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.

Am I An Independent Contractor or An Employee?

Whether an individual is an independent contractor or an employee for GST/HST purposes is an important question. If an individual is an employee, then the employer does not have to pay GST/HST in respect of the individual's salary and the individual does not have to charge, collect and remit GST/HST on the amount paid as salary. However, if the individual is in independent contractor and earns more than $30,000 per year, the person is required to register for GST/HST purposes and charge, collect and remit GST/HST.  Often, the individual gets paid a tax included amount and, therefore, pays the GST/HST from the amount received.

The issue arises more and more often.  There are few GST/HST decisions on the issue on employee vs independent contractor.  We often look at CPP and EI cases for the views of the Tax Court of Canada.

In a recent decision on October 21, 2015, in Quinte Children's Homes Inc. v. The Minister of National Revenue,Justice Graham issued a decision that clearly sets out the test used to determine whether an individual is an independent contractor or an employee:

1. The first issue is whether the intention stated in the contract was that of an independent contractor or an employee?

2. The second issue is whether, when examine through the prism of that shared intention, their objective relationship was that of an employee/employer or independent contractor?

3. In examining the relationship prism, whether the Wiebe Door factors apply?

  • Whether the "employer" exercised control over the "employee"?
  • Whether the "employer" provided the tools necessary for the "employee" to perform work?
  • Whether the "independent contractor" had an opportunity for profit - or could negotiate the amount of consideration paid for services performed?
  • Whether the "independent contractor" had a risk of loss?

In the end, Justice Graham found that Ms. Fobear (who was an intervenor in the case) was an independent contractor.  In the analysis, Justice Graham answered some questions finding Ms. Fobear was an employee and other questions finding Ms. Fobear was an independent contractor.  These cases are rarely simple.  What tipped the scales in this case was a lack of control exercised by Quinte Children's Homes Inc. over the day-to-day activities of Ms. Fobear.

Businesses Cannot Receive GST/HST Amounts Twice: Department of Finance Issues Amendments

On January 17, 2014, the Department of Finance released proposed amendments to the Excise Tax Act (Canada) in order to clarify that a GST/HST registrant cannot claim input tax credits (ITCs) in circumstances when the person has received a refund/credit/rebate of the GST/HST from a supplier. For example, if an Ontario business buys a computer from Best Buy for $1000 + $130 (HST) and returns the computer and receives a credit for $1130 from Best Buy, the Ontario business cannot claim an ITC for the $130 and recover it twice.

Also, non resident importers who must pay GST/HST at the border cannot claim input tax credits where the amount of GST/HST paid at the border is recovered (e.g., by way of a tax adjustment note) from a  supplier outside Canada.

The amendments are a reaction to the Tax Court of Canada decision in Quinco Financial Inc. v. R. (known in GST/HST circles as The Brick case).

The amendments, when passed into law, will be deemed to have retroactive effect.

Interested parties are invited to provide comments on the draft legislative proposals by February 17, 2014. If the proposed amendments have unintended consequences in respect of legitimate activities, it is important to provide comments.

A Judicial Review Of A CRA Administrative Decision Is An Option

A taxpayer recently succeeded in a judicial review of a Canada Revenue Agency decision to deny taxpayer relief (that is, a cancellation of a penalty).  On February 27, 2013, the Federal Court of Appeal sided with the taxpayer in NRT Technology Corp. v. Attorney General of Canada, 2013 FC 200.  The case is against the Attorney General of Canada and not the Canada Revenue Agency because the government department cannot defend itself in a judicial review - the Attorney General is the respondent if an interested party does not participate.

In short, the CRA assessed NRT Technology a penalty (a significant amount) for failure to remit payroll taxes on time (even though this is a payroll tax case, the principles would apply in the case of GST/HST).  NRT Technology applied for taxpayer relief (that is, a cancellation of the penalty) and the CRA denied the request.

