The Canada Revenue Agency Advises Charities About Political Activities

On August 20, 2015, the Canada Revenue Agency ("CRA") posted on its web-site an "Advisory on partisan political activities" by charities. The CRA "gently" "reminded" charities that "registered charities that they are prohibited from devoting any of their resources to partisan political activities."  However, the CRA failed to remind charities that should the CRA take the position that their resourced were allocated to partisan political activities, they might revoke their charitable status.  If the CRA revokes a charity's charitable status for income tax purposes there are many negative consequences, including GST/HST consequences.

Charities are entitled to claim certain public sector rebates of GST/HST paid on business inputs.  If charitable status is revoked, the entitlement to claim public sector rebates would be affected.

Certain supplies by charities are exempt from GST/HST.  However, if charitable status is revoked and another exemption is not applicable, the supplies may be taxable.  If the charity does not collect GST/HST on supplier that transition from exempt to taxable status, the charity may be assessed for failure to collect GST/HST.

In other words, the business model o the charity will be affected and potential GST/HST liabilities may result.

If you are a charity, please review the CRA's advisory to ensure that you do not cross the lnies that have been drawn.  The advisory states:

"Since we are in an election period, we remind registered charities that they are prohibited from devoting any of their resources to partisan political activities. A partisan political activity is one that involves the direct or indirect support of, or opposition to, any political party at any time, whether during an election period or not, or a candidate for public office.

The prohibition on partisan political activity is a long-standing requirement under the Income Tax Act. Charities are responsible for their resources, and must devote these resources to exclusively charitable purposes. Since they are well placed to study, assess, and comment on government policies that relate to their charitable programs, charities can engage in a limited amount of non-partisan political activities. However, charities that devote any resources to partisan political activities may no longer be eligible for registration. A charity’s resources include funds, property, and personnel (volunteers, employees, and directors).

Partisan political activity may include, but is not limited to:

  • providing financial or material contributions to a political party or candidate
  • making public statements (oral or written) that endorse or denounce a candidate or political party
  • criticizing or praising the performance of a candidate or political party
  • organizing an all-candidates meeting or public forum in a way that could be seen to favour a political party or candidate
  • inviting candidates to speak at different dates or different events in a way that favours a candidate or political party
  • posting signs in support of, or opposition to, a candidate or political party
  • distributing literature or voter guides that promote or oppose a candidate or political party explicitly or by implication
  • explicitly connecting its views on an issue to any political party or candidate

The restrictions on partisan political activities do not prevent volunteers, employees, or directors of charities from:

  • helping in a political campaign, as long as they do this in their personal capacity and do not suggest they represent a charity
  • making partisan political comments in public (including on social media), as long as they make it clear they are speaking in their personal capacity and not as a representative of a charity

Charities that use the Internet or social media to post information should ensure the information does not contain partisan political statements. Also, the information should not link to statements made by a third party that support or oppose a candidate or political party.

When a charity invites comments on its website, blogs, or on social media, it should monitor them for partisan political statements and remove, edit, or moderate such statements within a reasonable time.

For more information on political activities, go to Resources for charities about political activities, including Policy Statement CPS-022, Political Activities, and Partisan political activities, or call our Client Service Section at 1-800-267-2384."

The Canada Revenue Agency Announces Ice Storm Taxpayer Relief

On January 9, 2014, the Canada Revenue Agency (CRA) issued a news release "Taxpayer relief available for businesses affected by power outages due to severe weather conditions in Ontario, Quebec, and Atlantic Canada" in which it provides information to taxpayers affected by the December 2013 ice storm.

Many businesses in Ontario, Quebec and the Atlantic provinces could not file GST/HST returns on time in December due to the power outages. Late filed GST/HST returns (and failure to pay the amounts owning) could lead to assessments of interest and penalties. The CRA is willing to grant taxpayer relief relating to the late filing/late payment penalties and interest.The amount of GST/HST owing must still be paid.  The delay must be reasonable.  Requests for taxpayer relief will be considered by the CRA on a case-by-case basis.

Affected businesses can apply to have interest or penalties or both waived or cancelled using Form RC4288, Request for Taxpayer Relief.

 

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.

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Do You Have A Complaint About The Canada Revenue Agency?

If the answer is 'YES", there is a form for that & and address to send the complaint.  On September 21, 2011, the Canada Revenue Agency (CRA) released RC4420 Information on CRA - Service Complaints Includes form RC-193, Service-Related Complaints.  Form RC-193 can also be found separately.

I know you are skeptical that filing a complaint will resolve the differences you have with the CRA.  That being said, the CRA has a process for submitting complaints about their service, you can use it.  At the very least, you may feel better by completing the form - even if you never submit it.  The writing and venting process may help you see both sides of the issue.

The complaints process relates to quality of service.  The CRA takes the position that it provides a service to taxpayers.  Put aside the argument that you do not want their audit services.  Try to look at the issue from the CRA's perspective (even if that is difficult on the one hand and goes against your logical brain on the other).  They are providing services.  The Minister issued a Taxpayers' Bill of Rights and needs to know if the CRA is living up to the standards that they set for the services they deliver to the public.

"Service" refers to the quality and timeliness of the work performed by the CRA.  The bases for a complaint include, but are not limited to:

•undue delays;
•poor or misleading information;
•staff behaviour; or
•mistakes, which could result from misunderstandings, omissions or oversights.

These service elements may be considered in the context of the Taxpayers Bill of Rights.

If you decide to fill out Form RC-193 (fillable version), you may send it to the Complaints office at

CRA - Service Complaints
National Intake Centre
PO Box 8000
Shawinigan-Sud QC G9N 0A6
CANADA

Fax: 1-866-388-7371 (within Canada or United States)
Fax: 819-536-0701(outside Canada or United States)

After you write your complaint, put it in a drawer for 24-48 hours before running off to the fax machine or post office.  You may wish to rewrite parts of the narrative portion before submitting the complaint.  You certainly do not want to make matters worse for yourself.  if you have been treated unfairly, you may wish to ask legal counsel for assistance as it may be prudent to use the complaints process to preserve legal rights.

Micro Feed-In Tariff Program in Ontario and HST: The CRA Clarifies Their Position

Last Week, the Canada Revenue Agency ("CRA") released GST/HST Info Sheet GI-122 "The GST/HST Implications of the Acquisition of Solar Panels Under the micro Feed-In Tariff Program in Ontario" to clarify when a person must register for GST/HST purposes and when input tax credits ("ITCS") will be allowed.  The new Info Sheet follows a period of uncertainty during which auditors would not allow ITC claims (and auditors questioned whether homeowners in the Micro FIT were permitted to register for GST/HST purposes).

Under the Micro Feed-In Tariff Program in Ontario, homeowners may install solar panels on their roof or elsewhere on their property, engage in activity of electricity generation, and engage in the commercial activity of selling the electricity to the Province of Ontario.  The issue is whether the homeowner is renovating used residential property (where no ITCs would be allowed) or purchasing solar panels and other equipment to manufacture energy and sell that energy to the province.

The Info Sheet determines that the homeowner (participating in the Ontario Micro FIT program) must register for GST/HST purposes if he/she receives more that $30,000 per year from the province under the program.  If the homeowner does not make $30,000 under the program, he/she may be a "small supplier" and would not be required to register for GST/HST purposes.  Small suppliers may voluntarily register for GST/HST purposes.

If a homeowner registers for GST/HST purposes, he/she must charge, collect and remit GST/HST on the money received from the Ontario government under the FIT Program.  They also must be careful to charge GST/HST on other taxable supplies (e.g., garage sales, sales of used cars, etc.).

If a registered homeowner purchases equipment to be used in connection with energy generation, he/she may claim ITCs and recover the GST/HST paid on those purchases.  However, these claims are subject to an audit by the CRA.  As a result, homeowners must be careful to not use the CRA as a personal ATM machine.  In other words, the CRA will scrutinize ITC claims to ensure unrelated home repairs and other personal expenses do not give rise to ITC claims.

For more information, there is a complex / high level opinion given by Torys LLP to the Solar Industries Association that has been posted on the Internet. For even more information, please go to the Solar Industries Association web-site.

Canada Revenue Agency Issues Draft Policy On HST Self-Assessment & Seeks Comments

It is unusual for the Canada Revenue Agency (CRA) to seek public comments on a difficult harmonized sales tax ("HST") topic.  Take advantage of the opportunity to shape their future policy.

On September 9, 2011, the CRA released DRAFT GST/HST Notice 266 "Harmonized Sale Tax - Self-assessment of the provincial part of HST in respect of property and services brought into a participating province".  The deadline for filing comments is October 31, 2011.  This document is 77 pages in length, so it will take time to review and find what will not work in practice.

