11 Tips For Small Business Owners For Keeping Canada Revenue Agency Collections Officers Happy

Recently, I was contacted by a small business owner who had an unpleasant conversation with a Canada Revenue Agency ("CRA") collections officer about an outstanding goods and services tax/harmonized sales tax ("GST/HST") assessment against his small company (of which he was a director).  The CRA collections officer had threatened to send the sheriff to his house that very day to seize personal assets.  When I called the CRA collections officer, she suggested to me that she merely discussed the director's liability process to the small business owner.  What because clear to me is that the CRA was not clear in what was said because the lack of clarity could result in payments against the outstanding debt.  The CRA collections officer was deliberately attempting to make the small business owner fearful.

However, what was actually happening is that the CRA collection officer had completed a direction to the sheriff to determine the assets of the reassessed corporation.  If the sheriff prepares a "No Assets" report, then the CRA could issue a director's liability assessment under section 323 of the Excise Tax Act. Only after the CRA issues a director's liability assessment against the small business owner could the CRA ask the sheriff to seize personal assets.  The problem in this case was that the address provided by the small business owner for the business was his home address.  It was for that reason that the sheriff would come to the home to determine if the corporation has assets that could be seized.

What needed to be done was satisfactorily resolve the corporation's GST/HST reassessment issues.  The following are tips to keep the CRA collections officer happy and away from personal assets from the small business owner.

1. Do not use your home address as your business address.  If you have an operating business and a business location that is not your home, use that address for communications with the CRA.  If the CRA collections officer issues a direction to the sheriff to prepare an assets report, the sheriff would go to the business address.

2. See if you can enter into a payment arrangement with the CRA to satisfy the corporation's debt.  The best way to avoid a director's liability claim is to make sure there are sufficient assets in the corporation.  The payment arrangement usually will be acceptable is it covers 6-24 months (that is you give post-dated cheques to pay the debt over time).

3. If you have a payment arrangement and have provided cheques to the CRA collections officer, you may provide proof of such arrangement to the sheriff.  The sheriff usually takes this into consideration when preparing an assets report.  If the assets report does not state that there are no assets, the CRA may not be able to issue a director's liability claim (depends on the facts).

4. If you enter into a payment arrangement, ensure there are sufficient funds in the account to pay the cheques.  If a cheque is returned NSF (not sufficient funds), then the CRA collections officer will look at other options to get the money.

5. During the period of the payment arrangement, make sure you are up-to-date on all CRA filings and payments (including GST/HST, income tax, payroll taxes, etc).  CRA collections officers are nervous fellows and gals and they will get concerned if the debts of the corporation start increasing.  This means that the cheques they have no longer cover the outstanding liability and that the outstanding liability will not get paid.

6. While the company is paying off the debt, apply for interest relief.  If the CRA accepts your interest relief request, your outstanding debt will decrease. Every little bit helps.

7. While the company is paying off the debt, if you are able to make a significant payment, do so.  This stops the interest clock on the amount you paid.

8. If you have nothing to hide (and even if you do have something to hide), be honest with the CRA collections officer.  Things you say may cause the CRA collections officer to become concerned.

9. Along the same lines, provide the information that is requested by the CRA collections officer.  If the CRA collections officer trusts you, he/she will be more likely to exercise discretion.

10. Always remember to be civil.  The CRA collectinos officer has a job to do.  It does not become personal unless you make it personal.  Know that they have a supervisor that wants to see results. Help them to their job.

Bonus tip: If you cannot make it work with a CRA collections officer because of a personality conflict between you and her/him, ask to meet with the CRA collections officer and his/her supervisor.  Do not use this opportunity to rant at the supervisor because you will only show the supervisor that the CRA collections officer is right about you.  Take the opportunity to press the reset button of the relationship. You need a positive resolution to your GST/HST problems.

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

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. 

Canada Revenue Agency Auditors Concerned About Registrants Overclaiming Input Tax Credits

Based on personal experience and not any official report from the Canada Revenue Agency ("CRA"), it is obvious to sales tax professionals that the CRA are concerned about goods and services tax ("GST") and harmonized sales tax ("HST") registrants over claiming input tax credits.

On a GST/HST return for a reporting period, the registrant must report the amount of GST/HST collected during the reporting period on its taxable sales.  However the registrant remits "net tax" after adding amounts it must add and deducting amounts it may deduct.  One of the most important category of deductions from GST/HST collected is input tax credits being claimed.  The more input tax credits, the less GST/HST that must be remitted (and in some cases, the larger the refund cheque).