The starting point is the CRA has wide discretion to waive penalties and interest and, thereby, grant a taxpayer relief. In this case, the CRA took the position that NRT Technology failed to act quickly to remedy the error. The remittance was due on or before March 3, 2006 and NRT Technology remitted the amount on March 14, 2006 (without prompting by the CRA and operating under the mistaken belief the remittance was due on March 15, 2006). By the time the CRA realized that an error was made (in April 2006), the remittance had already been made by NRT Technology.  Do you see the potential to extend this decision in the case of GST/HST filing deadlines?

The Federal Court of Appeal found the CRA's stated reasons for denying the relief to be unreasonable.  The Federal Court of Appeal found that the reason was inconsistent with the evidence. 

Some tax practitioners would have considered the CRA letter to be perfunctory.  The usual reasons to deny the relief requested were being provided again.  Some may have referred to the letter as "standard form". However, each taxpayer who is assessed deserves consideration.  If evidence is presented to the CRA in the taxpayer relief process, it should be carefully considered and weighed.  If a negative response does not appear to consider the evidence presented, then a judicial review may be warranted.

One cautionary note - judicial reviews can be expensive in terms of legal fees and taxpayers should consider this option when the amount of relief at issue warrants the expenditure. The Federal Court of Appeal is often deferential to the government decision-maker and success in a judicial review is not guaranteed.  That being said, the NRT Technology case gives taxpayers hope that they will get a fair hearing by the Federal Court of Appeal.


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...

Canadian Taxpayers Bill of Rights

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

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

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

3. You have the right to privacy and confidentiality.

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

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

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

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

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

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

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

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

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

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

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

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

Continue Reading...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Taxpayers May Not Be Helped By Past Mistakes of CRA

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

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

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

Sorry to be the messenger of this news. 

What 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.

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.

Canada's Courts of Appeal Web-Site Links

I hope that the list of Canada's Courts of Appeal web-sites are helpful to you:

Federal Court of Appeal:
British Columbia:
New Brunswick:
Nova Scotia:
Prince Edward Island:
Northwest Territories:
Court Martial Appeal Court:


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

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

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

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

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

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

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

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

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.

Smells Fishy: Canada Revenue Agency Obtains Court Orders To Access Books and Records of Quebec Municipalities

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

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

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

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

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

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.

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

When a taxpayer appeals an assessment to the Tax Court of Canada, the amount of the assessment can only go down; it cannot go up higher (with the exception of the added interest that accrues after the date of the assessment).  In other words, if the Canada Revenue Agency (CRA) assessed $25,000, the Tax Court cannot undertake a calculation and determine the number should have been $30,000 and then increase the assessment.  The decision of the Tax Court of Canada would have to be to confirm the CRA's $25,000 assessment. 

We are reminded of this in Long Ha v. The Queen (I love the name of this case).  Judge Miller refers to a decision of Judge Thurlow in Harris v The Minister of National Revenue [1964] C.T.C. 562 (Ex.Ct.):

On a taxpayer's appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court.

Whether the CRA may issue a second assessment for additional tax will depend on whether the amount at issue is statute-barred.  Often a tax dispute takes more than 4 years to proceed through the objection and appeal process.  The CRA will not be entitled to issue a second assessment unless (1) the limitation period for the assessment has not expired or (2) the error is a misrepresentation attributable to neglect carelessness or willful default or fraud or (3) the taxpayer signed a waiver relating to the period at issue and has not revoked the waiver.

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

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

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

Justice Stratus held:

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

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

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

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

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

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

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

Recently, on June 6, 2011, the Tax Court of Canada released its decision in Long Ha v. The Queen.  I will admit that I read the case because of the name of the appellant.  The case was actually very interesting (from a factual perspective).

This case involved a sole proprietorship that was assessed income tax and goods and services tax (GST) on a net worth assessment basis.  The main focus of the appeal was the GST assessment.  Interestingly, Mr. Ha was partially successful in showing that CRA's  net worth calculation was incorrect.

