr. Frenna’s assessment. He went on to say that if the Minister wanted to assess on a certain basis, he should have to prove the basis for his determination was correct. On this latter point, under Canada’s self‑reporting tax system, except in certain circumstances not relevant to the present matter, the onus is on the taxpayer to prove his position in respect of the amount assessed is correct. As for the lack of documentation, it is unfortunate that Canada Revenue Agency officials did not provide Mr. Testani with the sort of analysis presented by counsel for the Respondent; had they done so, this appeal might not have been necessary. However, the lack of such documentation does not, in itself, provide me with a legal basis to allow Mr. Frenna’s appeal.

2. Mr. Testani submitted that if the Minister’s assessment were based on the assumption that Mr. Frenna and Ms. Testani had been in a common-law relationship in 2008, then the Tax Court of Canada ought to order the Canada Revenue Agency to allow certain adjustments to Ms. Testani’s 2008 income tax return to take that assumption into account. As it turned out, that was not the Minister’s position but even if it had been, I have no jurisdiction to make such an order as only the appeal of Mr. Frenna was before the Court.

3. In a similar vein, Mr. Testani argued that if the Minister had assumed that Mr. Frenna and Ms. Testani had been in a common-law relationship in 2008, the Canada Revenue Agency ought to have advised Ms. Testani to adjust her income tax return accordingly to take advantage of a deduction for Mr. Frenna. The Canada Revenue Agency is not under an obligation to provide such advice to taxpayers.

4. Finally, I referred Mr. Testani to the detailed information contained in the materials filed by counsel for the Respondent in her submissions, specifically, a highlighted copy of section 122.5 of the Income Tax Act and the Canada Revenue Agency publication, GST/HST Credit, in particular, page 9. For that reason, I have not reproduced the rather lengthy legislative provisions here.

What this case shows is that if the jurisdiction of the Tax Court of Canada was expanded to include judicial reviews, the result could have been more favourable to the taxpayer.  At the present time, Mr. Frenna would have to appeal the denial of the GSTC to the Tax Court and file a judicial review with the Federal Court of Canada to review the failures on the part of the CRA to provide adequate information to Mr. Frenna.  This would have involved significantly more costs and time and energy.  Also, the Tax Court could not order declaratory relief and order the CRA to review Ms. Testani's tax returns to allow the deductions.

 

Taxpayers May Not Be Helped By Past Mistakes of CRA

I often discuss with corporate taxpayers that they have been doing things a certain way for a number of years.  Often these taxpayers were audited by the Canada Revenue Agency ("CRA") on a previous occasion and the taxpayer's way of doing things were blessed or the mistake was not highlighted.  I have discussed that the CRA is not bound to make the same mistake twice and can change its mind without giving notice to the taxpayer.

In a recent decision of Manotas v. the Queen, the Tax Court of Canada discussed this very issue in the context of a taxpayer claiming residency for the purposes of determining entitlement to the Goods and Service Tax Credit.  The words may be changed slightly to apply in goods and services tax ("GST") and harmonized sales tax ("HST") cases.  Judge Bowie wrote in the decision:

I have not overlooked that the appellant has chosen to file returns declaring her income in Canada each year, nor the fact that upon her departure the Minister expressed the view that she was a “factual resident of Canada”. It is not open to individuals to establish Canadian residence when that is economically beneficial to them by the simple expedient of filing a return of income under the Act. Nor is the Minister bound by his conclusion as to her residence formed a decade ago. Factual circumstances change, and conclusions change with them. But even where the circumstances remain unchanged, the Minister is free to form a different opinion as to the legal effect of the circumstances in a later time period. It is well settled that if the Minister arrives at an erroneous conclusion in assessing a taxpayer (or in determining the right to refundable credits), she is not bound to repeat that error in perpetuity: see Nedelcu v. The Queen [which was confirmed by the Federal Court of Appeal]

Sorry to be the messenger of this news. 

What Does A Seller Do When Someone Refuses To Pay HST?

This is a problem now and the problem will occur more regularly in British Columbia after the referendum results are misstated and people believe the HST should not be charged.  The answer that vendors, sellers & service providers do not want to hear is the only answer to give.

GST/HST registrants are tax collectors for the government.  They must charge, collect and remit the HST or risk an assessment plus interest and penalties.  During an audit by the Canada Revenue Agency ("CRA") will assess the registrant for failure to collect HST or a failure to remit the HST.  This means that if the vendor does not charge the purchaser HST (when he/she should), the CRA will assess the vendor.  If the vendor does charge the HST on the invoice and the buyer does not pay the HST, the vendor must remit that HST to the government with its GST/HST return for the period during which the transaction took place (regardless of whether the money was actually received).  If a vendor fails to remit HST, it will be assessed.

There are special rules for bad debts that do not apply to only the HST portion.  There are also special rules that allow a registrant (seller) to sue a recipient (vendor) for HST, however, these rules only kick in after an assessment by the CRA.

The CRA auditors will not be sympathetic when a vendor does not follow the rules.  Telling an auditor that the buyer refused to pay the HST will fall on deaf ears.  The auditors will not care that the vendor would have lost the sale and the profits related to the sale.

