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

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

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

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

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

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

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

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

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

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

Canadian Sales Tax Rates (as at October 1, 2016)

Canadian Sales Tax Rates Chart
As at October 1, 2016

 

Province/Territory Provincial Sales Tax GST/HST Rate GST Included in PST Tax Base Combined Rate
British Columbia 7% 5% N/A 12%
Alberta Nil 5% N/A 5%
Saskatchewan 5% 5% No 10%
Manitoba 8% 5% No 13%
Ontario N/A 13% N/A 13%
Quebec 9.975% 5% N/A 14.975%
New Brunswick N/A 15% N/A 15%
Nova Scotia N/A 15% N/A 15%
Newfoundland/Labrador N/A 15% N/A 15%
Prince Edward Island N/A 15% Yes 15%
Northwest Territories Nil 5% N/A 5%
Yukon Nil 5% N/A 5%
Nunavut Nil 5% N/A 5%

The HST rate for Newfoundland/Labrador increased to 15% from 13% effective July 1, 2016.

The HST rate for New Brunswick increased to 15% from 13% effective July 1, 2016.

The HST rate for Prince Edward Island increased to 15% effective October 1, 2016.

The ITC recapture rate in Ontario decreased to 50% as of July 1, 2016.

Steps To Take

  1. Are you charging the correct amount of sales tax?
    • Sales departments/accounts receivable departments that have programmed HST-included pricing will need to update the sales tax rates in their systems.
    • Even companies that calculate sales tax separately will need to make sure that computer programs have been updated.
  2. Are you paying the correct amount of sales tax?
    • Payroll departments will need to review invoices in the months following the sales tax increases to ensure that they are being charged the correct amount of sales tax.
    • This means not paying the higher rate for property and services provided before July 1, 2016 and paying the higher rate, if applicable, after July 1, 2016.
  3. Are you claiming the correct amount of ITCs?
    • The finance department will need to make sure that computerized programs that break out the amount of HST payable on invoices have been updated to reflect the higher HST rates.
  4. Are Ontario businesses not giving too much back?
    • The ITC recapture rate in Ontario has decreased to 50% from 75%.  This means the amount of ITCs that companies can claim may have increased for some large businesses.
    • Have you updated your computerized records to reduce the recapture rate?

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

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

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

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

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

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

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

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

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

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

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

15 Stages Of A Canada Revenue Agency GST/HST Audit

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

One Of The Common Objection Mistakes - Missing The Deadline

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

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

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

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

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

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

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

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

Audit Tip: Make A List Of All Documents Provided To The Auditor

When we work with clients who are undergoing a GST/HST audit, we recommend that the client document each and every request of the auditor and what is provided.  This is done is two ways:

1) The taxpayer should keep a written master list of all documents (including (a) the request of the auditor, (b) the date of the request, (c) the documents provided to the auditor, (d) the date the documents were provided to the auditor, (e) notes about information provided along with the document, and (f) the location in the binder of hard copies or the name of the electronic document; and

2) A binder with hard copies copies of all the documents provided to the auditor and a USB key with any electronic documents provided to the auditor.

The master list and the copies are helpful if there is a disagreement over what was provided (e.g., the auditor claims certain documents were never provided) or if there is a disagreement about and assessment.  If the dispute is ultimately appealed to the Tax Court of Canada under the General Procedure, a partial list of documents (and potentially the documents) would be discoverable.  It takes much less time to photocopy an binder than to recreate document production at a later point in time.

Recently we were hired to file an appeal in a Tax Court proceeding and the bookkeeper no longer worked for the company.  The new bookkeeper was not familiar with the documents and spend many hours trying to re-create the document trail.  If the original bookkeeper had kept a list of documents and a binder, the client could have saved a lot of time and money.

We also recently worked with an existing client after an audit and they have followed our advice. They sent u the list of documents provided to the auditor and we could quickly determine that the auditor had not put many of the key documents in the audit file.  We had filed an ATIP request and received a very small file.

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

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

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

The filing fee is only $CDN 5.00.

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

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

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

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

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

Newfoundland/Labrador Has Cancelled HST Rate Increase

On December 14, 2015, the Government of Newfoundland/Labrador officially cancelled the proposed HST rate increase - the Department of Finance has issued a press release.  The 8% PVAT portion was scheduled to increase to 10% (based on an April 2015 announcement by the previous government). The combined rate will stay at 13% (rather than going up to 15%)  That is not going to happen now - because the new provincial government has decided to cancel the increase after the November 30th election.

The Government of Newfoundland/Labrador has asked the Government of Canada to accommodate the cancellation. On December 15, 2015, the Canada Revenue Agency issued a Fact Sheet cancelling the HST rate increase.

It is very important for businesses to know that the HST rate increase has been cancelled. There was uncertainty.  Businesses have been busy getting their systems ready to collect the higher rate of HST.  In light of the cancellation of the HST rate increase, the transition rules designed to determine which tax rate to charge/pay are no longer applicable.

HOWEVER, a few tax changes will still take place on January 1, 2016.  For example, the proposed new municipal rebate (25% stating January 1, 2016, 57.14% starting January 1, 2017) will not be impacted by the cancellation of the HST rate increase and the transitional rules for the municipal rebate rate increase will continue to apply. In addition, new remittance rates for the streamlined accounting methods affecting eligible public service bodies (i.e., municipalities) begin after December 31, 2015.

For more information ,please contact Cyndee Todgham Cherniak at cyndee@lexsage.com.

HST Rate in Newfoundland/Labrador Is Increasing to 15% on Janaury 1, 2016

Effective January 1, 2016, the GST/HST rate for supplies made in Newfoundland/Labrador will increase to 15% (the Government of Newfoundland and Labrador has increased the HST component to 10%).  It is time for businesses to prepare their systems for the increase so that the correct amount of HST is charged, collected & remitted (suppliers) and paid (recipients).

The Department of Finance for Newfoundland/Labrador has posted information about the transitional rules on its web-site.

One recommendation is for businesses to invoice customers in 2015 (before the end of the year) for goods and services delivered prior to January 1, 2016.  Historically, there have been problems when tax rate changed as auditors tend to gravitate towards the higher tax rate.

How to Appeal a GST/HST Assessment Correctly

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

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

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

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

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

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

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

3) the relevant provisions of the Excise Tax Act;

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

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

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

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

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

 

Certain Over-the-counter Remedies are Subject to GST/HST

Today I went to the pharmacy to fill an ophthalmologist's written order for lubricating eye drops.  I have Graves Disease Ophthalmopathy and carry my eye drops everywhere I go.  When my $66.00 eye drops came with an additional HST charge of $8.58, I thought I would investigate.

The GST/HST and Excise News No. 81 (August 2011) states:

"Supplies of drugs, medical devices and health care products that are not zero-rated


"Please note that zero-rating does not apply to all drugs, medical devices and health care products sold in pharmacies or medical supply stores. Examples of drugs, medical devices and health care products that are subject to the GST at the rate of 5%, or the HST at the rate of 12%, 13% or 15% (depending on the province where the supply is made) are:
• over-the-counter medications such as sinus and nasal preparations, acetylsalicylic acid, and acetaminophen;
• eye drops;
• many vitamins and minerals;
• cold remedies and cough medicine such as syrup and cough drops;
• medicated shampoos; and
• personal health products such as bandages and ankle and knee supports.


These goods are available to the general public without a prescription through retail outlets and are intended to treat the symptoms of minor illnesses that do not require the advice or intervention of a health professional. Regardless of whether they are prescribed by a medical practitioner or by an authorized individual, these goods are generally not zero-rated. For example, an over-the-counter acetylsalicylic acid product purchased at a drugstore would not qualify for zero-rating, even if the purchaser has a prescription for acetylsalicylic acid and shows it to the pharmacist, unless the product is also dispensed by the pharmacist."

What this means is that certain therapeutic goods that are prescribed by medical practitioners are subject to HST.  It does not matter if the goods are medically necessary.  It does not matter if the goods serve a medical purpose.  It does not matter what ailment the goods treat.  What matters is where the goods are located in the pharmacy and whether the goods can be purchased without a prescription.

If price is a factor, the patient should obtain a prescription for the drug/therapy.  Depending on the pharmacy dispensing fee, the price point for getting a prescription would be be around $75.00 in Ontario (assuming the dispensing fee is $9.95).  The higher the dispensing fee, the higher the GST/HST included price you might be willing to pay.  It does create a discrepancy between harmonized and non-harmonized provinces (e.g., Alberta, British Columbia, Saskatchewan and Manitoba).  When traveling to non-harmonized provinces, you may want to stock up on taxable pharmacy items.

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."

Canada Proposes To Exempt Hospital Parking Fees From GST/HST

On January 24, 2014, Canada's Department of Finance released legislative proposals and explanatory notes relating to the Excise Tax Act (Canada) (the "HST legislation") that would exempt hospital parking fees paid by patients and visitors from goods and services tax (GST) / harmonized sales tax (HST). Comments on the legislative proposals may be submitted until February 24, 2014.

This is welcome news because patients and visitors to hospitals have more important issues to worry about. This is a compassionate decision by the Government of Canada to not impose GST/HST on parking fees paid by patients and visitors.

The question for the consultations is whether there are unforeseen consequences of this proposal.  Would making hospital parking exempt create an undue administrative burden for parking lot operators due to the inability to claim input tax credits?  Is there a better solution - Should hospital parking be zero-rated?

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.

 

The ABCs of Harmonized Sales Tax

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Top 10 HST Predictions for 2014

I would like to start of 2014 with my top 10 predictions for 2014 having to do with HST.

1. Fraudsters and scammers will use the Canada Revenue Agency name in vain more frequently in 2014 to take advantage of trusting Canadians.  We are hearing about this more often and I predict it will get worse because people are giving their information (and money) to people who call and say they are from the CRA. Canadians should be careful and ask for documentation.  It is sometimes obvious when documentation is in connection with a fraud/scam.  The CRA's telephone number is 1-800-959-5525 - call them and ask questions if you are ever unsure.

2. There will be more news of CRA employees engaging in inappropriate behaviour.  I am sorry to say this. The news stories of CRA employees inappropriately accessing taxpayer information, inappropriately accessing outside information and accepting bribes for lower assessments will increase in 2014.  The reporters are looking for these stories and oversight of CRA employees has areas for improvement.

3. GST/HST compliance will be an important topic for discussion in 2014. When the GST rate was 5%, a number of businesses did not put the effort into compliance. Now that the HST rates are much higher, companies will put money into reducing the risk of a large unexpected assessment.

4. The dollar numbers in Notices of (Re)Assessments will increase in 2014.  Ontario harmonized in 2010.  Quebec has harmonized.  Nova Scotia increased its HST rate to 15%.  The assessments in 2014 will cover the broader scopes and the higher rates.  Mistakes will be found.  This will lead to large assessments.

5. CRA auditors will become more aggressive in denying input tax credits where the business does not have documentary evidence to support the input tax credits.

Continue Reading...

Candian Sales Tax Rates Chart (As at April 1, 2013)

Canadian Sales Tax Rates Chart
As at March 1, 2013

 

Province/Territory

Provincial Sales Tax

GST/HST Rate

GST Included in PST Tax Base

Combined Rate

British Columbia

7%

5%

No

12%

Alberta

Nil

5%

N/A

5%

Saskatchewan

5%

5%

No

10%

Manitoba

7%

5%

No

12%

Ontario

N/A

13%

N/A

13%

Quebec

N/A

14.975%

N/A

14.975%

New Brunswick

N/A

13%

N/A

13%

Nova Scotia

N/A

15%

N/A

15%

Newfoundland/Labrador

N/A

13%

N/A

13%

Prince Edward Island

N/A

14%

No

14%

Northwest Territories

Nil

5%

N/A

5%

Yukon

Nil

5%

N/A

5%

Nunavut

Nil

5%

N/A

5%


 

Why Are There So Many Tax Changes Coming Into Effect April 1?

There are many tax changes coming into effect on April 1 of each year.  Is it an April Fool's joke? No - the Government of Canada's year end is March 31 (the fiscal year runs April 1 - March 31).  The same holds true for the provinces. Tax changes are often implemented to start at the beginning of the government's new fiscal year.

This is why British Columbia de-harmonization occurs on April 1, 2013 and it is no longer an HST participating province.  Prince Edward Island becomes an HST participating province on April 1, 2013. The Government of Quebec must start to pay HST on its purchases starting on April 1, 2013 (did not start on the January 1, 2013 harmonization date). Many of the measures in the 2013 Budget take effect either budget day or April 1.

This is why so many government budgets are released in the month of March every year. Even the provinces implement many changes to taxes on April 1.  For example, the government of Ontario (via Ontario Tire Stewardship) is implementing increases (and decreases) on April 1, 2013. Ontario Electronics Stewardship Fees change on May 1, 2013 (for something a little different).

