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

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

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

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

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

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

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

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

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

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

15 Stages Of A Canada Revenue Agency GST/HST Audit

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

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

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

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

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

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

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

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

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

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

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

One Of The Common Objection Mistakes - Missing The Deadline

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The filing fee is only $CDN 5.00.

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

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

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

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

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

Newfoundland/Labrador Has Cancelled HST Rate Increase

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

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

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

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

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

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

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

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

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

The Canada Revenue Agency Advises Charities About Political Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When You Wonder If The CRA Caller Is Scamming: Who Are You Going to Call?

The scammers are getting too smart.  They know that individuals do not want to have the Canada Revenue Agency (CRA) chasing them for unpaid debts.  That is why the nasty scammers are impersonating the CRA.  The scammers call unsuspecting individuals and say they are from the CRA.  When you hear this, your antenna should go up.

Remember what President Ronald Reagan said:

The most terrifying words in the English language are: I'm from the government and I'm here to help.

If you get an unexpected call from someone who says they are from the CRA, take the following steps:

1) Get their badge number (they often will not give a name, but must provide a badge number); and

2) Call the CRA toll free line 1800-959-5525 (this is the number I call to ask questions of real CRA employees) (don't be discouraged by a busy signal - I often have to try many times before the phone rings).

Ask the real CRA employee if you owe the CRA anything.  Ask the nice CRA employee to make a note in your file that you have been contacted by someone impersonating the CRA. Why? Because you never know when you may need to argue you are cautious because you have been contacted by scammers.

The CRA is going to have to find a way to secure communications between the CRA and taxpayers.  In the meantime, do not provide information to someone you do not know (even if they say they are with the CRA).  If you have any concerns that you really do owe the CRA taxes, you can make a secure payment online or at your bank. 

 

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.

If You Use Zapper Software, You May Shocked By New GST/HST AMPs

The March 21, 2013 Federal Budget in Canada announced new administrative monetary penalties (AMPs) and criminal offences under the Excise Tax Act (Canada) for:

(1) the use of  Electronic Suppression of Sales (ESS) software;

(2) the possession or acquisition of ESS software; and/or

(3) the manufacture, development, sale, possession for sale, offer for sale or otherwise making available ESS software.

ESS software is also known as "zapper" software because it hides sales transactions, thereby allowing vendors to under-state sales and evade payment of GST/HST and income taxes. This has been a hot audit topic for a number of years and the Department of Finance is giving the Canada Revenue Agency (CRA) new tools to rid Canada of zapper software.

The AMPS penalties will shock the vendors who use ESS software or possess or acquire ESS software.  Vendors who use ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction.  Vendors who possess or acquire ESS software may be assessed an AMPs penalty in the amount of $5,000 for the first infraction and $50,000 on any subsequent infraction.  These two AMPs penalties go hand-in-hand because a vendor who acquires or possesses ESS software is also likely to use it.  Both AMPs penalties can be imposed against the same vendor.  Also, if the CRA issues a first level AMPs penalty, it will also require the ESS software to be removed from the computer.  If ESS software is subsequently discovered in a new audit, it is likely second level AMPs will be imposed.  It may be possible that the CRA will interpret the AMPs penalties on a per transaction basis because the penalties may be imposed on a per infraction basis.

Businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale will receive higher voltage AMPs.  The AMPS penalty for a first infraction is $10,000 and $100,000 for any subsequent infraction.  This AMPs penalty aims to end the supply of ESS software in Canada.

There is a limited due diligence defense available for vendors who acquire and possess ESS software and businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale.  The due diligence defence will generally require a person to show that exercised the degree of care, diligence and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have used in comparable circumstances.  There may be cases where the person has attempted to ensure that they do not have ESS software and it has been installed on their computers. There may be a bug in a computer program that disrupts the sales records, but it was not intended.

In addition to the AMPs penalties, businesses that manufacture, develop, sell, possess for sale, offer for sale or otherwise make available ESS software for sale may also be subject to criminal sanctions.  The potential fines are as low as $10,000 (in addition to the AMPs penalties) and as high as $1,000,000 and/or imprisonment of up to 5 years or both.

These new AMPs penalties and criminal sanctions will take effect January 1, 2014.  Given the time before implementation, it may be prudent to spend money on an IT check-up (it will likely cost less than a first level AMP).

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.

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

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

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

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

The British Columbia PST Exemption Forms Help Auditors And Create Identify Theft & Other Risks For Buyers

In the week of March 18, 2013, The British Columbia Ministry of Finance released the following 3 exemption certificate forms:

The instructions on each of these forms is that the vendor must collect the information from the buyer or the vendor must collect PST. What this means that the information must be provided by the buyer or they must pay PST.

Looking at FIN 425 "Certificate of Exemption - Children's Clothing and Footwear", parents/grandparents (purchasers of children's clothing) must provide their name, address and telephone number to the retail clerk in order to benefit from the exemption contained in the law.  Forms must be competed and any number of people may access the information provided.  I am not suggesting that all retail locations are dishonest - not in the least.  There are elements in society who are dishonest and they may put themselves in a position to obtain this information.  If the buyer of the children's clothing pays by credit card (and isn't that usually the case?), the retail clerk would have a person's credit card number, name, address, telephone number and security code from the back of  the credit card.  What more will they need to engage in illegal activities for quick gain?

Businesses and consumers are at the mercy of telemarketers.  All three exemption certificates require a telephone number to be provided.  Names, addresses and telephone numbers can be added to marketing lists.

Finally, businesses must provide their PST number.  While this is understandable, how does a business prevent another person from using the information in order to make exempt purchases.  Based on experience from old Ontario RST days, it was common to see bar staff using ORST numbers to purchase alcohol for home party consumption.

It is understandable that the Ministry of Finance wants to be able to audit the use of purchase exemption certificates.  The government wants to protect the tax base. However, the people planning PST re-implementation should ask about protecting the people too. In my humble opinion, the exemption certificate forms are not balanced to protect buyers and this is a problem.  The quick retort that if a buyer wants to benefit from an exemption they should be willing to take the risk is not acceptable.  A person who is buying children's clothing should not be put in a position that they must pay PST or accept identity theft risk. 