Vendors in British Columbia should post a sign in their shops telling buyers that HST will be collected until the transition date (currently said to be March 2013).  This includes service providers who provide in person services (such as hair salons).  Other vendors and service providers should include a statement in quotations that:

 "Harmonized Sales Tax ("HST") is payable in respect of any property or services provided prior to the date established by the Province of British Columbia and Federal Government of Canada to transition to a provincial sales tax (the "Transition Date").  HST will continue to be charged after the Transition Date if required by law.  All applicable provincial sales taxes are payable in respect of property and services provided after the Transition Date."

This statement may be added to contracts for property or services.

If a buyer does not pay the HST after the property or services are provided, the vendor may pursue the buyer in Small Claims Court or the provincial court for breach of contract.  However, in respect of point of sale refusals, the vendor will have to make a business decision whether to meet refusal with a refusal to make the sale. Service providers and restaurant owners who have provided the service and experience the refusal at the cashier are in a very difficult position and may have no other option but to call the police before the person dashes (while being careful to avoid a false imprisonment claim made against them).

In any event, document any situation where there is a refusal to pay the HST and provide as much detail as possible..  Even if an unsympathetic CRA officer will not accept the information, the Tax Court of Canada may sympathetically suggest that a remission order would be appropriate.

GST/HST Business Consent Form

When you would like to communicate with the Canada Revenue Agency that you have hired a lawyer, accountant or other consultant to represent your interests and that the CRA may communicate with your representative you must complete a Business Consent Form.  The Business Consent Form has been around for some time.  It was recently revised and newly released on August 12, 2011.

Deadlines for Filing Canadian Sales Tax Objections and Appeals

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.

Which Sales Tax? Notice of Objection Deadline Extension Deadline After Max. Extension Notice of Appeal Deadline Extension Deadline After Max. Extension
GST/HST 90 days after notice of assessment Possible if ask 1 year of deadline Minister has discretion to set new deadline 90 days after notice of confirmation of assessment by CRA Possible if ask TCC within 1 year of deadline TCC has discretion to set new deadline
ORST 180 days after notice of assessment Possible if ask within 180 days Minister has discretion to set new deadline 90 days after decision of Ministry Possible if requested before expiry of time limit to file appeal Minister has discretion to set new deadline
B.C. SST 90 days after notice of assessment No statutory extension  N/A  90 days after notice of confirmation of assessment No statutory extension  N/A
Manitoba RST 90 days after notice of assessment  N/A N/A 90 days after Commission's decision  N/A  N/A
Saskatchewan RST  One month after the date of service of notice of estimate Possible  Board has discretion to set new deadline One month after the date of Board decision  Possible Granting extensions is at discretion of Court
Quebec Sales Tax 90 days after notice of assessment Possible if ask 1 year of deadline  Minister has discretion to set new deadline 90 days after notice of confirmation of assessment by Minister Possible if ask Court of Quebec within 1 year of deadline Court of Quebec has discretion to set new deadline

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.

Amounts Paid To Canada Border Services Agency As Ascertained Forfeiture May Include GST

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.

Extreme Case Shows 90 Day Time Limit For Filing GST/HST Notice of Appeal

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. 

Federal Court of Appeal Says 10 Years Not Too Long To Assess A Director GST/HST

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.

A Director May Liable For Corporation's GST/HST Debt Even Where Corporation Cannot Be Assessed

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.

The CRA Must Prove That A Notice Of Assessment Was Sent

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.

The Tax Court of Canada Cannot Increase An Assessment Above The Canada Revenue Agency's Assessment

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.

Federal Court of Appeal Rules That Suppliers Cannot Stop A GST Assessment Using Judicial Review

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).

The Long Ha Case Is Not That Funny, Except For The Tax Debtor's Name

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.).

Disproving Audit Assumptions

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.

Canada Revenue Agency Assessed Director's Liability Against Surviving Director

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.

Canada Post Strike Makes Filing Ontario Retail Sales Tax Objections/Appeals Difficult

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!

Gross Negligence Penalty: Intentional Failures and Omissions Can Be Costly

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.

Judge Gives Lesson in Record-Keeping

In the recent Tax Court of Canada decision in Malik v. The Queen, Judge Hershfield was clearly frustrated by the record-keeping (or lack thereof) of Mr. Malik, a resident of Canada of Pakistani origin.  Judge Hershfield's written reasons also demonstrate that the testimony of the Appellant lacked credibility.  The decision is an interesting read from the perspective of watching a judge struggle to be fair when he knew that the taxpayer was spinning facts.

There are many lessons to be taken from this decision.  Judge Hershfield wrote a number of paragraphs dealing with record-keeping in the Canadian tax system.  Other taxpayers can benefit from reading the lessons.  Two of my favorite passages are:

[18] ...The Canadian tax system is based on a self-reporting system. This applies to new Canadians, who venture into new business activities in Canada, as much as it applies to seasoned business persons. The lack of proper accounting records and supporting documents, in this case, has not only made it impossible to determine with any degree of certainty the actual business income of the Appellant but it is further blurred by an organizational structure emanating in Pakistan. Such arrangements must be documented in such a way so as to identify with certainty the legal nature of the relationships of the parties as well as their income entitlements so as to permit consistent and legally effective income and expense allocations amongst the various jurisdictions in which these enterprises operate.