Most interesting is how the case began.  On June 8, 2002, Mr. Ha was returning to Canada and was sent to a secondary inspection by the Canada Border Services Agency.  In the secondary search, $40,000 in cash was discovered.  The matter was referred to the Royal Canadian Mounted Police (RCMP) who did not seize the cash.  However, the RCMP were not satisfied with Mr. Ha's explanations as to why he had such a large amount of cash in his possession, the RCMP sent a referral to the Canada Revenue Agency (CRA) who reviewed Mr. Ha's income tax returns.  The CRA found that the $40,000 was not explained by Mr. Ha's income tax returns.  The CRA took the position that Mr. Ha had unreported income from business (Mr. Ha was a salal picker and fisherman).  The CRA conducted a net worth assessment based on a bank deposit analysis, bank statements, mortgage applications and mortgage statements. The schedule for personal expenditures was calculated using Statistics Canada information to estimate the costs for a single individual.  The CRA assessed Mr. Ha income tax and GST.

Mr. Ha conceded that his income was under reported.  However, he disputed the CRA's net worth calculation as too high.  The CRA felt Mr. Ha's calculation of his unreported income was too low.  The Tax Court had to find the right answer.  The Tax Court found that Mr. Ha's evidence was not credible. His explanation concerning the $40,00 changed each time he told it. When he was stopped in the Vancouver International Airport, he told the authorities that the $40,000 in his possession was from his employment as a fisherman and from a restaurant business. On December 12, 2004, he told a CRA auditor that the $40,000 was from his savings, salal picking and a few hundred dollars from friends. At the hearing before the Tax Court, Mr. Ha testified that the $40,000 was a loan or gift given to him.

After determining that Mr. Ha's evidence was not credible, the Tax Court found that the evidence of a number of witnesses was credible.  As a result, the Tax Court reduced the net worth assessment by the certain amounts that, based on the evidence, were not attributable to business activities (e.g. were loans, insurance proceeds, transfer from spouse, a withdrawal from an RRSP, etc.).

Disproving Audit Assumptions

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

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

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

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

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

Canada Revenue Agency Assessed Director's Liability Against Surviving Director

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

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

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

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

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

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

. . .

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

And later:

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

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

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

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

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

Canada 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.

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.

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.

The CBSA's 2011 Post-Release Verification Target List May Result in GST Assessments Too

The Canada Border Services Agency (CBSA) identifies categories of goods for post-release targeted verifications on an annual basis.  This list is important for importers of goods for customs purposes and also GST purposes.  If the valuation is too low, the CBSA will increase the value for customs duties purposes , which results in an increase in value for GST purposes.  Additional GST will be calculated and assessed and interest on that GST debt from the date of importation.

Post-release verifications occur after goods are released by the CBSA and are intended to verify the information provided by businesses when goods are reported for customs purposes (compliance with Canada's customs laws).  There are three main types of post-release verifications.

A) Random Post-Release Verifications: These verifications are random. The CBSA randomly selects importers from their records and conducts an verification to measure compliance with Canada's customs laws and revenue seepage. In other words, the importer's number just came up.

B) Targeted Post-Release Verifications: These verifications are not random. The importer is selected due information provided to the CBSA concerning non-compliance with Canada's customs laws.

C) Post-Release Verifications Based on National Priorities: These verifications occur as a result of the CBSA setting national priorities that are determined through a risk-based assessment and evergreen process. The CBSA picks H.S. tariff codes on an annual basis to target for verifications and semi-randomly picks importers of those goods for a targeted verification. Often the importers with significant volumes of the goods are selected for verification and importers who have not been audited recently. The CBSA is asking the question whether the importing community is making mistakes with respect to a particular type of goods.