The most obvious concern to CRA auditors is that GST/HST registrants claim false input tax credits when they file their GST/HST returns.  False claims are when a person did not actually purchase a business input and are making up a deduction.

One of the most common audit issues if failure to maintain records relating to input tax credits that meet the documentary requirements of subsection 196(4) of the Excise Tax Act (Canada) and the Input Tax Credit Information (GST/HST) Regulations.  The CRA will reject input tax credits when the documents to support the claims are not available or if the documents do not contain all the relevant information (e.g., the GST/HST number of the supplier).

Another common audit issue is that the input tax credit is claimed too early (and, therefore, in the incorrect reporting period.  For example, a business files monthly returns.  A business buys a building on March 2nd.  If the registration claims the input tax credit for that building purchase in the February GST/HST return, the input tax credit will be denied and moved to March.

The last two areas of concern are often a source of frustration for businesses.  Honest business owners can get caught.  They are not the bad guys who are essentially stealing money by making false claims.  They are often busy and do not have the best record-keeping systems or do not have the time to chase down a supplier for information after the goods/services are provided and the money has been paid.  They do not pour over every detail on a piece of paper because hey know what transaction transpired.

Would You Like To Get On The HST Bandwidth Wagon?

The Canada Revenue Agency ("CRA") is looking at the characterization of telecommunication services provided by non-traditional means (such as Voice over Internet Protocol).  Which HST place of supply rule applies depends on the characterization.  What is important to know if that if the CRA does not have all the answers yet (which, it does not), you may not be charging HST properly if you do not ask them.

The CRA has already received a few advance ruling requests.  The CRA has indicated that they are looking at 4 different requests that deal with VoIP services:

  • supplies of VoIP services by a non-resident supplier where the communications are initiated outside Canada, but received in Canada;
  • supplies of VoIP service calling plans for a flat fee;
  • supplies of VoIP services provided where the communication are initiated in Canada, but received outside Canada; and
  • supplies of VoIP services provided by a non-resident where the communications are initiated and received outside Canada, but routed through a server located in Canada.

If you have similar questions, it may be wise to request an advance GST/HST ruling from the CRA.  It may take time (possibly years) before the CRA issues a policy statement based on the rulings it provides.  It also may take months or years for the CRA to publish the rulings it gives to those who have asked.  If you would like to receive your own binding ruling (that may be handed to a CRA auditor when they visit a supplier or a recipient of VoIP services), you will need to submit your own ruling request.

The great benefit of GST/HST ruling requests is that it demonstrates due diligence in the event that the CRA disagrees with you in the end.  Acts that count as "due diligence" can relive a director from a director's liability claim.

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.

Director's Liability Provisions in GST/HST Law Is Not Restricted To 4 Year Limitation Period

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

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

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

The Court's reasons included:

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

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

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

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

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

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

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

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.

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.

Amalgamations and GST/HST

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

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

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

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

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

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

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

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

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

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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People Are Careful When Writing A Confession, Why So Little Care When Completing A HST Voluntary Disclosure Form?

I honestly do not know the answer to this question.  I am baffled when a client comes to me after they have completed and sent to the Canada Revenue Agency ("CRA") their voluntary disclosure form in which they admit to a mistake in their harmonized sales tax (HST) compliance. They have already confessed their errors.  Then, when they see the HST assessment, the do not agree with the number and have a list of reasons.

I have been asked on many occasions to help correct the CRA auditor's misunderstanding of the facts - the same facts provided by the client in writing to the CRA in the voluntary disclosure form.  I cannot count the number of times a client has said to me "I did not mean to write that", "I should have been more careful in what I wrote", "I did not verify that information and it is in fact wrong", "I did not think about that", and "I just wrote something quickly".  I am asked to "fix this" ---  and, I have my work cut out for me.

Voluntary disclosures are similar to a "confession", albeit a voluntary disclosure is not often relaying criminal activities.  However, it is possible that a person will write information in a voluntary disclosure that could be used in a criminal investigation under the Excise Tax Act.  If you would seek the help of a lawyer when writing a confession, then seek the help of a lawyer when completing a voluntary disclosure form.  If you would take time to investigate facts and write, edit, review, redraft and reconsider the writing of a confession, then take time when completing a voluntary disclosure form. If you would take time to understand the consequences of writing a confession, then take time to understand the consequences of completing a voluntary disclosure.  If you would not want to cause a misunderstanding when writing a confession, then avoid misunderstandings when completing a voluntary disclosure form.

If you do not understand the law, you may miss opportunities to raise good facts that may be used to your benefit --- your actions have not all been bad have they?  You may not convey the important information and facts that support defences (such as the due diligence defence).  You may miss opportunities to support lower penalties.  You may miss opportunities to limit interest if there has been an officially induced error. 