Financial services providers, financial institutions, multi-jurisdictional charities & non-profit organizations, universities & colleges with campuses in more than one province, long term care home providers operating in more than one province, residential real estate management companies operating in more than one province, doctors and medical professionals or management companies operating in more than one province and other exempt businesses would be affected by this draft policy.  Non-resident companies also should be mindful of the draft policy if they are active in Canada and make exempt supplies.

In addition, even though the HST provinces should realize that they import supplies, they may not think of the HST consequences.  Ontario, Nova Scotia, New Brunswick, Newfoundland/Labrador and British Columbia (until they stop being a participating province) should also consider how the policy will affect them.

While the policy is in draft, it will be applied going back to July 1, 2010.  Also, while it is draft now, it will be finalized in the future.  The CRA auditors will consider this policy to be an assessment road map.  Please take the time to make sure it reflects a workable solution.

While it is self-serving for me to say this: Ask a sales tax lawyer for help in reviewing the draft policy and writing your comments.  This is your chance to improve your future and you can save money in the long run if you fix the problems before the policy is engraved in stone.

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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. 

Goderich Businesses Affected By Tornado May Seek Taxpayer Relief

I spent some of the best years of my childhood living in Goderich.  As a sales tax lawyer, I want to share a Canada Revenue Agency news release about claiming taxpayer relief in light of the tornado devastation.  Many businesses are not able to find their records let alone make timely GST/HST payments.  Income tax time will also be a problem.

Taxpayers are entitled to ask for relief in these circumstances.  Please let the CRA know as soon as you can about your circumstances (and send the letter by registered mail to keep proof of submission).  Open communication is the best way to "get on the same page". 

The CRA applies the "fairness" provisions on a case-by-case basis. However, the fact that your business was destroyed or disrupted or your home was destroyed or you emotionally are in a state of shock are reasons to ask for fairness.  My experience is that the CRA can and will reach out a helping hand to those who truly need it.

My heart goes out to the people of Goderich - my former neighbours, my friends and my community. I cannot image the challenges you must deal with and see every day.

Non-Residents Can Get Their Border GST/HST Back If They Plan Ahead

I am asked regularly whether a non-resident person who does not wish to register for GST/HST purposes can get an input tax credit for the goods and services tax ("GST") and harmonized sales tax ("HST") (if charged and) paid at the border.  The answer is "no", the non-resident cannot claim an input tax credit if they do not get into the GST/HST system, post security and file GST/HST returns.

However, other options may be available depending on the facts (which can be arranged to permit recovery).  These options are available in a business transaction and are not available to a non-resident bringing goods to Canada for their own use (e.g. at a cottage in Muskoka). The two main options are:

1) use of a drop shipment certificate; and

2) structuring the importation in a way to permit another person to recover the money.

These options are not available in every situation.  They are complicated to describe and implement.  Often the assistance of a sales tax lawyer or accountant or consultant is requirement to make sure the transactions are structured perfectly.  Since the purpose of the structuring is to get money back from the Canadian government or accomplish tax relief, the Canada Revenue Agency may inquire about the facts to see if all "t"s are crossed and "i"s dotted.

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For Many Businesses In Ontario, Only The Accounting Departments Knows HST Means More Work

When harmonized sales tax ("HST") was announced to be introduced into Ontario, the McGuinty Government told everyone that the administrative burden for businesses will decrease.  Those who work in the area know the truth - there is more work now than there was before HST.

Big businesses (many of which are not really that big) have a greater administrative burden with HST record keeping and reporting because they recapture certain input tax credits and undertake the calculations very quickly or face late filing penalties. 

Builders of real property experience a greater administrative burden with HST because they must file many different forms for transitional rebates, new housing rebates and the recaptured input tax credits.  What they did not tell builders is that they will have to file separate forms for the GST portion of the rebate and the PVAT portion of the rebate.  Builders also face late filing penalties.

Same holds true for long term care home and retirement home builders who also must file multiple forms to claim the new residential rental property rebates and transitional rebates (separate forms for each for the GST portion and the PVAT portion).  I have spoken with one client who spent hours just trying to determine which forms needed to be filed out.  Some portions of some forms did not need to be completed because there were other forms to complete instead.  My client could not figure out what to do to get the much needed money back and called me.  It even took me a couple of billable hours to create the road map.  Quite frankly, the forms are a bureaucratic mess.  I should also note that after the forms are filed by builders, they are usually audited and valuations are required before the money is paid (often after a year of waiting).

Public sector bodies (municipalities, universities, schools, hospitals, charities, not-for-profits) also have to complete and file separate forms for the GST portion and the PVAT of the public sector body rebate.  In most cases, the percentage of the rebate at the federal level is different than the rate at the provincial (PVAT) level.  If the public sector body (e.g. a charity) operates in more than one province, there are separate calculations because the provincial rebate rates are not harmonized.  Some provinces do not offer all the rebates.

In addition, businesses must collect HST according to the place of supply rules.  Some of these businesses are charging HST on transactions where they did not previously collect provincial sales tax.  This may be because the sales tax base changed or it may be because the transaction involves an HST province.  Prior to HST, there may not have been a nexus between the supplier in the province and after HST the business is a tax collector of HST.

There are many other examples that I could provide.  Many involving having to spend large amounts on legal or accounting advice to make sure 13%/15%/12% mistakes are not made.  Instead of providing more examples where the administrative burden has increased, I will ask you to provide real life examples by making comments.  Please add to the discussion.

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.

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.

Direct Deposit of GST/HST Rebates and Refunds

If you would like the Canada Revenue Agency to make a dict deposit of a refund or a rebate into you business account, you should complete a "Direct Deposit Request" form.  The downside of filling out such a form is that it becomes easier for the CRA to garnish a bank account if the business is assessed.  They will have the bank account information in their computer records.

What Will Happen If The "Yes" Vote Wins In British Columbia?

The most important document to study will be the "hard-to-read" Comprehensive Integrated Tax Coordination Agreement between British Columbia and the Government of Canada signed in November 2009 (called the CITCA by tax geeks).  The second most important document to read is the amendment letter to the CITCA signed in March 2010.  A review of the original Memorandum of Understanding may also be helpful. There will be other relevant documents that will be made public voluntarily and through access to information requests to the Government of Canada and the Government of British Columbia.  These documents will need to be reviewed carefully to determine the best plan to move forward.

What exactly will happen will happen in response to a "Yes" vote is yet to be determined.  What we know is that many will not like the plan.  The elimination of the Harmonized Sales Tax ("HST") in British Columbia will not happened immediately on August 26, 2011 if the "Yes" (anti-HST) vote is the successful side.  People celebrating at bars and restaurants will see HST on their bills after the announcement.

Businesses will need time to adjust.  This would be fair to the businesses who are, in reality, the tax collectors from the public.  The businesses will need to know what to do and the mechanisms to collect another tax (even if it is the British Columbia social services tax) will have to be put in place.  Businesses throughout Canada and not just British Columbia will need to adjust their record-keeping systems.  As with HST implementation, a change will involve a lot more work than just changing a tax rate in the computer.

Businesses inside and outside British Columbia will also need to register to collect the replacement tax.  The government will need to launch a new education campaign to communicate the obligations on businesses.  Also with the "To Do List', the government will need its own "To Do List", which will include setting a time line, passing legislation, education of the public (and duck as the tomatoes are thrown), hire people in the Consumer Taxation Branch, train the new employees, prepare policies and bulletins, talk with the Federal Government about repayment, enforcement and other process matters, etc.

If the "Yes" vote wins, GST registrants in British Columbia will still be required to charge, collect and remit HST when they sell to an HST province.  They will still be obligated under the Excise Tax Act (Canada) and regulations thereto to file a GST/HST returns in the future.  The HST Place of Supply Rules will still apply to certain transactions.  So, HST will not be elimniated fully under any change plan.

The rules relating to claiming refunds, rebates and credits under the HST tax system will need to be clarified for B.C. businesses.  There is a possibility that there may be a deadline set for amounts a business or consumer is entitled to receive from the Government of Canada.

If the HST is going to be eliminated, businesses who are registered for GST/HST purposes and entitled to claim input tax credits will take the opportunity to purchase goods and services before the change.  Those businesses that will have to pay unrecoverable provincial sales tax after the change may decide to undertake the expenditures at a time when they can recover HST by way of an input tax credit.  Businesses will take prudent steps to save money while the change occurs. 

Consumers, on the other hand, may delay purchases until after the change occurs when they are purchasing an exempt good, real property, intangible property or services that are not subject to provincial sales tax.  This will most negatively affect the real estate market and the service sector.  There will be transition rules for the change that will need to be developed and communicated.