...

[31] One last comment on the reporting obligations and the bank deposit methodology used in this case lest the Appellant has not learned something in the course of these assessments and the prosecution of his appeals. Two things should be obvious from this Judgment. One is that both the Appellant’s domestic and foreign business arrangements need to be organized and structured, in a legal manner, with appropriate documentation in place to support the filing position arising from that legal structure. Secondly, a bookkeeper or accountant is going to sooner or later have to show the Appellant that business bank accounts need be segregated to account for all business transactions and that each and every bank entry requires a support ledger that indicates the nature of the entry and the background to it. Behind that ledger are the physical documents that support or evidence the explanation of the entry. Without the latter supporting documentation, ledgers will become questionable and will lose their value in supporting a particular treatment in respect of bank statement entries.
 

Continue Reading...

Can A CRA Auditor Ask For Lawyer's Files When Taxpayer Deducts Lawyer's Bill As Business Expense?

The answer is contained in the recent Tax Court of Canada interim decision in Richard A. Kanan Corporation v. The Queen.  In this case, a tricky Canada Revenue Agency auditor would not allow deductions taken by a dentist for legal expenses because the invoices were stated to be "for services rendered" and the auditor was not allowed to see the entire file.  Judge Campbell tries to strike a balance in her decision between the divergent interests.  This case is a MUST READ for all lawyers who provide advice to businesses (especially all tax lawyers).

Judge Campbell considered two questions:

1) Can the Appellant meet its onus without disclosing privileged information?

2) If the Appellant relies on privileged information to meet its onus, will an implied waiver be found over its entire legal file?

The short answer is that the Appellant MUST provide information about the legal services in order to justify the deduction.  However, auditors CANNOT go on fishing expeditions through a lawyer's files.

With respect to the first question, Judge Campbell concluded succinctly in the end of the interim decision:

"When a taxpayer deducts an expense from his or her income, he or she may be called upon to justify that deduction – to convince the Minister, or failing that, the Court, that it is a properly deductible expense. Where the expense is a lawyer’s fee, the proof that is required will often be covered by solicitor-client privilege. While these Interim Reasons are not intended to provide the CRA with a licence to access privileged information, it is clear that a taxpayer who presents a claim for deductions in a return must also accept that at least some disclosure will be necessary to properly dispose of that claim."
 

With respect to the second question, Judge Campbell concluded succinctly at the end of the interim decision:

"...a taxpayer should not be forced to reveal the specifics of its legal advice, or to turn over the lawyer’s entire file. In addition to limited disclosure, the lawyer or the Court may edit documents to remove non-essential material, and the Court may impose conditions to ensure the confidentiality of the information. Further, taxpayers must be allowed to provide the proof that is required without the risk that they will be found to have waived the privilege entirely."
 

Judge Campbell has clearly recognized in her decision the importance of solicitor-client privilege.  She writes:

"To find otherwise would create an unreasonable and unacceptable rule. Taxpayers would effectively have the choice of foregoing a proper deduction for legal expenses or revealing to CRA the entirety of their lawyer’s files. Such a rule would be inconsistent with the status accorded to solicitor-client privilege as a substantive and fundamental civil right, and a privilege which must be as close to absolute as possible."

While the decision says nothing about non-lawyer consultants and accountants who provide tax advice to taxpayers, it is worth noting that the above decision would not cover such advisors.  With respect to non-lawyer advisors, the Canada Revenue Agency may ask for the entire file (with the exception of solicitor-client work product if the non-lawyer hired a lawyer in connection with the advice) to review regarding the deductibility of an expense.

While the decision does not relate to input tax credits for GST/HST purposes, the principles would likely be applied in a similar manner. 

Help Judges Help Taxpayers: Why Small Business Record Keeping is Important

It is important for small business owners to keep good records.  The recent decision by Judge Woods of the Tax Court of Canada in Antwi v. The Queen makes the point very well.  It is best to provide a large excerpt of this short case:

[3]  While documentary evidence is not always necessary to prove a taxpayer’s case, here it was crucial as the Appellant herself was unable to explain how the sole proprietorship had paid for the supplies which she admitted had been purchased. The best she could do was to offer various hypothetical explanations: perhaps she had paid for some of the supplies out of her employment income (even though the value of the supplies was more than double her entire income for the year); other amounts could have been paid by her two brothers either in cash or by credit card (but no evidence of their having done so was presented); sometimes, friends and relatives helped out with payments (but no details of who they were or what amounts they might have contributed).

[4] Not surprisingly, some seven years after the fact the Appellant could not remember specifically what amounts were paid by whom for what. And not having retained the source documents or kept records of the transactions in issue, she had no way of reconstructing the sole proprietorship’s business activities in 2004 and 2005. A further complication lay in the fact that while it was not reported to the tax authorities as such, the sole proprietorship was apparently intended to be the Appellant’s mother’s business; the Appellant and her two brothers provided the funds for its start-up and operation; their mother, the hands-on work in the store. According to the Appellant, because her mother had difficulty with English and had no previous retail experience, she made many errors entering sales into the cash register; for example, she might enter too many zeros so that a sale that was actually for $10.00 would appear as $1,000. Because the Appellant was busy with her own employment, she was not able to be at the store to assist her mother or to correct the mistakes that inevitably occurred. Thus, to the extent that any records did exist, it is unlikely they were very reliable. In any event, although the Appellant admitted that the invoices, cash register tapes and banking statements she had provided to the auditor and Appeals Officer had been returned to her, she was unable to say, as of the date of this hearing, where those documents might currently be found. Finally, in response to her agent’s question in direct examination as to whether inventory had ever been counted for the business, the Appellant answered in the negative.