The CBSA's Post-Release Verification list for 2011 are:

Type of Goods H.S. Codes Comments
Gloves Headings 40.15, 42.03, 61.16, 62.16,39.26, 42.03

On list previously and significant non-compliance identified

Focus of verification will be tariff classification & tariff treatment

Cotton Yarn Headings 52.05, 52.06, 52.07

Focus of verification will be tariff classification & tariff treatment

Furniture Parts Heading 94.03

Focus of verification will be tariff classification & tariff treatment

Organic surface-active agents - soap and other than soap Headings 34.01 and 34.02

Focus of verification will be tariff classification & tariff treatment

Copper and articles thereof Various goods under Chapter 74

Focus of verification will be tariff classification & tariff treatment

Stone vs. articles of stone 25.14, 25.15, 25.16, 68.01, 68.02, 6803.00.90, 6803.00.10.10

Focus of verification will be tariff classification & tariff treatment

Juice products Heading 20.09

On list previously and significant non-compliance identified

Focus of verification will be tariff classification & tariff treatment

Textile Bags 3923.29.90.90

Focus of verification will be tariff classification & tariff treatment

Ski apparel Various goods under chapters 39, 61 and 62 Focus of verification will be valuation of goods
Parts of gas turbines 8411.99.20.11, 8411.99.20.19, 8411.99.290.90 Focus of verification will be valuation of goods
Light-duty automotive goods Various god under chapter 87 Focus of verification will be valuation of goods
Bulk shipment of ore Chapter 36 Focus of verification will be valuation of goods
Plastic household goods Heading 39.24 Focus of verification will be valuation of goods
Motor car, bus and lorry tires Various goods under heading 40.11 Focus of verification will be valuation of goods
Video recording apparatus 8521.90.90.00 Focus of verification will be valuation of goods
Pumps for liquids 8413.11.10, 8413.19.10, 8413.70.99 Focus of verification will be valuation of goods
Article of jewelery and parts Heading 71.13 Focus of verification will be valuation of goods
Mattresses Heading 54.07, and Chapters 55 and 60 Focus of verification will be origin of goods
Electric generators Heading 85.01 Focus of verification will be origin of goods
Vegetable fats 1516.20.90.41, Focus of verification will be origin of goods
Pumps for liquids 8413.11.10, 8413.19.10, 8413.70.99 Focus of verification will be origin of goods
Cocoa powder 1805.00.00, 1806.10.10, 1806.10.90 Focus of verification will be origin of goods

This does not mean that all importers who import the goods on the 2011 hit list will be audited. It does mean that some importers of the good on the list will be audited in 2011/2012. Importers of the goods on the list should conduct their own internal verifications and determine whether they are importing goods in compliance with previously issued ruling letters, case law, CBSA policy and other statements of the law. If an importer identifies errors prior to being contacted by the CBSA for a verification, that importer may be permitted to make a voluntary disclosure of its non-compliance and the CBSA may waive the penalties that would have been payable if the CBSA discovered the non-compliance during a verification.

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

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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Ontario Auditors Should Not Assess Vendor for ORST Paid By Purchaser

Ontario retail sales tax auditors are busy auditing vendors who applied for vendor permit numbers prior to July 1, 2010 (prior to the implementation of HST). The sales side audits sometimes disclose that a vendor failed to charge ORST to a purchaser (often years after the fact).

I cannot count the times a vendor has asked me if the auditor can collect the same Ontario retail sales tax (ORST) from both a vendor and a purchaser.  The answer is "NO".  If a purchaser has been assessed and paid the ORST in connection with a transaction with a vendor, the vendor cannot be assessed the same ORST.  This would be double tax.  This would be the government taking advantage of both parties to the oversight.

Section 20(3) of the Retail Sales Tax Act provides:

"The Minister may assess against every vendor who has failed to collect tax that the vendor is responsible to collect under this Act a penalty equal to the amount of tax that the vendor failed to collect, but, where the Minister has assessed such tax against the purchaser from whom it should have been collected, the Minister shall not assess the vendor." (emphasis added)

I often advise vendors to call their purchasers to see if they have been assessed ORST with respect to their transactions.  If the answer is "yes", the vendor needs to receive information to provide to the auditor --- and quickly. 

I was surprised recently to learn that an auditor was busy auditing a vendor and discovered that it had not charged ORST systematically on goods that the vendor thought was exempt.  The Ministry was auditing the purchasers at the same time.  I provided information to the auditors concerning the overlapping audits as the vendor and purchasers worked out how to deal with their ORST issue.