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.

Farmers Receive Guidance From British Columbia on New PST Regime

On March 22, 2013 (a week before the re-implementation of provincial sales tax in British Columbia), the Ministry of Finance issued PST Bulletin 101 "Farmers".  Old MacDonald has some guidance, but is it helpful enough?

The good news for farmers is that they have a bulletin.  The bad news is it is 19 pages to read, digest, synthesize and implement in one week,  The good news is that half of the pages are lists of exempt sales and taxable sales.  The bad news is that March 21 is a date many farmers start to prepare fields, orchards and farms for spring planting and start the business cycle - they do not have a lot of extra time like they did after harvest ended in Fall 2012.

As for content, PST bulletins are helpful.  PST Bulletin 101 "Farmers" does contain good lists and some thought and effort went into the preparation of the lists.  However, there is not much guidance on when the BC auditors will deny the exemption on the basis that the purchase is not "solely for farm purposes".

Not all the answers farmers require are contained in PST Bulletin 101 "Farmers".  Farmers may have to review other Bulletins, such as PST Bulletin 002 "Charging, Collecting and Remitting PST"PST Bulletin 301 "Related Services",  PST Bulletin 103 "Aquaculturists" (which is currently not released), Bulletin PST 110 "Production Equipment and Machinery Exemption" (which is currently not released), Bulletin PST 305 "Containers, Labels and Packaging Materials" (which is currently not released), and PST Bulletin 314 'Exemptions for First Nations" (which is currently not released) to name a few (not all).

Farmers may apply for an exemption card to show at the time of a purchase of exempt goods and/or services.  Farmers must apply for the exemption card using Certificate of Exemption - Farmers Form (FIN 458) (however, it is currently not released). In the meantime (and after re-implementation), farmers may use their BC Farmer Identity Card. Farmers who do not have a BC Farmer Identify Card may apply for one from the Ministry of Agriculture Council.  In light of the fact that PST re-implementation is April 1, 2013 and only one week away, it is unlikely that a farmer without a card will be able to receive one before April 1.  This is unfortunate in light of the fact that re-implementation coincides with the planting season.

That being said, the supplier is able to provide a refund of the PST paid within 180 days of the purchase if the documentation is subsequently provided.  However, retailers will need to have the ability to document refunds and expose themselves to assessments for making errors.  This is not an ideal situation for retailers.

Farmers may also seek from the BC Ministry of Finance refunds of PST paid in error or paid due to inadequate documentation to support a point of sale exemption. There will be a form (FIN 355/FAF), but it is currently not yet released.

British Columbia Ministry of Finance Releases FIN 492 Certificate of Exemption - Production Machinery and Equipment

On March 20, 2013, the British Columbia Ministry of Finance released form FIN 492 "Certificate of Exemption - Production Machinery and Equipment". Either my computer download capabilities are a not working properly or there is a problem with the form (or it is my eyes after too much reading of PST legislation).

The Certificate of Exemption is a purchase exemption certificate.  Businesses that may purchase exempt manufacturing and production machinery and equipment use this form when seeking a point of sale exemption or a blanket exemption and the vendor keeps the form on file. This purchase exemption certificate is different than the FIN 490 - Certificate of Exemption - General, which is to be used by businesses to purchase goods that are exempt for the purposes of resale or incorporation into goods for resale (or any other reason except it is production machinery and equipment).  I am not sure why there is the need for two separate forms (and why a few more potential boxes to check cannot be added to one form).  The two separate forms may give rise to confusion and assessment risk for vendors for having the wrong form completed.

Documentation of exempt of exempt transactions used to be a hot audit topic under the old PST regimes in British Columbia and Ontario.  Auditors would ask for the documentation and the vendor under audit would look or seek forms from their buyers/customers.  In many cases, it was not possible to satisfy the auditor and the vendor was assessed a penalty for failure to collect PST.  I recommend that businesses keep a folder of the forms for buyers to complete (please note that individual names are scrutinized as opposed to business names and forms without a PST number of the buyer are also scrutinzed by auditors).  I recommend that all completed forms be scanned and saved in computerized records - this was an electronic folder can be used as a back-up (do not throw out the completed forms because an auditor may demand the original).

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.

British Columbia Issues Revised Bulletin for Registering for New BC PST

In December 2012, the British Columbia Ministry of Finance issued Bulletin PST-001 "Registering to Collect Provincial Sales Tax".  On February 26, 2013, the British Columbia Ministry of Finance issued a revised Bulletin PST-001 "Registering to Collect Provincial Sales Tax". Since the British Columbia PST starts on April 1, 2013, businesses need to turn their minds to whether they must register for BC PST purposes. There isn't much time left to you have your number on time and inputted into your compliance systems.

Businesses inside and outside British Columbia that were registered under the old and defunct social services tax regime cannot use their old BCSST number.  They must re-apply for and obtain a new PST registration number.  New businesses that have come into existence after harmonization (and those that existed prior to harmonization) will no longer be permitted to use their GST/HST number with respect to provincial sales tax (they will still use the number to collect and remit GST). These businesses in British Columbia need to register for and obtain a BC PST number.

Many non-resident businesses are also required to obtain a BC PST registration number.  I will leave it to another post to discuss the far-reaching nature of the registration and collection requirements in the new BC legislation.

Registration is possible on-line, in person or by fax.  The on-line registration process appears to be simple.  Please let us know if you have used the electronic registration method and how soon did you get your number.

We would be pleased to speak with non-residents of British Columbia concerning the new registration rules.  The British Columbia government closed gaps in the law (real and perceived) in order to ensure a greater tax base of registered businesses.

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.

New Buy America Initiative Takes Aim At Zero-Rated Exports

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

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

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

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

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

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

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

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

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

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

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

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

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Taxpayers May Not Be Helped By Past Mistakes of CRA

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

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

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

Sorry to be the messenger of this news. 

Voluntary Disclosures: Get Ahead of the Sales Tax Problem

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

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

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

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

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

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

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

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

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

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

1) use of a drop shipment certificate; and

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

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

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

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

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

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

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

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

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

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

Canada Revenue Agency Auditors Concerned About Registrants Overclaiming Input Tax Credits

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

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

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

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

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

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

What Does A Seller Do When Someone Refuses To Pay HST?