Request For Taxpayer Relief - How Do You Spell R-E-L-I-E-F?

There is form that exists than enables a taxpayer (including a GST/HST registrant, supplier or recipient) to request GST/HST relief from the Canada Revenue Agency (often in the form of interest and penalty relief, but can include GST/HST).  It is an RC4288 form. However, it is not a magic form and completing it does not necessarily mean that you are going to get the relief you seek. While the CRA has broad discretion to grant relief, they also have broad discretion to deny relief.

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

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

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

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

What Happens If I Do Not Respond To A GST/HST Requirement For Information?

A GST/HST Requirement For Information (called RFIs) is a demand by the Canada Revenue Agency ("CRA") for information or documents issued pursuant to section 289 of the Excise Tax Act (Canada) ("ETA"). Subsection 289(1) of the ETA provides that:

Despite any other provision of this Part, the Minister may, subject to subsection (2), for any purpose related to the administration or enforcement of ... this Part, including the collection of any amount payable or remittable under this Part by any person, by notice served personally or by registered or certified mail, require that any person provide the Minister, within any reasonable time that is stipulated in the notice, with

(a) any information or additional information, including a return under this Part; or

(b) any document.

Simply put, the CRA has the authority under the ETA to request persons (including third party advisors, such as lawyers and accountants) to provide identified information and/ or documents to the CRA.

Where a Requirement For Information is sent to you for your own information, the CRA is not required to take any formal steps before sending the Requirement For Information.  Where the CRA sends a Requirement for Information to a third person (e.g., a lawyer) for the information of another person (e.g., a former or existing client), the CRA must obtain a judicial authorization prior to imposing on the third person (e.g., lawyer) the Requirement for Information obligation.  Subsection 289(2) of the ETA provides:

The Minister shall not impose on any person (in this section referred to as a “third party”) a requirement under subsection (1) to provide information or any document relating to one or more unnamed persons unless the Minister first obtains the authorization of a judge under subsection [289(3) of the ETA].

Continue Reading...

Can a GST/HST Registrant File a Notice of Objection On-line?

The Canada Revenue Agency has started to "go electronic" and developed an e-filing system for GST/HST registrants to file GST/HST returns on-line and other documents.  However, it is important to note that as of March 1, 2013, the "My Account" and "My Business Account" does not permit notices of objection to be filed on-line.  To be more correct, the Excise Tax Act does not allow registrants to file notices of objection on-line. However, there are many other things that you can do using the electronic system and a list is available on-line.

Section 301 of the Excise Tax Act requires that notices of objection be filed in "the prescribed form and manner".  The prescribed form is a GST Form 159. The prescribed manner is by mail and the CRA location depends upon the postal code of the registrant.

What this means is that a notice of objection may be considered to be invalid if filed on-line. The CRA has discretion to accept or not accept the notice of objection if it is not filed in the prescribed form and in the prescribed manner.  It is better to anticipate the CRA will take advantage of a registrant's error.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Respond To CRA Requests for Information on Due Diligence

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

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

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

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

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

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

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

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

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

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

Canadian Sales Tax Rates (as at May 1, 2012)

Canadian Sales Tax Rates Chart
As at May 1, 2012

Province/Territory

Provincial Sales Tax

GST/HST Rate

GST Included in PST Tax Base

Combined Rate

British Columbia

N/A[1]

12%[2]

N/A

12%

Alberta

Nil

5%

N/A

5%

Saskatchewan

5%

5%

No

10%

Manitoba

7%

5%

No

12%

Ontario

N/A

13%

N/A

13%

Quebec

9.5%[3]

5%[4]

Yes[5]

14.98%

New Brunswick

N/A

13%

N/A

13%

Nova Scotia

N/A

15%

N/A

15%

Newfoundland/Labrador

N/A

13%

N/A

13%

Prince Edward Island

10%[6]

5%[7]

Yes[8]

15.5%[9]

Northwest Territories

Nil

5%

N/A

5%

Yukon

Nil

5%

N/A

5%

Nunavut

Nil

5%

N/A

5%



[1] British Columbia will reinstate provincial sales tax on April 1, 2013 at a rate of 7%

[2] On April 1, 2013, the GST/HST rate will decrease to 5% because British Columbia is de-harmonizing

[3] Quebec will harmonize with GST on January 1, 2013. The proposed amended QST rate is 9.975%

[4] On January 1, 2013, the Amended QST, GST rate will be 14.975%

[5] Starting January 1, 2013 there will no longer be tax on tax

[6] Prince Edward Island will harmonize with GST on April 1, 2013. The proposed rate will be 14%.

[7] Prince Edward Island will harmonize with the GST on April 1, 2013 and impose HST at the rate of 14%

[8] Starting on April 1, 2013, there will no longer be tax on tax

[9] Will reduce to 14% on April 1, 2013

Canada & Quebec May Sign HST Agreement Tomorrow

The Globe & Mail is reporting that Prime Minister Harper & Premier Jean Charest may sign a Comprehensive Integrated Tax Coordination Agreement (CITCA) (also known as an HST Agreement) on Friday, September 30, 2011.  In an article entitled "Ottawa, Quebec poised to ink $2.2 billion HST deal", it appears that the agreement promised during the election campaign has been negotiated.

The question for sales tax practitioners is: How different is this CITCA going to be from the model version used with Ontario, British Columbia and Nova Scotia?  It appears that Canada has agreed to a significant change.  Revenue Quebec will continue to collect the tax in Quebec.

However, will Quebec loose the QST and adopt the HST?  In other words, will Quebec lose its naming rights?

When is the implementation date?  Businesses will need time to make necessary changes.

Also, will the HST rate go up, go down or stay the same? One benefit of harmonization is that QST should no longer be payable on the GST included amount.

What point of sale rebates (provincial exemptions from PVAT) will be selected by Quebec?  Will Quebec be restricted to point of sale rebates on only 5% or will they be permitted a higher percentage of coverage for point of sale rebates?

What will happen to zero-rated financial services?  Currently, under the QST regime, many financial services are zero-rated.  Under the GST regime, many financial services are exempt.  Zero-rated is better than exempt because the intermediary financial institutions are entitled to full input tax credits on inputs purchased for use in commercial activities (including zero-rated activities). A shift from zero-rated supplies to exempt supplies will have a significant effect on financial institutions.

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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.

HST in BC = Hot Spoiled Tomato

I have recently written a blog post on various definition phrases for HST.  It is early this morning, this one may not be the best one that I have come up with.  Since the topic is a hot topic and there is negativity, I thought I would add "Hot Spoiled Tomato" - at least for British Columbia. 

So why a tomato?

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Timmins Endorses Anti-HST Resolution

The city of Timmins is a northern Ontario city who is using its municipal voice to request an harmonized sales tax (PVAT portion) point of sale exemption on heat & hydro.  The Daily Press reports in an article entitled "City support resolution fighting HST" that the City of Timmins endorsed a resolution calling on the Ontario government to exempt items of necessity, such as gas and utilities.

It would be preferable if the cities would use proper language as they are not looking for an exemption.  The government of Ontario does not have power to amend the Excise Tax Act (Canada) to add an exemption.  Ontario does have the power to grant point of sale rebates. A point of sale rebate on a taxable good is better than an exemption because suppliers of exempt property and services are not entitled to claim input tax credits in connection with business inputs related to the exempt supply.

The resolution endorsed by Timmins was prepared by North Bay. North Bay's resolution has been forwarded to other Northern Ontario cities including Sudbury, Sault Ste. Marie and Thunder Bay.

Maybe Timmins could seek Shania Twain's voice and the message will get more press.

 

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U.S. May Breach Most-Favoured-Nation Rules If It Imposes GST/HST Protectionist Measures

Yesterday I shared with you the Bloomberg Businessweek article "Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson".  In this article, Alan Tonelson suggests that the United States should impose additional duties at the border on goods coming from a country with a value-added tax.  Canadians should be concerned because under the goods and services tax ("GST") and harmonized sales tax ("HST") regime, most exported goods are zero-rated. 

If the United States Administration followed Mr. Tonelson's advice, they would arguably be in breach of their most-favoured-nation (MFN) obligations at the World Trade Organization ("WTO") and in the North American Free Trade Agreement (NAFTA).  Simply put, the MFN concept focuses on non-discrimination.  In particular, goods at the border must be treated the same.  As a result, the United States cannot impose higher tariffs on some goods at the border and lower tariffs on other goods (except there may be lower duties if there is a free trade agreement that satisfied the requirements of GATT Article XXIV).

The U.S. is not allowed to charge a 13% tariff on all goods from Ontario, a 12% tariff on goods from B.C., a 5% tariff on goods from Alberta, a different tariff on goods from the EU, a different tariff on goods from Australia, etc. in retaliation of zero-rating. The U.S. is not allowed to increase its tariff rates on goods from some countries (VAT countries) and not raise tariffs on goods from other countries (non-VAT countries).  To be clear, under the GATT, 1947, the United States cannot increase tariffs from their current MFN bound levels against any WTO country. Under the NAFTA, the United States cannot raise tariffs against Canadian goods above the levels agreed in the NAFTA (most NAFTA tariff rates for Canadian goods are now duty-free or 0%).

There are rules in the WTO Subsidies and Countervailing Measures Agreement  ("SCM Agreement") that would allow the United States to impose countervailing duties, but only after a trade remedy process. However, any attempt to impose countervailing duties against Canadian good as a result of zero-rating would undoubtedly lead to a challenge at the WTO under the Dispute Settlement Understanding.

The United States should be mindful of its international obligations while dealing with its domestic financial issues.  Options that breach international obligations must be taken off the table as trade wars with each and every country that imposes a VAT will not be helpful to global recovery efforts.

New Buy America Initiative Takes Aim At Zero-Rated Exports

In an recent article in Bloomberg Businessweek printed online on September 18, 2011 entitled "Buy American and Fairer Trade Can Solve Job Woes: Alan Tonelson", Canadians are put on notice that the U.S. is taking aim at value-added tax ("VAT") regimes that do not charge VAT on exported goods. Canada's goods and services tax ("GST") and harmonized sales tax ("HST") regime zero-rates exports.  Zero-rating means that Canada imposes GST/HST at the rate of 0% instead of the applicable GST/HST rate on domestic transactions.  This means that Canada may soon have a significant Buy America problem.

Alan Tonelson's article has a subtitle "VATs Are Protectionist", which is a signal that what follows is not going to be friendly.  Some of the points made by Tonelson are:

  • New tariffs should be imposed on countries with VATs;
  • VATs contribute to U.S. trade deficits;
  • VATs raise the price of imports because they are imposed on domestic consumption 9thereby making U.S. goods more expensive);
  • VATs subsidize exports (because governments do not impose VAT on exports); and
  • NO exceptions from the new import tariffs should be allowed for products made by U.S. trading partners who have a VAT regime.

If this idea moves into law, Canada and the EU countries, Australia, New Zealand and a number of other significant trading partners would be affected.

While I hope that this latest protectionist rhetoric does not go anywhere, Canadian businesses need to be concerned about this issue.  Canadian businesses need to communicate their concerns with the Canadian government and become engaged on this topic. In addition, businesses need to prepare and diversify their export base because it is clear that the U.S. market may become more unfriendly to Canadian manufactured goods.

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

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

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

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

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

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. 

Voluntary Disclosures: Get Ahead of the Sales Tax Problem

If you make a voluntary disclosure of a sales tax error (giving rise to a payment), you get ahead of the problem.  You maintain an element of control.  If the Canada Revenue Agency or provincial governmental authorities (whichever is applicable) find the problem during the audit, you may have little control over the outcome.  This is why it is recommended that you make a voluntary disclosure if you find your sales tax mistakes and do not wait for the auditor to "maybe find it".

The Canada Revenue Agency and the Ontario Ministry of Revenue have developed voluntary disclosure programs that promise to not charge a gross negligence penalty (and other forms of penalty) if you voluntarily come forward to report the errors and pay the tax and interest.  In some cases, the authorities will even grant relief on a portion of the interest if the disclosure goes back many years.

For a voluntary disclosure to be accepted, it must be voluntary.  This means that the authorities have not informed the taxpayer of an upcoming audit.  If you were not on their radar and you come forward, there is a potential for financial savings.

But, that is not enough for the disclosure to be accepted.  It must be the first time this problem is identified with the tax authorities.  If you have made this type of error before and were informed about the error, the authorities will not accept the disclosure as voluntary.  They expected you to make the corrections to the sales tax recording and remittance systems after their earlier discussions with you.

