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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

One Of The Common Objection Mistakes - Missing The Deadline

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

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

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

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

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

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

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

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

Proposed Law: GST/HST Auditors Can Share Information About Foreign Bribery

On July 12, 2013, Canada's Department of Finance released for public comment proposed changes to the Income Tax Act, Excise Tax Act and Excise Act, 2001. I would like to focus on the proposed charges to the Excise Tax Act (also known as the "GST/HST Legislation").

Section 16 proposes an amendment to section 295 of the Excise Tax Act to add subsection 5.04 and reads in part:

"An official may provide to a law enforcement officer of an appropriate police organization

(a) confidential information, if the official has reasonable grounds to believe that the information will afford evidence of an act or omission in or outside Canada that if committed in Canada would be

(i) an offence under any of

(A) section 3 of the Corruption of Foreign Public Officials Act,

(B) sections 119 to 121, 123 to 125 and 426 of the Criminal Code,

(C) section 465 of the Criminal Code as it relates to an offence described in clause (B), and

(D) sections 144, 264, 271, 279, 279,02, 281, and 331.1, paragraphs 334(a) and 248(1)(e) and sections 349, 435 and 462.31 of the Criminal Code.

Normally, an auditor must keep confidential information received during the course of an audit,  in other words, if he/she suspects that the financial records of a company disclose evidence of bribery activities, the auditor cannot give that information to the RCMP. 

With the new books and records provisions in the Corruption of Foreign Public Officials Act, this proposed amendment has some logic.  I have previously commented that the auditors' ability to disclose would limit prosecutions of bribery activities that came to light in the course of an audit.

This proposed amendment means that companies that engage in such illegal bribery activities run a risk of discovery even when the GST/HST auditors show up.  Any time a GST/HST auditor asks for financial information, the company will have to worry about the secret being found out. 

The solution is to not engage in illegal bribery activities. Another solution is to conduct internal investigations and make sure there are no bribery activities.  Correct and disclose problems if they are found. The heat is being turned up.

Canadian Lawyers May Need The BC PST "Application For Clearance" Re Transactions Closing After April 1, 2013

When a business sells its assets by way for a sale in bulk (or the Bulk Sales Act applies), it does not do so in the normal course of its business.  Usually, one of the preconditions to closing a transaction (one of the vendor closing documents in an asset purchase) is a certification from the provincial sales tax authorities to the vendor that all provincial sales taxes have been paid or arrangement have been made by the vendor to pay the taxes. The vendor provides this certification to the purchaser.  When this certification is provided, the provincial sales tax authorities cannot pursue the purchaser for the unpaid provincial sales taxes of the vendor.  When this certification is not obtained, the provincial sales tax authorities may pursue the purchaser for the unpaid sales taxes of the vendor.

If an asset purchase transaction involves or includes assets located in British Columbia on the closing date, it may be necessary to obtain a clearance certificate from British Columbia.

The BC Ministry of Finance released FIN 447 "Application for Certification" on March 28, 2013.  Vendors use this form to submit their application for a certificate.  It may be completed to cover provincial sales taxes and other provincial indirect/commodity taxes (such as tobacco tax, motor fuel tax, carbon tax, social service tax, and hotel room tax).

What is most interesting about this form is that the lawyers for the purchaser may file the form (previously, the lawyers for the vendor were the the party who requested the clearance certificate and could not control the delivery).  While the vendor (person whose tax records are to be searched) must sign the form giving authorization for the search, the purchaser may be the submitter of the form and the party receiving the information.

Lawyers Receive Revised PST Guidance from British Columbia

On March 19, 2013, British Columbia issued revised PST Bulletin 106 "Legal Services", which provides guidance to lawyers about the new provincial sales tax ( BC PST) rules for lawyers and law firms.  Under the new BC PST rules for lawyers, legal services are subject to BC PST at a rate of 7%. This does not give much time to get ready and may cause some concern with respect to transactions not completed before April 1st (this may be a busy week for lawyers).

PST Bulletin 106 "Legal Services" is only three pages in length and provides limited guidance.  That being said, it raises a few red flags for law firms outside of British Columbia.  For example, PST indicates that legal services provided by any law firm with respect to "acting as legal counsel in negotiations, including settling terms of a business purchased in BC", are subject to the new BC PST. This could translate into exposure of lawyers and law firms outside British Columbia who act in a national sale of a business, including assets in British Columbia.  There is an audit risk for failure to register for BC PST purposes and failure to collect BC PST with respect to legal fees.  By the way, the bundling rules in the Provincial Sales Tax Act (British Columbia) add to the value of the risk because the auditors may try to argue tax is payable on the legal fees for the non-BC components of such a national/multi-provincial transaction.

PST Bulletin 106 "Legal Services" contains a short (but broad) list of legal services provided outside British Columbia that are considered to be subject to BC PST.  The list of legal services outside BC that are subject to BC PST includes the following (provided that a specific exemption does not apply):

  • legal services that relate to real property situated in BC
  • legal services that relate to tangible personal property that is ordinarily situated or brought into BC
  • legal services that relate to the ownership, possession or right to use any other property in BC
  • legal services that relate to a court or administrative proceeding in BC
  • legal services that relate to the incorporation of a company under the Business Corporations Act or Societies Act
  • legal services that relate to the registration of an extra-provincial company or society under the Business Corporations Act or Societies Act
  • legal services that relate to the interpretation or application of an enactment as defined in the Interpretation Act, or a former or proposed such amendment
  • legal services that relate to a contract or covenant (or the contemplation of a contract or a covenant) related to a physical or legal presence, activity or transaction in BC, or the contemplation thereof
  • legal services that relate to the interpretation or application of any enactment, or a former or proposed enactment of any jurisdiction, or the analysis or application of any law, if it relates to
    • a physical or legal presence in BC
    • any activity or transaction in BC
    • the contemplation of a presence, activity or transaction in BC
  • any other matter that relates to BC

Auditors have wide discretion take the position that they may assess a lawyer/law firm outside British Columbia under administrative policy or statutory provisions.  Canadian lawyers and law firms are at risk, as well as U.S. lawyers and law firms and lawyers/law firms outside North America.