If you ask the auditor to check to see if they have assessed purchasers, the auditors usually decline (okay, the appropriate word may be "refuse").  That being said, I have met a few nice auditors in my day and, when the transactions involve only a few big relationships, the auditor has (in limited cases) obliged.

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.

Send Documents to the CRA Using a Traceable Method

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

1) To prove that you completed the document; and

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

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

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

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

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

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

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

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

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

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

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)


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.

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

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

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

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

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

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

The judge further goes on to add:

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

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

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

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

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

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

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

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

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

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

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

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. 

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

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

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

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

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

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

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

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

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

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

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

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

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.

A Vendor for ORST Purposes May Judicially Review Collections Action of Minister

A client came to me after the Ontario Minister of Revenue issued a writ of seizure and sale pursuant to paragraph 37(1)(b) of the Retail Sales Tax Act (Ontario).  The writ of seizure and sale instructed the sheriff to seize my client's assets and sell them to satisfy an alleged retail sales tax debt.  The alleged debt allegedly arose thirteen years prior to the issuance of the writ.  I am using the word "alleged" because there is a disagreement over whether an assessment was ever issued against the person against whom the writ was issued.

On May 13, 2010, the Divisional Court of the Ontario Superior Court quashed the writ.  We had filed  judicial review of the Minister of Revenue's decision to issue the writ of seizure and sale.  In other words, after the decision, there was no writ permitting the sheriff to seize and sell assets.

In Carter v. The Minister of Revenue, the Divisional Court held that pursuant to Rules 67.07(2) and 67.07.1(1) of the Rules of Civil Procedure,  "the Minister was required to obtain leave to issue the warrant in question, some thirteen years after the alleged assessment became final and binding."  On August 30, 2010, the Ontario Court of Appeal agreed when deciding a motion by the Minister for an extension of time to seek leave to appeal the Divisional Court decision.  The Court of Appeal stated:

I believe the Minister overstates its case by arguing that the Divisional Court is placing a de facto limitation period on tax collection.  The court' decision simply holds that the Minister requires leave to use one of its remedies - the warrant - where it waits six years to do so.

This is an important decision because the economy and the shifting of Ministry personnel to the Canada Revenue Agency (due to HST implementation) has caused the Ministry to look at old assessments that have not yet been collected.  The morale of the story is that if the Minister of Revenue issues a writ of seizure and sale (also called a warrant) and the alleged debt is more than six years old (based on the date on the assessment), the Minister must seek leave from the Superior Court of Justice before issuing the writ. The Minister would have to notify the alleged tax debtor and the alleged tax debtor would have the opportunity to dispute the facts and law raised by the Minister.  This means that it is possible that the writ would not be issued and the alleged tax debtor would not have to face the potential of having assets seized and sold and then fighting the government to receive damages (if the actions were in error).

I should add a reality check for persons who are at the receiving end of the Minister of Revenue's collection actions - the cost of pursuing a judicial review is expensive.  While I cannot give exact details, I can say that a judicial review to the Divisional Court can result in legal fees in the range of $50,000 - $100,000.  I can tell you that the lawyers who act for the Minister of Revenue may take legal steps that will cause the legal fees of the applicant in a judicial review to increase.  I can tell you that the costs awarded by the court may be a small fraction of the legal fees incurred by a successful applicant.  However, I can also tell you that if enough money is at stake and the case has merit (e.g., the Minister did not seek leave to issue a writ or the writ is issued against the wrong person or for an incorrect amount), a judicial review might be worthwhile.

Motion Denied - Justice Was Not Delayed

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

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

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

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

The Court of Appeal agreed with Mr. Carter.

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

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

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

3) Any prejudice to the respondent; and

4) The merits of the appeal.

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

There are many quotable statements in the decision:

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

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

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




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

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

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

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

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

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

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

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

Ontario has a very short list including the following:

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

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

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

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

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

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

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

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

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I Have Questioned Whether the EcoTaxes Are Unconstitutional

Over the last few days, I have been quoted in the media discussing Ontario's other July 1, 2010 tax reform, being the ecotaxes stated by the McGuinty Government to have been imposed by stewards under the Waste Diversion Act, 2002.  I have questioned whether the ecotaxes as implemented are unconstitutional and inconsistent with the provisions of the Waste Diversion Act, 2002 and the regulations thereto.