Even if this is a first time issue, that is not enough for the disclosure to be accepted.  It must be complete.  You must do the work that an auditor would do.  You cannot hide some of the information or transactions.  For example, I recently worked with a non-resident client to make a voluntary disclosure of Ontario retail sales tax payable on goods imported from outside Canada for own use.  The client made an initial disclosure and payment based on Canada Customs import documentation.  Before we submitted the paperwork, we undertook a second review of the records and realized we have forgotten imports from another province.  We updated the disclosure and paid the additional tax.  We submitted to the authorities a detailed spreadsheet with each of the transactions and the back-up documentation at tabs matching the excel spreadsheet line number.  We made it easy for the government to audit and agree with our calculation.

The auditor assigned to the voluntary disclosure may conduct a desk audit or an on-site audit after the supporting documentation is provided.  If the auditor finds that the disclosure is not complete, he/she will assess the tax that you said was owing, the additional tax he/she found was owing, and then will calculate interest and penalties on the entire amount.

Many mistakes can be the subject of a voluntary disclosure; but, not all mistakes can be the subject of a voluntary disclosure.  If you collected sales tax and did not remit it, you will not be permitted to make a voluntary disclosure.  The government has a serious issue with you keeping their money.

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 Should B.C. Premier Clark & Minister Falcon Do Now?

British Columbia Premier Christy Clark and Finance Minister Kevin Falcon should act like the Chairman and Chief Financial Officer of a publicly listed corporation.  What would the Chairman and CFO of a publicly listed corporation do if the federal government issued a harmonized sales tax ("HST") assessment for $1.6 Billion?  They would hire the best lawyers in the area of commodity tax and the best litigators to review all relevant documents, all relevant law and see if there is any valid argument to object to paying the assessment.  The Chairman and CFO of a publicly listed corporation would attempt to preserve shareholder value if at all possible. The Chairman and CFO would not give up immediately and write a big cheque without considering all legal options.

Yesterday on the Lang & O'Leary Exchange on CBC, I discussed the need to review carefully the Comprehensive Integrated Tax Coordination Agreement between Canada and B.C..  Annex C addresses the issue of the transitional payment of $1.599 Billion and what happens if the CITCA is terminated before the 5 year anniversary date.  Sections 9-17 of Annex C are the most relevant to consider.  The key question will be whether British Columbia has committed a "material breach" under the CITCA?

The answer to this question needs to be considered carefully given the fact that the people of British Columbia have spoken in the referendum and the Government of Canada cannot demand the Government of B.C. to ignore the will of the people in the very unique circumstances.  This is not a case where the politicians have unilaterally decided to back out of the CITCA.  In fact, Premier Clark does not want to terminate the CITCA and may hope to try again in the future to implement the HST.  The Government of B.C. has followed the law in holding the referendum and has spent significant resources to educate the public about how they should vote.  How do these facts interact with the CITCA wording?

I am not saying that this is the answer to the $1.599 Billion question.  I am saying that a lot of questions need to be asked of really smart people who are not ex-political aides.  It is time to ask HST lawyers and contracts lawyers and litigators to canvass all the legal arguments.  In the end, the $1.599 Billion may be payable.  Let's not start with that conclusion and give up on asking more questions.

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.

HST = Hated Sales Tax/Historical Sales Tax in B.C.: What Does It Stand For in Ontario?

Now that the British Columbia referendum results are in, Ontario voters will have their opportunity to brand the HST in the October 6, 2011 election. 

The BC voters have demonstrated that the "Hated Sales Tax" will become a "Historical Sales Tax".  They have clearly told the B.C. Liberals that it is a "Half-Baked Sales Tax" and they should have thought longer and been more open about it.

The McGuinty Liberals in Ontario will paint the BC referendum results as the "Hiccup Sales Tax" trying to distance themselves from the results.  They may even go so far as to say it is the "Humanity Sales Tax" that Ontario must have it in the name of societal welfare.

The McGuinty Liberals will label it the "Happy Sales Tax" stating that Ontarians are happy to pay the HST (I do not believe this for a second).  Or, the "Harmonious Sales Tax" because Ontarians live in harmony and peace with the HST (yah right!). In an attempt to appeal to young voters, it may be called the "Hip Sales Tax".  It will definitely be a "Hyped Sales Tax" by the time the election is over.

The Progressive Conservatives in the Ontario election campaign period have a platform to highlight the worst of the HST in Ontario, such as the added costs of living for real people in Ontario.  Tim Hudak has promised to implement a point of sale rebate on heat and hydro so that it is not longer the "Hydro Sales Tax" and "Heat Sales Tax".  When people cannot afford the necessities of life, it will be the "Hungry Sales Tax" as their prepared food order exceeds the $4.00 threshold.  Retail sales tax was not payable on real property and the HST is a "Homeownership Sales Tax".  Retail sales tax was not payable on most services and HST is a "Haircut Sales Tax".  Retail sales tax was not payable on hockey lessons and rentals of arenas and HST is a "Hockey Sales Tax". The HST causes provincial health care budgets to balloon and is a "Hospital Sales Tax" and "Health Sales Tax".

The Ontario voters may turn it into the "Heckle Sales Tax" and cat lovers the "Hairball Sales Tax" (whating to spit it back at the liberals).  Many will say it is a "Hypocritical Sales Tax" as the McGuinty Government should have considered and implemented significant spending cuts before promoting and implementing HST. Those who believe that McGuinty did not listen to the people who voted for  him in the last election may call it the "Hearing-loss Sales Tax".

Prime Minister Harper will take some hits in Ontario with the brand "Harper Sales Tax", but he has a majority and will shrug it all off.

Are there other examples of what HST stands for? 

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.

Friday Augsut 26th All Will Be Revealed Re BC Referendum Results

Elections BC has announced that it will announce the British Columbia Harmonized Sales Tax (HST) referendum results on Friday - August 26, 2011.  We are on pins and needles waiting for the news of the results.

The Vancouver Sun has reported that "Provincial officials have said it could take up to two years to eliminate the HST if it is voted down in the referendum."  So, whatever the referendum results, the HST is not going away in BC soon.

What is remarkable to me (someone who has actually read the CITCA (the agreement between B.C. and the Federal Government concerning the HST), is all this talk about B.C. having to pay back the $1.6 million. It seems to me that if the HST was introduced in B.C. on July 1, 2010 and it is now August 2011 and it will take "up to 2 years to eliminate the HST, the HST may be in effect in BC until August 2013. 

BC is able under the CITCA to reduce the rate after two years and not breach the agreement.  So, under the CITCA, the rate can be reduced as of July 1, 2012.  What is wrong with reducing the rate to 0% in order to save the $1.6 Billion?

Also, I find it interesting that it takes less than one year to implement the HST, but twice as long to eliminate it.  This is one of those things that makes you go hmmmmmmmm?????

If the "Yes" vote wins, the province will need time to change the tax regime.  What I have said previously does not undermine that reality.  What I am commenting on is unreasonable statements by officials prior to the release of the result.  They may be trying to establish expectations.  If that is the case, the officials will fail if they continue to make statements that cannot withstand scrutiny.

Would You Like To Get On The HST Bandwidth Wagon?

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

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

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

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

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

The HST Place of Supply Rules for Conferences May Not Apply to Sponsorships

Many associations hold their conferences or meetings in Canada and/or HST provinces (Ontario, British Columbia, New Brunswick, Nova Scotia and Newfoundland/Labrador).  For example, the American Bar Association recently hosted their annual meeting in Toronto, Ontario.  I was asked whether a sponsorship by a U.S.-based law firm would be subject to harmonized sales tax ("HST").

The answer is "It all depends".  There are two HST place of supply rules that need to be considered.  In section 28 of Part I of the New Harmonized Value-Added Tax System Regulations, there is a specific rule for "location specific events" (like a conference).  For this rule to apply, there must be a direct connection between the service being performed (e.g. the service of giving recognition) by the supplier and the event (e.g., the conference).

Depending on what exact services are being provided in return for the sponsorship, the Canada Revenue Agency may not consider the connection to be direct.  An example of an indirect service is advertising services (such as including the firm's name in promotional materials).  If this is the case, the general place of supply rule would apply and not the specific rule relating to location specific events.  The general place of supply rules for services is found in section 13 of Part I of the New Harmonized Value-Added Tax System Regulations.

In the example given, the U.S. law firm (if it does not have any offices in Canada) would not receive a service in an HST province.  As a result, HST would not apply to the consideration paid for the sponsorship. 

If the U.S. law firm had offices in the united States and an office in Canada, an analysis of the location "most closely connected with the supply" would be required.

If the U.S. law firm received admission tickets to the event as part of the sponsorship package, it may be that the CRA would consider that the supplier provided a multiple supply and a portion of the consideration paid would be subject to HST.

For more information, please contact Cyndee Todgham Cherniak, a sales tax lawyer in Ontario at 416-760-8999.

What is VAT?

I have a cute story to share.  At dinner last night, I was speaking with an American couple who had traveled to England in the 1980s. Prior to their trip, they researched bed & breakfasts and found the perfect spot to stay.  The bed & breakfast advertised that their prices were VAT included.  When the couple checked in, they asked the owner of the bed & breakfast "At what time is VAT?"  The owner of the B&B was confused by the question.  "What do you think is VAT?" she replied.  The husband responded "Victorian Afternoon Tea" - he was so excited that he was staying at a place that served Victorian Afternon Tea at no extra cost.  Instead of making an unfriendly remark to the mistaken American couple, the owners responded "Wouldn't that be nice?" and brought them some tea.

I am sharing this story because it may not occur to Canadians that people from other countries may not understand what is "GST" or "HST". What would people think if GST/HST was included?

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.

August 5th, 4:30PM PST Deadline For Filing BC HST Referendum Ballots

The deadline for filing British Columbia HST referedum ballots is Friday, August 5, 2011 at 4:30PM PST.  The ballot must be received by Elections British Columbia by the 4:30PM PST deadline.  If you plan to mail in your ballot, it may be too late (after August 2nd) to get it to Canada Post and have Canada Post deliver by snail mail on August 5th. Courier is another option (but who wants to spend the money?)

Results of the mail-in referendum vote are expected in late August or early September. British Columbians will go about their daily lives until the date of the announcemnt of the results.  What the people, businesses, finance officials, politicians, academics, economists and pundits will be interested in is the voter turnout numbers.  What if the vote is "Yes" but only 16% of the eligible voters in the province sent in their ballots? What if thousands of votes are left uncounted because Canada Post delivered the ballots after the 4:30PM deadline on August 5th?  

This will be a contest that will be watched less than the American Idol finale.  And, like last season, most will be indifferent to the winner.  The subsequent legal challnges may be interesting ....

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.

Government Procurement Bid Challenge Under WTO Agreement on Government Procurement: Is This An Option For B.C. HST Contracts Dispute?

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

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

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

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

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

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

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

Why Did B.C. Politicians Ask Ex-Aids for HST Advice and Not HST Lawyers and Accountants?

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

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

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

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

What Should You Do If The Ontario Ministry of Revenue Refuses You An HST Cheque?

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

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

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

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

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

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

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

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

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

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

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

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

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

Today is the last day for obtaining referendum ballots in British Columbia

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Tax Court reviewed other cases and ultimately held:

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

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

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

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

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

The CRA Must Prove That A Notice Of Assessment Was Sent

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

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

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

The Court later stated:

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

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

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

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

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

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

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

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

Believe: It is Possible to Stop an Incorrect Assessment

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

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

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

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

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.

Happy Anniversary Harmonized Sales Tax in Ontario & British Columbia

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

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

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

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

How am I celebrating? I am on vacation.

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?

The Canada Revenue Agency Has Released New Voluntary Disclosure Form

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

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

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

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

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

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

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

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

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

Justice Stratus held:

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

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

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

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

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

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

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".

 

Canada Revenue Agency Provides List of Exempt and Taxable Health Care Service Providers

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

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

The CRA's position is:

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

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

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

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

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

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

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

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

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

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

Disproving Audit Assumptions

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

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

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

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

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

Canada Revenue Agency Assessed Director's Liability Against Surviving Director

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

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

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

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

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

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

. . .

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

And later:

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

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

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

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

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

Canada Revenue Agency Says Beneficiary (NOT Bare Trust) Should Be GST/HST Registered

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

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

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

The CRA states the following administrative policy:

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

....

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

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

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

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

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

Is the British Columbia HST Referendum Question Clear?

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

The ballot asks:

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

Is this question clear?  It is to me.

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

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

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

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

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

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

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.

I Do Not Give The Canada Revenue Agency An A (Deserve F)

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

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

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

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

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

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

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

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

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

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

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

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

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

Sales Tax Audit Tip - Ask to Include the Auditor's Manager or Senior Manager

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

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

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

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

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

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

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

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

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.

"Assessment Avoidance" Has A Positive Ring

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

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

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

Judge Gives Lesson in Record-Keeping

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

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

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

...

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

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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.