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.

 

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].

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Respond To CRA Requests for Information on Due Diligence

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

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

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

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

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

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

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

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

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

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

Canadian Taxpayers Bill of Rights

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

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

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

3. You have the right to privacy and confidentiality.

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

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

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

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

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

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

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

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

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

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

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

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

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Do You Have A Complaint About The Canada Revenue Agency?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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. 

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

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

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

1) use of a drop shipment certificate; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

GST/HST Business Consent Form

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

Deregistered Charities Face GST/HST Issues

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

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

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

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

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

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

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.

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

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

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

The CRA document addresses many issues, including:

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

2. How is GST/HST calculated?

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

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

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

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

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

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

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

The Canada Revenue Agency Has Released New Voluntary Disclosure Form

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

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

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

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

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

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

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.

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.

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, 157.90.99.00 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.

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

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

Judge Campbell considered two questions:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continue Reading...

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 ...

This Audit Comes With A Warning

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

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

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

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

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

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

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

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

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

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

What Is The Best Defense to A Purchase Side Audit?

The Ontario Ministry of Revenue conducts audits of vendors (sales side audits) looking for failures to remit tax collected and failures to collect tax.  The Ministry also conducts audits of purchasers (some are also vendors) looking for failures to pay tax on taxable goods (called purchase side audits).  When an auditor is looking at the purchase side of the business and failures to pay Ontario retail sales tax ("ORST"), the best defense is that "The other guy was audited already or self-assessed the ORST - you have your money".

The Ministry should not audit both the vendor and the purchaser for the exact same tax.  This happens sometimes because an audit or a purchaser can lead to an audit or a vendor and vice versa because an audit brings out information of non-compliance of others. Often the auditor goes from an audit of one person to his/her next "target" who was discovered in a previous audit.  Many times the auditor may not know of the other audit/assessment.  It should not be assumed that the auditor is intentionally trying to collect the same tax twice.

Over the course of my career, I have helped many businesses during the audit process by asking them to review an audit summary (before the "finish assessment" button is pushed) and identify large amounts of unpaid ORST on the purchase side of the audit.  I explain that the Ministry cannot assess the same tax twice.  If they have good relationships with their suppliers, I explain the benefits of picking up the phone and calling their contact at a supplier to see if they have been visited by an ORST auditor.  Sometimes the answer is "unfortunately, yes" and sometimes the answer is "luckily, no".

If they answer is "unfortunately, yes", it will be necessary to determine if the transactions at issue in the current audit were covered by the other audit and assessment.  If the answer is "yes", then the auditor should remove those items from the proposed assessment before pressing the 'finish assessment" button on the computer (there really isn't such a button).

Even if the answer is "luckily, no", the supplier may have self-assessed if they determined they should have charged and collected the ORST.  The supplier could have made a voluntary disclosure or received advice from an accountant or lawyer and the ORST could have been remitted without the purchaser knowing or receiving a new invoice showing ORST remitted/remittable.

It is worth mentioning that the vendors may use this defense if a purchaser has voluntarily disclosed or self-assessed and remitted ORST or if the purchaser has been audited.  The vendor may show an auditor that the ORST has been remitted or paid to the Ministry of Revenue in order to defend portions of a sales side audit.

The next step after finding that "the other guy has paid or remitted the ORST" is to communicate the information to the auditor and providing adequate proof that the monies have been paid.  This is where an experienced lawyer may be able to help with the clear communications and strategy. 

The existence of this defense is important to know now more than ever before because Ontario is auditing in order to finish all ORST audits by March 2012 (when the auditors transfer to the Canada Revenue Agency).  There is an increased likelihood that this defense is available given the volume of audits.

Voluntary Disclosures Must Be Complete and Accurate

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

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

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

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

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

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

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

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

GST/HST Debts and Canada Revenue Agency Garnishment

If CRA has assessed your business (or you) for goods and services tax (GST) or harmonized sales tax (HST) owing and you have not made acceptable payment arrangements with the Canada Revenue Agency (CRA), a CRA collections officer will commence enforcement action.

One of the many collection options available to the CRA is garnishment.

Garnishment may take many forms.  For example:

  • The CRA may seize your bank account;
  • The CRA many notify your employer of your GST/HST debt and ask for part of your wage to be paid to the CRA;
  • The CRA may find out which customers/clients owe you money and notify them of your GST/HST debt and ask that the account receivable be sent to the CRA; or
  • The CRA may learn that you have signed loan documents and ask that the lender pay the money owed to you be paid to the CRA instead.

In short, if the CRA finds that someone or something owes you money, they can intercept that money by sending the payor a notice of garnishment or demand to pay.

Garnishment actions can be embarrassing because others will learn about your problems.  Also, you may not get money you were hoping to spend on something else.

If you would like to avoid the embarrassing moments, negotiating a payment arrangement with the CRA is the only option.  Unfortunately, unlike with income tax, collection actions relating to GST/HST cannot be stopped by the filing of a notice of objection.

When you go to the CRA to negotiate a payment arrangement, you are not in a position of power.  You must be able to show the CRA that you cannot pay the full amount right away.  The CRA will want to protect their interests.  They may ask for a net worth assessment to be completed by you and would spouse (yes, your family may be brought into your tax problems).  The CRA may ask to see your bank statements.  They may ask you to get a loan from your bank or your parents.