This is a problem now and the problem will occur more regularly in British Columbia after the referendum results are misstated and people believe the HST should not be charged.  The answer that vendors, sellers & service providers do not want to hear is the only answer to give.

GST/HST registrants are tax collectors for the government.  They must charge, collect and remit the HST or risk an assessment plus interest and penalties.  During an audit by the Canada Revenue Agency ("CRA") will assess the registrant for failure to collect HST or a failure to remit the HST.  This means that if the vendor does not charge the purchaser HST (when he/she should), the CRA will assess the vendor.  If the vendor does charge the HST on the invoice and the buyer does not pay the HST, the vendor must remit that HST to the government with its GST/HST return for the period during which the transaction took place (regardless of whether the money was actually received).  If a vendor fails to remit HST, it will be assessed.

There are special rules for bad debts that do not apply to only the HST portion.  There are also special rules that allow a registrant (seller) to sue a recipient (vendor) for HST, however, these rules only kick in after an assessment by the CRA.

The CRA auditors will not be sympathetic when a vendor does not follow the rules.  Telling an auditor that the buyer refused to pay the HST will fall on deaf ears.  The auditors will not care that the vendor would have lost the sale and the profits related to the sale.

Vendors in British Columbia should post a sign in their shops telling buyers that HST will be collected until the transition date (currently said to be March 2013).  This includes service providers who provide in person services (such as hair salons).  Other vendors and service providers should include a statement in quotations that:

 "Harmonized Sales Tax ("HST") is payable in respect of any property or services provided prior to the date established by the Province of British Columbia and Federal Government of Canada to transition to a provincial sales tax (the "Transition Date").  HST will continue to be charged after the Transition Date if required by law.  All applicable provincial sales taxes are payable in respect of property and services provided after the Transition Date."

This statement may be added to contracts for property or services.

If a buyer does not pay the HST after the property or services are provided, the vendor may pursue the buyer in Small Claims Court or the provincial court for breach of contract.  However, in respect of point of sale refusals, the vendor will have to make a business decision whether to meet refusal with a refusal to make the sale. Service providers and restaurant owners who have provided the service and experience the refusal at the cashier are in a very difficult position and may have no other option but to call the police before the person dashes (while being careful to avoid a false imprisonment claim made against them).

In any event, document any situation where there is a refusal to pay the HST and provide as much detail as possible..  Even if an unsympathetic CRA officer will not accept the information, the Tax Court of Canada may sympathetically suggest that a remission order would be appropriate.

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

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

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

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

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

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

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

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

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

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

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

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

Would You Like To Get On The HST Bandwidth Wagon?

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

Sharing a Rumour That Has Not Been Independently Confirmed

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

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

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

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

The CRA document addresses many issues, including:

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

2. How is GST/HST calculated?

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

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

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

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

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

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

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

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.

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

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

The Vancouver Sun article states:

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

 

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

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

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

The CRA's position is:

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

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

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

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

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

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

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

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

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

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

Disproving Audit Assumptions

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

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

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

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

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

Canada Revenue Agency Assessed Director's Liability Against Surviving Director

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

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

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

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

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

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

. . .

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

And later:

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

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

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

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

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

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

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

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

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

The CRA states the following administrative policy:

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

....

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

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

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

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

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

Gross Negligence Penalty: Intentional Failures and Omissions Can Be Costly

Pursuant to section 285 of the Excise Tax Act (Canada), the Canada Revenue Agency (CRA) may impose a gross negligence penalty when assessing intentional failures. That is, the taxpayer is perceived to have lied (a lie or an omission) by the CRA auditor and must be punished.  Section 285 provides in part:

Every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certification, statement, invoice or answer ... made in respect of a reporting period or transaction is liable to a penalty of ... " [up to 25%].

What the exact penalty will be determined to be depends on the CRA auditor and a calculation.  The formula is set out in section 285.  What you might expect is the assessment plus interest plus another 25% of the assessed amount.

Justice D'Arcy of the Tax Court of Canada recently considered whether the gross negligence penalty applied in Thill v. The Queen (an income tax appeal).  The Income Tax Act (Canada) provision is similar to section 285 of the Excise Tax Act.  Justice D'Arcy confirmed the assessment of a gross negligence penalty.  He wrote:

[32] As Justice Strayer stated in Venne v. the Queen, 84 DTC 6247 (FCTD), [1984] C.T.C. 223:

. . . “Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. . .

[33] On the basis of the evidence before me, it is clear that the Appellant either intentionally failed to report the income at issue, or was completely indifferent as to whether the income should be reported. As a result, she knowingly, or under circumstances amounting to gross negligence, either made, or acquiesced in the making of, a false statement or omission on her tax returns for the 2005 and 2006 taxation years.

The decision is linked to an agreed statement of facts in this case.  I was not there in the courtroom.  Justice D'Arcy stated in his decision that he did not find the appellant to be credible --- this must have influenced his decision.  That being said, I cannot say that I agree that the appellant deserved the application of the gross negligence penalty (my view is based solely on my review of Justice D'Arcy's decision).  However, it is important to note that whether the gross negligence penalty should be applied is determined on a case-by-case basis.  The facts and the issues of the particular case are important in making the determination.

There is other case law that look at a higher level of wrongdoing.  It is beyond the scope of this post to summarize those cases in detail.

The purpose of this post in to warn that this 25% penalty exists and can hurt when applied.  I do not like seeing gross negligence penalties on assessments.  You will likely have to file a notice of objection and later a notice of appeal and appear before the Tax Court of Canada if an auditor assesses a gross negligence penalty.  In other words, the CRA are unlikely to reverse their gross negligence penalty without being told by a judge to reverse the penalty.  You will have to pay the assessment, including the gross negligence penalty, before you have your day in court.  The CRA, Collections, will be knocking on your door soon after the assessment.  In most cases where a gross negligence penalty has been assessed, the CRA, Collections officer has less sympathy and requires payment more quickly and is more likely to take collection actions (e.g. garnishment) because the gross negligence penalty says the assessed person was intentionally bad.  When you get to court, the judge may not agree with your version of the events and may confirm the assessment of the gross negligence penalty.