GST/HST Taxable Independent Contractor vs Non-Taxable Employee

When I say "taxable", I am talking about goods and services tax (GST) and harmonized sales tax (HST).  I am not talking about income tax in this blog post when I say "taxable".

The recent Tax Court of Canada decision in Craigmyle v. M.N.R. reminds us that planning is required for a business to claim that a person who is paid by the business is an independent service provider and not an employee (or vice versa).  Generally speaking, in the context of GST/HST, it is better that an individual is an employee because labour of employees is not subject to GST/HST.  An employer does not pay GST/HST to the employee and the employee does not need to register for GST/HST purposes.  During an audit, the assessment exposure/risk does not include the salary accounts in the general ledger.

That being said, a business may decide to look at other legal requirements when deciding how to structure the business (the GST/HST does not operate in a vacuum).  Since an employer has Canada pension plan and employment insurance payment obligations and income tax withholding obligations in regards to employees, the business may choose to retain the services of independent service providers and pay GST/HST on invoices submitted by the independent service providers for their services (if they are registered for GST/HST purposes).  The business must make a business decision.

If the business hires independent service providers, it should to ensure that independent service providers who make taxable sales in excess of $30,000 (the small supplier threshold) register for GST/HST purposes and charge GST/HST.  The business will have to be mindful of its own GST/HST assessment exposure/risk as a purchaser for non-payment of GST/HST.

The Craigmyle case deals with Canada pension plan and employment insurance.  In this case, the Canada Revenue Agency determined that the individual was an employee and the Tax Court of Canada disagreed --- the individual was an independent contractor.

The Tax Court of Canada examined what the Courts have held to constitute a contract of service. Based on Wiebe Door Services Ltd. v M.N.R. (F.C.A.) [Wiebe Door], and accepted and expanded by subsequent cases, the following test is applied focusing on the total relationship of the parties with the analysis centered around four elements:

(a) degree of control and supervision;

(b) ownership of tools;

(c) chance of profit; and 

(d) risk of loss.

Each situation has unique facts because the issue is the characterization of a relationship. Each case must be decided on a case-by-case basis. 

Business that are engaged in exempt activities for GST/HST purposes are less likely to structure the business around independent service providers because the GST/HST cost is generally unrecoverable (in Ontario that would be 13% on the service provider's fees).  Businesses that are engaged in zero-rated or taxable activities can recover the GST/HST paid to independent service providers.  The focus would be on the assessment risk in the event that mistakes are made or the Canada Revenue Agency has a different opinion concerning the characterization of the expense.

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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Sales Tax Audits and Paranoia

I am often reminded of President Ronald Reagan's famous quote when talking to a person who has received a "nice" letter from the tax authorities informing them about an upcoming sales tax audit of their business - "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"

The truth is that a sales tax auditor is coming to visit to find non-compliance with sales tax laws and yes, "they really are out to get you".  They may phrase their intentions in the positive.  They may say that they are there to confirm compliance with sales tax laws. However, it is my experience that most young auditors are eager to show their bosses in the tax authorities that they are good at their job, which is finding the mistakes.  The older auditors are jaded and they take the Dr. House approach "everybody lies".  There are some auditors who have industry specific knowledge and a positive approach (I can recall an Ontario retail sales tax auditor who audited a bar owner client 4-5 years back), but they are the special ones.  This category of auditors know that no one is perfect and they deal with the imperfections with dignity and respect.  They show respect for taxpayer fairness (like taxpayers are treated the same) and fair treatment of taxpayers.

Sales tax auditors ask in their nice letter concerning the audit for information to be available for their review when they arrive to conduct the audit.  During the audit they ask questions and ask for more documents to be made available for their review.  I always recommend that a client organize all the requested documents prior to the arrival of the auditor and for the client to have those documents in folders on the table/desk/work area the auditor will use during the audit.  I also recommend that the client undertake their own sample review two weeks before the scheduled audit to find the mistakes before the auditor. This is the equivalent of looking under the bed for monsters.

If I am called in at the time the letter arrives, I ask the same questions that the auditor will ask about the business.  If there is time, I help the client write a customized memo to the auditor about their business, the sales tax laws that are applicable and the tax authority's administrative statements and ruling letters that are applicable. This is the equivalent of becoming comfortable in ones surroundings and knowing how to respond to dangers that may arise.

A business owner should not be paranoid, but should be vigilant.  The business owner can be pro-active.  The business owner can participate in the audit process in a way that reduces the stress and feeling of lack of control.

For how long will the CRA be lenient regarding HST implementation errors?

The answer is "for not much longer".  It will be hard to argue that the CRA should be lenient in regards to any harmonized sales tax ("HST") implementaion errors --- but, I can gurantee you that every lawyer who practices in this error will try.  We have a number of good reasons to request leniency.

That is not the point of this posting.  The point I am trying to make is that if you are not sure that your implementation efforts are correct, it would be prudent to conduct an internal audit and check your GST/HST systems.  Finding errors before the one-year anniversary of HST in Ontario and British Columbia is better than not asking the question at all.  Do not be afraid of what you might find -- be more concerned about not finding the errors and being audited by an unforgiving CRA auditor.  The CRA may be lenient if you conduct an internal audit and adjust systems before the one year anniversary.  They may see this as a sign of compliance and of acting as a "good" suppler/purchaser/consumer.

What I can tell you is that if you undertake an internal audit and find the errors and fix the system errors, you will have good argument that you deserve lenient treatment.  Mom used to say "actions speak louder than words".

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

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

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

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

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

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

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

 

What is the worst GST/HST infraction?

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

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

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

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

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

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

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

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

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 ...

Non-Residents ask "How Do I Get the GST/HST Back on Goods Purchased in Canada?"

Non-residents businesses may be entitled to recover GST/HST paid on goods delivered in Canada if the goods are exported within 60 days and if they file the paperwork for a refund/rebate. Generally speaking, non-resident consumers are not able to recover GST/HST paid on goods purchased in Canada. Canada does not have a VAT rebate for visitors who purchase goods.

Non-resident businesses who purchase goods in Canada and arrange for delivery in Canada would complete the general refund application form GST189 to claim a refund.  The rebate ismailed to the Canada Revenue Agency and not handed to the supplier for immediate benefit.

If the non-resident business or consumer allowed the supplier to arrange for shipping of the goods so that the delivery of the goods occurs outside Canada, GST/HST would not be charged.  If goods are delivered in Canada, the supplier must charge the GST/HST because the supplier can no longer control whether the goods actually leave Canada.  I had a case once where the CRA officer said to me 'How do I know that your client did not stop while driving to the United States at a few spots to resell the goods within Canada?'  The reality was, it would be difficult to prove the officer was wrong.

So here are a few examples:

If a non-resident individual comes to Canada and buys clothes and takes delivery at the store, he/she would pay GST/HST to the store and would not recover the GST/HST by way of a rebate.  If that same individual arranges for the store to ship the goods outside Canada, then GST/HST would not be payable.

If a non-resident business purchases clothes from a Canadian manufacturer to be delivered in Canada, exports the goods so that they can be resold outside Canada, the business would pay GST/HST to the Canadian manufacturer and file a rebate claim so long as the goods were exported within 60 days. If the non-resident business purchases clothes from a Canadian manufacturer to be delivered outside Canada (the manufacturer arranges the shipping), the non-resident should not pay GST/HST to the Canadian manufacturer as the transaction is zero-rated.  The non-resident saves the cash flow costs by paying for the manufacturer to ship the goods.

If a non-resident person purchases a classic car at an auction in Canada for the purposes of reselling the car at a later point in time (an adventure or concern in the nature of trade), he/she may claim a refund/rebate if the car is delivered in Canada and GST/HST is paid to the vendor of the car.  If the non-resident purchases classic car to be delivered outside Canada (the supplier arranges the shipping), the non-resident should not pay GST/HST to the Canadian supplier as the transaction is zero-rated. 

If a non-resident takes possession of goods in Canada and plans to export goods and file for a rebate, they must prove that they exported with goods within 60 days.  That means they need paperwork that has been stamped by government authorities relating to the export.  It used to be that the non-resident would present themselves and the goods to the Canada Border Services Agency (CBSA) at the time of export and complete paperwork.  The CBSA says to non-residents that they do not have forms to complete relating to exports (even though there is the E15 Certificate of Destruction/Exportation).  I recommend that the non-resident prepares paperwork and ask the CBSA to stamp the paperwork to acknowledge the request (at least). More importantly, the non-resident should complete the entry paperwork when returning to their home country.  In the United States, the person would complete a form 7901.  This paperwork is good evidence of an import into another country, which usually is accepted as evidence of export from Canada. 

It may take weeks or months to receive the refund/rebate cheque in the mail.  There is an interesting case of a non-resident purchasing a plane and hitting a bird on take-off and having to complete repairs before export.  It took longer than 60 days to repair the plane, the 60 day deadline was missed and the rebate claim was denied by the Canada Revenue Agency and the Tax Court of Canada.

In the Passing Lane: Exceeding The Small Supplier Threshold

I was asked the following question:

Hi, what if I initially thought that I would not be doing $30,000 worth of business and therefore, did not charge the HST.  Then part way through the year, I get a surprise project that puts me over the $30,000 limit.  Do I then just start charging the HST, or, would I need to re-invoice the other clients for the HST amount?

The answer is that you must register for GST/HST purposes when you take on the project that will cause you to exceed the small supplier threshold. After you are registered for GST/HST purposes, you must invoice GST/HST where applicable on invoices issued after that date.  Unless you retroactively register for GST/HST purposes, you would not re-issue old invoices issued before the date of registration.

Employment Services vs Independent Contractor Services

The services of an employee (a real employee) are not subject to goods and services tax ("GST") or harmonized sales tax ("HST").  The services of an independent contractor are subject to GST/HST if that person is not a small supplier.  A small supplier is a person who makes less than $30,000 per year - they do not need to register for GST/HST purposes and are not required to charge, collect and remit GST/HST.

Persons who are independent contractors and who make supplies that exceed $30,000 per year must register for GST/HST purposes and charge, collect and remit GST/HST.  This would include service providers from outside Canada who come to Canada to perform services. 

Persons who hire independent contractors must pay the GST/HST on the services.  If the person is engaged in exempt activities, they may not be able to recover the GST/HST paid to the independent contractor.  As a result, the GST/HST can represent an increase in the cost of the services.  If the person is engaged in commercial activities, the person may be assessed for failure to pay GST/HST if the independent contractor does not charge GST/HST when required. As a result, the business must be a watchdog in this area.

With the implementation of HST, the distinction between employees and independent contractors has become more important.  If a business wants a person to be an employee, they need to document the employment arrangement and make all necessary source deductions.  If a business wants a person to be an independent contractor, they should review income tax case law to ensure that the person meets the factual requirements associated with an independent service provider.  For example, an independent contractor uses his own tools to perform his/her trade. 

This area is more complicated than it seems.  Depending on the amounts at issue, it may be worth taking some time to structure the arrangements more carefully and clearly.

Voluntary Disclosures Must Be Complete and Accurate

When a lawyer or accountant discovers that a client has made an error (e.g., treated certain sales as tax exempt when they are actually taxable), they may recommend that the client make a voluntary disclosure.  Assuming that the disclosure meets the administrative criteria of the tax authority as being voluntary (which is an entirely other problem), the hard part is "getting to 'Yes' with the auditor".

The voluntary disclosure must be complete and accurate.  The auditor operates under the mantra "accept, but verify".  If the person making the disclosure leaves out important information that they do not want the auditor to know, they may be fooling themselves and not the auditor.  The auditor may discover those secrets during a desk audit or an on-site audit.  The factual circumstances may not make sense to the auditor if part of the story is missing and the auditor will dig further. Do not assume that the auditor will accept the cheque on behalf of the government and not have a single follow-up question.  That never happens.

When a business makes a voluntary disclosure, they often do so to avoid paying the penalty that is charged when an auditor finds the mistake. In return for not charging the penalty, the government wants a complete and accurate disclosure of the relevant facts in order to be in a position to determine that the business is coming in to full compliance.  Essentially, in a voluntary disclosure, you do the work for the auditor and the auditor quickly reviews the work (and in the case of correct disclosures, simply agrees with your worksheets).

Voluntary disclosures can be problematic when this simple review stage cannot take place because the information is not provided.  In many cases of voluntary disclosures by inexperienced persons, there is no intentional wrongdoing, but the disclosure is not complete because of the inexperience.  The auditor wants certain information and if the person making the disclosure does not understand the task at hand, or the sales tax regime, or the facts that are relevant or the documentation that will be relevant, etc., the good intentions of the voluntary disclosure can turn into a big and costly mess.

It is kind of like that home renovation project that started with a beautiful photo in a magazine and when you did it yourself to save money, it ended really badly and was much more expensive.  Or, you hired a cheap contractor who did not have experience renovating bathrooms, but took on the project, and ran into problem after problem after the demolition phase.  Part way through the project, you could not turn back and go back to the status quo.