Every discussion that you have with CRA Collections will be recorded - so you have to be very careful about what you say and keeping your cool.  You also have to be careful about who you let speak on your behalf.

If you enter into a payment arrangement, it should be realistic,  If you do not honour your agreement (e.g., you miss payments), the agreement may fall a part and the CRA will take the collectinos actions available under the law and will use the information you provided to them when negotiating the payment arrangement.

Would You Like the HST Map to Right?

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

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

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

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

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

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

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

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

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

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

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

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

Sale of a Business or Part of a Business

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Advance Rulings; and

2. Interpretations.

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

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

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

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

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

Would you like to find MONEY in your Business?

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

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

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

I will share one tip today. 

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

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

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

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

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

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

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

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

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

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

HST and Disbursements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Registrant Purchasers of Real Property Should Update Certificates

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

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

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

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

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

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

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

HST = Haveto Sum Together

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

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

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

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

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

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

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

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

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

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

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

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

Tip on Pre-HST Billings

Many service providers (such as lawyers, accountants, marketing gurus, consultants, advisors, custom computer  software programmers, certain graphic designers, etc.) do not currently charge Ontario retail sales tax (ORST) on their services.  Starting on July 1, 2010, these service providers must charge harmonized sales tax (HST).

The HST transition rules provide that if services are commenced prior to July 1, 2010 and continue after July 1, 2010, the supplier will be required to allocate between the pre-HST period and post-HST period and not charge HST on the pre-HST period and charge HST on the post-HST period. An allocation is required (except if 90% or more of the services are provided prior to July 1, 2010).

Suppliers need to maintain evidence to provide to Canada Revenue Agency auditors.  While it is incorrect to say that all auditors are difficult idiots, I often tell clients to assume that such an auditor will show up on their doorstep in the future to conduct an audit.  What evidence and documentation are you going to have to prove your point to the auditor?  With respect to not charging HST on pre-July 1, 2010 supplies of services, what evidence are you going to be able to present?

Good documentation will include docket entries, time sheets, employee punch cards, etc.  What will also be helpful are invoices issued in June 2010 billing the client for pre-July 1, 2010 services that have been performed.  I often refer to this as "blowing out your WIP (work in progress).  If you issue a bill and it is recorded in your computer system prior to July 1, 2010, it must be that the the services recorded as being provided before July 1, 2010 were actually provided. Note that if you are billing in May/June 2010 for services to be rendered on or after July 1, 2010, HST will be applicable.

I have one caveat that I have to highlight - you need to ask whether it is likely your client will pay the invoice. If a supplier issues an invoice prior to July 1, 2010 and must charge GST (that is, the supply is not zero-rated or exempt), the supplier will be required to remit the GST to the Receiver General of Canada with the GST/HST return for the reporting period in which the invoice is issued (e.g., June 2010).  If the recipient does not pay the GST by the GST/HST return filing deadline, the supplier still must remit the GST.  As a result, there can be a cash flow issue.

If a supplier cannot issue an invoice, we are recommending a "WIP freeze".  This means that the supplier would generate a document that would evidence the pre-July 1, 2010 work in progress.  Depending on the circumstances, the document may evidence the number of hours worked and/or the value of the services rendered prior to July 1, 2010.  The document will need to be supported by some verifiable data (e.g. a date stamped printout of computerized records). The method must be able to withstand scrutiny and be reasonable in the circumstances.  What is communicated (and the words used) may be important as auditors assessment radar is often triggered by the words taxpayers use.

I would be pleased to provide services to help you generate evidence of the provision of pre-HST services.

I should also mention that it is better to do generate the evidence now as an employee may not be available at the time the auditor arrives. In other words, it is sometimes difficult to substantiate facts at a later point in time.

The HST is Coming, The HST is Coming

Kevin Marron has written a helpful article about harmonized sales tax in "The Canadian Lawyer" magazine entitled "The HST is Coming, The HST is Coming".  I am not just saying it is a good article because I am quoted in the article.  My good friend, Terry Barnett, is also quoted.

Please note that I will be giving a presentation on HST for lawyers with David Schlessinger of KPMG LLP on June 23, 2010, which is being presented by the Law Society of Upper Canada.  Last I heard, over 283 people have signed up to listen.

British Columbia Government Restructures Itself To Save HST Costs

The Globe and Mail newspaper is reporting in an article entitled "B.C. alters health structure to avoid $3.5 million HST bill" published on May 7, 2010 that the British Columbia is undergoing a restructuring. The B.C. Ministry of Health Services and the CEOs of the provincial health authorities have agreed to tuck the Shared Services Organization, which provides services such as computer support and bulk purchasing for the health sector, under one of the health departments / crown entities.

The reason for the reorganization is that the Shared Services Organization would otherwise be required to charge HST on supplies made to the Government of British Columbia and other provincial health entities AND cannot recover all of the HST by way of input tax credits or public service bodies rebates.  Hopefully we will get more detailed about the reorganization to learn whether the changes create exempt supplies (instead of taxable supplies) or non-taxable labour.  This will help us identify other HST savings opportunities.

The question that taxpayers should be asking is whether the Ontario Government and the B.C Government have undertaken a complete analysis of their internal operations in order to address all situations where the provincial government must pay #HST (and GST) on supplies made in the province (or to businesses in HST provinces) that is not recoverable.  We should be asking if HST is going to cause provincial budgets to balloon.  We should be asking whether those who are implementing HST recognize the cost effects associated with HST.  Proof of understanding the cost effects is the government itself taking steps to minimize the negative effects within the government spending structure.