Did you know that the CRA audits to "net tax" or do you even know what I mean by that?  You may be able to identify amounts that the CRA owes you and when you calculate "net tax" for the period in which you owe GST/HST, you may be able to subtract amounts you can show the government owes you.  There is a lot more to consider than "getting things off your chest".

Now that I have said my piece - here is the voluntary disclosure form.  The CRA calls this form "VOLUNTARY DISCLOSURES PROGRAM (VDP): TAXPAYER AGREEMENT", do not let the name fool you or cause you to be complacent.

 

What is the worst GST/HST infraction?

The worst goods and services tax (GST) / harmonized sales tax (HST) infraction is collecting HST and not remitting the GST/HST to the Receiver General of Canada.  The Canada Revenue Agency (CRA) considers this to be on the same level of wrongdoing as stealing the government's money.  Many auditors say to registrants and non-registrants who charge HST who do not file GST/HST returns after collecting GST/HST from recipients  or who file returns without the remittance cheque that they are stealing the government's money.

GST/HST is a tax on consumers or on consumption.  Generally speaking, businesses do not bear the ultimate burden of the GST/HST.  However, the Government of Canada relies on suppliers to collect GST/HST from recipients of taxable supplies.  If a business takes advantage of the fact that they collect GST/HST and keep the government's money, the system breaks down.

This is why there is no limitation period for this type of infraction.  If a person collected GST from a recipient in 2001 and did not remit it to the Receiver General, that person could be audited and assessed today.  If the person is a corporation and still in business, the CRA could assess a director if the money cannot be recovered from the corporation.  If the person is a corporation and no longer is in business, the CRA could assess a former director so long as the director did not cease to be a director more than 2 years ago.  If the person is a partnership, the CRA may assess one or more of the partners.  If the person is a sole proprietorship, the individual may be assessed.

When a supplier discovers that it collected tax and failed to remit it (for example a bookkeeper was stealing the money) over a lengthy period of time and makes a voluntary disclosure, the CRA may ask the person to go back in their records to the very beginning (at least until the start of GST or the systematic failure).  The interest charges on the unremitted GST/HST can exceed the amount not remitted (I have seen theis many times).

The person who does not register for GST/HST purposes and who falsely informs recipients that they are registered, gives a false GST/HST number, and takes the GST/HST money for themselves is arguably the worst of the worst type of offender.  Persons who do this may be prosecuted criminally for fraud and other GST/HST specific offences. Persons who collect GST/HST from recipients and just keep the money may also be prosecuted under the Excise Tax Act and the CRA publicly announces convictions.

Some businesses that commit this type of infraction have "good" explanations after their wrongdoing is discovered.  It is not easy to convince the CRA that the decisions are not blameworthy.  If you think that you will just tell the CRA a reasonable story and they will not issue an assessment for the tax not remitted plus penalties plus interest, you are living in a fantasy world.  There are few very good explanations that satisfy the conditions of the fairness policy or that pass the smell test.

For this reason, if you discover (not in the context of an audit because that would be too late) that you have collected GST/HST and failed to remit it, the best course of action is to make a voluntary disclosure (not the type within the CRA's voluntary disclosure program but voluntary in that you come forward on your own initiative).  If you admit your wrongdoing to the CRA (with a lawyer preferably) and pay the GST/HST collected and not previously remitted (or make arrangements to pay the amounts owed) and penalties and interest, the CRA may not pursue criminal charges.  There is a risk of criminal charges even if you come forward voluntarily and that is why making a voluntary disclosure with a lawyer's assistance is prudent.

For more information, please contact Cyndee Todgham Cherniak at 416-760-8999.  I am a lawyer and our discussions will be subject to solicitor-client privilege.

Categories of Ontario Retail Sales Tax Assessments

There are good assessments (being nil assessments) and bad assessments (you own money to the Ministry).  This blog post is going to list the most common types of Ontario retail sales tax (ORST) assessments.  It is not a complete list of every type, but I will hit the highlights:

1. Assessment of a vendor who has collected ORST and failed to remit the ORST;

2. Assessment of a vendor a penalty for failure to collect ORST from a purchaser as required (including innocent mistakes);

3. Assessment of a purchaser who did not pay ORST to a vendor as required (even when the vendor did not ask for the ORST or honestly thought the sale was exempt);

4. Assessment of a director for the ORST liability of the corporation;

5. Assessment of a person who imports taxable goods into Ontario;

6. Assessment of a person who hires a non-resident contractor (who has not coordinated with Ontario) who builds real property in Ontario and imports building materials; 

7. Assessment of a person who over claimed a rebate or refund;

8. Assessment of a buyer of a business to which the bulk sales tax applies in circumstances where the vendor owes Ontario ORST on past activities and the buyer did not get a clearance certificate; and

9. Assessment of an assignee, liquidator, administrator, receiver, receiver-manager, secured or unsecured creditor, agent of the creditor, trustee or other like persons who distribute property or proceeds from the sale without obtaining a clearance certificate from the province and there are outstanding ORST liabilities.