The two articles are:

1) Eco fee sham, Toronto Sun, by Antonella Artuso

2) Eco fee comes under fire, Toronto Sun, by Antonella Artuso

In addition, I appeared on the John Oakley radio show, CFRA Ottawa and the Motts Radio Show.

I will continue to question the ecotaxes and strongly believe that the surprise ecotaxes raise serious questions.  Taxation by government should be transparent and the government must be accountable to the people being taxed.  Government leaders should be honest with the electorate. Government leaders should show the electorate respect and not act as if "ignorant masses are compliant masses".  This is not appropriate behaviour in a democratic society. If we do not answer the questions about the legality of the ecotaxes, secret taxation will continue and become more prevalent as governments find new and innovative ways to raise revenues in order to maintain uncontrolled levels of spending.

We Now Have Place of Supply Regulations And More

In the June 9, 2010 Canada Gazette, the final HST place of supply regulations are published as SOR/2010-117 - now called "New Harmonized Value-added Tax System Regulations". Also included in the regulations are the HST anti-avoidance rules (Part 2), the HST transition rules (part 3), repeal of Place of Supply (GST/HST Regulations (Part 4) and application rules (Part 5).

It is about time that the nuts and bolts of the HST law is being made available to businesses in harmonized provinces. However, much is still missing, such as the real property rules and transition rules for builders of residential complexes. 

Gift Certificates and Gift Cards and GST/HST

Yesterday, I was asked a question about gift certificates.  A vendor is selling gift certificates in June for use in June 2010 or on or after July 1, 2010.  The question is what happens for GST/HST/ORST purposes when one sells the gift certificate and when one redeems the gift certificate for goods/services.

Before I go too far, it is important to pin-point what I mean when I say "gift certificates" (or rather what the Canada Revenue Agency (CRA) thinks is a gift certificate).  In CRA Policy Statement P-202 "Gift Certificates", the CRA states:

A gift certificate is a "device" (e.g. voucher, receipt, ticket) which,

1) has a stated monetary value,

2) can be redeemed on the purchase of property or a service from a particular supplier; that is, the supplier agrees to accept the device as consideration, or a part hereof, in respect of the purchase of property or a service,

3) for which consideration is given in the amount of the stated value, and

4) which has no intrinsic value.

The determination of whether property, which otherwise would qualify as a gift certificate, has an intrinsic value will require a certain degree of judgment on the part of departmental officials applying this policy. Generally, the value inherent in the property will be evident from the circumstances surrounding its sale. If the purchase of the property is promoted as something more than a device which may be used as a partial payment towards a future purchase, the possibility that the property has value in itself, should be examined.

Pursuant to section 181.2 of the Excise Tax Act (Canada) (the "GST/HST Legislation), the issuance or sale of a gift certificate for consideration (e.g., money) shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money. 

This means that when a vendor sells or issues a gift certificate, no GST or HST is payable because the GST/HST Legislation says no supply has occurred.  If there is no supply, there is no event that results in the application of GST/HST. 

HOWEVER, when a person uses that gift certificate to purchase goods and/or services, the gift certificate is money. The redemption of the gift card for goods or services is a supply for GST/HST purposes.  If the supply (e.g., a DVD) is a taxable supply and, therefore GST/HST is collectible, then the gift certificate should be used to pay the purchase price plus GST/HST.  In other words, a the time of the supply that is a purchase of goods and/or services is the moment when the vendor needs to ask about GST/HST consequences and charge the correct amount of GST/HST/

This is important because I also saw a flyer yesterday for the sale of gift cards in June 2010 to save HST.  This flyer was wrong in the context of what was being sold and when. A vendor would collect (let's say $100 in cash) for a $100 gift certificate in June 2010.  When the consumer redeems the gift card for services (or property), the vendor will determine whether to charge GST and/or HST on what is purchased.  If the gift card is redeemed in June 2010, then the vendor would collect GST (and possibly ORST) in respect of the purchase if the supply is in Ontario.  If the gift card is redeemed on or after July 1, 2010, then the vendor would collect GST and HST if the supply in in an HST province.