Consumers outside the province of British Columbia may delay purchases of goods from British Columbia until after the change (or at least after the date of the announcement of the plan for the replacement tax).  The place of supply rules may change and give rise to opportunities to save sales tax.

In the meantime, the Government of British Columbia will undoubtedly talk about repayment of the monies received from the Government of Canada to implement the HST.  There will be talk of new taxes that were not in place in British Columbia before July 1, 2010.  As sure as night follows day, if the "yes" vote is the majority, the blame game will start.

We will continue to watch and report on this developing story - if it develops into a story.  Nothing much will happen if the "No" vote is the majority.

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.

Deregistered Charities Face GST/HST Issues

When I say "deregistered charities", I am referring to deregistration as a charity and not deregistration for GST/HST purposes.  If a charity that was a registered charity is deregistered as a charity (no longer considered to be a charity by the Canada Revenue Agency (CRA)), that entity will face a number of assessments, including GST/HST, if they do not make changes.

If an entity is deregistered as a charity, it would have to determine if the supplies made by it are exempt or taxable for GST/HST purposes.  Many supplies made by charities are exempt pursuant to Part V.1 of Schedule V to the Excise Tax Act (Canada).  A key pre-condition to the exemption may not be satisfied after deregistration.  If the exemption is no longer available and the entity does not change its invoicing (charging) practices, it may be assessed for failure to collect GST/HST.

If supplies become taxable (when a charity no longer makes exempt supplies), the entity must determine if they may claim input tax credits paid by it on business inputs.  The accountants and book-keepers will have to undertake a careful review.  If the entity does not claim input tax credits, it may lose its opportunity.

If an entity is deregistered as a charity, it would no longer be entitled to claim public service body rebates to recover otherwise unrecoverable GST/HST paid on business inputs.  Charities may claim a public service body rebate of 50% of the GST portion.  Depending on the province(s) in which a charity operates, the charity may claim another rebate for the PVAT (provincial) component.  If the charity is deregistered, a key pre-condition of entitlement will no longer apply.  If the entity does not change the way it completes its GST/HST return, it may be assessed to draw back rebates improperly claimed.

There are many other changes that may be experienced by specific charities.  For example, certain charities take advantage of the election in section 211 of the Excise Tax Act (Canada) and that benefit would no longer be available.  Certain volunteer reimbursements and allowance rules would not longer be available. Certain charities could deregister for GST/HST if they are below the small supplier threshold for charities. 

If the CRA is talking about deregistration of an entity as a charity, that entity needs to address the issues in that discussion.  If they ignore the CRA during the deregistration process and do not take steps to revisit all elements of charging GST/HST and taking advantage of entitlements, there may be costly assessments against the former charity and/or the directors of the charity.

Alert: Businesses Must Remit GST/HST From Own Pocket Even If Not Paid By Customer/Client

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

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

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

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.

Sharing a Rumour That Has Not Been Independently Confirmed

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

The Canada Revenue Agency Has Released A New Guide For Non-Residents Doing Business In Canada

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

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

The CRA document addresses many issues, including:

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

2. How is GST/HST calculated?

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

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

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

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

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

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

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

Have You Lost Your GST/HST Return & Do Not File Electronically?

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

Warning: Registered Persons Should Not Claim 100% Of The ITCs on Meals & Entertainment

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

The Vancouver Sun article states:

  • Taneja footed a $429.42 bill for a birthday party of 20 at the Waldorf, then headed with a staff member to meet some friends at 100 Nights, where he spent a further $358.40 on food and booze;
  • But HST costs Taneja incurs to do business get refunded, and he supports the harmonized tax as a better alternative to the PST/GST hybrid. Before, businesses could recover the five-per-cent GST, but not the seven percent PST component.
The reality is that any registrant for HST purposes cannot recover 100% of the HST paid on meals and entertainment expenses.  At best, the registrant is limited to an input tax credit (ITC) of 50% of the HST paid on meals and entertainment expenses.  Large businesses (businesses that make taxable supplies in excess of 10,000,000 per year, certain financial institutions and certain MUSH sector businesses) may be subject to the recaptured input tax credit rules and these businesses must reverse their ITCs on the provincial component of the HST charged in connection with their meals & entertainment expenses.
 
For example, if a small business, such as the individual in the Vancouver Sun article, has a meal expense of $200 (including tip) in British Columbia, they would pay HST in the amount of $24.  The allowable input tax credit would be only $12 (not the full $24).
 
Now for the reality check - Under the British Columbia PST regime, a person did not pay social services tax on restaurant meals (food component) and paid SST on alcohol.  Assuming the restaurant meal did not include alcohol, prior to HST, the individual would pay $200 plus $10 GST.  The individual would recover $5 by way of an input tax credit.  As a result of HST, the unrecoverable cost of the restaurant meal increased from $205 to $212  (costs $7 more).
 
The CRA may audit ITC claims to ensure that a registrant indeed paid the HST in connection with commercial activities and that he/she has the documents required that meet the documentary requirements.  The individual in the article is said to have met "friends at 100 Nights".  If a registered person goes out to dinner with friends, family or for personal reasons, he/she is not entitled to claim ITCs in connection with the personal expenditures.  The CRA will be concerned that under the HST regime, sole proprietorships and other registrant may be using their GST/HST returns improperly as a personal ATM to government money.  It was never intended that individuals recover personal costs. 
 
In the circumstances of the person in the Vancouver Sun article, the CRA will go through the receipts (and there better be receipts) with a fine tooth comb and will want information about the many meals and entertainment expense claims, including who was the business client at each of the restaurant/bar. The CRA auditor may ask for the names and contact information of the business associates and will follow-up with the business associates to see if they met for business purposes.  The threat of an audit or quasi-criminal charges for lying to an auditor often cause the business associates to convey accurate information about the meetings over meals & entertainment. Also, business clients do not like the attention of the CRA and contact by the CRA may negatively affect a business relationship (I have seen this happen before when an individual writes a person's name on an expense claim and the meeting did not actually occur).
 
I would like to warn those registrants who are not familiar with the HST rules and who do not have an accountant/bookkeeper who knows the HST rules.  Following the actions of the person in the article may get you into trouble with the CRA.
 
As for the Vancouver Sun article, the next article may have a different title: "HST Audit Increases Red Tape".

 

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.

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.

Some Payments Made By Limited Partnership To The General Partner Are Subject To GST/HST

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

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

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

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

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

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

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

Partners and Partnerships: Transfers Are Tricky

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

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

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

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

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

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

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

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

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

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

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

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

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.

A GST/HST Joint Venture Election Allows One Co-Venturer To Account For GST/HST

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

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

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

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

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

1. There MUST be a written joint venture agreement;

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

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

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

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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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.

What Happens When Good Companies Make Mistakes?

Some companies/businesses are very compliance-conscious when it comes to sales tax.  They attempt to do everything by the book.  However, with the changes to harmonized sales tax and the late breaking changes to the sales tax laws, some issues may have fallen through the cracks.

Other companies have hired experienced sales tax staff to ensure accounting records are accurate and GST/HST returns are filed on time.  But, these employees deserve their 4 weeks vacation or have sick days from time to time.  Someone else takes over their desk and mistakes can occur.

Some companies conduct internal audits of their sales tax reporting mechanisms every year.  When such mistakes are discovered, the entity may make be able to make adjusting entries (such as claiming an overlooked input tax credit) or may file an amended return (if permitted to adjust the amount of GST/HST collected).  However, when the mistakes are discovered later in time or are systemic in nature or are the result of changes to the law that were not understood in time, it may be necessary for the company to make a voluntary disclosure.

A voluntary disclosure must be made before the tax authorities come knocking on your door.  If the tax authorities are already planning an audit, they may not accept any disclosure as voluntary in nature.

A voluntary disclosure must be complete and may be subject to an audit.  Think of a voluntary disclosure as you doing the auditor's job for them.  You do the calculations that they would do if they came in to conduct an audit.  By taking this approach, if the tax authorities decide to verify your voluntary disclosure, they can quickly determine that you have been as thorough as they would have been.

Words of U.S. Supreme Court Justice Robert H. Jackson

Robert H. Jackson once wrote that:

"The United States has a system of taxation by confession. That a people so numerous, scattered and individualistic annually assesses itself with a tax liability, often in highly burdensome amounts, is a reassuring sign of the stability and vitality of our system of self-government. What surprised me in once trying to help administer these laws was not to discover examples of recalcitrance, fraud or self-serving mistakes in reporting, but to discover that such derelictions were so few. It will be a sad day for the revenues if the good will of the people toward their taxing system is frittered away in efforts to accomplish by taxation moral reforms that cannot be accomplished by direct legislation. But the evil that can come from this statute will probably soon make itself manifest to Congress. The evil of a judicial decision impairing the legitimate taxing power by extreme constitutional interpretations might not be transient. Even though this statute approaches the fair limits of constitutionality, I join the decision of the Court.”