In the end, your intentional failures or omissions may cost you a lot of money (more than the GST/HST that was the underlying amount owed). When you take a gamble in the GST/HST arena, think about the potential cost of the risk.  If you have been assessed a gross negligence penalty, know that the fight with the CRA will continue to cost you money.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ontario Has Not Updated Its Precedent Assessment Letter

Ontario businesses (primarily vendors) are being audited for Ontario retail sales tax (ORST) compliance as the ORST program is being wound down.  The auditors move to the Canada Revenue Agency (CRA) in March 2012.

When business is audited they receive an audit summary setting out the auditor's findings and the proposed assessment amount.  As the time of the assessment, they receive (1) an assessment letter and (2) the assessment (often sent separately and sometimes of different days). result The assessment letter continues to state (incorrectly):

"Failure to comply with the above-noted requirements of the Retail Sales Tax Act in the future may in the application of a 25% penalty under section 20(7) and/or 20(4) under the Act."

The Ministry of Revenue have forgotten to tell the auditors that vendors must now comply with the provisions of the Excise Tax Act (Canada) and not the Retail Sales Tax Act (Ontario) (with the exception of insurance companies and buyers of used cars).

If a vendor is audited by the Ontario Ministry of Revenue and receives an assessment, it does not mean that they now (after July 1, 2010)  must charge ORST or remit ORST in respect of own use or pay ORST on purchases of tangible personal property and taxable services.  Vendors are not required to charge 13% HST and 8% ORST as the assessment letters suggest.

Failure to update the assessment letters may lead to confusion and unjust enrichment of Ontario.

Partners and Partnerships: Transfers Are Tricky

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

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

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

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

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

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

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

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

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

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

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

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

Amalgamations and GST/HST

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. There MUST be a written joint venture agreement;

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

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

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

"Assessment Avoidance" Has A Positive Ring

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

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

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

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.

Judge Gives Lesson in Record-Keeping

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

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

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

...

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

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

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

Judge Campbell considered two questions:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

GST/HST Taxable Independent Contractor vs Non-Taxable Employee

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

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

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

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

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

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

(a) degree of control and supervision;

(b) ownership of tools;

(c) chance of profit; and 

(d) risk of loss.

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

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

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

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

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

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

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

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

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

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

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

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

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

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Sales Tax Audits and Paranoia

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Categories of Ontario Retail Sales Tax Assessments

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

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

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

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

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

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

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

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

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

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

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

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

B) audit summary: this is not an assessment; 

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

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

Ontario Auditors Should Not Assess Vendor for ORST Paid By Purchaser

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

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

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

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

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

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

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

What Happens When Good Companies Make Mistakes?

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

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

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

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

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

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

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

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

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

So here are a few examples:

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

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

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

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

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

In the Passing Lane: Exceeding The Small Supplier Threshold

I was asked the following question:

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

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

Employment Services vs Independent Contractor Services

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

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

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

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

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

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.

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

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

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

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

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

Read this document!

Would You Like the HST Map to Right?

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

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

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

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

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

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

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

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

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

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

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

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

Send Documents to the CRA Using a Traceable Method

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

1) To prove that you completed the document; and

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

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

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

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

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

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

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

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

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

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

Department of Finance Releases Modified HST Rules For Financial Institutions

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

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

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

 

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

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

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

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

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

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

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

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

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

Did you have difficulty reconciling various reports? Fix it. 

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

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

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

If GST/HST Registrant Buys Real Property, The Registrant Should Not Pay GST/HST to Vendor

I was recently called by a person who purchased a hotel property from a vendor.  The buyer paid GST/HST to the vendor.  The Canada Revenue Agency (CRA) has denied the input tax credit on the basis that GST/HST was not payable and, therefore, the GST/HST was paid in error.  The CRA has said that since the error was not discovered until after 2 years after the payment, they will not give a refund of tax paid in error.  This real property is used in commercial activities and the Government of Canada gets its GST/HST on accommodations, food sales, etc.

Here is the starting point of the analysis - Subsection 221(1) of the Excise Tax Act provides that every person who makes a taxable supply in Canada must collect GST/HST payable by the recipient in respect of the supply. BUT, paragraph 221(2) of the Excise Tax Act sets out important relief:

"A supplier (other than a prescribed supplier) who makes a taxable supply of real property by way of sale is not required to collect tax under Division II payable by the recipient in respect of the supply where ...  (b) the recipient is registered [for GST/HST purposes] and, in the case of a recipient who is an individual, the property is neither a residential complex nor supplied as a cemetery plot or place of burial, entombment or deposit of human remains or ashes."

What means that the supplier is not required to collect GST/HST when the buyer is registered for GST/HST purposes and purchases certain real property.

This blog post to is intended to help buyers not get themselves into the same mess.

The problem faced by this person should be fixed.  Since solutions are unique, you will have to continue to read The HST Blog to learn how.  When I hear of unfairness like this, I am inspired to help.

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

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

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

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

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

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

The judge further goes on to add:

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

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

Continue Reading...

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...

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Advance Rulings; and

2. Interpretations.

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

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

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

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

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

Would you like to find MONEY in your Business?

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

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

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

I will share one tip today. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The ABCs of Harmonized Sales Tax

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

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

A is for Almost Everything - HST covers almost everything;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Registrants Who Hold Garage Sales Should Charge GST/HST

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This is a fair ruling in the circumstances. 

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

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

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

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

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

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

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

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

Directors' Liability for HST Debts Is Important Consideration

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

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

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

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

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

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

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

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

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

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

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

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

Bequested Goods Are Not Subject to HST on Importation

I was sent a question as to whether harmonized sales tax (HST) will be imposed on imported goods that have been the subject of a bequest to the importer.  I wanted to answer this question since my own Grandmother passed away this year --- so this one is for Alice (and the writer of the question).

Goods that are classified under H.S. tariff item 98.06 may be imported as a non-taxable importation (in other words, no HST on importation).  H.S. tariff item applies to:

(a) Personal and household effects of a resident of Canada who has died (on the condition that such goods were owned, possessed and used abroad by that resident);

(b) Personal and household effects received by a resident of Canada as a result of the death or in anticipation of death of a person who is not a resident of Canada (on condition that such goods were owned, possessed and used abroad by that non-resident), or

(c) ll the foregoing when bequeathed to a resident of Canada.