For example, if the gift card is for a spa treatment (e.g., a manicure), if the services take place in June 2010, the vendor would charge for the manicure ($20) and charge GST ($1).  If the gift card was for $25, the vendor would apply $21 against the gift card and the person could keep the $4 credit for the next visit or could take the cash.

If the manicure takes place in July 2010, then the vendor would charge $20 for the manicure, $1 GST and $1.60 HST (assuming the manicure services were provided to an individual in Ontario).  In July 2010, the vendor would apply the $22.60 against the gift card and the individual would have $2.40 remaining.

Even though there isn't a similar explicit rule for Ontario retail sales tax purposes, Ontario has the following statement on an official web-site:

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

Retailers must not charge consumers provincial Retail Sales Tax (RST) and/or federal Goods and Services Tax (GST) when buying gift cards.

The Ministry of Consumer Services advises consumers to check their gift card receipts to ensure they are not charged sales taxes when buying gift cards.

Sales taxes should only be applied on goods or services when purchased using the gift card as the payment option.

Based on this official statement, it appears that the position of the province of Ontario is that Ontario retail sales tax is not collectible at the time of a sale or issuance of a gift certificate/gift card.

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

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

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

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

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

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

Canada's Department of Finance Has Released Draft HST Place of Supply Rules Regulations

On April 30, 2010, Canada's Department of Finance released "Draft Regulations in respect of the Place of Supply of Property and Services".  Section 33 states that the Place of Supply (GST/HST) Regulations are to be repealed and replaced by the Regulations in respect of the Place of Supply of Property and Services.  Even though these regulations have been released in draft form, the will apply to supplies made (a) on or after May 1, 2010 and (b) after February 25, 2010 and before May 1, 2010 unless any part of the consideration for the supply becomes due or is paid before May 1, 2010.

It is very important to note that the place of supply rules have changed slightly in certain cases.  For example. the place of supply rules for services in connection with litigation have changed from:

February 25, 2010 version: "A supply of a service rendered in connection with criminal. civil or administrative litigation in a particular province will be regarded as being made in that province.


April 30, 2010 version: A supply of a service rendered in connection with criminal, civil or administrative litigation (other than a service rendered before the commencement of such litigation) that is under the jurisdiction of a court or other tribunal established under the laws of a province or in the nature of an appeal from a decision of a court of other tribunal established under the laws of a province, is made in that province.

The HST Blog raised concerns about the draft place of supply rule for litigation services and may have influenced the change.

There are other changes to the draft regulations that will be discussed in future blog posts. Please note that draft regulations trump administrative announcements.

What is a "Service" for GST/HST Purposes?

The harmonized sales tax (HST) transition rules and HST place of supply rules set out general and specific rules for tangible personal property, real property, intangible property and services.  What is important and glaringly missing is guidance on how the Canada Revenue Agency divides up the categories.

Subsection 123(1) of the Excise Tax Act (Canada) defines "service" to mean:

"anything other than
(a) property,
(b) money, and
(c) anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person"

This means that the catch-all basket is the services basket.  It also means that you must determine if the supply at issue fits in another basket and whether it is property, money or supplied in the context of an employer-employee relationship.

I will focus on the more difficult concept - property. Subsection 123(1) of the Excise Tax Act (Canada) defines "property" to mean:

"any property, whether real or personal, movable or immovable, tangible or intangible, corporeal or incorporeal, and includes a right or interest of any kind, a share and a chose in action, but does not include money."

"Personal property" is defined to mean "property that is not real property".  So, you must ask if the supply is real property.