United States v. Kahriger, 354 U.S. 22 (1953)

I think of this passage when I ponder some of the new and very complex rules relating to financial services, financial institutions, "arranging for" and pensions under the Excise Tax Act (Canada). As the insightful Justice Jackson has pointed out, the voluntary reporting regime is undermined when good companies who want to comply cannot.

The words of Justice Jackson may be repeated in Canada and in the context of sales taxes because the GST/HST regime involves self-reporting.  I am just saying ...

Withholding Tax Problems for Non-Residents Can Arise When Register for GST/HST and Tick Box "Carrying on Business in Canada"

I have seen an increase in Regulation 105 withholding tax audits recently and non-residents registered for GST/HST are affected.  The withholding tax audits are usually audits of Canadian companies who make payments to non-resident suppliers (often from the United States).  The cases I have seen recently involve a non-resident who provides services to the Canadian company at the a Canadian location.  Often, the contract calls for the Canadian company to reimburse the non-resident supplier for expenses incurred during the delivery of the services (e.g., the travel costs).  More recently, the Canadian business asks the non-resident to register for GST/HST purposes so that the non-resident can remove imbedded GST/HST in the agreed disbursements. With the implementation of HST, the disbursement costs have increased.  When the non-resident voluntarily registered for GST/HST, they checked the box on the registration form that they are carrying on business in Canada.

In many cases, when a Canadian business pays an amount to a non-resident business, the Canadian business must withhold a percentage specified in an tax treaty (the withholding tax) and remit that amount to the Canada Revenue Agency.  For example, if a U.S. company provides services to a Canadian company, the withholding tax rate would be 15%.  The Canadian business provides the non-resident with the requisite forms and the non-resident takes steps to get the money back from the Canadian Government. It is beyond the scope of this blog posting to cover all the withholding tax rates of Canada and all the exceptions and the steps to pay and recover withholding tax.  What is clear is that many Canadian companies do not withhold and get audited and assessed.

My reason for posting this blog article is to communicate to non-residents that the administrative task of completing a GST/HST registration form establishes a paper trail for non-residents and a simple answer relating to one Canadian tax may result in non-so-simple issues regarding another Canadian tax.  Please ask questions of an experienced Canadian tax lawyer.

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".

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.

What Can I Do To Motivate You To Make Positive Steps Towards Better GST/HST Compliance

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

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

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

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

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

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

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

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

Did you have difficulty reconciling various reports? Fix it. 

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

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

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

Should Companies/Partners Undertake GST/HST Inspections Before Buying a Business?

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

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

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

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

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

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

Would you like to find MONEY in your Business?

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

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

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

I will share one tip today. 

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

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

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

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

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

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

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

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

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

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

The ABCs of Harmonized Sales Tax

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

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

A is for Almost Everything - HST covers almost everything;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Registrants Who Hold Garage Sales Should Charge GST/HST

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

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

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

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

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

Canada Revenue Agency Issues Ruling that ITCs Available If Retailer's Goods Stolen

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

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

This is a fair ruling in the circumstances. 

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

Communication of Zero-Rating, HST Point of Sale Rebates and HST on Sales Receipts is Problematic

Retailers are having difficulty communicating information to consumers on a single invoice.  Both large and small retailers are having to communicate a single blended HST charge and, at the same time, communicate when goods are zero-rated (HST is charged at 0%), exempt (no HST) and when they are offering an HST point of sale rebate (charging GST at 5%). 

The retailers have to segregate the information for consumers on the single piece of paper they provide at the time of sale (the sales receipt).  As a result, different lines of information may be shown on a sales receipt that may be confusing.  To a consumer that does not bring along a calculator, it may appear that the retailer is charging 13% + 5% tax or undercharged the 13% HST (in Ontario).

The more important problem is for the small retailers who may not be charging the HST correctly and may not be communicating the information correctly.  The smaller retailers may not have realized the extent of the systems changes that were required to implement HST.

Small retailers should know that some of the large retailers have been struggling with this issue --- you are not alone. However, both are expected to get it right.  Auditors will visit small retailers too.

Alert to Non-Residents - It is a Good Time to Take a Closer Look at Canadian Business Activities

I have helped many non-residents of Canada register for goods and services tax (GST) purposes over the years. These GST registered non-residents must apply the HST place of supply rules to their transactions involving Canadian buyers/clients.

In addition, many of these non-resident clients have filed extra-provincial registrations to carry on business in a Canadian province so that they could open a bank account and pay the Receiver General any GST collected. 

These non-resident entities have made two representations to the Government of Canada and/or a provincial government that they are 'carrying on business" in Canada.  Many have done so without considering income tax and/or withholding tax consequences.

The implementation of HST should trigger a closer look at a non-resident's Canadian business activities.  So far, I am close to 100% in finding mistakes that could be or are already very costly.

First Ontario HST Returns May Be Filed Now

This is so exciting (NOT) - It is August 2010 and this means that some businesses that are in a net refund position (that is, their input tax credits exceed their GST/HST collected) may be filing their GST/HST returns for the month of July 2010.  The businesses that would file their GST/HST returns early would most likely be monthly filers.  Some examples are builders of multi-unit residential complexes, persons who made a large purchase of equipment in July 2010 due to the recoverability of HST, exporters and exempt entities.

July 2010 has now ended (months seem to come and go so much more quickly).  Businesses will be working on their records and filing their GST/HST returns (many must now file electronically).

The first GST/HST return must include HST collected during the transition period - please do not forget.  All HST must be remitted to the Receiver General of Canada - do not send it to the ontario Ministry of Finance.

When calculating input tax credits, please include all GST/HST paid or payable before August 1, 2010.  If you are a large business, do not offset the recaptured ITCs against the ITCs collected number - it has its own line on the GST/HST return.

Gratuities as Added Consideration For the Supply

I was at an event last night hosted by Women's Post and a woman entrepreneur in the audience who was in the events planning business in Ontario asked why harmonized sales tax (HST) was charged being charged on gratuities (she had noticed this since the implementation of HST).  She noticed that venues and caterers were quoting (1) the charge for the room and/or (2)  the food/beverages and (3) a mandatory gratuity and that HST was being charged on all charges, including the gratuity.

The answer is that the Canada Revenue Agency (CRA) considers the mandatory gratuity to be extra consideration for the supply (say, of the venue.food/beverages/etc) rather than a contribution towards the salary (non-taxable) of the employees that will be working the event. The CRA had taken this position with the goods and services tax (GST).  GST/HST is payable on the consideration for the supply and since the gratuity is considered by the CRA to be additional consideration, it goes into the calculation/formula.  As a result, the CRA takes the position that GST/HST is payable on the added consideration that is the gratuity portion.

I have seen the same analysis used by CRA when they look at gratuities paid on restaurant meals, resort vacation packages, hair salon services, spa services, etc - whenever there is a mandatory gratuity OR when the gratuity is included in credit card payment (that is the recipient pays adds a gratuity to a credit card payment).  For example, when I go to the hair salon, I pay by VISA.  Before I indicate my PIN number when I use my chip card, I am asked whether I wish to add a tip or gratuity and I usually add 15%-20% of the tax-excluded price for the services rendered.  The CRA when auditing such service providers/venues, adds the gratuity amounts to the consideration for the services and calculates the GST/HST owing.

Based on the cases I have seen, often the service provider does not charge the GST/HST on the gratuity portion and has to dip into their pockets to pay a substantial assessment.

The morale of the story is that when possible, recipients should give waitresses/waiters and service providers cash tips when they are adding an amount to the bill for the exceptions services performed by the individual to the recipient.  If the gratuities are in the invoices or in the credit card payments 13/113 of the amount in Ontario (12/112 in BC, 15/115 in NS, 113/113 in Nfld/Lab. and NB) will not go to the waitress/service provider and will be remitted to the Receiver General of Canada.  This is unfortunate because the individuals affected are making low hourly wages and rely on the gratuities as employment income (to make ends meet).

I have been involved in structuring the payments so that more money goes to the real people who work very hard for the additional employment income - it is possible if a business plans in advance of the CRA visit.

Cascading Taxes: When Is HST Payable In Addition To/Including Another Tax?

A tax on a tax is called a "cascading tax".  Cascading taxes are common in today's world.  As a general rule, most new taxes and levies can result in cascading tax (HST charged on top of the new tax) unless the provincial government asks the federal cabinet to list the new tax in a regulation.