It will be important to communicate effectively on the import documentation that the goods are the subject of a bequest (or belonged to a resident of Canada who passed away while outside Canada).  Please use H.S. tariff code number 98.06 on the Customs invoice. It will be helpful to name the deceased person and/or the estate of the deceased person.  If the goods are the subject of a bequest, be prepare to provide to a Canada Border Services Agency officer a copy of the Will or the Receipt and Release that identifies the goods that are the subject of a bequest. 

If the goods belonged to a Canadian resident who passed away abroad, the goods should be listed by the coroner or an official in the foreign jurisdiction as belongings of the deceased person.  There will be many situations where such documentation is not possible.  In such cases, a reasonable attempt should be made to corroborate that the criteria of the H.S tariff code have been satisfied.

Please remember that this H.S. tariff code has been misused by some and that is why your difficult time is going to be the subject of an inquiry by CBSA officers. 

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

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

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

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

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

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

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

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

MUSH Sector Rebates

This Post is out-of-date

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

I have promised to share my MUSH sector rebate chart.

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

This chart highlights many important problems for the MUSH sector. 

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

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

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

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

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

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

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

 

New ORST Auditors Are Making Big Mistakes - What Can You Do?

Ontario has hired a significant number of new auditors to complete Ontario retail sales tax (ORST) audits before the March 2012 deadline when the Ministry of Revenue staff join the Canada Revenue Agency.  What I am seeing is inexperienced auditors who do not know the law issuing large assessments to Ontario vendors and walking away saying that they can file a notice of objection if the vendor disagrees.  The audits are being rushed and the new auditors have not allocated themselves enough time to complete the task correctly.

What this means is that assessed vendors must file a notice of objection and pay the full amount of the assessed ORST while they wait for a Ministry of Revenue appeals officer to review the objection (and it takes more than two years for the appeals officer to pick up an appeal). I have an objection that I filed in 2007 that has not been moved forward by the Appeals Branch.

What can vendors do?  My best recommendation is to be very prepared for any audit.  As soon as you receive the letter or call that an ORST audit is to occur, organize all the relevant documents.  Conduct test audit to determine if you have any problems. Find your own mistakes --- in other words, do the auditors job before the auditor. Know what the assessment should be before the auditor does.

If you have a disagreement with the auditor over the application of the law or his/her interpretation of the facts, call in an expert ASAP.  Many vendors wait until after the problems have developed too far to call in an expert.  If the time clock is running out on the audit, it becomes more difficult to set up a meeting with a supervisor or request that the auditor seek a tax advisory opinion.

Many vendors want to save money and ask a book-keeper or accountant without sales tax expertise to help them during the audit and in preparing notices of objection.  Please remember that it may cost more if you are assessed and have to pay the full amount while waiting for an objection to be considered.  Once the Ministry of Revenue has your money, they will not want to give it back and will be incentivised to delay.

Ensuring that the assessment is correct when it is issued is the best strategy to adopt.  That being said, when you are audited by an inexperienced auditor for the government, it is easier said than done.

Was the Director Wearing a White Hat?

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

Justice Diane Campbell wrote:

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

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

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

Bed Bugs and HST

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

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

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

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

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

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

Appraisal/Valuation Issues Re Non-Commercial Jewelry Imports Can Lead to GST/HST Issues

I have many clients who are individuals and business owners who have had their jewelry seized and detained by the Canada Border Services Agency (CBSA) upon return to Canada. Such detentions have a GST and/or HST effect since GST and HST is calculated based on the value for customs duty purposes.  If the jewelry is a non-commercial importation by an individual (in other words, an individual acquired the jewelry outside Canada for personal use), then the GST/HST is an additional cost (if the goods exceed the exemption limit).

In many cases (too many cases) the client has a receipt in which a value is stated, but the secondary screening officer does not accept the sales documentation as valid. The CBSA officer believes (often without any probable grounds except the person did not answer questions satisfactorily or "they looked nervous about something") that the invoice understates the value.

In many cases, the CBSA charges the importer criminally with smuggling or providing a false document and a civil penalty. The CBSA officer often detains the jewelry and assesses a penalty of 30%-70% of a value to be determined. The CBSA then sends the seized jewelry to be appraised. As a result, the effect is serious --- and costly to resolve.

In every case that I have seen, the appraisal exceeds the amount of the invoice. This may be because appraisers are used to overstating the value for insurance purposes. This may be because the appraiser is asking the wrong questions - such as what would a willing buyer pay a willing seller in Canada at a retail (B2C) sale? This may be because the appraiser has not been told to include a trade level adjustment (in the case of a commercial importation). In every case, it is the interest of the CBSA to get as high an appraisal as possible in order to collect more duties (including excise duties), taxes (GST (commercial and non-commercial goods), HST (non-commercial goods) or PST (non-commercial goods)) and penalties. It may be because an appraisal is a guess an exact science.

Anyone in these circumstances should look at the Government of Canada auction web-site for surplus and seized goods. The relevant area to review are "What has sold". Look at (1) jewelry, collectors items, arts and crafts, etc. and (2) seized assets (excluding vehicles). If you look at specific items that have sold, you will find many examples of jewelry that was appraised at one high amount and that sold in the government auction for less than half that value. I recently purchased a jade necklace valued at $50 on the auction site and I paid only $25. You will likely find better examples that are closer to the type of goods that have been seized from you. This is good evidence to present that a government appraisal is incorrect.

If you anticipate in advance that the CBSA may question your documentation on the purchase price of a good outside Canada, then improve your evidence. For example, get an appraisal completed by a reputable firm. Bring any sales promotional documents, such as sales catalogers or store advertisements. If an item was purchased at an auction outside Canada, bring the promotional materials. If your jewelry is a family heirloom, take photos of the jewelry and work with a reputable Canadian appraiser before bringing the goods to Canada.