I would guess that the Ontario Government has not asked each and every government employee and manager and Deputy Minister to go over their budgets to identify unrecoverable HST costs within Ministry, department and Crown entity budgets.  Let's wait for the NDP and Conservative opposition parties to find what the governing HST Liberals have overlooked.  I will predict a few big budget line items increasing due to unrecoverable HST.  This will be a topic for discussion and accountability into the future (after HST implementation).  I wonder if the Ontario Ombudsman is going to be busy looking at HST issues.

The other side to this story is that if the BC and Ontario governments must reorganize due to HST,: what about businesses?  Both Ontario and British Columbia have said that HST will reduce administrative costs for business.  Well, here is an example within the BC Government that shows an INCREASE in administrative costs resulting from the implementation of HST.  The reality is that HST will increase administrative costs for certain businesses (especially where amounts are paid for services and other goods and services not subject to provincial sales tax).

The tax officials' counter-argument is that businesses (like the BC Government) can reorganize to avoid increased HST administrative costs.  That is correct.  Steps may, in certain cases, be made to minimize HST costs.  However, the restructuring of business organizations will cost businesses money - legal fees, accounting fees, advisors fees, etc.  So, businesses must spend money during the worst economic recession in recent years in order to save HST in the future.  In addition, any business that reorganizes will have to ask questions whether their restructuring may be challenged by the Canada Revenue Agency using the GST/HST general anti-avoidance rule.  It may not be so simple.

HST Place of Supply Rules for Litigators and Those Who Provide Litigation Services (Revised)

The harmonized sales tax (HST) place of supply rules include a specific rules for "services rendered in connection with litigation". These rules apply to lawyers, process servers, transcription service providers, those who provide expert opinions in connection with litigation, etc.

Section 26 of the Draft Regulations in respect of Place of Supply for Property and Services released on April 30, 2010 sets out the proposed specific place of supply rules for services in relation to litigation:

"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 or other tribunal established under the laws of a province, is made in that province."

More simply put, the rules are:


Rule #1: The general place of supply rules for services will apply to criminal, civil or administrative litigation services provided prior to the commencement of such litigation.
For example, if a person hires a lawyer to discuss whether the facts warrant litigation, the general rules apply. If a person hires a lawyer to sue an opponent and discussions lead to a settlement before a statement of claim is filed with the Court, the general place of supply rules would apply.
 

Rule #2: The general place of supply rules will apply to services in connection with litigation that is under the jurisdiction of a Court or other Tribunal established under the laws of Canada (rather than the laws of a province).


Rule #3: The general rules for services will not apply to litigation services rendered after the commencement of litigation. If the services are in connection with litigation that is under the jurisdiction of a court in an HST province (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador) or is in the nature of an appeal from a decision of a court or other Tribunal established under the laws of an HST province, then HST applies.


If litigation has commenced (e.g., there is an initiating document such as a statement of claim) and Rule 3 applies, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province, the supply will be regarded as being made in that HST province. In other words, if the litigation is in the Ontario Superior Court of Justice and you have a court file number assigned, HST at the rate of 13% applies.


Rule #4: If litigation has commenced (e.g., there is an initiating document such as a statement of claim), a supply of a service rendered in connection with criminal, civil or administrative litigation filed with a court under the laws of a non-HST province (e.g., Alberta), the supply will be regarded as being made in that non-HST province. In other words, if the litigation is in Alberta and you have a court file number assigned, HST will not be applicable to the services in connection with the litigation (however GST will be applicable).


Rule #5: If a supply of services in respect of litigation is supplied to a non-resident of Canada, the zero-rating provisions may apply to both the GST and HST component. The HST place of supply rules do not override the zero-rating provisions for exported services and professional services.
 

An unanswered question is whether an arbitration is "litigation" under the place of supply rules and, therefore, subject to the specific place of supply rule discussed above. If the Canada Revenue Agency takes the position that an arbitration is caught by the rules, arbitration centres in the HST Zone may not be popular with Canadian parties. Also, business law lawyers and in-house counsel may have to reconsider contractually stipulating that Ontario or British Columbia as the place of arbitration in contracts.


Lawyers should consider whether their clients can save HST based on the place of filing and should start asking the questions as part of their litigation strategy now --- given that litigation filed today will likely continue after HST implementation.


Lawyers and service providers should also recognize that the place of supply rule for pre-filing services is different than post-filing litigation services. Therefore, one file might involve a change in the HST rate. When this happens, it is best to open a new file at the time of the filing of the initiating document
 

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

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

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

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

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

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

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

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

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

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

Canada Revenue Agency Releases a New WebCast on Completing New Electronic GST/HST Return

The Canada Revenue Agency (CRA) has made available a WebCast about the completion of the new electronic GST/HST return.  While the WebCast will not win an academy award for best short film or best foreign film, it is worth watching (it is longer than I expected).  If you cannot bear watching the WebCast, there is a transcript.

The WebCast gives important information to registrants for GST (and HST) purposes and others who must file GST/HST Returns.  The WebCast includes important information for builders of real property  and other businesses (anyone with sales over $1.5 Million in annual taxable sales (including exports and other zero-rated supplies)) who must file GST/HST Returns electronically starting with their July 2010 GST/HST Return or the GST/HST Return for the reporting period including July 1, 2010.   The July 1, 2010 date is important because Ontario and British Columbia want to have electronic records on how much HST they should be expecting to receive from Ottawa.

When planning to watch the WebCast, please  bring some healthy popcorn to watch the video as part of the video does explain how exactly you are to complete the GST/HST Return on a line by line basis.