Goods and services tax (GST) and harmonized sales tax (if applicable) (HST) is calculated on the consideration payable for a supply of property or services.  Subsection 154(2) of the Excise Tax Act (Canada) provides that "the consideration for a supply of property or a service includes:

(a) any tax, duty or fee imposed under an Act of Parliament [that means federal laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the production, importation, consumption or use of the property or service [other than GST/HST];

(b) any provincial levy [intended to cover provincial laws] that is payable by the recipient or payable or collectible by the supplier, in respect of that supply or in respect of the consumption or use of the property or service, other than a prescribed provincial levy that is payable by the recipient [that means it is in a regulation]; and

(c) any other amount that is collectible by the supplier under an Act of the legislature of any province and that is equal to, or is collectible on account of or in lieu of, a provincial levy, except where the amount is payable by the recipient and the provincial levy is a prescribed levy."

The term "provincial levy" is defined to mean "a tax, duty or fee imposed under an Act of the legislature of a province in respect of the supply, consumption or use of the property  or a service."  What is most significant about this definition is that unless the levy is imposed pursuant to an Act of the legislature of the province, GST/HST would not be payable on the tax-included price. It is always necessary to go to the source of the taxation/fee/levy.

The Taxes, Duties and Fees (GST/HST) Regulations contain a negative list of provincial levies that are excluded from the GST/HST calculation.  If the provincial law is not in the list, then the provincial levy is included in the price for the purposes of calculating GST/HST.

Ontario has a very short list including the following:

  • the Land Transfer Tax Act, R.S.O. 1990, c. L.6,
  • Chapter 760 of the City of Toronto Municipal Code, made under Part X of the City of Toronto Act, 2006, S.O. 2006, c. 11, Sched. A, if the tax, duty or fee would have applied to that transfer under that chapter as it read on February 1, 2008

The Taxes, Duties and Fees (GST/HST) Regulations also prescribe in the list "a tax imposed by the legislature of a province, under an Act referred to in the definition of "general sales tax rate", which includes subsection 2(1) of the Retail Sales Tax Act (Ontario). This exclusion is more complicated, but has been generally applied to exclude Ontario retail sales tax from the calculation of GST.

Now that Ontario has harmonized and is not using the Retail Sales Tax Act to impose taxes representing significant revenue, any new provincial levy may be included in the GST/HST calculation as it would not be listed by the Taxes, Duties and Fees (GST/HST) Regulations.  I say "may" because the other requirements in section 154 of the Excise Tax Act would have to be met. To be excluded from the GST/HST calculation, new taxes must fall within a listed Act in the manner it is identified or the provincial government must ask the Government of Canada (specifically federal cabinet) to change the regulation.

It seems as if in most situations, suppliers assume (and act as if) the tax/fee is included in the calculation of GST/HST because it is the safe thing to do.  However, questions are not asked if this is correct.   For every provincial levy or charge that we might be inclined to include for the purposes of calculating GST/HST, we must ask questions before including the fee in the calculation:

  • Is the tax/fee imposed pursuant to a law of Canada?
  • Is the tax/fee imposed pursuant to an Act of the legislature of a province?
  • Is the tax/fee imposed by a regulation or a rule and there isn't a charging provision in an Act of the legislature (I an thinking carefully about the ecotaxes)?
  • Is the tax/fee imposed under a municipal by-law?
  • On what is the tax/fee imposed?
  • Is a recipient of a supply responsible for paying the tax/fee under the law imposing the tax/fee?
  • Is the supplier of the supply required to collect the tax/fee?

I have serious questions whether the Toronto plastic bag fee is subject to HST.  I have serious questions whether GST/HST should have been charged on top of the ecotaxes.  I have questions whether certain destination marketing fees are subject to GST/HST.  I think that consumers are paying GST/HST on top of many taxes and fees when the GST/HST laws do not require GST/HST to be charged.

The unfortunate reality is that the implementation of HST has incentivized Ontario and British Columbia to cause prices to increase so that they get more HST revenues.  It is in the interest of the government for retailers and suppliers to make mistakes and overcharge consumers.  It is no longer in the interest of Ontario and British Columbia to list new provincial levies in the Taxes, Duties and Fees (GST/HST) Regulations.  It is no longer in the interests of the leaders to keep prices down for consumers.

For this reason, it is more important than ever for businesses and retailers to understand the law and force the governments to follow the law.  It is more important than ever before that provincial levies are imposed in a transparent manner.  It is more important than ever for the people to make it known that there is a cascading tax and the government is accountable to them and needs to request the new tax to be listed.

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File Opening Forms May Provide Useful Information to Auditors

I am a big fan of anticipating a problem during a Canada Revenue Agency audit and solving the problem before it happens.  File opening forms may provide useful information to a CRA auditor.  The first thing they do is they inform the CRA auditor that you are diligent.  You took your GST/HST compliance responsibilities seriously.  You tried to ask the right questions in order to bill correctly.

A file opening form can be useful in recording the information that will allow you to determine whether the harmonized sales tax (HST) place of supply rules apply and at what rate you should be charging HST.

There isn't a single form that will work for all businesses - in other words, you would be wise to work with an HST lawyer or expert to develop the form and learn how to analyze the information on the form in a diligent manner.  If you have a billing policy, then you are more likely to get the answer right.

Some of the information that may be included on a file opening form (and I want to make it clear that this is not an all inclusive list) is:

  1. Date
  2. The correct legal name of the client/customer
  3. If the client is incorporated, the jurisdiction of the corporation and the incorporation number
  4. If the client is a partnership, the jurisdiction of the partnership and the partnership registration number
  5. The head office address or the address at which the individuals are located who provide instructions to you
  6. Name of the prime contact who will be giving instructions
  7. The normal location of that person
  8. Telephone number of the prime contact
  9. Fax number of the prime contact
  10. Email address of the prime contact
  11. If different than 6, the name of the person who hired you
  12. If different than 7, the normal location of the person who hired you
  13. If different than 8, the telephone number of the person who hired you
  14. Will you be providing (a) goods, (b) services, (c) real property, (4) intangible property, or (e) other
  15. A short statement of the proposed work
  16. If you are selling goods, the address to which goods will be shipped
  17. If you are providing services in respect of real property, the address at which you will be providing the services or the location of real property at issue
  18. Your client's/customer's GST/HST registration number

We would be willing to create a special file opening form for your business (for a fee to be determined based on the work involved - e.g., simple business would be $250 plus all applicable taxes).  We will ask more detailed questions about your business and add prompts for information that you will need to apply the HST place of supply rules (and ward away assessments).  We will teach you how to read the information so that you can charge the right amount of HST given your unique circumstances.  To prepare upfront, at the time of file opening, will in all likelihood be less expensive than a CRA assessment.

For more information, please contact me at 416-760-8999.  I am a Canadian sales tax lawyer.

Input Tax Credit Reporting 101

Many businesses are conducting tests to determine whether they are recording their input tax credits properly.  In particular, they are verifying that when they pay harmonized sales tax (HST), the HST is recorded properly in their computerize records so that when they file their first GST/HST return for the reporting period that includes July 1, 2010, they include the HST paid on purchased supplies.

When a business files a GST/HST return, they should include in the input tax credit line all GST and HST paid or payable.  Even though some input tax credits of large businesses are subject to recaptured ITC rules (which will not be addressed in this post), they must claim the full amount in the ITC line and NOT undertake an offset calculation.  For the purposes of the example below, I am assuming the business is located in Ontario:

Type of Supply Value of the Supply GST Paid or Payable HST Paid of Payable  Total ITC
real property rent $10,000 $500 $800 $1,300
legal services $20,000 $1000 $1,600 $2,600
telecommunications $500 $25 $40  $65
computers  $10,000  $500 $800  $1,300
energy  $1,000  $50  $80  $130
vehicle  $50,000  $2,500  $4,000  $6,500

While there would be many other entries in a typical business, in the above example, the ITC to be claimed is $11,895.  As previously mentioned, if the business is subject to the recaptured ITC rules, that calculation does not affect the ITCs claim line and is addressed/calculated elsewhere.

A GST/HST registrant has a prescribed period of time (often 4 years) in which to claim input tax credits.

Registrant Purchasers of Real Property Should Update Certificates

The GST rules (now the HST rules) have historically allowed a supplier (seller) of taxable real property to make a supply to a recipient (purchaser) and not collect GST/HST in respect of the real property if the purchaser is registered for GST/HST purposes and provides a written certification of registration status.  The relevant sections of the Excise Tax Act are subsections 123(1), 221(2) and 228(4).

What happens in these real property transactions is that the purchaser provides the seller a certification at closing and the supplier verifies the purchasers GST/HST registration number with the Canada Revenue Agency (as a due diligence step).  If the certification is verified by the Canada Revenue Agency, the seller does not collect GST/HST from the purchaser at the time of the closing/transfer and the purchaser self-assesses GST/HST on its GST/HST return for the period in which the transaction took place.  On the GST/HST return, the purchaser indicates the amount of GST/HST he/she/it is self-assessing and takes an input tax credit  on the same return to neutralize the cash flow effect. The purchaser also files a GST Form 60 with its GST/HST return.