Consider sales tax specialists as a "Mike Holmes" of voluntary disclosures.  Professionals who have done this before plan ahead.  They use their knowledge to investigate the potential issues BEFORE moving forward with the project.  They develop a plan that is tried and true.  They help you be reasonable in your expectations.  They work with you so that the results are successful and within the planned budget.

Many sales tax lawyers who have helped many clients make voluntary disclosures have precedents that they use to prepare the voluntary disclosure.  They know the statutory provisions, the case law, and the tax advisory opinions that apply.  Sales tax lawyers are able to help you gather the facts and communicate the facts correctly.  They can anticipate the follow-up questions and include the answers in the disclosure.  They can help you organize the applicable documents and the documents that the auditor likes to review in the normal course. 

Getting to "yes" in a voluntary disclosure means meeting the auditor's expectations and needs.  The auditor must put together a report for a supervisor.  You must give the auditor what he/she needs to get that approval.

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

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

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

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

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

Read this document!

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".

Would you like to register for GST/HST purposes?

If you would like to register for GST/HST purposes and do not have the forms, maybe I can help point you in the right direction:

1) Fill out the Business Consent Form (RC 59) if you are appointing someone to act on your behalf (like me)

2) Fill out the Request for a Business Number (RC1) if you would like more than just the GST/HST account number (e.g. income tax, payroll or import/export)

or

Fill out the Business Number (BN) - GST/HST Account Information if you have a business number (often provided automatically with a Canadian or provincial incorporation) and only need to set up a GST/HST account.

3) If you are a non-resident, you may need to post security.  More information about posting security is found in GST Memorandum Series 2-6 "Security Requirements for Non-Residents".

I should note that completing these documents is not a simple task and the answers provided to the questions may have serious consequences to you.

You Get What You Pay For

If you do not wish to pay for GST/HST advice, you may find that you get what you paid for - you paid nothing and you received nothing of value.  If you do not want to pay for GST/HST advice, and you ask a question, you may get:

1. The right answer;

2. An incorrect response after the responder looks for the correct provisions of the Excise Tax Act and regulations thereto and looks for administrative statements by CRA - but cannot find what is needed or cannot understand what information is found;

3. An incorrect response after no inquiry whatsoever because their time is not worth anything - you do not think their time is worth much and that is why you want to pay nothing;

4. A guess at the answer based on gut instinct or pure wishful thinking; or

5. An incomplete answer that does not address the nuances of your specific situation;

I often have this conversation with people who have been audited and assessed.  They have called the Canada Revenue Agency and were assessed anyway.  They have asked bookkeepers for GST/HST advice knowing that the book-keeper does not know what is the correct name of the GST/HST laws.  They have asked employees in the tax department even though they know that the employee did not take a course in GST/HST.

A Snow Storm is Heading For Southern Ontario & Municipalities Pay More with HST

Fact: It snows in Canada.

Fact: Snow plowing services were not subject to Ontario retail sales tax and are now subject to HST at the rate of 13% (previously snow plowing services were subject to 5% GST).

Fact: Prior to July 1, 2010, municipalities received a 100% rebate of GST paid on outsourced snow plowing services.

Fact: After June 1, 2010, municipalities must pay HST (13%) and receive a 100% rebate of the GST portion and only 78% rebate of the HST/PVAT portion. 

This means that 1.76% is not recoverable.  This means that HST has resulted in increased costs to municipalities for snow removal.  Depending on a municipalities snow removal budget and use of 3rd party contractors, the cost could exceed $1 Million per season.

Environment Canada is telling us that snow removal services are going to be needed today and tomorrow. My opinion is that the winter of 2010/2011 will the politicians a lesson that snow removal services should be zero-rated as they are necessary in Ontario.  Alternatively, municipalities need a 100% MUSH sector rebate on the PVAT portion.

I always get often angry emails from people when I raise areas where the GST/HST regime can be improved. Guess I should expect some emails regarding this post.

Department of Finance Releases Modified HST Rules For Financial Institutions

On January 28, 2011, the Department of Finance released the long awaited harmonized sales tax (HST) rules relating to the calculation of the provincial component (known as the provincial value-added tax or PVAT) of the HST.  In what will be known as the January 28, 2011 Release, the Department of Finance provides a backgrounder, proposed amendments to the Excise Tax Act (which will have to be passed by the House of Commons and Senate) and proposed changes to regulations (which can be promulgated by the governor in Council).

These rules were initially announced in Department of Finance news releases dated May 19, 2010 and June 30, 2010.  The January 28, 2011 Release is said to incorporate modifications and changes as a result of consultations with the affected financial services industry.  A number of issues raised in the consultations require further research, analysis and stakeholder consultations, which will take place until March 31, 2011.

The HST rules for financial institutions remain very complicated.  It is not possible to summarize the 130 pages of new laws and regulations in this blog post.  Suffice it to say, each financial institution in Canada or engaged in business in Canada will need to take a look at the January 28, 2011 Release.  Many commodity tax specialists spent the week-end trying to get their heads around this new package.

 

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?

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

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

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

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

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

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

The judge further goes on to add:

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

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

Continue Reading...

My Train Conversation About What Is The Excise Tax Act

Yesterday, I took the Via1 train from Toronto to Ottawa to watch the Senators Game. I met interesting people on the train.  I met a man and his wife (close to retirement age - but not quite).  They asked what I did for a living and I said that I was a GST/HST lawyer.

We had an interesting discussion that I wanted to share with you. The man had never looked at a law before and he thought that the Excise Tax Act (also known as the GST/HST Rule Book) was (or should be) a list of all things and services under the sun in alphabetical order and that each thing/service had a rule saying whether it was subject to GST/HST.  The woman thought the Excise Tax Act was more like the Book of Oracles where each good and service had a rule as to whether it was subject to GST/HST. Both ideas of what the law should be was a guide for users.

Both thought that the Excise Tax Act was simple to read and held all the answers in an easy format. "That would be really nice" I responded before telling them that the Excise Tax Act was complicated to read.  I went on the Internet and read them the self-supply rules.  They looked at me and said "Really, are you making this stuff up?".  I said no - unfortunately.

This was a very pleasant and sometimes funny conversation that I had on the train.  I learned a valuable lesson that those who do not know as much about GST/HST as I do have different expectations.  The public's expectations that the tax laws are easy for people to follow are genuine and hopeful (but not realistic).

Many clients ask for a simple and short answer - this is in part based they also expect that the answers are easy to find and give (some want to save money too and others think lawyers make tax answers more complicated than necessary).  There is a disconnect and no easy answer. 

Based one my conversation on the train, I am more aware of what is the disconnect between expectations and reality.  Maybe the drafters of the Excise Tax Act, regulations, administrative statements should take a train ride, listen to people and ask themselves what they can do to make it simpler.

Sale of a Business or Part of a Business

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

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

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

Are You Doing Business In Canada or Doing Business With Canadians?

The most frequent question that I ask U.S. businesses is "Are you doing business in Canada or doing business with Canadians?"  It is an important GST/HST question.  If a business is merely doing business with Canadians, it is not required to register for GST/HST purposes.  If a non-resident business (also applies to resident businesses) are doing business in Canada, they may be making taxable supplies in Canada and may be required to register for GST/HST purposes.

The phrase "doing business in Canada" is a term of tax art.  The phrase "doing business in Canada"  is not defined in the Excise Tax Act (Canada). The phrase has been considered in many income tax and sales tax cases.  As a result, a determination is made on a case-by-case basis.  The Canada Revenue Agency has issued administrative statements to inform suppliers on factors they consider in making a determination.  In many cases, it is recommended that a non-resident supplier apply for an advance GST/HST ruling (usually in cases where they want a decision that they are not doing business in Canada).

I have been asked to look at this issue more than any other GST/HST issue.  I could give many examples that cross many forms of businesses.  I will give two of my more recent examples.

Example #1: A U.S. company provides specialized services to clients.  They design and develop custom computer programs and implement the program after completion.  Employees of the U.S. company spends months (sometimes over a few years) at the clients' premises.  In recent years, the U.S. company was retained by a few Canadian companies for big and small projects. The U.S. company has established a Canadian bank account in which it was paid for its services.

This company was doing business in Canada and needed to register for GST/HST purposes.  It did not matter that the U.S. company did not have its own offices in Canada and only worked at the premises of its clients.  Given the amount of time that the U.S. company spent in Canada performing services on Canadian soil, it was easy to determine that the company was carrying on business in Canada.

Example #2: A U.S. company with a business location in the United States very near the Canada/U.S.border sold goods.  While Canadians could cross the Canada-U.S. border, buy goods, and be responsible for taking the goods across the border, This was not what usually happened.  The U.S. company regularly delivered the goods f.o.b. Canadian customer's front door.

If the U.S. company delivered the goods infrequently f.o.b Canada, it may have been considered to be doing business with Canadians.  If the U.S. company delivered the goods f.o.b U.S. business and the customer arranged for shipment across the border, the U.S. company may have been considered to be doing business with Canadians.  However, the reality was very different. Based on the actual activities of the U.S. business, they would likely be considered to be carrying on business in Canada.

The facts are always very important.  Even if you have asked this question before and are attempting to NOT carry on business in Canada, it is important that non-residents of Canada ask what is the practical reality.  Based on my experience, non-resident businesses often get into difficulty because employees change the game plan without knowing why things are being done a certain way.

"Are you carrying on business in Canada" is an important question to ask. 

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.

If You Would Like Near Certainty in GST/HST, You Need To Get An Advance GST/HST Ruling

Seth Godin, a marketing guru, usually is right on the mark.  In today's post, entitled "The Certainty Premium" he writes, in part:

How much would you pay for an envelope that had a 50% chance of containing $10 and a 50% chance of being empty?

Over time and in bulk, probably $4.99. But certainly not more than $5.

Here's where it gets interesting: how much extra would you pay for a plane that was guaranteed to be always on time, or a surgery that was always guaranteed to work? Suddenly, the same math that helped us value the envelope doesn't work so well. That's because we're often willing to pay a significant premium to avoid risk.

In GST/HST, near certainty may be derived from a ruling from the Canada Revenue Agency (CRA).  There are two types of requests that can be made to the CRA, GST/HST Rulings Directorate:

1. Advance Rulings; and

2. Interpretations.

An advance ruling requires that the requested provide their name and all relevant facts relating to the request.  The CRA will consider the request, possibly ask questions, and request more documentation before issuing an advance ruling.  This process takes time and the request is well considered (sometimes a very long time).  However, what the taxpayer receives from the CRA is a letter containing their answer that is binding.  This means that the CRA should not issue an assessment against the person who made the request for the ruling if they requester acts in accordance with their advance GST/HST ruling.  In cases where an auditor disagrees or the CRA's administrative position has changed after the CRA provides the advance GST/HST ruling to a requester (and they have not notified the person to whom the ruling was provided of the change), the CRA generally does not assess GST/HST, penalties and interest for the past, but requests that the person abide by the CRA's current position on a going forward basis.  This can save a person from audit stress and having to pay an assessment in the future.

An interpretation is something less than an advance ruling and it is not binding on the CRA.  An interpretation usually involves a general and generic question and can be made on a no-names basis.  The interpretation provides the CRA's current position relating to the facts and topic set out in the request. If a taxpayer has an interpretation and an auditor disagrees or the CRA's position changes, an assessment may be issued against a requester. Usually, if a person has an interpretation letter from the CRA, the CRA will not assess penalties because the person exercised due diligence by requesting an interpretation.  There are cases where the CRA will restrict the audit period to something less than 4 years if their administrative position changed.  CRA auditors exercise discretion on a case-by-case basis.

That being said, if the CRA discovers during an audit that the request for an advance ruling or interpretation does not set out all relevant facts or that the facts were "spun" and not entirely accurate, they may take the position that the ruling or interpretation is void and may issue an assessment against the requester despite the ruling or interpretation.  For this reason, if there is a significant amount that may be assessed if a future audit covers 4 years, then it is wise to use the services of a GST/HST professional who can help you write your ruling request.  In addition, the GST/HST professional can communicate with the CRA, GST/HST Rulings Directorate personnel to determine what information they require to analyze the advance ruling/interpretation request. 

Businesses often do not know what they do not know and are too afraid to ask the CRA out of fear that contact will cause an audit to occur.  Businesses owners may not know what to say and what not to say.  By working with a professional, the business owner may be shielded from the CRA's view or may find out that their advance ruling request may not be granted and that they are doing something wrong.  If the business is doing something wrong, they can make a voluntary disclosure for past mistakes and correct the errors on a going forward basis. Assessment risk may be reduced.