Thought of the Day - Auditors Do Not Know Your Business

Mistakes are made by auditors because they do not know your business.  You may think that you have the advantage over an auditor because you know what they do not know.  Unfortunately, it does not work that way.  What the auditor does not know, he will assume.  He is allowed to make assumptions.  he is allowed to make incorrect assumptions.  If the auditor makes an assessment based on incorrect assumptions, you have the right to provide evidence to rebut those presumptions.  However, the cost of going to court often exceeds $100,000.  The morale of the story is that it is cheaper to be humble and sit down with he auditor and explain your business.  Tell him what he should know to do his job correctly.  Treat the auditor like an apprentice and share what you took years to learn and understand.

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

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

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

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

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

A Thought About GST and Imports

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

HST and Disbursements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First Ontario HST Returns May Be Filed Now

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

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

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

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

Gratuities as Added Consideration For the Supply

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ontario has a very short list including the following:

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

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

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

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

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

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

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

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

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Are You Ready? July 23, 2010 is the Day of Your Last Regular ORST Return

On July 23, 2010 - TOMORROW - Is the day the last regular Ontario retail sales tax (RST) returns are due.  Are you a vendor?  Have you added up all the RST you collected in the period before July 1, 2010?  Is your RST return ready to be filed?  Have you written that last RST cheque?  How are you going to celebrate?

Vendors must file their final RST return for reporting periods ending on or after June 30, 2010.  The final RST return should be filed with the Ministry of Revenue on or before July 23, 2010.  Some vendors may be required to file a supplemental RST return on or before the 23rd day of the following month. The final supplemental RST returns are to be filed by November 23, 2010.

Harmonized Sales Tax - Tax Tip 13 (June 2010) "Prepare for Ontario's HST: Final, Supplemental and Amended Retail Sales Tax Returns" provides more information on what you should do.

File Opening Forms May Provide Useful Information to Auditors

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

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

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

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

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

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

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

Input Tax Credit Reporting 101

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

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

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

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

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

Registrant Purchasers of Real Property Should Update Certificates

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

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

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

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

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

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

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

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

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

HST = Haveto Sum Together

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

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

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

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

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

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

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

Businesses that Sell Goods Must Charge HST Based on Delivery

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

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

Answer: Yes

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

Answer: No

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

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

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

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

This means that:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will ORST Refunds Be Another TFSA Miscommunication?

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

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

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

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

I will give an example in order to clarify: 

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

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

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

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

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

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

On June 30, 2010 The Ontario Ministry of Revenue Cancels Ontario Retail Sales Vendor Permits

On June 30, 2010, the Ontario Ministry of Revenue released Tax Tip #15 "Vendor Permits" and informed all persons with vendor permits (registrations for Ontario retail sales tax purposes) that their vendor permits were being canceled on June 30, 2010.

The Ministry of Revenue states:

"On June 30, 2010, all current RST vendor accounts will be closed by the Ontario Ministry of Revenue. Vendors should not destroy their permits which should be kept along with other business records as required. For details on how long records should be kept see tax information bulletin Retention/Destruction of Books and Records on [the Ministry] website."

However, certain insurance providers are still in the retail sales tax system.  The Ministry indicates that they must re-register:

On July 1, 2010 all businesses primarily engaged in insurance activities will be automatically re-registered and a new vendor permit number will be issued. Tax return filing frequencies that are currently in place for RST returns will be maintained after June 30, 2010.

A door is closing and a new one is opening - HST.  This is a logistical step in the transition.

New Canada Revenue Agency Guides Help With New Housing Rebate Calculations

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

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

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

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

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

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

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

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

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

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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).

The Toronto Post-G20 Clean Up and HST

As many businesses in Ontario know, there was damage in downtown Toronto that resulted from the actions of a few protesters during the week-end of July 26-27.  Here are a few tips about the pre- and post- harmonized sales tax (HST) world.

  • If a window is purchased in the pre-HST period at a retailer of glass, then goods and services tax (GST) and Ontario retail sales tax (ORST) will apply.
  • If a window is purchased on an installed basis during the pre-HST period, GST will apply, but ORST will not apply.  ORST will be incorporated into the cost of the installed window as it will be a cost of the supplier of the installed window.
  • If a window is purchased pre-HST or installed pre-HST, then the ORST cost (whether paid to the retailer or indirectly to the installer), the ORST is not recoverable.
  • If the window is purchased or installed post-HST (on or after July 1, 2010), then GST and HST would apply.
  • If a clean-up crew is hired to remove painted slogans in the pre-HST period, GST would apply, but ORST will not apply.
  • If a clean-up crew is hired to remove painted slogans in the post-HST period, GST and HST will  apply.
  • If the retailer is a store and engaged in commercial activities, they would be entitled to claim a full input tax credit to recover any GST/HST.
  • If the business is a bank, it is unlikely that the bank may claim an input tax credit and recover GST/HST paid to repair the damage.
  • If an insurance company enters into the contract with the window installer, it is unlikely that the insurance company will be entitled to recover the GST/HST because the sale of insurance policies is an exempt financial service. [Note: have the business buy the window and claim the in input tax credit]
  • If the Ontario provincial police buy a new car pre-HST, GST may not apply if the OPP are on the list of Ontario government departments (the federal government cannot charge tax of the provincial government).
  • If the Ontario provincial police buy a new police car post-HST, they must pay GST and HST.  The current rules do not provide rebates for provincial government departments.
  • If the Toronto police buy a new car pre-HST, they must pay GST and ORST, but would get a 100% rebate of the GST portion (not the ORST portion).
  • If the Toronto police buy a new car post-HST, they must pay GST and HST and will be entitled to claim the municipal PSB rebate to recover a large portion (not all) of the GST/HST paid.

I do not intend to suggest that businesses should wait. I am merely highlighting the different results caused by the tax reform.

Service Providers That Make Presentations May Have to Rethink Venue

There are many types of service providers who make presentations to audiences.  Sometimes the audience is the public (e.g., business people who want to learn how to benefit from Facebook). Sometimes the audience is employees a a particular company (e.g., a law firm brings in a marketing guru t talk about business and sales plans, a nursing home operator brings in service providers to lecture bout ways to improve delivery of services, a bank brings in a security expert to talk to employees in a lecture hall, etc.).

The general HST place of supply rules may not apply to these types of transactions.  There is a special HST place of supply rule for services in connection with a location specific event. 