These certifications are not a prescribed form (that is the CRA has not developed a form to complete) and many lawyers and real property businesses have developed a precedent that they use.  These precedent certifications need to be updated to account for HST.

I would recommend that the new certifications include the following information:

  1. The Recipient's (buyer's) correct legal name;
  2. The Recipient's GST/HST number;
  3. The Recipient's reporting period (not necessary, but helpful to diarize self-assessment deadline);
  4. The Recipient's mailing address in the Canada Revenue Agency's records (I have needed this in the past to verify items 1 and 2);
  5. The municipal address of the real property (in order to make HST place of supply determination at the time f the self assessment)
  6. The transfer value of the real property; and
  7. The rate of HST applicable (based on 5 and 6).

The Registrant Real Property Certification should make reference to both GST and HST on a going forward basis so as not to confuse the auditor who wants to raise a big assessment against the parties.

We have prepared such precedent certificates for transactions and will be willing to sell a precedent for a flat rate of $100 (the cost of which can be recoverable).

HST = Haveto Sum Together

I have been asked many times over the last few days about reporting of harmonized sales tax (HST) on GST/HST returns.  One question was posed by a retailer who sells paintings across Canada.  He said that in the month of July (so far) he has sold paintings (and delivered the paintings in Ontario, British Columbia and Nova Scotia.  He has asked how he must report the GST/HST to the Canada Revenue Agency (CRA) on his GST/HST return.

My response is that he must add all the GST and HST together and report the combined amount on a single line of his GST/HST return.  I will give an example to help explain:

This is an example that I have made up and does not use the numbers I have been given by any person.  Let's assume we are already at the end of July for the purposes of my example.  The painter sold the following paintings, to the following destinations, and has collected the following amounts of GST and HST:

Painting Destination Value GST Collected HST Collected
Painting 1 British Columbia $10,000 $500 $700
Painting 2 Ontario $20,000 $1000 $1,600
Painting 3 Ontario $10,000 $500 $800
Painting 4 Alberta $30,000 $1,500 0
Painting 5 Nova Scotia $10,000 $500 $1000

The amount of GST/HST that must be reported on a single line on the painter's GST/HST return will be $8,100.  For reporting purposes, it will make no difference how many sales were made in each HST province.  The total combined GST/HST is reported on as a single number.  Believe it or not (agree or not), the governments thought that this approach would be easier and a basis for selling the HST to businesses as a simple tax.

Many ask at this point how each province gets their respective HST.  The payments to provinces go into a big pot of money and are allocated according to complicated formulas in the Comprehensive Integrated Tax Coordination Agreements (CITCAs)  I will not bore you with the details.

One final point is that the supplier's records must be auditable.  The CRA auditor will know the combined total and will ask how that number was determined.  The details remain relevant and suppliers should keep records that are easy for the auditors (and then the audits are less painful for the suppliers).

Will ORST Refunds Be Another TFSA Miscommunication?

Many businesses may be entitled to a refund of Ontario retails tax (ORST) paid in respect of goods and/or "taxable services" paid for before July 1, 2010 where the goods and/or "taxable services" are provided after July 1, 2010. 

The best examples I can give are annual subscriptions/licenses of computer software and leases of goods (however, there are other situations).  Please review your invoices to see if you paid an annual or other periodic amount of ORST before July 1, 2010 and set aside those invoices that relate, in part, to the period after July 1, 2010.

As a matter of law, it may be that the Canada Revenue Agency expects to receive harmonized sales tax (HST) for the portion o the supply that occurs after July 1, 2010. The HST transition rules may require an allocation between the pre-HST period and the post-HST period.  It also may be that as a matter of law, you were required to pay ORST on the full invoice at the time it was paid and things changed. You may entitled to receive a refund of ORST paid pre-HST in respect of the post-HST period.  I know that this may sound silly, but tax changes sometimes have silly effects/results.

I have reviewed the Canada Revenue Agency web-site for some guidance on this issue and have found nothing (so far).  I have also reviewed the Ontario Ministry of Revenue web-site for some guidance on this issue and have found nothing (so far).  It is for this reason that I am saying that the HST may be a source of confusion, like tax free savings accounts.  It would be helpful for businesses to be told clearly what is expected of them.

I will give an example in order to clarify: 

For example, some businesses and MUSH sector entities may an annual license for computer software in May 2010 and paid Ontario retail sales tax in addition to GST and the lump sum annual lease price.  In this example, computer software was licensed for a year for $120,000 and GST would have been $6000 and ORST would have been $9600. However, the ORST portion would be in respect of software that could be used post HST and, therefore, the purchaser must pay HST is respect of the period after June 30, 2010.  10 of 12 months would be subject to HST instead of ORST.  As a result, the purchaser would have to self-assess and remit HST on $100,000 = $8,000.  The business would be entitled to a refund of ORST from the Ministry of Revenue in the amount of $8000.

The self-assessment would occur on the GST/HST return for the first reporting period after July 1, 2010.  There is a line on the GST/HST return for self-assessed GST/HST.

The refund application would not be filed with the CRA, but, rather would be filed with the Ontario Ministry of Revenue. Here is the general refund application form - it is difficult to find on the Ontario Ministry of Revenue web-site.

This may sound silly - robbing Peter in order to pay Peter (and Paul). Some businesses for some purchases may pay both HST and ORST and will have to wait to get the ORST back.  These same businesses have audit risk under both the ORST and HST tax regimes.  The business has paid the correct amount of tax initially and then has a problem and can be assessed for failing to ensuring the tax was paid to the right person. 

You will not be able to say that ultimately Ontario received its money because technically under the HST regime, the HST goes into a pot of money and that money is allocated according to formulas, which are not based on the place of supply.  The formulas do not allow for a matching of HST to a particular province.

In a more perfect tax system, there would be a joint CRA and Ontario Ministry of Finance form that would allow a business to identify payments of ORST in the pre-HST period that cover the post-HST period.  In a more perfect tax system, the governments would ask for a copy of the invoice and make the corrections for you.  In a more perfect tax system the governments would waive interest and penalties when there is not intention to underpay sales taxes.  It should be easy for businesses to comply with sales tax laws, but sometimes it is not simple or easy.

New Canada Revenue Agency Guides Help With New Housing Rebate Calculations

June Billings & HST Transition Rules

I was speaking with a service provider (marketing advisory services) in Ontario the other day about her June 2010 billings.  She said that she will be sending out invoices on June 15, 2010 in respect of services to be provided between July 1, 2010 - July 31, 2010.  She does not currently charge Ontario retail sales tax on her advisory services.  She asked me whether she is required to charge Ontario harmonized sales tax (HST).

The answer is yes (assuming the client being billed is located in the province of Ontario).  ABC Co. would charge GST on her marketing advisory services.  She would remit the GST with her GST return for the period June 1, 2010-June 30, 2010 (she is a monthly filer).

She would also add HST to the invoices.  However, she would remit the HST collected with the GST/HST return for the post-HST implementation period being her July 1-July 31, 2010 GST/HST return, which is due at the end of August 2010. She does not include the HST in the GST/HST return that she files in July even though the HST was invoiced in June 2010.

Yes, there is an unusual delay in the remittance of the HST.  This is because the HST must go into the HST pot so that it can be properly allocated to the HST Zone provinces (including Ontario).  If the HST is remitted to the Government of Canada in July, Premier McGuinty does not get any of the money.  Also, the supplier would be making a mistake and may be penalized at the time of an audit.

Graphic Designers in Ontario/BC Have HST Characterisation of Supply Questions

Graphic Designers have experienced Ontario retail sales tax issues for the last 4-5 years as auditors have taken the position that their services are actually "taxable services".  As a result of the confusion, the Association of Registered Graphic Designers (Ontario) consulted with the Ontario Ministry of Finance and prepared materials for members.  A number of charts/continuums were prepared by the Association to provide to the Ontario Ministry of Finance to demonstrate that there are many different types of graphic design services.  The Association's tools set out information for 8 categories of graphic designers (categories for the purposes of communication with Ontario):

  • exhibit graphic design
  • environmental/architecture graphic design
  • editorial graphic design
  • identity graphic design/branding
  • web design/new media
  • package graphic design
  • advertising graphic design
  • corporate communication/promotional material graphic design

After the creation of these documents, the Ontario Ministry of Revenue released RST Guide 520 "Graphic Designers", in which Ontario recognized and provided guidance regarding the Ontario retail sales tax consequences for various categories of graphic design services.