[5] I agree with counsel for the Respondent that the Appellant’s situation falls squarely within the circumstances described by Bowman, CJ in 620247 Ontario Ltd. v. Canada 1995 CarswellNat 27 at paragraphs 8 and 12:

8.a. The assessment is based upon the assumption that the bank deposits are about as accurate an indication of the sales as one is likely to get, -given that the appellant kept no books and its only record of sales was the sales slips, which were incomplete and essentially in an unsatisfactory state. It may be a fair surmise that some of the bank deposits came from sources other than sales but the evidence simply does not establish how much. In a case of this type, which involves an attempt by the Department of National Revenue to make a detailed reconstruction of the taxpayer's business, it is incumbent upon the taxpayer who challenges the accuracy of the Department's conclusions to do so with a reasonable degree of specificity. That was not done here. A bald assertion that the sales could not have been that high, or that some unspecified portion of the bank deposits came from other sources is insufficient. I am left with the vague suspicion that the chances are that the sales figures computed by the Minister may be somewhat high, but within a range of indeterminate magnitude. This is simply not good enough to justify the allowing of the appeal. If I sent the matter back for reconsideration and reassessment the same evidentiary impasse would result. I must therefore conclude that the appellant has failed to meet the onus of showing that the assessment is wrong.

 

 

12 Precisely the same problem arises [with the challenge to the Minister’s GST assessment]. There may well be errors in the Minister's calculations, but given the unsatisfactory state of the appellant's records it is difficult to see how he could have made a different determination and while I may not be bound to apply the same rather rigid criteria evidently demanded by the Minister there is no evidence upon which I can arrive at a different figure.

[6] The former Chief Justice ultimately concluded that given the lack of books and records, the auditor acted on the best evidence he could find. The sole distinction between the case above and the Appellant’s situation is that I am unable to find any fault with the assessing officials. A review of the schedules in the Replies and Tab 7 of the Respondent’s Book of Documents[1] suggests that the officials thoroughly reviewed whatever documentation was made available to them and where supported, allowed adjustments in the Appellant’s favour. After that point, however, the same sort of evidentiary deficiencies that hindered the Appellant’s case at the hearing precluded any further revisions to the reassessments.

[7] In short, there is simply is not enough evidence before me to justify interfering with the Minister’s reassessments. In reaching this conclusion, I have some sympathy for the Appellant who seems to have put her faith in advisors who have not served her particularly well. On the other hand, the Appellant struck me as an intelligent young woman quite capable of foreseeing the risks of engaging in a business for two years without maintaining at least basic records with some accuracy and regularity.

The morale of this case is that the organized taxpayer has information that can be provided to the judge.  The judge needs evidence to overturn the decision of the Canada Revenue Agency.  Judges want to be fair.  Help judges help you.

Resignation As Director May Not Be Enough To Avoid Director's Liability

The May 3, 2011 Tax Court of Canada decision in Snively v. The Queen should serve as a helpful reminder to directors of corporations that they may still be considered to be a director of a corporation for GST/HST assessment purposes even after they have resigned as a director.

The general rule for director's liability is contained in subsection 323(1) of the Excise Tax Act:

If a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3) or to pay an amount as required under section 230.1 that was paid to, or was applied to the liability of, the corporation as a net tax refund, the directors of the corporation at the time the corporation was required to remit or pay, as the case may be, the amount are jointly and severally, or solitarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount.

An exception to the general rule is set out in subsection 323(5) of the Excise Tax Act with the effect that a director is not liable for the GST/HST debts of the corporation if the person ceased to be a director more than 2 years ago:

An assessment under subsection (4) of any amount payable by a person who is a director of a corporation shall not be made more than two years after the person last ceased to be a director of the corporation.

There is an exception to the exception to the general rule which results in the director remaining liable for the GST/HST debts of the corporation regardless of the 2 year limitation period.  Under corporate laws, the person (individual) may be deemed to be director even if the person has submitted a formal resignation. If the corporation was incorporated pursuant to the Business Corporations Act (Ontario), subsection 115(4) would apply.  Subsection 115(4) of the Business Corporations Act (Ontario) provides:

Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act.

The corporations laws of other provinces of Canada may contain similar provisions.

Judge Paris of the Tax Court of Canada makes the point in Snively that the Excise Tax Act does not provide a complete answer to the question of director's liability:

It is well established that, since “director” is not a defined term in the ETA, it is appropriate to look to a corporation’s incorporating legislation for determining whether a person was a director of a corporation at a particular time for the purposes of section 323. ...