Section 28 of the New Harmonized Value-added Tax System Regulations provides:

"A supply of a service in relation to a performance, athletic or competitive event, festival, ceremony, conference, or similar event is made  in a province if the service is to be performed primarily at the location of the event in the province."

This means that if a service provider makes supplies of such services, they would charge HST at the rate of 13% if the event is held in Ontario (assuming the  50%"primarily" test is satisfied). if a service provider makes supplies of such services, they would charge HST at the rate of 12% if the event is held in British Columbia (assuming the  50%"primarily" test is satisfied). Similarly, if a service provider makes supplies of such services, they would not charge HST (but would charge GST) if the event is held in Alberta, Quebec, Saskatchewan, Manitoba or PEI.

The "primarily" test would be most often applicable if the person providing the service is from a different province than the province in which the event occurs.  If an Alberta-based marketing guru gives a presentation in Ontario, it is possible that HST would not apply to his/her speakers fee.  Based on my own experience giving presentations, it takes a significant amount of time to prepare the presentation and a short amount of time to deliver a presentation.  Based on my experience, out-of-HST province service providers may be able to demonstrate that HST is not applicable on a case-by-case basis.  that being said, if a service provider does not charge HST in relation to services provided in an HST province, they should maintain documentation regarding that decision.

I will predict that border cities (that is, cities on the border between an HST province and a non-HST province) will see a decrease in conferences.  Many conferences previously held in places like Ottawa will move to alternatives, such as Gatineau, Quebec.

Finally, MUSH sector and exempt businesses will consider venues for corporate events and internal training.  if an entity cannot claim full input tax credits and recover HST, if may be less expensive to hold events outside HST provinces.  That being said, the travel costs and costs associated with being away from the office might outweigh the HST costs.  That being said, if Paradise Island, Nassau, Bahamas offers great deals, we may see more winter/spring events outside HST provinces.  That being said, the Canada Revenue Agency might take a close look at taxable employee benefits.

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.

June Billings & HST Transition Rules

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

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

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

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

The New Harmonized Value-Added Tax System Regulations Contain a Surprise - An Anti-Avoidance Rule

The June 9, 2010 Canada Gazette (Part II,  Vol 144, No. 12) contained the New Harmonized Value-Added Tax System Regulations SOR/2010-117. Part 2 (section 34-37 contain the HST anti-avoidance rules.  These rules are in addition to the general anti-avoidance rule in section 274 of the Excise Tax Act (Canada) and the Ministerial discretion in subsection 2(18) and section 6 of the Retail Sales Tax Act (Ontario).

In short, related parties (parties operating at non-arms length) may see their tax planning challenged by the Canada Revenue Agency and additional assessments of harmonized sales tax (HST) levied where the Minister believes there is a tax benefit flowing from a transaction with no bona fide business purpose.  The HST anti-avoidance rules do not appear to apply to arm's length parties.

First, the time frames - the HST anti-avoidance rules apply to transactions that occurred after March 26, 2009 (the date of Ontario's HST budget announcement). In particular, Part 5 of the Regulations provide:

  • Section 35 applies to any agreement varied,
    altered or terminated on or after March 26,
    2009 and to any new agreement entered into on
    or after that day.
  • Section 36 applies to any agreement varied,
    altered or terminated on or after April 6,
    2010 and to any new agreement entered into on
    or after that day.
  • Section 37 applies to any transaction made
    on or after March 26, 2009.

My first reaction is - poor souls in British Columbia.  The drafters of the Regulations are mistaken and must believe that the B.C. HST announcement occurred at the same time as Ontario and not on July 23, 2009.

Next, what appears to be covered:

  • Non-arm's length transactions entered into between March 26, 2009 and July 1, 2010 that are altered or varied or terminated
  • Non-arm's length transactions entered into after a tax rate change announcement that are altered or varied or terminated
  • Non-arm's length transactions or series of transactions would in the absence of this section result, directly or indirectly, in a tax benefit to one or more of the persons involved in the transaction or series of transactions it may not reasonably be considered that the transaction, or the series of transactions, has been undertaken or arranged primarily for bona fide purposes other than to obtain a tax benefit, arising from a harmonization event, for one or more of the persons involved in the transaction or series of transactions.

I would like to highlight something that is written in the Regulatory Impact Statement (at the end of the Regulation) after reading the part under "Consultations"

The Regulations are designed to reflect previous HST announcements of proposed rules by Ontario and British Columbia on October 14, 2009 and by the Government of Canada on February 25, 2010.

I must have missed the anti-avoidance rules announcement.

Finally, after re-reading the Regulatory Impact Statement regarding the anti-avoidance provisions, businesses that have expanded into another province after March 26, 2009 may find their business activities under a CRA microscope and will have to prove their legitimate business purpose to an auditor:

The Regulations also set out rules to prevent persons from improperly taking advantage of a change in the new harmonized value-added tax system under the Excise Tax Act. Such changes include the addition of a province to the system, a change to the tax rate of a participating province or a change to a rebate of the provincial component of the HST.

The anti-avoidance rules in these Regulations apply where persons not dealing at arm’s length with each other enter into transactions to obtain a tax benefit as a result of a change in the new harmonized value-added tax system and not primarily for bona fide purposes other than to obtain the tax benefit. In these circumstances, the Regulations allow the Minister of National Revenue to assess the participants in the transactions in order to deny the tax benefit. Generally, the aim of the harmonization anti avoidance rules is to prevent persons not dealing at arm’s length from attempting to avoid the HST simply to obtain a tax benefit and for no bona fide purpose.

Here are the HST anti-avoidance rules (which are long and difficult to read):

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

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

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

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

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

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

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

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

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

Gift Certificates and Gift Cards and GST/HST

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

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

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

1) has a stated monetary value,

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

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

4) which has no intrinsic value.