At the present time, there are four different electronic filing options, as follows:

  • GST/HST NETFILE
  • GST/HST TELEFILE
  • GST/HST EDI filing and remitting, and
  • Internet File Transfer, and we will review in detail the GST/HST NETFILE option.

For those who have never filed electronically using NETFILE go to www.cra.gc.ca/gsthst-netfile to get signed up. Before you file, you will need your 15 digit Business Number, your Reporting Period dates and your four digit access code.

Watching the WebCast will give businesses who must file in this manner important ideas about how to set up their internal records and reporting systems to enable quick completion of the electronic GST/HST Return.  For example, the manner in which restricted input tax credits are required to be reported would suggest separate internal accounting records (General Ledger) accounts for Ontario, British Columbia, etc.  This would suggest that invoices should clearly indicate the place of the supply (e.g., write on the invoice "The Place of Supply is Ontario and, therefore the applicable GST/HST rate is 13%").  Taking such steps will make it easier for the auditors (and your memories) at the time of an audit.

Based on my discussions with some larger businesses who are being asked to file using the GST/HST NETFILE method, some businesses actually are not able to use the CRA's preferred electronic filing method due to their computer systems.

Another important issue that has arisen is payment.  Non-resident companies like the idea of electronic filing.  However, they do not have a Canadian funds bank account.  To open a Canadian funds bank account, they need to have an extra-provincial registration in a Canadian province of territory for doing business in that jurisdiction.  It is not necessary to have a permanent establishment in the province or territory to open a bank account. However, the CRA looks at the location of bank accounts in its consideration of residency/permanent establishments.  As a result, there is a problem that needs to be resolved to facilitate the quick payment of GST/HST obligations without changing ones characterization for other tax purposes.  I should note that it is not necessary to make payments of GST/HST Returns electronically and the old fashioned method of sending a cheque or wire transfer remains acceptable for now.

HST Place of Supply Rules for Services

Warning: On April 30, 2010 the Department of Finance released draft place of supply rules regulations that supersede/override the information in this post.  Please do not rely on the information in this post.

Harmonized Sales Tax (“HST") will become a reality in Ontario and British Columbia on July 1, 2010. And some businesses are required to start collecting HST as of May 1, 2010.

Businesses in the HST Zone  - Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador - will have to use the newly released place of supply rules, some of which are different from the existing place of supply rules (for Nova Scotia, New Brunswick and Newfoundland/Labrador). The applicable HST rates are:

  • Ontario: 13% (5% GST and 8% provincial HST component)
  • British Columbia: 12% (5% GST and 7% provincial HST component)
  • Nova Scotia: 13% (5% GST and 8% provincial HST component)
  • New Brunswick: 13% (5% GST and 8% provincial HST component)
  • Newfoundland/Labrador: 13% (5% GST and 8% provincial HST component)

In addition, some businesses outside the HST Zone will be required to charge, collect, and remit HST to the Federal Government in accordance with the place of supply rules when the place of supply is within the HST Zone.

On February 25, 2010, Canada's Department of Finance released its proposed harmonized sales tax (HST) place of supply rules which will be used to determine whether a supplier must charge, collect and remit HST in connection with a supply made in Canada and whether a recipient must pay HST in connection with an acquisition or importation and at what rate. Simply put, the proposed HST place of supply rules will be used to determine in which province a supply is considered to have occurred for HST purposes.

The HST place of supply rules for services have evolved from the existing rules to reflect the addition of the larger economic provinces of Ontario and British Columbia to the HST Zone.

The first question to ask when applying the HST place of supply rules is: What is being supplied or sold? Is it property (tangible personal property, real property or intangible property) or a service? If the supplier is supplying or providing a service, then the HST place of supply rules for services should be used.

The next question is whether one of the specific place of supply rules applies or the general place of supply rules for services. Determine whether any of the following types of services are being provided and, if so, go to the specific place of supply rule:

  • personal services (e.g., a hair cut)
  • services in relation to real property (e.g., constructing a house);
  • services in relation to intangible property (e.g., designing a trade mark)
  • computer-related services and Internet access;
  • telecommunication services;
  • premium rate telephone services;
  • services in relation to a location specific event (e.g., participation in a conference);
  • passenger transportation services;
  • services supplied on board conveyances;
  • baggage charges;
  • services of child supervision;
  • services related to a ticket, voucher or reservation;
  • freight transportation services;
  • postage and delivery services;
  • customs brokerage services;
  • air navigation services;
  • repairs, maintenance, cleaning, alterations and other services relating to goods;
  • service of a trustee in respect of a trust governed by an RRSP, RRIF or RESP.

If the supplier is not providing any of the above listed specific services (and note the devil may be in the details or the unpublished legislation or regulations), then the general place of supply rules for services will apply. There are 4 general place of supply rules for services, which must be applied in the following order. Rule #1 and Rule # 2 are the fundamental rules. Rules #3 and Rule #4 are tie-breaker rules.

Rule #1: If a supply of a service is made and, in the normal course of business, the supplier obtains a particular address of the recipient that is

(a) a home or business address in Canada of the recipient,

(b) where the supplier obtains more than one home or business address in Canada of the recipient, the home or business address that is most closely connected with the supply, or

(c) where the supplier does not obtain a home or business address in Canada of the recipient, another Canadian address that is most closely connected with the supply,

the supply will be regarded as made in the province in which the particular address is situated.

NOTE: The Canada Revenue Agency (CRA) has indicated that it will release additional guidance on how they plan to interpret the "most closely connected with the supply" requirement. The CRA plans on establishing a hierarchy of criteria to apply. The hierarchical criteria will be released in due course. However, we have been informed that the first criteria to apply are not the place of the billing address.