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This Audit Comes With A Warning

Recently, I was called in to assist a vendor who had a visit from an Ontario retail sales tax ("ORST") auditor on a Tuesday and the auditor indicated that the assessment would be issued on Wednesday.  What was different about this audit was that the issues were complex and it was so very quick. A year ago, this audit would have taken months to complete.  A year ago, the auditor would give the vendor time to review an audit assessment before pushing the "issue assessment" button.  A year ago, the auditor would have allowed the complex issues to be debated and possibly would have requested guidance from tax advisory on the complex issues.  Not this year ....

What was different is that this auditor had arrived with the conclusions already formed.  This meant two things: (1) the auditor was targeting a specific type of business and had seen the issue before, and (2) the auditor was rushing quickly through a list of targets.

What is different is that ORST auditors move to the Canada Revenue Agency in March 2012 and have to complete all remaining audits before they move jobs.  Auditors do not have the luxury of time because the clock is ticking.

Ontario businesses need to prepare for audits and call in specialists earlier - procrastination is no longer an option.  Vendors may not have time to find an ORST specialist and canvass the issues in the period between the auditor's initial visit and the auditor pressing the "issue assessment" button.  Specialists may not be able to run to a vendor's aid on short notice.

Once an assessment is issued, the assessed person must file a notice of objection in order to dispute the amount assessed.  More importantly, the assessed person must pay 100% of the assessment immediately or according to a payment schedule arranged with the Ministry of Revenue.  Even more importantly, it takes over 2 years for an appeals officer to review an ORST notice of assessment and even longer to make a decision.  I have a notice of assessment filed in 2007 that has not been dealt with yet by the Ministry.  If the issues are complex, the assessment may be confirmed at the appeals stage and the assessed person must go to court to get the money back.

ORST audits are different in this final rush to close the books.  Vendors who do not realize that things have changed may be surprised.  Vendors who have not yet been audited, should expect a visit from an auditor.  They should also plan ahead if they want to limit the negative effects of the audit.

OECD Seeks Comments on "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality"

In December 2010, the Organization for Economic Co-Operation and Development (OECD) released for comment a document entitled "OECD International VAT/GST Guidelines: Draft Guidelines on Neutrality".  The deadline for filing comments is March 22, 2011.

Canada is a member of the OECD.  Canada imposes the goods and services tax (GST) and harmonized sales tax (HST), which are value-added taxes.  As a result, the OECD guideline may be incorporated into Canadian law in the future.  As a result, it will be important for Canadian businesses who operate multi-nationally and may be affected by the guideline to prepare thoughtful comments.

This document succinctly summarizes some of the important principles behind GST/HST style taxes and, therefore, may be VERY useful to litigants in explaining why an auditor's approach is incorrect.  I have considered its usefulness in the context of may GST/HST disputes. 

For example, proposed guideline No. 1 is "The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation."  This is a basic principle and I can hear you saying "YES".  I can hear you saying "Why did the auditor assess me as a supplier when I am engaged in a taxable business?"

Read this document!

You Are Unlikely to be Granted an Extension of Time Due To Negligence of an Advisor

In the recent case of Bouganim et al. v. The Queen, the Tax Court of Canada denied a request for an extension of time beyond the 90-day limitation period for filing an appeal.  The taxpayer had been assessed and the objection was denied.  The taxpayer hired a lawyer who did not file the appeal before the 90-day limitation period.  The taxpayer hired a new lawyer and the new lawyer filed an application to the Tax Court of Canada for an extension of time to file the appeal.  Since the Tax Court of Canada would not grant the extension of time, the taxpayer could not appeal the assessment and the assessed amount was due and payable in full.

Unfortunately, I see this situation from time to time.  Lawyers, accountants and advisors who are not familiar with the provisions of the Excise Tax Act do not know the filing deadlines (and often do not know where to find them).  A commodity tax lawyer knows the provisions for filing a notice of objection and notice of appeal.  A commodity tax lawyer will not make the mistake of missing an appeal deadline (unless you contact them after the deadline or give them insufficient time).

There are circumstances when the Tax Court of Canada will grant an extension of time.  For more information, please contact Cyndee Todgham Cherniak at 416-760-8999. 

Send Documents to the CRA Using a Traceable Method

When you send a GST/HST return, file a refund application or file a notice of objection or appeal, you need evidence for two reasons:

1) To prove that you completed the document; and

2) To prove that you sent the document on or before a statutory deadline or the date requested by the Canada Revenue Agency (CRA).

You may be the unlucky person whose document is lost by Canada Post or the courier during transit or by the CRA after delivery.

First, you should determine if you must use a specific method of transmission of the document.  The requirement of a specific method of transmission would be in the applicable provisions of the Excise Tax Act (Canada) and/or applicable regulations.  Sometimes there is a specific method of transmission (e.g., by first class mail, by registered mail, etc.) required in the statutory provision and, in these circumstances, you must do as told. 

Second, you should make sure you know about any statutory limitation periods (that is, the deadline for filing the document).

Taxpayers are often asked to send documents to the CRA auditor or appeals officer during the course of an audit. There are no rules applicable to the method of sending these documents. Often the CRA give a deadline for sending the documents to the auditor and the auditor may finalize an assessment if the documents requested as not delivered on time.