For more information on GST/HST Rulings, please look at GST/HST Memorandum Series 1.4 (September 2009) "Excise and GST/HST Rulings and Interpretation Services".  If you need help in analyzing whether to request an advance GST/HST ruling or an interpretation, please call Cyndee Todgham Cherniak at 416-760-8999.

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.

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

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

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

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

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

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

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

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

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

 

It is Unlikely You Will Get HST Corect If You Do Not Ask The Right Questions

Harmonized sales tax ("HST") is complicated.  I get asked easy and hard questions every day.  What I am seeing is that many business owners want to be correct on all maters HST, but do not ask the right questions.  A business owner must ask:

  • What am I supplying?
  • Am I making a single or multiple supply?

Many business owners start with a different question.  Unfortunately, they do not take sufficient time to analyze what they actually supply (or may be seen by a Canada Revenue Agency Auditor to supply) as a first step.  BUT, if you do not know what it is that you are supplying, then you may not property apply other HST rules (such as the place of supply or transition rules).

For example 1: A number of years ago, I had a client tell me that they license computer programs.  I asked to see the licenses that allowed users to use their computer programs.  They looked at me blankly and said none of their customers had signed a license agreement.  When we dug into what they actually supplied, they ran a web-site that allowed persons to access information via the Internet.  They had developed a computer program for their own use in order to run their web-site and process information received from Internet users.  They never gave the Internet users the ability to download this computer program.  The actual deliverable was a list of names and useful information that the Internet user could then use to contact one of the supplied names to acquire an unrelated service from a third party.

This client thought that they provided tangible personal property when in fact they performed a service or provided intangible personal property.

For example 2: Another client is an interior designer.  The interior designer said she provided interior design services.  However, for many clients, the interior designer bought and resold paint, tiles, wall paper, furniture, etc. and chargde a 15%-25% mark-up.  The interior designer actually provided tangible personal property and services.

For example 3: Another client is an exterminator (of pests).  The exterminator thought he performed a valuable service.  In the world of HST, he actually performed a service in respect of real property.

The list of examples could go on and on.  My point is that unless you look at the question of "What Am I Supplying?" from an HST perspective, you may not apply the other HST rules properly.  There are many other HST rules to apply properly.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

How Much is That Doggie in the Window?

A pet (dog or cat or other) will cost more because he veterinarian bills are subject to HST.  Prior to HST, you would have paid Ontario retail sales tax (PST) to the pet store when you purchased your pet and you would have paid PST on the food and toys.  However, prior to July 1, 2010, you would not have paid PST on the vet exams and tests.  Now, you will pay HST on virtually every charge by the vet.

On December 28, 2010, I took my dog to the vet as she had bloody sores on her back and was in pain. She cried most of the night and could not get comfortable.

The vet charged me $77.00 (plus HST) for the examination and made decisions to run tests.  The hospital cytology cost $66.00 plus HST, the skin scraping (which is actually gathering a little skin to analyze) cost $51.50 plus HST and the culture and sensitivity aerobic (which is testing the goopy matter for the type of infection so that the correct antibiotics are prescribed) cost $129.50 plus HST.

After the analysis, antibiotics were prescribed at $64.60 plus HST (the same antibiotics are not subject to HST when prescribed to a human), a medicated topical spray to calm skin cost $50.46 plus HST (again a similar treatment would be exempt if prescribed to a human patient).  I also purchased some skin sensitivity dog food that was subject to HST.

My poor dog was still very uncomfortable, so I took her back to the vet for a medicated bath (and that really helped).  The medicated bath was $65.00 plus HST.  The vet also prescribed another medicine to be added with food or to be injected in my dogs mouth with a syringe (without needle tip).  This cost another $49,32 plus HST.

I still need to purchase a three month supply of Invermectin to solve the real issue - demodex (the second incidence in the last two years and my dog is 10 years old).

In addition, I still need to take my dog for her annual physical in 2011, pay for her annual shots and her heart worm medication.  I also will take her for her semi-regular groomings and nail clippings.  I buy rawhide bones for her weekly teeth cleaning.  I should not forget to mention that I will continue to buy her dog food and pay HST.

All totaled, I will pay over $250 in HST in the first year of HST on my dog.

While I can make sacrifices to pay the HST, some cannot and should consider the ongoing costs of pets, including HST, when making purchasing decisions.  If I had to choose between relieving my dogs pain and treating her infection or not, it would be a hard decision.  my vet tells me that many pet owners since July 1, 2010 could not afford treatment for their pets and either the pet suffered or was euthanized.

Directors' Liability for HST Debts Is Important Consideration

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

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

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

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

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

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

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

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

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

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

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

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

Income Tax Status of HST Transition Support Payment for Small Businesses

A number of readers of the HST Blog have asked whether the Ontario HST Transition Support Payment for Small Businesses is subject to income tax. The answer is "yes" - sorry to be the bearer of bad news.  I was informed a number of months ago by a representative of the federal Department of Finance that the payment is subject to income tax and that the Ontario negotiators were/are aware of this interpretation.

So, please make sure that you make a record of the payment for 2010 income tax calculation purposes.  The reality is that th tax authorities will know about the payment to you - so, please do not forget it (even if it is really small).

Have You Received Your HST Transition Support Payment for Small Businesses?

The HST Blog asks you to comment on whether you have received your HST Small Business Transition Support cheque.  The Ontario government has advertised in HST Tax Tip #7 that small and medium sized businesses (sales less than $2 Million in the tax year 2009) that they will be receiving an HST transition support payment up to $1000 in "the fall of 2010".  Well, the leaves are colourful and it is officially fall of 2010 - where are those government cheques?

The entitlement criteria are:

•not be a listed financial institution under the Excise Tax Act (Canada);
•carry on business in Ontario and have been a GST/HST registrant on July 1, 2010;
•make GST/HST taxable supplies (including zero-rated supplies) in the course of carrying on business;
•have a premises in Ontario where it conducts its business; and
•have taxable revenue of less than $2 million in a 12-month period. 

I have spoken with  number of small businesses and no one I have spoken to has received a cheque.  Please comment on whether you are still waiting for your government cheque.  This is our way of helping keep the government accountable.

Tip: Service Providers Must Make HST Place of Supply Determination of an Invoice-by-Invoice Basis

Service providers should not make a determination of the place of supply for harmonized sales tax (HST) and applicable HST rate once at the beginning and not revist the analysis.  As a technical matter, the legislation requires that service providers make a determination for each billing period because the relevant facts may change from invoice to invoice.  For example, the types of services may change from billing period to billing period, which could affect the application of the HST place of supply rules.  If there is more than one office or home address provided by the client, the location most closely connected with the supply may change from invoice to invoice.

The advice is do not follow the Ronco advice "Set It and Forget It".  Canada Revenue Agency auditors are being trained to look into the details of each invoice and look at changes.

Gary Clement's National Post Cartoon Re HST and Service Providers

I had to share Gary Clement's latest cartoon from the September 30, 2010 National Post.  Many service providers will appreciate this one:

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.

MUSH Sector Rebates

This Post is out-of-date

A registrant/non-registrant for GST/HST purposes which makes exempt supplies will not be entitled to claim input tax credits (unless the entity also makes taxable supplies). Some entities are not entitled to claim any rebates of the GST/HST paid on business inputs.  The MUSH sector may or may not be entitled to claim a rebate depending on the province in which the entity is located.

I have promised to share my MUSH sector rebate chart.

MUSH Sector Entities GST Portion  Rebate HST Portion Rebate - Ontario HST Portion Rebate - BC HST Portion Rebate - NS HST Portion Rebate - NB HST Portion Rebate - Nfld
Municipalities 100% 78% 75% 57.14% 57.14% No rebate
Hospitals 83% 87% 58% 83% No rebate No rebate
School Authorities 68% 93% 87% 68% No rebate No rebate
Universities & Colleges 67% 78% 75% 67% No rebate No rebate
Charities 50% 82% 57% 50% 50% 50%
Qualifying Not-for-Profits 50% 82% 57% 50% 50% 50%

This chart highlights many important problems for the MUSH sector. 

1. The lack of significant rebates for hospitals in British Columbia, Newfoundland/Labrador and New Brunswick will put a strain on provincial budgets due to the unrecoverable health care costs.

2. The lack of significant rebates for school authorities and universities and colleges in Newfoundland/Labrador and New Brunswick will put a strain on provincial budgets due to the unrecoverable education costs.

3. Nova Scotia was able to relieve some of its budget pressures when it signed a CITCA.

4. For Ontario, the effective unrecoverable GST/HST rates (what the entity will not be able to recover by way of a rebate) in respect of purchases for use in exempt activities are:

MUSH Sector Entity Effective GST/HST Rate after Rebate
Municipalities 1.76%
Hospitals 1.89%
School Authorities 2.16%
Universities and Colleges 3.41%
Charities 3.94%
Qualifying Not-For-Profits 3.94%

4. For British Columbia, the effective unrecoverable GST/HST rates (what the entity will not be able to recover by way of a rebate) in respect of purchases for use in exempt activities are:

MUSH Sector Entity Effective GST/HST Rate after Rebate
Municipalities 1.75%
Hospitals 3.79%
School Authorities 2.51%
Universities and Colleges 3.40%
Charities 5.51%
Qualifying Not-For-Profits 5.51%

 

Was the Director Wearing a White Hat?

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

Justice Diane Campbell wrote:

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

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

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

Bed Bugs and HST

The bed bug extermination business is thriving (not good for renters, home owners, hotel operators and others, but good for pest control service providers).This post is for the pest control service providers.  I was recently asked which place of supply rule applies to pest control services.  The person asking had incorrectly assumed that the general HST place of supply rule applied.

The correct answer is that the HST place of supply rule for services in respect of real property will apply to most (if not all) pest control services.  The service provider must go to a particular building to undertake the actions to rid the place of the bed bugs.  The service provider goes to a home, an apartment building, a hotel, a condominium building, a nursing home, or a theatre.  These places have particular locations.

Based on the HST place of supply rules, if the place is located in an HST province (e.g., Ontario), HST would apply to the amount charged for the service.  If the place is located outside an HST province (e.g., Quebec), HST would not apply (but GST would apply if the place is in Canada) to the amount charged for the service.  If the place is located on a reserve, then the point of sale rebate would apply.

Bed bug exterminators should clearly identify on their invoice the location at which the services were performed.  This will help the HST auditor apply the HST place of supply rules correctly and assess the correct rate of GST/HST.

For persons located in Ontario and British Columbia, pest control services were not taxable under the provincial sales tax regimes of either province.  Many persons who are recipients of pest control services are consumers and, therefore, are not able to recover the HST by way of an input tax credit.  Landlords, for example, cannot recover HST paid on pest control services in rental properties. Another good example is a home owners is the final consumer and cannot recover HST paid on bed bug removal - even if the bed bugs arrived from a foreign hotel.

Bed bugs and other pests may carry diseases and cause health issues, but the extermination services are not considered to be health care services.  People (and parents) must pay the HST to protect their families from bed bug bites and health issues.

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.

A Thought About GST and Imports

Since the implementation of harmonized sales tax ("HST") in Ontario and British Columbia, the Government of Canada should re-think the imposition of goods and services tax ("GST") on imports of commercial goods. In connection with the implementation of HST, the CITCAs include provisions such that HST is not imposed on imported commercial goods.  What is the logic of continuing to impose GST on commercial imports? Wouldn't it be better for Canadian businesses and, in particular manufacturers, if the GST cash flow cost on imported commercial goods is removed?  If the Canada Border Services Agency can live with the HST regime for imports, why can't they also live with no GST on commercial goods and GST on non-commercial goods?  Wouldn't it be a more efficient use of government resources if the Canada Border Services Agency is no longer responsible for collection of GST on imported commercial goods and is not longer shares verification/audit functions with the Canada Revenue Agency?  For that matter, wouldn't it be better for businesses if they did not have to be subject to GST audits/compliance verifications by two separate government agencies who do not adequately share information and interpretations?  I am just saying ...

HST and Disbursements

Disbursements have been an issue under the goods and services tax (GST) and will become a more complex issue with harmonized sales tax (HST).  When I speak about disbursements, I am talking additional charges or expenses incurred by the service providers, such as parking, filing fees, photocopies, etc. that are billed to the client with the fees for services.

As a general rule, disbursements take on the same GST/HST character as the underlying supply of services.

In 2004, the Canada Revenue Agency (CRA)  reissued Policy Statement P-209R "Lawyer's Disbursements" and indicated that they took the position that there are two categories of disbursements that may be found on a lawyer's bill:

1) Expenses/disbursements incurred by the lawyer as agent for the client; and

2) Expenses/disbursements not incurred as agent for the client.

The expenses/disbursements incurred as agent may be passed on to the client without additional GST/HST (however, the service provider should not take an input tax credit and then not charge GST/HST as the GST/HST should be passed to the recipient).