Another categorization of assessments that you should be aware of are:

A) interim assessment - meaning that the auditor has guessed the amount and not finished his/her work before issuing an assessment;

B) audit summary: this is not an assessment; 

C) final assessment: this is an assessment if it is in the form of a notice of assessment; and

D) revised assessment: if an auditor issues an assessment and subsequently revises the assessment, the new assessment generally replaces the previous assessment (if it relates to the same transactions) and restarts the limitation period for filing a notice of objection.

Would You Like the HST Map to Right?

Of course you would.  The "HST Map" to getting to "Right" is exactly what you want.  What should you do to get the right result every time?  What should you do to collect the right amount of HST every time you make a supply?  What should you do to calculate the right amount of input tax credits and recaptured input tax credits every time you file a GST/HST return?  What should you do to recover the maximum amount of credits, refunds & rebates allowed?  What should you do so that the Canada Revenue Agency says you are in the "Right" place when they complete any audit?

Unfortunately, these maps do not exist on supermarket shelves - but they can be generated or customized on a business-by-business basis by commodity tax lawyers and accountants.  Where "Right" is for you depends upon the facts and where you want to go.  Just as there are many cities and towns with the same name, there are many different "Right" destinations on an HST map.  If you do not know where is "Right", how are you going to determine the path to take to get there? How can you be sure you are taking the correct route to "Right"?  If you follow the directions someone else uses to get to "Right" you may be at the wrong "Right".

Once you can identify the destination of "Right", then a customized map can show you how to get there.  The customized map will set out the process that you must follow to get to your chosen "Right" destination.  The directions are a critical part of the map to "Right".

The HST map may take the form of a memorandum or opinion letter.  Sometimes the process involves seeking additional directions, which would be in the form of an advance GST/HST ruling from the Canada Revenue Agency.

It is possible to hire a commodity tax lawyer or accountant to prepare a customized HST map if you would like to get to "Right" and stay there.  These maps do exist - believe it or not.  Would you like one?

I should add one closing note that the Department of Finance may move "Right" on you when you are not looking.  Just like with the television show "Lost", you may find that you are no longer where you thought you were/should be.  Maybe the producers were thinking about the tax authorities when they came up with the plot for "Lost" --- hmmmm

Do You Really Want to Have an HST Map to Right?

Yesterday I had a discussion with a friend who was deciding on whether to write to the Canada Revenue Agency, GST/HST Rulings Directorate for a GST/HST ruling on an issue.  The discussion started that the client had followed advice given years ago that its supply was exempt.  The client had not collected GST for a number of years.  With the implementation of harmonized sales tax, the cost of being wrong has increased from 5% to 13% (in Ontario).  The client contacted my friend to revisit the issue.  The client does not want to be assessed - this is understandable.

The problem with writing in for an advance GST/HST ruling is that the CRA may not give the desired answer.  The CRA may disagree with the original analysis.  The CRA may see things differently.  The CRA may have given other rulings that are inconsistent with the ruling requested.  What if the CRA determines that the supply is taxable now, was previously taxable, and that the exemption did not apply to past supplies? What if the CRA determines that they were not in the "Right" place? There is a risk.

When there is a risk that the CRA will not give the ruling requested, the affected party (i.e., the client) must answer the question "Do you want to get to "Right"?  If the client wants the "Right' answer and to know where is "Right", the client should obtain an advance GST/HST ruling (which is binding) or an interpretation (which is not binding).  If the clients wants to continue to treat its supplies as exempt, then the client does not want to be at "Right".  If the client plans to ignore the ruling if it does not reaffirm what they want to do/are doing, the client does not want to be at "Right" and would increase its risk by applying for an advance GST/HST ruling.

It is important to determine whether the client (or you) want to have the "Right" answer or merely the answer the client (you) want.  They are not necessarily the same thing.

If the client (you) want to get to "Right", it is possible to prepare a customized map.  If the client(you) are not sure whether you really want to get to "Right", more thought is required on whether you do not care if you stay at 'Lost".

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.

If You Think Bankrutcy Is The Solution To HST/GST/ORST Problems, Please Read This

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

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

 

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.

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.