In all cases where you must send documents to the CRA, you should pick a method that gives you proof of transmission.  For example, when you send a document by registered mail, you can ask for a "return receipt", which is a document from Canada Post showing proof of delivery by Canada Post to the CRA. Also, you will have also received a document showing proof of delivery to Canada Post of the envelop to be sent by registered mail and both the envelop and the receipt are date stamped.  This is really good proof that you delivered the document to be sent on a particular day.

I have experienced situations where Canada Post's rules cause a document that I wish to send to the CRA to be rejected (e.g., envelop is too big or that the document weighs too much).  In these cases, if the Excise Tax Act or regulations requires that I send the document by registered mail, I send a letter and partial document by registered mail and send the entire document by courier.  I note in the letter to be sent by registered mail that I have attempted to follow the requirement to send the document by registered mail as required by the statute and that Canada Post has rejected the document.  I indicate the letter is being sent in accordance with the requirement and that I am sending the complete document by courier.  I give the courier tracking number in the letter.  This demonstrates that the courier package was sent prior to the letter, which was sent within the rules.  I maintain evidence of both documents that I have sent on or before the statutory deadline.

The recent case of Liao v. The Queen is a good example as to why evidence is important.  In this case, a taxpayer sent a GST refund application by regular mail.  When the taxpayer followed up with the CRA, the taxpayer learned that they had not received the refund application and the taxpayer sent another copy of the refund application.  The second copy was sent after the limitation period had expired and the CRA rejected the application as out-of-time.  The Tax Court of Canada accepted that the taxpayer had sent the first copy and that first copy was sent within the statutory limitation period.  The taxpayer was lucky that the Tax Court of Canada accepted the testimony.  The relevant deeming provisions in the Excise Tax Act indicate that anything sent by first class mail is deemed to have been received by the CRA on the day it was mailed.  Ordinary mail is considered to be first class mail.  A deeming rule causes something to be accepted as a true fact even if it may not be accurate.

In the end, evidence is key.  Liao would have been in a stronger position if it could be proved that the refund was sent on the first occasion.  Likely, the CRA would have accepted that the refund application was lost and the case would not have made it to the Tax Court of Canada.  Liao would have been saved from the stress and the cost of an appeal if it had verifiable evidence of the first transmission within the limitation period.

The last tip that I would like to give you is that you should scan your proof on transmission because it is easier to find it in your computer records when needed. Also keep the originals in a safe place.  I like to use purple coloured file folders for all important documents in a file.

The Arguments of a Taxpayer is Not Enough, the Taxpayer Needs to Present Evidence

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

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

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

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

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

The judge further goes on to add:

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

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

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Sale of a Business or Part of a Business

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

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

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

What is "Net Worth Assessment" and Can It Be Refuted?

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

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

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

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

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

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

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

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

Please Do Not Throw Your Notice of Assessment in a Drawer & Forget About It

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

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

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

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

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

A Taxpayer May Have Grounds to Judicially Review A Denial of Access to Voluntary Disclosure Relief

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

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

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

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

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

A "Waiver" Is NOT a Hand Gesture to a Canada Revenue Agency Auditor to Say "Goodbye"

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

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

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

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

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

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

The Canada Revenue Agency Wants To Be Paid ASAP

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

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

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

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

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

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

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

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

Directors' Liability for HST Debts Is Important Consideration

When was the last time you made a list of your various corporate directorships and asked the question "Do I want to be a director on this company or should I formally resign?".  Did you ask this question when HST implementation in Ontario and British Columbia occurred on July 1, 2010?  If not, why not?  The potential liability for unremitted HST or penalties for HST errors is now 13% (Ontario, New Brunswick, Newfoundland) or 12% (British Columbia) or 15% (Nova Scotia) plus penalties and interest.  There is a lot more money from your director pocket at stake.

Are you a de facto or de jure director?  Persons who are formally a director under provincial or federal corporations laws may be assessed by the Canada Revenue Agency (CRA).  In addition, persons who are not formally directors, but who take on the roles of directors (without the formal directors' resolution) may be considered by the CRA to be a director too and assessed as a director.  Have you taken steps to demonstrate that you do not intend to be a director of a company where you do not wish the CRA to place the "director" name tag on your jacket (and wallet)?

Do you have all the paperwork for your past directorships and resignations?  If the CRA came knocking on your door today to collect GST and/or HST owed by a company in respect of which you were a director years ago, could you prove that you resigned as a director and that the company actually filed the paperwork with the relevant governmental authority?  Do you know if the company filed the documents with the relevant governmental authority? Do you know if the company updated the information in the CRA's database concerning your resignation as a director? Can you still reach the individuals who asked you to be a director of the company?

Taking on the role and responsibilities as a director of a corporation involves significant obligations, not the least of which is vicarious liability for certain  GST/HST (and income tax, Ontario retail sales tax and other taxes) obligations of the corporation, should it become fail to make remittances or become insolvent.

Subsection 323(1) of the Excise Tax Act (Canada) provides that:

If a corporation fails to remit an amount of net tax  ... or pay an amount as required ... , the directors of the corporation at the time the corporation was required to remit or pay as the case may be, the amount are jointly and severally or solidarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount."