The same two categories apply to other service providers.  However, depending on the nature of the services, it may be that for other service providers expenses are not normally incurred in the context of an agency.  As a result, it is important to understand the CRA's administrative position:

The phrase “incurred as agent” indicates that the disbursement described is generally incurred in a lawyer's capacity as agent for a particular client. As such, no GST/HST is exigible on the subsequent reimbursement by the client. The phrase “not incurred as agent” indicates that the disbursement described is generally incurred otherwise than in a lawyer's capacity as agent for a particular client. As such, GST/HST is exigible on the subsequent reimbursement by the client (to the extent that GST/HST is exigible on the consideration for the service provided by the lawyer to the client). The characterization of each disbursement is based on the application of the principles of agency to a typical transaction involving that disbursement.Policy statement P-182R, Agency was used as the basis for this analysis.

In 2010, there have been two important court cases that provide additional guidance on the issue of disbursements (Merchant Law Group v The President of the Canada Revenue Agency (FCA); Roberge Transport Inc. v. The Queen (TCC).  Both cases give guidance that a court will consider as relevant whether the parties had an agency agreement (or some statement concerning the expenses being incurred as agent) in place to support the arguments that the expenses where incurred in the context of an agency. The Roberge Transport case is important to review because it is written by Justice Steven D'Arcy, who was one of the leading GST lawyers in the country before joining the bench in 2009.

Service providers, therefore, should follow the existing policy statement and add what may be taken from the cases.

There are many complex situations where the HST treatment of disbursements will become relevant.

Example 1:  A service provider pays a filing fee to a municipality in circumstances where the filing fee is exempt for GST/HST purposes.   The service provider may be required to charge HST when it bills the disbursement when the service provider is not an agent for the client.

Example 2: A service provider in an HST province (e.g. Ontario) retains a service provider on a sub-contract basis in a non-HST province (e.g., Manitoba) and pays the service provider's invoice and includes the disbursement on the Ontario service provider's invoice to the client.

Example 3: A trucking company providers trucking services to a Canadian manufacturer and incurs inter-provincial fuel taxes that it invoices the client as a disbursement. If the trucking company is not acting as an agent, there may be HST on the incurred taxes depending on the facts.

The answers re whether HST must be charged in respect of a particular disbursement will depend upon the facts.  I can tell you that businesses need more clarification regarding this subject.

My best advice is to read the Policy Statement on "Agency" and "Lawyer's Disbursements" and clearly state in retainer letters and contracts which expenses and disbursements will be incurred as agent for the client.  The list will depend on the business activities and usual disbursements.  You should seek help compiling the "Incurred as Agent" listing.

In addition, it is better to be consistent in your approach to billing disbursements. A billing policy is helpful and should be provided to all sales and billing staff.  Arguments will have greater persuasive value if it can be shown that a particular type of expense is always treated in a certain manner (usually as incurred as agent in order to not charge GST/HST).

A History Lesson Regarding a Failed HST Attempt

On February 20, 1991, then Finance Minister Michael Wilson announced in Department of Finance press release 91-023 that the Federal Government of Canada and the Government of Saskatchewan had signed a Memorandum of Understanding which provides for the harmonization of the provincial sales tax with the very new goods and services tax ("HST").  I have a copy of this press release from Carswell's Canada GST Service (pages R687-694 in the "Historical" binder), but have not received permission yet to attach the photocopy.  The harmonization was to occur on January 1, 1992; but never did.

At the time of the press release in 1991, Grant Devine was the premier of Saskatchewan.  A few months later he had been voted out of office and Roy Romanow was the premier of Saskatchewan. During the election campaign, the proposed tax harmonization was a hot topic and public opposition was fierce.  Due to the public opposition to the sales tax harmonization plan, Premier Roy Romanow scrapped the sales tax harmonization plans and to this day Saskatchewan does not have an HST.  Harmonization legislation was not drafted (or should I say completed and released publicly) by the federal Department of Finance until 1997 when Nova Scotia, New Brunswick and Newfoundland/Labrador decided to implement the HST.

Former Premier Grant Devine became the Premier of Saskatchewan in the 1982 after his Progressive Conservative Party won the most seats (55 of 64 seats) in the provincial election.  His government was re-elected in 1986.  During the 1991 election, the Progressive Conservatives won only 10 of 66 seats and both the Devine PC government and the HST were history.  In 2004, Grant Devine sought to enter the federal political arena as a candidate, but was not accepted by the federal PC Party. 

In 1991, the New Democratic party won the election in Saskatchewan.  Roy Romanow became premier and held that position through two elections (1991-2001). Former Premier Lorne Calvert replaced Roy Romanow as NDP leader and premier of Saskatchewan (2001-2007).  Calvert and his government were defeated in 2007 by the Saskatchewan Party and Brad Wall became premier (2007 to present).  The Saskatchewan Party is a coalition of members of the Saskatchewan PC and Liberal parties, but is not the result of a merger.  Technically, the Saskatchewan PC party still exists, but is dormant so to speak.  It can, therefore, be said that the PC party in Saskatchewan did not recover after the failed HST attempt.

Back to the February 20, 1991 Department of Finance press release - Michael Wilson's press release and the backgrounder included statements about how the harmonized sales tax would be better for businesses.  It included statements about how single tax administration would result in economic efficiency and cost savings to businesses.  The people of Saskatchewan did not accept these statements as evidenced by the thrashing the initiators of the HST experienced (both federal and provincial PC parties) during the post announcement elections.

If one considers the Saskatchewan experience and then looks at the anti-HST movement in British Columbia, one should be able to see more clearly how the people can have a strong voice.

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.

Continue Reading...

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).

I am Giving an HST Presentation for Graphic Designers on July 21

I am giving a webinar on July 21, 2010 at noon (EST) organized and hosted by the Association of Registered Graphic Designers - Ontario.  Members and non-members are permitted to register for the webinar.  I will spend time looking at the harmonized sales tax (HST) place of supply rules applicable to various types of graphic designers. I will also talk about things you can do to improve compliance with HST rules.  If you would like to register, please go here.

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).

Businesses that Sell Goods Must Charge HST Based on Delivery

I have been asked many times over the last few days questions about the HST place of supply rules for goods. 

  • Does a retailer in Alberta have to charge HST (Ontario rate) on goods sold to a Ontario resident?

Answer: Yes

  • Does a wholesaler in Ontario have to charge HST (Ontario) on goods shipped to Quebec?

Answer: No

The HST place of supply rules for goods is:  HST is applicable to tangible personal property (goods) if the goods are delivered by the supplier (seller) to the recipient (buyer) in an HST province.

For the purposes of the HST place of supply rules for goods, property (a good) is deemed to be delivered in a particular province (e.g., Ontario) by a supplier (seller) and is deemed not to be delivered in any other province by the supplier (seller) if the supplier (seller):

(a) ships the property to a destination in the particular province (e.g. Ontario) that is specified in the contract for carriage of the property or transfers possession of the property to a common carrier or consignee that the supplier has retained on behalf of the recipient (buyer) to ship the property to such destination; or

(b) sends the property (good) by mail or courier to an address in the particular province (e.g., Ontario).

This means that:

  • If an individual comes into a retail store in Ontario and purchases a widget and the retailer gives the widget to the buyer in the store, GST/HST is payable at the combined rate of 13%.
  • If an individual goes into a store in British Columbia and buys a coat and asks the retailer to ship the coat to Ontario, GST/HST is payable at the combined rate of 13%.
  • If an individual goes into a store in British Columbia and buys a coat and takes the coat with him/her, GST/HST is payable at the combined rate of 12%.
  • If an person buys a painting from an artist in Alberta and has the painter ship the painting to Nova Scotia, GST/HST is payable at the rate of 15%.
  • If an Ontario based wholesales/distributor sells goods to a retailer in Quebec and ships the goods to Quebec, GST is payable at the rate of 5%.
  • If an Ontario based wholesales/distributor sells goods to a retailer in Quebec and the retailer sends his own truck to pick up the goods, GST/HST is payable at the rate of 13% because the goods were delivered on Ontario and could be given to another person in Ontario.

B.C. Anti-HST Group Files Court Challenge

On July 5, 2010, an group led by Bill Vander Zalm filed a judicial review with the Supreme Court of British Columbia to challenge the Liberal Government's actions to implement the HST.  The two main orders sought are:

1. An order in the nature of certiorari quashing the Order of the Lieutenant Governor in Council No. 661, dated November 30, 2009, and approval given therein to the Minister of Finance to enter into the Comprehensive Integrated Tax Coordination Agreement with the Government of Canada; and

2. A declaration that the Comprehensive Integrated Tax Coordination Agreement between the Government of Canada and the Government of British Columbia dated November 30, 2009 is of no force or effect and a nullity.

In simple terms, the orders, if granted by the Supreme Court of British Columbia, would undo/remove certain procedural steps that have led to the HST implementation and could cause all HST house of cards to fall.

I have read a copy of the Petition to the Court and find that it raises serious procedural issues.  The most interesting points are raised in paragraphs 10-11, 16 & 18 of the Petition:

10. On November 30, 2009, the Lieutenant Governor in Council, by Order in Council 691 made pursuant to s. 4 of the Ministry of Intergovernmental Relations Act, R.S.B.C. 1996, c. 303, purported to give authority to the Minister of Finance to enter into the Comprehensive Integrated Tax Coordination Agreement with the Government of Canada (the "CITC Agreement").

11. In the CITC Agreement, the Government of British Columbia agreed, subject to the requisite legislative approvals, to the imposition and implementation of PVAT in British Columbia.  The CITC Agreement purports to authorize the Government of Canada to introduce the necessary legislative amendments to include British Columbia as a participating province under Part IX of the Excise Tax Act. The parties agreed that the PVAT would be implemented in British Columbia on July 1, 2010.

16. The British Columbia Legislature did not purport, in the Consumption tax Rebate and transition Act, to ratify the CITC Agreement, authorize the Minister of Finance to enter into the CITC Agreement or otherwise approve the PVAT for British Columbia.

18. The British Columbia has not ratified the British Columbia CITC Agreement.

In simple terms, the B.C. Liberal Government did not take the formal procedural steps required to approve the cornerstone CITC Agreement. 

In addition, the B.C. Liberal Government did not that the legally and constitutionally required steps. Part 3 of the Petition sets out the laws that were not followed.  This is the part of the case that will be fascinating for legal historians and constitutional law observers.  The case will look into the well known principle of law associated with the Boston Tea Party  - "No taxation without representation".

What is argued to be a fatal flaw of the HST implementation in British Columbia is "[t]he CITC Agreement did not originate in the [B.C.] Legislature, and has not been ratified or approved by the Legislature..."  Taxation of the people was not done properly.

The questions raised in the Petition are important ones for the people of British Columbia and businesses.  While businesses may be concerned that Mr. Vander Zalm may be correct and their input tax credits may be taken away, my humble view is that the case has been brought quickly and the answer will be provided relatively quickly [even though Mr. Joseph Arvay, Q.C. has voiced hope that the case will be head by August 1, 2010, judicial proceedings take time and appeals lengthen the process].  Businesses will be better off if the judicial review decision is quick - rather than having the issue raised and determined 10 years from now after a large assessment of a single taxpayer.  If 10 years of tax collection and filing GST/HST returns is reversed 10 years from now, the retroactive uncertainty and ramifications will be worse for businesses.

The implementation of HST in British Columbia is major tax reform that was rushed to meet the July 1, 2010 date.  If the Mr. Vander Zalm is correct (and I think he is raising very important points and he is knowledgeable in government procedures), he is doing the right thing for the citizens of British Columbia by asking for a judicial review of the government's procedural steps and constitutional and legal authority to implement the HST. 

HST and Actors/Actresses - Will HST Cause Actors/Actresses to Avoid Canada?

More actors and actresses are concerned that Ontario's and British Columbia's decisions to implement harmonized sales tax (HST) will affect them --- and they should be concerned.  If they do not consider the issue of HST, the cost may be 13% of the contract in Ontario or 12% in British Columbia.  Since an actor/actress may make millions of dollars filming a movie in Canada, we are not talking about small numbers.

Subsection 143(1) of the Excise Tax Act (Canada) provides that:

For the purposes of this Part, a supply of personal property or a service made in Canada by a non-resident person shall be deemed to be made outside Canada, unless
(a) the supply is made in the course of a business carried on in Canada;
(b) at the time the supply is made, the person is registered under Subdivision d of Division V; or
(c) the supply is the supply of an admission in respect of a place of amusement, a seminar, an activity or an event where the non-resident person did not acquire the admission from another person.

If this provision applies, then an actor/actress would not have to register for GST/HST purposes and would not have to charge collect and remit GST/HST on their services performed in Canada.