"Real property" is defined to include:

(a) in respect of property in the Province of Quebec, immovable property and every lease thereof,
(b) in respect of property in any other place in Canada, messuages, lands and tenements of every nature and description and every estate or interest in real property, whether legal or equitable, and
(c) a mobile home, a floating home and any leasehold or proprietary interest therein;

If the supply does not fit within this "real property" definition, you must ask if the supply is "tangible personal property or intangible property.  However, the terms "tangible personal property" and "intangible personal property" are not defined in the Excise Tax Act.  That being said, there is significant case law on the subject(s).
In short, if you can determine that the supply is not real property, not property, not money and not supplied in connection with an employer-employee relationship, the rules relating to services would apply.

The various publications by the Canada Revenue Agency, Department of Finance and Ontario/BC contain examples in connection with the transition rules.  This helps if certain situations fall between the lines or in the grey area.  In my 16 years of practice I have seen many grey areas and have seen auditors move supplies from one basket to another.  I expect this practice to continue.

If your situation falls between the lines in the grey area, please seek the advice of a specialist.  For example, the Canada Revenue Agency is going to have difficulties with computer programs.  Over-the-shelf software will likely be considered to be tangible personal property.  Custom computer software may be considered to be tangible if provided on a disk/CD-Rom or a service if custom or intangible personal property if the contract sets out license rights.  Whether a computer software maintenance contract is a contract for services or intangible property is an open question that the Canada Revenue Agency is considering.  If it is possible that no maintenance would be required in a given period, the Canada Revenue Agency may consider the contract to be in respect of intangible personal property.  The same issue arises for warranties and help desk contracts.

Ontario Issues Publication on What is Subject to HST and What is Not

Ontario has posted a good/help (not entirely complete) publication "What's Taxable Under the HST and What's Not?".  It is a good first attempt at communicating with the public at large about what property and services will be subject to HST.

Broad categories that are broken down into sub-items are:

  • clothing and footwear;
  • food and beverages;
  • home services;
  • accommodation and travel;
  • around the house;
  • motorized vehicles;
  • home purchases;
  • health products and services;
  • memberships, entertainments and sports equipment;
  • leases and rentals;
  • electronics;
  • professional and personal services;
  • tobacco; and
  • banking and investments.

There document has been prepared more as a self-promotion piece than anything else.  as a result, it does not emphasize the multitude of services, real property and intangible property that will be subject to higher rate taxation.

That being said, a document such as this is needed and useful.

Great Article About What Is Unconstitutional Provincial Indirect Taxation

Benjamin Alarie and Finn Poschmann have written a very good opinion article in today's Financial Post newspaper entitled "Ontario's quiet taxes through regulation". In this article, they correctly point out that under Canada's Constitution, a province's powers to impose taxes are broad and limited.  They write:

"Canada's constitution and the case law that surrounds it define the relative jurisdiction and powers of the federal government and the provinces. In matters of taxation, government authority is extensive, and legislatures may enact laws imposing a wide range of taxes.

Despite these broad powers, governments are limited in what they may do without legislative approval. They may use regulation, which is not approved by a legislature, to set fees to recover the costs of goods or services they provide to the people being charged the fee. They may not, however, use regulation to impose taxes that fund the general activities of government."

Read more:

The focus of the article is Regulation 66/10, which directs the Ontario Energy Board to assess a special levy on the Independent Electricity System Operator and distributors in respect of and in proportion to the amount of electricity they distribute.  As a result, the discussion is focused on this particular levy (not HST).

That being said, the authors have made the following important points that may arise in HST debates soon or in the case of a big assessment in the future:

  • From the perspective of the Constitution Act, 1867, taxes are either direct or indirect; in Canadian law, a direct tax is paid by the person on whom a charge is levied, and an indirect tax is passed on to others, as with most sales taxes. Under subsection 92(2) of the Constitution, provinces have the jurisdiction to impose direct taxes but not indirect taxes.
  • In no case ...does a province have the constitutional ability to impose a tax -- direct or indirect --through regulation alone.
  • In the event of a successful constitutional challenge that showed the levy to be a tax, however, the province would be under an unambiguous legal obligation to return the revenues.
  • The province could impose retroactive tax legislation allowing it to keep the revenue.

The article is worth reading and saving --- in the event of an audit and assessment.