British Columbia issued SST Bulletin 128 for graphic designers in British Columbia (before the Ontario Guide).

With harmonized sales tax (HST), graphic designers will continue to have serious characterization issues.  The HST place of supply rules are based upon (divided into categories) based on the characterization of the supply.  FOR HST PURPOSES, THERE ARE MANY DIFFERENT PLACE OF SUPPLY RULES THAT MAY APPLY FOR GRAPHIC DESIGNERS BASED ON WHAT TYPE OF GRAPHIC DESIGNER SERVICES/DELIVERABLES THEY PROVIDE.

Some graphic designers would apply the general HST place of supply rules for services.  Some graphic designers would apply the HST place of supply rules for services in respect of real property.  Some graphic designers would apply the HST place of supply rules for services in respect of tangible personal property. Some graphic designers would apply the HST place of supply rules for services in respect of photographic -related goods.  Some graphic designers would apply the HST place of supply rules for computer-related services.  Some graphic designers would apply the HST place of supply rules for intangible property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of real property. Some graphic designers would apply the HST place of supply rules for intangible property in respect of tangible personal property. Some graphic designers may apply a combination of HST place of supply rules.

Any graphic designer in Ontario who does not charge the 13% HST rate in Ontario will have to justify not charging the 8% HST portion.  The same holds true for graphic designers in British Columbia if they do not charge the 7% HST portion.  Yes, both graphic designers in Ontario and British Colombia may compete with U.S.-based graphic designers who are not charging HST. That is another issue altogether. 

Graphic designers who sell only to businesses/clients/consumers in their province will not have place of supply issues as they will charge their provincial are on all invoices.  The graphic designers who have businesses/clients/consumers in more than one province will have to characterize their services/deliverables and apply the correct place of supply rule.  I would be pleased to help.

HST Means No More ORST Purchase Exemption Certificates

I received the following question today:

I am a furniture manufacturer who works with interior designers.  When I invoice, if an item is being re-sold by the designer then I do not invoice the Ontario retail sales tax (ORST).  The designer will invoice ORST directly to the client. How will this change with the HST?  Will my clients be exempt if they are re-selling an item?   Also, when I purchase materials for manufacture many items such as wood, screws glue etc are PST exempt when I purchase them and get added into the cost once sold to the customer?  How will the HST deal with this?

The answer is that the furniture manufacturer will be required to charge HST when he/she sells to the interior designer.  The interior designer is no longer entitled to provide an ORST purchase exemption certificate to be exempted from payment of sales tax.  The interior designer will pay the GST/HST and claim an input tax credit (if he/she is registered for GST/HST purposes.  The interior designer will charge the final consumer GST/HST.

In addition, the furniture manufacturer will no longer purchase his/her inputs using an ORST purchase exemption certificate.  In other words, the furniture manufacturer must pay GST/HST on all materials and components used in the manufacture of the furniture.  The furniture manufacturer would be entitled to claim an input tax credit if he/she is registered for GST/HST purposes.

This will result in cost flow issues for both the manufacturer and the interior designer (the two businesses in the example).  The businesses will have to fund the GST/HST portion when paying invoices and will be able to claim input tax credits (and offset GST/HST collected) on their GST/HST returns for the period during which the supply occurred.  I am told that some businesses may need to increase their lines of credit in order to fund the HST component that was previously ORST exempt by virtue of the purchase exemption certificate.

To be clear, on July 1, 2010, purchase exemption certificates will be invalid for purchases after July 1, 2010.  The days of the sales tax relief will over gone for good.  The Canada Revenue Agency auditors will be auditing the entire supply chain to make sure that GST/HST was paid at each step in the supply chain.

Canada's Department of Finance Has Released Financial Institution Rules for the Harmonized Sales Tax (HST)

On May 19, 2010, the federal Department of Finance released "Financial Institution Rules for the Harmonized Sales Tax (HST)", which is a rather long and complicated document. The good news is that only financial institutions (including de minimis financial institutions) must figure out how this document changes their way of doing business and imposes new obligations.  The bad news is that financial institutions may charge higher service fees to cover their compliance costs / assessment risks.

The released document provides information on changes to rules for selected financial institutions (also known as SLFIs).  The changes include changes to the test for determining whether an entity is an SLFI.  As a result, it will be important for entities to apply the new test to see whether they are still SLFIs and whether they are now considered to be a SLFI.  The release states:

British Columbia and Ontario's decision to join the HST, effective July 1, 2010, will significantly increase the number of FIs that are SLFIs. For example, a bank with branches in Ontario and Manitoba and in no other provinces would become an SLFI only as a result of Ontario harmonization.

This statement suggests that some entities (were not considered to be SLFI before and are considered to be a SLFI now) now have a lot of work to do to prepare before July 1, 2010.

The released document also provides information to financial institutions about the "special attribution method" (friendly name "SAM") that they are required to use.  This complicated formula will likely appear in the coming weeks in regulations and, therefore, will not be subject to scrutiny by opposition MPs and the Canadian Senate.

The SAM attribution methods are briefly discussed for:

i. banks

ii. insurance corporations

iii. trust and loan corporations

iv. investment plans and segregated funds

v. other corporations, individuals and trusts

The publication also covers the following topics:

  • information requirements
  • penalties
  • MTFs that are ETFs
  • timing of PVAT (provincial HST component) determination under SAM
  • compliance rules
  • transitional rules for SLFIs re Ontario and BC
  • recapture of ITC rules for SLFIs
  • SLFI transition installment base
  • Imported supplies - non resident trusts
  • SLFI rules respecting deemed pension supplies and pension rebate
  •  

 

Ontario's Small Business Transition Credit Raises Questions

On May 14, 2010, the Ontario Government released Ontario Tax Tip 7 "Prepare for Ontario's HST: Small Business Transition Support" in which Ontario discusses a payment small business would receive to offset costs of modifying systems in order to transition to harmonized sales tax (HST).  Ontario Tax Tip 7 is intended to help small businesses understand if they are eligible for a small business transition support payment and explain how the support payment will be delivered to them. This support payment has been commonly referred to as the “Small Business Transition Credit”.

In order to qualify for a transition support payment, an eligible business must:

  • not be a listed financial institution under the Excise Tax Act (Canada);
  • carry on business in Ontario and be a GST/HST registrant on July 1, 2010;
  • make GST/HST taxable supplies (including zero-rated supplies) in the course of carrying on business;  and
  • have taxable annual revenues of less than $2 million (as announced in the 2010 Ontario Budget, the province will prescribe the 12-month period for calculating the $2 million taxable revenue threshold for purposes of the transition support payment).

If a small business for the transitional support payment, the amount the business will receive will be based on the following:

Total Quarterly Taxable Revenues Amount of Transition Support Payment
Up to and Including $15,000 $300
Over $15,000 and Up to and Including $50,000 2% of Taxable Revenue for the Quarter
Over $50,000 and Up to and Including $500,000 $1000

How is the Ontario Government going to program the computers to identify sole proprietorships and partnerships (joint ventures) and other businesses that are not separate legal entities?  There are many forms of small businesses that are not Ontario incorporated entities.  There are many forms of business that do not file separate tax returns.  A sole proprietor would report business income on his/her personal income tax return.  A partnership is not a legal entity for income tax purposes and the partners report business income and business losses on their respective income tax returns. 

Will the Canada Revenue Agency look at both income tax returns and GST/HST returns?  If the CRA is going to look at GST/HST returns, how will the annual filers be found and their quarterly sales revenues determined?

Are branches of foreign companies going to be treated differently than Ontario corporations?  If so, this approach would not encourage foreign direct investment to Ontario.

Are municipalities, schools, school boards, hospitals and other MUSH sector entities entitled to receive the small business transition credit if their taxable sales fall within the thresholds?

What is the Ontario Government going to do to prevent abuse?  What if a person registered 1000 corporations in June 2010?  Would they receive $30,000 from the Ontario Government even if each reported revenues of $10?

There are a number of questions that need to be answered so that all small businesses are recognized.  Equally as important, questions need to be asked so that cheques are not blindly written to HST-abuse vehicles.

Small businesses will need the financial assistance because it will cost more than $300-$1000 to implement the necessary changes correctly.  The problem is that there are problems with the mechanism.

Finally, I should mention that the small business support is taxable for income tax purposes.  The Department of Finance confirmed this today at the Southern Ontario Commodity Tax Group Meeting at the Toronto Board of Trade.