On the other hand, subsection 240(1) of the Excise Tax Act (Canada) is the provision relating to registration and provides that:

"Every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for the purposes of this Part, except where
(a) the person is a small supplier;
(b) the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business; or
(c) the person is a non-resident person who does not carry on any business in Canada."

If a person must register for GST/HST purposes, they must charge, collect and remit GST/HST (if applicable) in respect of services performed in Canada (and a participating province).

Assuming that the actor/actress is a non-resident of Canada, the key question is whether they are "carrying on business" in Canada.  There is no definition of "carrying on business in Canada" in the Excise Tax Act.  As a result, whether a particular actor/actress is carrying on business in Canada will depend on the specific facts.  There are many factors specific to the work/life of the actor/actress, their background and their activities in a year that may cause the Canada Revenue Agency (Canada's IRS) (the "CRA) to conclude he/she is carrying on business in Canada as opposed to carrying on business outside Canada and visiting Canada (briefly) in connection with that outside business.

The CRA has issued a policy statement concerning the factors they consider when determining whether a person is carrying on business in Canada --- but none of the examples relates to actors/actresses. Policy Statement P-051R "Carrying on Business in Canada" was last updated in 2005.

It is important to note that getting GST/HST correct may mean that the actor/actress (or their production company) would charge GST/HST on the portion of their services performed in Canada and the payor would recover that GST/HST by way of an input tax credit.  If they do not ask the question, it may result in auditors, assessments and a bad & costly experience.

It is important to note that the GST/HST test is not connected to a permanent establishment in Canada like the Canada-United States Income Tax Treaty. In other words, an individual may not have to pay Canadian income tax and may be entitled to register for GST/HST purposes and charge GST/HST on a contract for services.

Canadian commodity tax lawyers can help apply the CRA's "carrying on business" test and provide opinions that are subject to solicitor-client privilege.

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.

HST Is Reality --- Reality Bites (For Many)

Today is July 1, 2010 and Ontario and British Columbia have implemented the harmonized sales tax. Nova Scotia has raised their HSt rate from 13% to 15%.  The HST will cost consumers more. 

Businesses that are engaged in "commercial activities" and are registered for GST/HST purposes will recover GST/HST paid in connection with the business (with the exception of items that are subject to the recaptured ITC rules).  Another important exception is that ITCs will be denied by the CRA if you do not maintain or receive the proper documentation or information from suppliers.

I will continue to blog about these important issues. Today, I am going to give the links to a number of articles/opinions written about the implementation of HST:

Please send us additonal links to articles.opinions.

How Do You Plan To Save HST?

July 1, 2010 is the start of my diet.  I am going to make a positive out of the harmonized sales tax (HST).  In order to fund my HST liabilities,  I am going on a diet.  While I am not particularly overweight, i could lose a few pounds. 

I will not buy lunches in downtown Toronto food courts.  If the average lunch costs me $10.00, I should save $1000 per year at least and can use that money to pay for gas, electricity for my home, home heating fuel, food (on which HST will be payable), supplements (on which HST will be payable), landscaping, and other necessities.

I know that prepared meals under $4.00 will be he subject of a point of sale exemption - but, it is better for me to go on a diet than eat pizza and cheeseburgers for lunch. Why is the unhealthy food exempted?

I will also go to the hair salon 3 fewer times a year and will stretch out the time between visits. This will save me another $700 (my person is expensive).

I will reduce the number of manicures and massages so that I can pay for my travel within Ontario. 

I will try to use telecommunications more and travel to the Ottawa office less. This should save me at least $1000 in Porter and Air Canada flights.  I have already tried this.  "Go To Meeting" is very good.

As a consumer, I can make this work.  If others do not adopt similar changes to buying patters, then businesses will not be hurt.  If others do change their spending patterns, HST will be a business killer.

What do you plan to give up in order to save HST?

Many Government Purchasing Departments Are Reopening Contracts and Seeking Price Reductions

This past week, I have seen a dozen or so requests made by municipal and Ontario government departments writing to their suppliers and seeking price reductions relating to existing contracts on the basis that savings related to embedded Ontario retail sales tax (ORST) must be passed on to the buyer (government department).  Most of the requests that I have seen suggest that the basis for the request is contained in the harmonized sales tax (HST) laws.

The truth is that the HST laws do not require that suppliers reopen contacts for renegotiation and pass on any savings to the purchasing government department.  The question is whether there is a provision in the contract that requires that any savings relating to tax reform be passed on to the purchasing government department.  So far, I have not seen any contract containing such a provision --- but, some may exist.

The practical reality is that if a supplier to a government purchaser does not make adjustments or open the kimono so to speak and engage in a discussion), then the government purchasing department may not renew a contract or may treat the supplier negatively in the future in a procurement situation.  As a result, even though the contract does not require price adjustments, suppliers may choose to make adjustments in order to keep the customer happy.

I will give you an example that may seem odd to a sales tax lawyer/accountant without full facts.  In one matter, a client provided a photocopier and toner to the government purchaser.  The cost of the photocopier was already a sunk cost.  However, the purchasing government department said they expected a price reduction because the supplier bought toner and the ORST cost of the toner was within the contract pricing.  As a result of HST, the supplier would no longer pay ORST on the toner and would recover the HST on the toner by way of an input tax credit.  The government department wanted a price adjustment to remove the ORST on the toner that would have been considered by the supplier in its initial pricing under the contract. The small price adjustment made sense to keep the purchasing manager happy.

With three of the matters I reviewed this week, due to the nature of the contract, there was no ORST savings to pass on to the government department.  That being said, the purchasing manager needed to be convinced and the client needed to provide detailed information about its pricing in order to prove to the purchasing manager that this was the case.  The dilemma was that in proving that there was no ORST cost embedded in the pricing, the government department needed to be provided with information that could be used in the future to negotiate price reductions.  in other words, the supplier needed to show too much of its internal information and supplier information.

Two clients priced their contract years ago so that some aspects of the contract were loss leaders and some aspects of the contract resulted in a profit.  The contracts as a whole resulted in a profit to the supplier.  In this exercise, the purchasing government department attempted to reduce the profit margins on the profitable aspects of the contract in order to achieve overall savings (to the detriment of the suppliers' bottom lines).

In all cases, the purchasing manager made it clear that he/she expected price adjustments and would communicate internally if no price adjustments were made.  Pressure was exerted and suppliers to the government were discouraged from maintaining the status quo and not "throwing the government a bone".

One reason for the pressure on the government side is that the Ontario government will start to pay HST on goods and services that were not subject to GST and/or ORST in the past.  Municipal governments do not receive all of the Ontario HST component back by way of a rebate (previously and under HST, 100% of the GST payable was refundable).

I would be pleased to discuss these issue that I am seeing with anyone in this situation.

New Canada Revenue Agency Guides Help With New Housing Rebate Calculations

Tomorrow Is The Last Pre-HST Day, Do You Have Any Purchases to Make

Tomorrow is June 30, 2010, the last day before the sales tax world in Ontario and British Columbia changes.  Today you should ask yourself, CAN I MAKE A PURCHASE AND SAVE HST.

Consumers will be thinking about saving HST. The question that needs to be asked is what is not subject to Ontario retail sales tax, but will be subject to HST.  I cannot provide an all-inclusive list.  However, here are a few suggestions on what you might buy today:

  • land survey (I am doing this today believe it or not)
  • landscaping services
  • house cleaning services
  • painting services
  • if you sign an agreement of purchase and sale of a previously lived-in home, you may save the real estate commission
  • if you take possession and title of a newly built home before July 1, 2010, you save the HST
  • hair dressing/colouring services
  • manicure/pedicure
  • massage
  • dry cleaning
  • taking Rover to the vet
  • visiting the dentist for teeth whitening (not on my list - sorry Dr Jay)
  • ask a lawyer to draft a will or a pre-nuptial agreement
  • buy a domain name (is your name taken yet?)
  • fill up your home heating fuel tank
  • propane for the summer barbeque
  • clean the swimming pool
  • one last pre-HST Botox injection
  • one last work-out at the gym
  • energy-efficient home appliances are exempt from ORST
  • bicycles are exempt from ORST
  • custom computer software is exempt from ORST
  • subscription to Cosmo, Oprah, Mike Holmes or any magazine that interests you
  • notice in the newspaper about a garage sale, birth notice, death notice, in memoriam, etc.
  • ticket to see a play in a small local theater
  • ticket to a dinner theater
  • pre-paid funeral expenses/deposit on final resting place

What is on your list?

I will be writing another post tomorrow on the purchases that businesses have been waiting to make in order to save the unrecoverable ORST and recover HST by way of input tax credit.

Have You Picked "The Chosen One" in Accounts Payable?

One risk-management step that is often over-looked in a time of sales tax reform is selecting "The Chosen One" in accounts payable who is tasked with reviewing all incoming invoices to ensure that suppliers are properly charging sales taxes. 

When auditors arrive with their spreadsheets in hand, they conduct a (1) purchase side audit and (2) a sales side audit. During the purchase side audit, the auditor reviews a sample of incoming invoices to ensure that the business under audit has paid the right amount of sales tax on its business inputs.  Where a supplier to the business does not charge retail sales tax (ORST) or goods and services tax (GST), the auditor will assess the purchaser business - as it is allowed to do under the law.

Businesses can control this assessment risk by assigning the task of reviewing incoming invoices to a trained person - "The Chosen One".  This accounts payable employee will review each incoming invoice and either seek corrections from the supplier or make arrangements to self-assess the tax that is applicable, but not charged.

With the start of harmonized sales tax (HST) in the provinces of Ontario and British Columbia, this is a perfect time to ensure that someone is actively reviewing incoming invoices.  First, you will want to make sure that suppliers are no longer charging ORST on invoices for goods and services provided after June 30, 2010.  If a supplier still shows ORST or PST (provincial sales tax) or RST (retail sales tax) as being charged on the invoice, you will want to follow-up and ask for a revised invoice.  It must be clear that ORST/PST/RST is not being charged.  It may be that HST is being charged, but it must be clear so that an auditor is not confused.

On that point, HST is supposed to be a single combined tax.  The vendor is not supposed to separate the charges into GST and HST on the invoice (except where the supplies are subject to the recaptured ITC rules).  As a result, in Ontario, the invoice should identify 13% HST and no 5% GST and 8% HST separately.

In addition, "The Chosen One" should review incoming invoices to ensure that HST is being charged where applicable.  As a result , you will need to determine when you must pay HST (not just when you must charge HST).  You will have to understand the HST place of supply rules as they apply to purchases.

Businesses outside the HST Zone will also have to have "The Chosen One" selected and briefed on the HST place of supply rules.  You should expect to see some invoices arriving from the HST Zone that will automatically charge HST at the applicable provincial rate of the supplier because that will be the safe default position.  Communication will be important after the implementation of HST to correct these types of errors.  When in doubt regarding the application of HST, the purchaser may obtain an advance ruling from the GST/HST Directorate of the Canada Border Services Agency.

Finally, non-residents of Canada that purchase goods/property and/or services from Canadian businesses also need to have "The Chosen One".  Many Canadian businesses have adjusted their billing systems with the implementation of HST.  There will be situations where previously zero-rated supplies (GST charged at 0%) will default in the computer systems to 12%, 13% or 15% HST depending on the location of the supplier.  A quick call to the supplier to notify them of the change would be in order so that the computer errors can be corrected.

Continue Reading...

Tip: 3 Days Left in Pre-HST World: Do Some File Cleaning

Today is June 28, 2010 and there are only three more days left in pre-HST Ontario/BC.  Those in the service industry (where files are maintained for clients) should bill for services rendered before July 1, 2010.  Services rendered before July 1, 2010 are not subject to harmonized sales tax ("HST").  In addition, many services are not subject to Ontario retail sales tax ("ORST") - only "taxable services" as defined in the Retail Sales Tax Act (Ontario) are subject to ORST in Ontario.

I offer this advice to help not confuse an auditor - close any dormant files on Monday-Wednesday  (June 28-30, 2010) (pre-HST period).  Send those files to records (and you will not have to pay HST on the service fee of the moving company if the service is performed before July 1).  Hire a temporary worker to provide assistance in the pre-HST period and save the HST.  Both GST and HST are payable of the services provided by temporary employees services.  If your employee (that is, he or she is on your payroll and is not a third party service provider or employed by a third party service provider) provides the assistance in closing the files in the computerized system and putting the files in boxes, then his/her employment related services are not subject to wither GST/HST.

You will both clean your office and save the HST at the same time.  More importantly, you will have documentation to show that the files were closed prior to HST.  You will have additional proof to give an auditor that you took steps to make a clear division for the purposes of the application of the HST transition rules. The easier you make it for the auditor, the easier you make it for yourself.

In addition, if that client comes back and needs more work performed by you post-HST, you can open a new file, gather the new information for your HST decision tree and start fresh (and start charging HST where applicable).