There are a number of limitations on director's liability, including:

1) the person being assessed is a former director of the corporation and ceased to be a director more than 2 years before the assessment;

2) the director or former director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in similar circumstances;

3) the Minister has not taken certain steps to recover from the corporation as required by subsection 323(2) of the Excise Tax Act.

We are seeing more director's liability assessments by the CRA (and other governmental authorities) in the current economic climate.  Some companies have decided to pay demanding creditors over the CRA.  Some companies have declared bankruptcy.  Some companies have been sold.  Some companies have let paperwork slide while trying to stay above water.  Some of the CRA calls are to individuals who thought they ceased to be a director years ago --- the CRA is digging into old collection files and seeing what can be collected now.

It is time to reconsider whether the the good intentions of the past (becoming a director of a corporation) may lead you into the poorhouse or dent your retirement savings. for more information, please contact Cyndee Todgham Cherniak (a sales tax lawyer) at 416-760-8999.

Taxpayers' Ombudsman Issues Report "The Right to Know"; Hope CRA Acknowledges Key Points

On November 9, 2010, the Taxpayers' Ombudsman, Paul Dube, issued a report entitled "The Right to Know" concerning the rights of taxpayers to know why they have been assessed and why their objections and appeals are being denied.  Mr. Dube concluded "that when the CRA's Appeals Branch does not provide reasons for its decision on a taxpayer's appeal or objection, it fails to fulfill its commitments to fairness, openness, and accountability."

This an important document about fair treatment of taxpayers and how taxpayers are not being treated fairly in all cases by the Canada Revenue Agency, Appeals Branch.

Whether individual CRA officers will take the report to heart and change their ways in order to improve communication is yet to be seen.  What is significant is that the Taxpayers' Ombudsman will be watching.  Someone has spoken for the many whose voices cannot be heard (or whose concerns and complaints have been ignored).

New ORST Auditors Are Making Big Mistakes - What Can You Do?

Ontario has hired a significant number of new auditors to complete Ontario retail sales tax (ORST) audits before the March 2012 deadline when the Ministry of Revenue staff join the Canada Revenue Agency.  What I am seeing is inexperienced auditors who do not know the law issuing large assessments to Ontario vendors and walking away saying that they can file a notice of objection if the vendor disagrees.  The audits are being rushed and the new auditors have not allocated themselves enough time to complete the task correctly.

What this means is that assessed vendors must file a notice of objection and pay the full amount of the assessed ORST while they wait for a Ministry of Revenue appeals officer to review the objection (and it takes more than two years for the appeals officer to pick up an appeal). I have an objection that I filed in 2007 that has not been moved forward by the Appeals Branch.

What can vendors do?  My best recommendation is to be very prepared for any audit.  As soon as you receive the letter or call that an ORST audit is to occur, organize all the relevant documents.  Conduct test audit to determine if you have any problems. Find your own mistakes --- in other words, do the auditors job before the auditor. Know what the assessment should be before the auditor does.

If you have a disagreement with the auditor over the application of the law or his/her interpretation of the facts, call in an expert ASAP.  Many vendors wait until after the problems have developed too far to call in an expert.  If the time clock is running out on the audit, it becomes more difficult to set up a meeting with a supervisor or request that the auditor seek a tax advisory opinion.

Many vendors want to save money and ask a book-keeper or accountant without sales tax expertise to help them during the audit and in preparing notices of objection.  Please remember that it may cost more if you are assessed and have to pay the full amount while waiting for an objection to be considered.  Once the Ministry of Revenue has your money, they will not want to give it back and will be incentivised to delay.

Ensuring that the assessment is correct when it is issued is the best strategy to adopt.  That being said, when you are audited by an inexperienced auditor for the government, it is easier said than done.

Prescribed Interest Rates for GST/HST

I was recently asked what is the difference between the rates of interest (1) payable by a tax debtor to Canada for GST/HST and (2) payable by the Government of Canada to a taxpayer when an incorrectly assessed amount of GST/HST is refunded.  There is a difference.

Period  Refund Interest Payable By Canada Arrears and Instalment Interest
2010    
July 1 - September 30

1% Corporate taxpayers

3% non-corporate taxpayers

5%
April 1 - June 30 3% 5%
January 1 - March 31 3% 5%
2009   5%
October 1 - December 31 3% 5%

The prescribed rate of interest on refunds and amounts owed to corporate taxpayers recently changed.  The Auditor General raised concerns in her Spring 2009 report about interest paid by Canada to corporations regarding overpayments.  Simply put, the interest rate payable by Canada to corporations on overpayments of tax was higher than bank interest rates and was costing the Government of Canada.

From the perspective of the taxpayer, the CRA should not be incentivized to make incorrect assessments, force payment and hold on to the taxpayer's money.  The change creates a disincentive to the CRA to settle tax disputes.

Was the Director Wearing a White Hat?

I would like to share a quote with you from a recent GST case, Arsic v. The Queen.  In this case, the Canada Revenue Agency (CRA) was pursuing a director of a corporation for the GST debts of the corporation.  In these circumstances, the director may raise the due diligence defence, which prevents the CRA from shifting the corporation's GST liability (plus penalties and interest) to the director.