Rule # 2: If, in the normal course of business, an address in Canada of the recipient is not obtained by the supplier of a service, the supply will be regarded as having been made in a participating province if the part of the service that is performed in Canada is performed primarily in the participating provinces. In such instances, the supply will be regarded as made in the participating province in which the greatest proportion of the service is performed.

Rule #3: If (a) Rule #2 applies (i.e., no address in Canada of the recipient is obtained and the service that is performed in Canada is performed primarily in the participating provinces), and (b) a single participating province cannot be determined as being the participating province in which the greatest proportion of the service is performed because the service is performed equally in two or more particular participating provinces, then the supply will be regarded as made in the particular participating province for which the rate of the provincial component of HST is highest.

Rule #4: If Rule 3 applies, but a single participating province still cannot be determined to be the place of supply because the particular rate of the provincial component of the HST in two or more of the particular participating provinces is the same, the supplier will be required to charge HST by applying that particular rate. In other words, if 3 applies, but a single HST province cannot be identified (same 13% rate in more than one province), the services will be subject to 13% HST.

The application of the HST place of supply rules in any given situation may be a complicated legal task.

HST Place of Supply Rules for Litigators and Those Who Provide Litigation Services

Warning: On April 30, 2010 the Department of Finance released draft place of supply rules regulations that supersede/override the information in this post.  Please do not rely on the information in this post.

The HST place of supply rules include a specific rules for "services rendered in connection with litigation". These rules apply to lawyers, process servers, transcription service providers, those who provide expert opinions in connection with litigation, etc.

Rule #1: The general place of supply rules for services will apply to criminal, civil or administrative litigation services provided prior to the commencement of such litigation.  The general place of supply rule focuses on the billing address of the client and the place where the services are performed..  There is a hierarchy of 4 place of supply rules that are applied in order.

For example, if a person hires a lawyer to discuss whether the facts warrant litigation, the general rules apply.  If a person hires a lawyer to sue an opponent and discussions lead to a settlement before a statement of claim is filed with the Court, the general place of supply rules would apply. 

Rule #2: The general rules for services will not apply to litigation services rendered after the commencement of litigation. In other words, if there is an initiating document (such as a statement of claim) Rule 2 applies and Rule 1 does not apply.

Rule #3: If litigation has commenced, a supply of a service rendered in connection with criminal, civil or administrative litigation in an HST province will be regarded as being made in that HST province.  In other words, if the litigation is in the Ontario Superior Court of Justice and you have a court file number assigned, HST at the rate of 13% applies.

Rule #4: If litigation has commenced, a supply of a service rendered in connection with criminal, civil or administrative litigation in a non-HST province (e.g., Alberta) will be regarded as being made in that non-HST province.  In other words, if the litigation is in Alberta and you have a court file number assigned, HST will not be applicable to the services in connection with the litigation (however GST will be applicable).

Rule #5: If a supply of services in respect of litigation is supplied to a non-resident of Canada, the zero-rating provisions may apply to both the GST and HST component. The HST place of supply rules do not override the zero-rating provisions for exported services and professional services.

The HST place of supply rules do not currently distinguish between federal court litigation and provincial court litigation. As a result, it is not clear whether filing a Tax Court of Canada case in Alberta will save the litigants HST.  It is also not clear whether all pre-hearing meetings and the trial must take place in Alberta if the case is filed in Alberta.

It is also not clear whether all cases filed with the Canadian International Trade Tribunal, which is located in Ottawa, will be subject to Ontario HST at 13% even if the affected litigant is located in Alberta. The same confusion will hold true for many other administrative tribunals with all the powers of a superior court of record, such as the CRTC, the Competition Bureau, to name a few. There are a number of federal statutes that create administrative tribunals and a number of federal statutes establish appeal rights only to that federal tribunal that happens to be located in the nation's capital, Ottawa, which is located in the HST Zone. it will be interesting to watch whether access to justice issues are raised by persons (such as individuals) who cannot recover HST costs.

Another question is whether an arbitration is "litigation" under the place of supply rules and, therefore, subject to the specific place of supply rule discussed above that bases the application of HST on the place of the filing. If the Canada Revenue Agency takes the position that an arbitration is caught by the rules, arbitration centres in the HST Zone may not be popular with Canadian parties. Also, business law lawyers and in-house counsel may have to reconsider contractually stipulating that Ontario or British Columbia as the place of arbitration in contracts.

Lawyers should consider whether their clients can save HST based on the place of filing and should start asking the questions as part of their litigation strategy now --- given that litigation filed today will likely continue after HST implementation.

Lawyers and service providers should also recognize that the place of supply rule for pre-filing services is different than post-filing litigation services. Therefore, one file might involve a change in the HST rate. When this happens, it is best to open a new file at the time of the filing of the initiating document.

Sales Tax Tip: Ask to Include the Auditor's Manager in Discussions

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

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

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

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

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

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

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

New GST/HST Electronic Filing Requirements Announced

To little fanfare and no media attention, on January 4, 2010, The Honourable Jean-Pierre Blackburn, Minister of National Revenue and Minister of State (Agriculture and Agri-Food) announced proposed changes to electronic filing requirements for goods and services tax/harmonized sales tax (GST/HST) registrants beginning July 1, 2010.

The reason for the electronic filing requirements is that the Canada Revenue Agency needs to gather information so that the Department of Finance can communicate information to Ontario and British Columbia pursuant to the CITCAs (a.k.a. HST Agreements).

Currently, only GST/HST registrants who meet the criteria set by the Minister of National Revenue have the option to use electronic filing. As a result of the proposed changes, restrictions will be removed so that all registrants, including those registrants that file a return with Revenu Québec, will be able to file electronically.