The Canada Revenue Agency Takes the Position that a Deposit is Not Consideration

Based on the current Canada Revenue Agency (CRA) position on deposits, a vendor/purchaser may not be able to get around the harmonized sales tax (HST) transition rules by having a client/customer pre-pay a deposit on April 30 or before.  The CRA's position (following statutory provisions in the GST Legislation) is that a deposit is not treated as a payment for a supply until the supplier applies it against the consideration for that supply. For example, if a person pays a deposit of $100 in April 2010 but the consideration for a taxable supply of property/a service becomes due (and the deposit is applied) on or after July 1, the $100 deposit and the balance of the consideration will be subject to HST.

The relevant statutory provision is subsection 168(9) of the Excise Tax Act (Canada), which provides:

For the purposes of [the rules on when tax is payable], a deposit (other than a deposit in respect of a covering or container ...), whether refundable or not, given in respect of a supply shall not be considered as consideration paid for the supply unless and until the supplier applies the deposit as consideration for the supply."

This provision does not leave much discretion to the CRA auditors.  I can look into my crystal ball and hear them now quoting this section after HST implementation and saying that they have no choice as the Act mandates them to issue assessments in respect of deposits.  Without a legal clarification or an administrative statement, there is assessment risk - real assessment risk.

The reason for this rule is that until the property or service is actually supplied, it is not known what was provided and whether it was provided.  It is possible that  a service/good is never be provided and, therefore, the deposit would be returned.  It is possible that an exempt or zero-rated service would be provided and, therefore, no GST/HST would be payable. 

The characterization as a refundable deposit is the problem.  The same problem exists relating to retainers and other forms of deposit that are money on account and not consideration for property or services.

Please be careful to characterize pre-payments as pre-payments.  Otherwise, a CRA auditor may take the position in the future that HST was payable, collectible and/or remittable on amounts paid before the May 1, 2010 transition rule deadline.

A little guidance is provided in CRA New Memorandum Series 19.1 Real Property and GST/HST.  For clarification, the problem is NOT restricted to real property - this is just a policy to read.  The CRA has not issued a policy statement on deposits.

Vendors in Ontario and BC Face Audit Risk If Fail To Follow HST Transition Rules

Many businesses in Ontario and British Columbia are not prepared for harmonized sales tax (HST) transition, which starts on May 1, 2010.  Yes, July 1, 2010 is the official implementation date for HST.  However, the transition rules require businesses that deliver property and/or render services after (or lease goods beyond) July 1, 2010 to collect and remit HST with respect to consideration paid after May 1, 2010.  In other words, any contracts entered into after May 1, 2010 where consideration is paid after May 1, 2010 for property delivered or leased or services rendered after July 1, 2010 would be subject to HST.  The two key facts to remember for the HST transition rules at issue are (1) delivery/provision/rental after July 1, 2010 and (2) payment received after May 1, 2010.

It is not clear why the Governments decided to implement this transition rule - except the concern that consumers and exempt businesses would somehow circumvent HST in the months of May and June 2010.

In the end, it is businesses that are most at risk.  If a vendor makes a mistake and fails to charge HST, they may be audited and assessed a penalty for failure to collect HST.  When this happens, the HST is an unrecoverable cost to the business (unless the business can pursue the consumer).

If you consider goods, this is where the vendor may get hit hard.  The vendor of goods would likely collect both GST and Ontario retail sales tax (ORST) (unless the goods are exempt from ORST) in May or June because most goods are subject to ORST.  However, a Canada Revenue Agency auditor can come along and reassess the vendor for HST if the transition rules apply.

For example, if a vendor enters into a contract to sell a $200,000 motor home on May 15, 2010 and receives payment in full, he/she may collect GST in the amount of $10,000 and mistakenly collect ORST in the amount of $16,000.  If the motor home is delivered in August 2010 (because it needed to be manufactured), the vendor should have collected HST and not ORST.  If the vendor remits the GST to the Receiver General of Canada and the ORST to the Minister of Finance in Ontario, a Canada Revenue Agency auditor may assess the vendor for failure to collect and remit HST (or may even take the position that the ORST was actually HST and that the vendor collected and did not remit HST).  The vendor may be assessed the $16,000 and interest and a penalty for making a mistake.  This mistake could require the vendor to pay over $20,000 depending on when the audit occurs (taking into account interest and penalties).

If more than one mistake is made between May 1, 2010 and July 1, 2010, the amounts could really add up.

The HST transition rules are flawed.  The vendor may face a catch-22 situation.  If the vendor promises to deliver the motor home on June 25, 2010 and collects the $200,000 on May 15, 2010, the vendor would believe the $16,000 is ORST.  The vendor must remit the ORST with its May ORST return that is due on June 23, 2010.  If the motor home is not available by June 30, 2010 and the motor home is delivered after July 1, 2010, the HST transition rules would turn the ORST into HST.  Under the HST transition rules, the vendor would be required to remit the HST with it GST/HST return for July 2010, which is due on August 30, 2010.  In other words, the vendor is required to keep the HST a little bit longer and remit the amount to the Receiver General of Canada instead of the Minister of Finance.

It will be easy for an auditor to come along in 2012 and say what a vendor should have done in the circumstances.  The auditor may not be sympathetic to the fact that the vendor did collect the right amount of sales taxes and that the Government of Ontario actually was not out any money.

Where the Government of Ontario would be out money is with respect previously non-taxable services and previously exempt goods.  With respect to the ORST exempt goods, Ontario taxation policy effectively changes on May 1, 2010 (e.g., custom computer software, bicycles, manufacturing and production equipment, etc.).

With respect to services, this is really the focus of the HST transition rules,  Here are some links to articles I have written that may help service providers:

 

Effective Communication Will Be The Key To A Successful HST Compliance Program

After a business realizes that harmonized sales tax (HST) is coming and that changes are required to systems and documentation, the business must figure out what is necessary to ensure compliance.  The government publications help, but do not give enough information to make sure that businesses know what they must do to comply.

It is not sufficient for the Ontario Ministry of Revenue to announce that HST is 13%, HST is payable and collectible where GST is payable and collectible (except if a point of sale rebate is permitted), the implementation day is July 1, 2010, there are transition rules and place of supply rules and most businesses should stop charging Ontario retail sales tax on July 1.  What is missing is effective communication on what steps businesses should take to prepare.  This trial and error approach is costly for businesses - Businesses should try to comply and government will tell them where the mistakes were made by assessing GST/HST, interest and/or penalties.

The onus (and I do not mean legal onus or burden of proof) is on suppliers (sellers/retailers) and recipients (buyers/[purchasers) to figure out the legal requirements and be perfect in their implementation of the law (to the extend it is currently passed) and administrative statements (to the extent they are written and accurately reflect the written or unwritten law) and place of supply rules (which have not been passed by way of law or promulgated by way of regulation yet).  In other words, the communication from government to businesses is insufficient to ensure compliance.

In addition, businesses must effectively communicate within the organization in order to ensure compliance.  Someone must do their best to understand the HST rules and communicate the rules within the organization so that the proper system changes are made.  If the tax department/Chief Financial Officer does not discuss HST implementation with the sales department, the sales persons might not know what is subject to HST and what is not.  The sales persons may not understand when an invoice should include HST and when HST is not payable.  The sales persons might not know that they must charge HST on sales made in May and June if delivery occurs after July 1, 2010.

In addition, the computerized systems cannot change themselves.  Usually there is the information technology (IT) guru within an organization that must write computer source code or undertake configurations to ensure that HST is charged on invoices.  If there is not effective communication with the IT guru about what changes need to be made to electronic documents and computerized systems to record HST, the computers may be of little help in fulfilling their important role(s).

In addition, the IT guru may have to make adjustments to accounting systems so that the record keeping/ accounting programs track the GST and HST properly.  The computer system will be a useful tool to ensure GST and HST collected is added / reported correctly when GST/HST Returns must be completed and filed electronically (or in paper format).  The computer system will be a central tool in recording and reporting input tax credits, rebates, refund and restricted input tax credits.  If the IT guru does not receive clear instructions, he/she might not make all the necessary changes.

Effective compliance often includes an internal audit or monitoring of the systems to ensure that accurate information is communicated.  If no one has this role / function within their job description, the job might not be performed.

If problems are discovered, effective communication is necessary to make new and further adjustments to the system.  For example, if a September 1, 2010 invoice to the Government of Ontario did not include GST and HST (because prior to HST implementation neither taxes were charged), whoever discovers the problem will need to communicate the mistake internally within the organization so that the sales people, the IT guru, human resources, the tax department or CFO and others make the necessary changes.  Someone will also need to contact the Government of Ontario and send the invoice for the GST/HST or amended invoice including GST/HST.

Finally, I have to point out that effective communication extends to lawyers, accountants, customs brokers and other service providers.  A business will get incorrect/incomplete answers to questions if there is ineffective communication to outside service providers.  If you are going to rely on a service provider's help, you need to communicate all the relevant facts and instructions - otherwise the advice or services that you expect to be provided to you may not be provided.