Justice Diane Campbell wrote:

In the end, I must attempt the difficult task of determining what a reasonably prudent person should have done or would have done in circumstances comparable to those in this appeal.  It remains a question of fact tempered with a good dose of even-handed common sense.  It is always easy to criticize the choices of a taxpayer when armed with the benefit of hindsight."

This quote will be helpful to directors.  The judge is making it clear that the auditor did not use common sense when assessing the director for the liabilities of the corporation. She accepted the due diligence defence and allowed the appeal.  The end result is that the director did not have to pay the assessment relating to the GST debt of the corporation.

More importantly, the quote should help directors.  Directors must ask themselves what would the Court expect a reasonably prudent director to do?  What should I do to show the Court that I tried to prevent the corporation from getting into GST/HST trouble?  I often use the white hat / black hat analogy.  The taxpayer needs to help the Court see that they always were the good guy wearing the white hat.  The director must not wear a black hat and engage in questionable behaviour. In Court, the bad facts may (will likely) come out.

Motion Denied - Justice Was Not Delayed

On August 30, 2010, the Ontario Court of Appeal denied a motion brought by the Minister of Revenue for an extension of time to file an appeal in respect of a judicial review of a retail sales tax writ that was quashed by the Ontario Divisional Court.  A copy of the decision in The Minister of Revenue v. Robert Carter is available in The HST Library.

This is an important case. Robert Carter brought a judicial review (in Robert Carter v. Minister of Revenue) of writ issued by the Minister pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario). The Ontario Divisional Court quashed the writ on the basis that the Minister did not follow the process set out in Rules 60.07(2) and 60.07.1(1) of the Rules of Civil Procedure, which required the Minister to seek leave of the Court to issue the writ (due to the fact the alleged assessments were issued thirteen years earlier).  This Minister did not file leave to appeal within the 30 day time limit.  The Minister brought a motion to the Ontario Court of Appeal seeking an extension of time to file leave to appeal.  Mr. Carter opposed the motion on two grounds:

(i) the Minister did not meet the test for an extension of time; and

(ii) the Minister had not paid Mr. Carter the cost previously awarded by the Divisional Court.

The Court of Appeal agreed with Mr. Carter.

The overarching principle that is applied by the Court in such cases is "whether the 'justice of the case' required that an extension be given".  The Court of Appeal has consistently applied four factors in exercising its discretion:

1)  Whether the Appellant formed an intention to appeal within the relevant period;

2) The length of the delay and the explanation for the delay;

3) Any prejudice to the respondent; and

4) The merits of the appeal.

The Court of Appeal ultimately decided these questions in favour of Robert Carter, the respondent.  The Court was satisfied that Mr. carter demonstrated prejudice and the Minister did not show that he has a meritorious appeal.

There are many quotable statements in the decision:

  • The Ministry of Revenue wields considerable power and discretion that can affect the lives of residents in Ontario in profound ways. Insofar as the Ministry's bureaucracy is unable to comply with the Rules of Civil Procedure in doing so, it seems to me that the answer to this problem is for the Ministry to review its internal decision making processes, not for this Court to make accommodations for the Ministry that are not available to other litigants.
  • Aside from indemnifying the winning party, costs are also used as a tool to encourage settlement, deter frivolous actions and defences, and discourage unnecessary steps in the litigation process. And, because they offset some of the outlays incurred by the winner, they make litigation more accessible to litigants who seek to vindicate a legally sound position.
  • Certiori is a broad and flexible remedy. Generally speaking, it is available in most situations where a government decision has an effect on an individual's rights or legitimate expectations.  On its face, s. 37(1)(b) gives the Minister  degree of discretion in the choice of enforcement measures.  This choice will have a serious effect of the rights and obligations of individuals subject to an assessment.  I am not persuaded that this exercise of executive discretion is sheltered from judicial review simply because it can be described as routine.
  • I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection.  The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.

I will comment further on some of these points in other postings on this blog.

I must admit that I am pleased with this result for my client. I will keep readers posted on whether the Minister files an appeal to the Supreme Court of Canada.

 

 

 

Important Case for Those Who Would Like To Judicially Review The CRA

If you would like to successfully judicially review the Canada Revenue Agency (CRA) in regards to a fairness decision, the Federal Court, Trial Division in Spence v. the Canada Revenue Agency is worth reading.

In this case, Ian Spence, the applicant in a judicial review was successful.  A judicial review is filed pursuant to Rule 18.1 of the Federal Courts Act.  A judicial review must be filed within 30 days of the decision under review (in this case the refusal of the CRA to grant the fairness application).  The deadline cannot be extended.

The judge granted the judicial review and ordered that (1) the CRA decision be set aside and the matter be referred to a different CRA official for redetermination, and (2) the applicant receive costs in respect of the application for judicial review (in other words the CRA must pay Mr. Spence an amount in respect of his legal fees in pursuing the judicial review).

The judge determined that there was no basis for the CRA representative to claim that there was no basis for granting fairness relief.  Under the legislation, the CRA has broad discretion to grant the relief requested.  While the CRA has issued guidelines relating to the fairness process, those guidelines do not impede the statutory discretion.

In short, this decision may open the door to a more flexible fairness process.  A taxpayer may file a fairness relief application if a liability has been determined and the taxpayer is seeking relief on the basis of fairness.