Under the new proposed measures, the following groups will be required to file their GST/HST returns electronically:

  • GST/HST registrants with greater than $1.5 million in annual taxable supplies (except for charities); or
  • all registrants required to recapture input tax credits for the provincial portion of the HST on certain inputs in Ontario or British Columbia; or
  • builders affected by the transitional housing measures announced by Ontario or British Columbia.

In general, charities and most GST/HST registrants with annual taxable supplies of $1.5 million or less will not be affected by these changes, although the CRA is encouraging all GST/HST registrants, regardless of their filing frequency and reporting requirements, to use electronic services.

Regulations specifying the persons and classes of persons who will be required to file an electronic return will be available soon (government has been prorogued).

The CRA will offer several electronic filing options for GST/HST registrants. However, many registrants will not have an option and will be forced to use a particular electronic filing method.

  • GST/HST NETFILE
    • Netfile is a free Internet-based filing service that allows registrants to file their returns directly to the CRA over the Internet. To file using GST/HST NETFILE, registrants complete an online form, enter the required information and confirm that they want to file their return. Once the registrant hits <submit></submit></submit><//submit>a confirmation page will immediately be displayed containing the six-digit confirmation number.
    • It is proposed that the following GST/HST registrants would be required to file an electronic return using GST/HST NETFILE effective for the first reporting period that ends on or after July 1, 2010:
    • any registrants that are required to recapture ITCs on the provincial portion of the HST on certain inputs in Ontario or British Columbia (see below); and
    • builders that
      • make sales of grandparented housing where the purchaser is not entitled to claim a GST/HST new housing rebate or new residential rental property rebate;
      • make sales of housing that are subject to the HST where the builder purchased the housing on a grandparented basis;
      • are required to report a transitional tax adjustment amount; or
      • report provincial transitional new housing rebates (see below).
    • In conjunction with these proposed new filing requirements, the CRA will include new information fields on the GST/HST NETFILE return for these registrants.

  • GST/HST TELEFILE
    • Telefile allows eligible registrants to file their GST/HST returns using their touch-tone telephone and a toll-free number.
    • It is also proposed that each builder having greater than $1.5 million in annual taxable supplies that is not otherwise required to file using GST/HST NETFILE and that pays or credits a GST/HST new housing rebate amount to the purchaser and claims that amount as a deduction from the builder’s GST/HST liability would be required to file an electronic return using GST/HST NETFILE or GST/HST TELEFILE effective for the first reporting period that ends on or after July 1, 2010.

    • As a result of the proposed changes, the CRA will include new information fields on the GST/HST NETFILE and GST/HST TELEFILE returns for these registrants.

  • Electronic Data Interchange (EDI)
    • EDI is a computer-to-computer exchange of information in a standard format. Eligible registrants can use EDI to file their GST/HST returns and remit their GST/HST payments electronically.
  • GST/HST Internet File Transfer (GIFT)
    • GIFT is a new option that allows eligible registrants to utilize third-party CRA certified accounting software to file their returns electronically.
    • It is also proposed that all GST/HST registrants, other than those required to file using GST/HST NETFILE or GST/HST TELEFILE and with greater than $1.5 million in annual taxable supplies, excluding charities, would be required to file an electronic return using GST/HST NETFILE, GST/HST TELEFILE, EDI or GIFT effective for the first reporting period that ends on or after July 1, 2010.

The CRA provides the following chart:

 

 

Type of Business Filing Options

Businesses that:
a) are required to recapture ITCs for the provincial portion of the HST on certain inputs in Ontario or British Columbia; or
b) are builders who sell grandparented housing where the purchaser is not entitled to claim a GST/HST new housing rebate or new residential rental property rebate; or
c) are builders who sell housing subject to the HST where the builder purchased that housing on a grandparented basis; or
d) are builders who are required to remit the transitional tax adjustment on housing; or
e) are builders who are reporting provincial transitional new housing rebates.

GST/HST NETFILE

Unless required to file using GST/HST NETFILE, builders with greater than $1.5 million in annual taxable supplies that pay or credit a GST/HST new housing rebate amount to the purchaser and claim that amount as a deduction from their GST/HST liability.

GST/HST NETFILE
GST/HST TELEFILE

Businesses that are not required to file using GST/HST NETFILE or GST/HST TELEFILE and with annual taxable supplies exceeding $1.5 million, excluding charities.

GST/HST NETFILE
GST/HST TELEFILE
GIFT
EDI

All other businesses.

GST/HST NETFILE
GST/HST TELEFILE
GIFT
EDI
Paper Return

The businesses that I have spoken with suggest that there are complications that need to be considered.  It is necessary to communicate with the Canada Revenue Agency if there are any problems so that notes can be made in your file and accommodations can be discussed.

Preparing for Harmonized Sales Tax

The current plans are that Ontario and British Columbia will harmonize their provincial sales taxes ("PST") with the goods and services tax ("GST") on July 1, 2010. Whether you support the idea of harmonized sales tax ("HST") or not, all businesses must prepare for the sales tax reform or risk costly errors in the future.

In preparing for the HST, there is a very long list of questions that should be asked. The following list is only the "tip of the iceberg":

1.      Has your business changed the general ledger ("GL") accounts for your 2010 taxation year to reflect change on July 1, 2010? Since HST will be implemented on July 1, 2010, any business that does not have a June 30th year end will need to ensure that the accounting records have the additional GL accounts so that PST is recorded pre-July 1, 2010, HST is recorded post-July 1, 2010 and that the tax base of depreciable capital costs include PST pre-July 1, 2010 and do not record recoverable costs post July 1, 2010. There are a number of other adjustments that will be required.

2.      Has your business adjusted its record-keeping to track restricted input tax credits? The Ontario and British Columbia HST proposals included the announcement that between July 1, 2010 and June 30, 2012, large businesses (businesses making over $10 million in taxable sales) will not be entitled to receive any input tax credits ("ITCs") (that is, recover HST paid) on purchases of:

  • (a)    Energy (except where purchased by farms and for use in producing goods for sale;

  • (b)   Telecommunication services (other than internet access and toll-free numbers);

  • (c)    Certain automobiles and road vehicles; and

  • (d)   Meals and entertainment expenses.

The time period for full restrictions on ITCs may be extended. The current plans are for the restrictions to be phased out between July 1, 2012 and June 30, 2015. As a result of the restrictions on the HST component, large businesses and any business that may become a large business (that is, may exceed the $10 million taxable sales threshold in an affected taxation year) should record the GST component and HST component separately in their books and records for these expense items.

3.      Has your business considered whether HST will affect cash flows and budgets? Many businesses have not yet considered whether payment of HST on commercial rent, electricity, production equipment and machinery, management fees, legal fees, accounting fees, temporary placement, rights to use intellectual property, etc. will affect their cash flow. Businesses that file GST/HST annually, quarterly or even monthly may have to address cash flow issues that will arise due to the upfront payment of GST/HST to suppliers and the delay before claiming permissible input tax credits.

4.      Has your business considered when the HST rules will start to affect your business decisions and activities? On October 14, 2009, the Ontario and British Columbia governments released publications outlining the transition rules for transactions that occur after October 14, 2009. The underlying purpose of the transition rules is to ensure that the provinces receive HST after July 1, 2010, even if arrangements were made prior to that date.

Type of Supply

Consideration Due or paid after July 1, 2010

Consideration Due or paid between May 1, 2010 and July 1, 2010

Consideration Due or paid between October 14, 2009 and July 1, 2010 (Category A Businesses)

Sales of Tangible Personal Property

HST applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Leases and Licenses Tangible Personal Property

HST Applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Services

HST Applies

HST applies – registered vendors should begin collecting

HST applies re certain businesses required to self assess

Sales of  real property (not residential)

HST Applies

NO HST

NO HST

Sales intangible property

HST Applies

NO HST

NO HST

Type of Imported Supply

Consideration Due or paid after July 1, 2010

Consideration Due or paid between May 1, 2010 and July 1, 2010

Consideration Due or paid between October 14, 2009 and July 1, 2010

Imported TPP (crosses border into Ontario/BC after July 1, 2010

HST applies

HST applies

HST applies re certain businesses required to self assess

Imported Services for consumption, use or supply in ON or BC to extent service performed a/f July 1, 2010

HST Applies

HST applies

HST applies re certain businesses required to self assess

Imported IPP for consumption, use or supply in ON or BC to extent IPP leased, licenses a/f July 1, 2010

HST Applies

HST applies

HST applies re certain businesses required to self assess

(There are many complex transition rules but these are not set in this abridged article. See the editor's note below. Indeed, there are a number of industry-specific transition rules relating to prepaid funeral and cemetery services, subscriptions to newspapers, magazines and periodicals, passenger transportation services, freight transportation services, commercial parking passes, memberships in clubs, organizations and associations, admissions to places of amusement, direct sellers, continuous supplies, real property construction, combined supplies, progress payments, holdbacks, etc.)

5.      Has your business undertaken a review of each existing contract to determine whether HST is going to be applicable? This question needs to be asked if your business is the vendor/supplier or the purchaser/recipient. If a business does not undertake this exercise, the business will be exposed to audit risk.

6.      Are there any changes required to your business' public statements on web-sites, quotation sheets, contracts, etc.?  Does your business communicate to customers/clients which sales taxes you will be charging or whether certain sales taxes are included in quoted prices? Do you sell to persons who may not be familiar with the proposed HST changes and who may challenge the charges at a late date in court? Do you sell to municipalities that will not be entitled to receive 100% of the HST by way of a public sector rebate? Do you sell to businesses and charities which are not able to recover the entire HST component? In short, the manner in which your business communicates information may expose your business to litigation risk with third parties.

7.      Are there any improvements that should be made to your documentation to ensure that you have the evidence necessary to justify non-collection of HST on export sales of goods and services that occurred outside Ontario or British Columbia? If a business does not charge, collect and remit the correct percentage of GST/HST (13% for Ontario and 12% for British Columbia), then a Canda Revenue Agency ("CRA") auditor may ask for evidence to justify a decision. If a business exports goods, the auditor may require proof of exportation and all shipping documents, including import documentation from the foreign jurisdiction. If the destination is another Canadian province, proof of delivery to that jurisdiction will likely be required. Contracts and invoices should indicate the place of delivery clearly. Since it is difficult to document the place of delivery of services and intangible property, questions should be asked concerning what documentation may be recorded and maintained. For example, a service provider may be required to present dockets on time spent outside Ontario or British Columbia performing services, hotel receipts, travel tickets, etc. 

8.      Has your business educated the accounting staff about the HST changes and trained the staff on recording information on incoming and outgoing invoices to account for the HST component? The CRA auditors require the business to review each and every invoice to ensure the GST/HST is correct. If a business fails to detect errors by suppliers, the recipient may be assessed unpaid GST/HST, penalties and interest. In addition, if an incoming invoice from a supplier does not satisfy the documentary requirements for claiming ITC's, an auditor may deny the credits.

9.      Has your business implemented codes of conduct or internal policies relating to sales taxes and income taxes in Canada that must be updated? If your business does not have internal controls, should internal checks & balances be established?

10.  Has your business considered whether the change to HST creates any opportunities to save money?

As mentioned, this list of questions is not definitive, but points to the scope of matters to be considered in preparing for harmonization.