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

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

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

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

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

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

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

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

Consumer Alert – Gift Cards - Retailers Charging Sales Taxes

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

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

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

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

Retailers Need to Know GST/HST/PST Rates Across Canada

Yesterday, I was speaking with a friend who manufactures custom designed jewelry for customers/clients.  She is in the process of updating her computer system to charge the appropriate amount of Canadian sales taxes (as at July 1, 2010).  The applicable rates in Canada (as at July 1, 2010) are:

Canadian Province Federal GST Rate HST Rate Provincial Sales Tax Rate
British Columbia 5% 7% N/A
Alberta 5% 0% 0%
Saskatchewan 5% N/A 7%
Manitoba 5% N/A 7%
Ontario 5% 8% N/A
Quebec 5% N/A 7.5% (charged on GST incl price
New Brunswick 5% 8% N/A
Nova Scotia 5% 10% N/A
Newfoundland/Labrador 5% 8% N/A
Prince Edward Island 5% N/A 10%

It is important to note that the tax rates can change (often in the Spring at the time budgets are tabled).

If a supplier is registered for GST purposes, they will have to charge (1) GST in respect  of taxable sales in Canada and (2) HST at the applicable HST rate if the HST place of supply rules deem a supply to be made in a participating province.

The rules may be different on when a vendor must register for provincial sales tax purposes and charge provincial sales tax on a sale of goods in a province or on services in respect of tangible personal property.

HST Means No More ORST Purchase Exemption Certificates

I received the following question today:

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

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

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

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

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

Ontario Government and BC Government May Not Follow HST Transition Rules & Give Selves Sale Tax Holiday

The Canada Revenue Agency (CRA) has issued GST/HST Info Sheet GI-073 "Ontario and British Columbia: Transition to the Harmonized Sales Tax - Payment of the GST/HST by Ontario and B.C. Government Entities (May 2010) and the examples provided put the government entities in Appendix A outside the HST transition rules. So, I have to warn suppliers to the Appendix A government entities to be careful because CRA auditors may try to apply the transition rules.  I find it funny and sad that the Governments do not follow their own transition rules to save the HST (when businesses and consumers do not get the same breaks).

Example 3 in GI 073 provides as follows:

In may 2010, an Ontario ministry, which is listed on schedule A to the RTA, orders and pays for furniture, but the furniture will not be delivered and ownership will not be transferred to the Ontario ministry until August 2010.  The furniture is acquired in the name of the Province and the Ontario ministry provides a Crown funds exemption request or certification clause to the supplier.

Because the Ontario ministry is listed on Schedule A to the RTA, and the consideration for the supply of the furniture is paid before July 1, 2010, the Ontario ministry will continue to claim an exemption from GST/HST.  Therefore, the supplier does not charge GST/HST on the consideration for the supply of the furniture to the Ontario ministry.  In this case, the supplier may accept the Ontario ministry's Crown funds exemption request or certification clause requesting relief from both the GST and the HST as the consideration for the supply was paid before July 1, 2010.

The HST transition rules applicable to everyone else were released on October 14, 2009. The HST transition rule for tangible personal property (goods) provided that if tangible personal property was purchased after May 1, 2010 and consideration was paid between May 1, 2010 and July 1, 2010 and the tangible personal property was delivered on or after July 1, 2010, HST would be applicable.  To save the HST, the tangible personal property would have to be purchased before May 1, 2010 and the consideration paid before May 1, 2010. As a result, the Ontario and B.C. Governments have beneficial treatment not available to others. 

The other interesting issue relating to Example 3 is that Ontario retail sales tax or B.C. social service tax would be payable if the furniture had been delivered before July 1, 2010.  So, it looks like (according to the CRA's GI-073) the rules applicable to Ontario and B.C. provide the Government entities with a tax holiday between May 1, 2010 and June 30, 2010.  How is that fair?

All I can say is for suppliers to the Ontario Government and BC Government to beware.  This does not seem correct.

My Latest HST (and Customs Duties) Presentation

Here is a copy of my latest PowerPoint presentation that I delivered on May 25, 2010 entitled "Let's Talk About HST and Customs Duties".  Yes, it is an odd combination of information.  The presentation was delivered in the context of supply chains involving Canada (Ontario in particular).  The focus was on non-income tax compliance.

Ontario's Small Business Support Payments Will Be Taxable For 2010 Income Taxes

A representative of the federal government confirmed this week that the amounts paid by the Ontario Government as small business transition support payments will be considered to be income for income tax purposes and will be taxable.  As a result, the $300 - $1000 just became a smaller amount that can be spent on harmonized sales tax (HST) compliance.

What is an interesting twist is that Ontario signed on to HST after the Federal Government agreed to provide a certain amount of money.  Did the Ontario negotiators realize that some of that money would go right back to the federal government in the form of income tax?

Small businesses must remember to include this one small time payment as income when reporting their 2010 income.  if they forget, the Canada Revenue Agency (the entity that is responsible for making the list of who is to receive the transition payment and how much they are to receive) may assess unreported income tax, penalties and interest.

Regulations Are Coming - How Soon - Very Soon

The federal HST implementing legislation does something unusual --- it permits a wide range of matters to be determined in the future by way of regulation.  This means that the Department of Finance (with input from other government departments and agencies) will write the regulations and the Governor-in-Council (a.k.a. the ruling Cabinet) will promulgate the rules.

To date (May 19, 2010), no HST regulations (relating to Ontario and British Columbia harmonization) have been promulgated.  We are told to expect three (3) sets of regulations soon.  The first (likely the HST place of supply rules) will be promulgated  (so we are told) by the end of May 2010.  Two other sets of regulations should be promulgated around mid-June 2010.  The regulations may include new penalties - so we are told.

Practitioners expect that the Department of Finance will post the regulations on their website www.fin.gc.ca. It may take up to 10 days for the regulations to be published in the Canada Gazette.

Yes, we are running out of time.  Yes, the rules will apply to more provinces than just Ontario and British Columbia. Yes, businesses need to know the rules in order to prepare for HST. Yes, consumers want to know the rules.  Yes, businesses will want to undertake transactions before July 1, 2010.  Yes, the fact the regulations have not yet been promulgated is a problem. Yes, we should expect problems with the regulations because they regulations will not be subject to the scrutiny of opposition parties and the Senate. Yes, there will be a degree of trial and error.

Ontario's Small Business Transition Credit Raises Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

Ontario Finally Lets Suppliers Know They Have To Start Charging HST

Is it a coincidence that today I had a discussion with an accountant who asked about whether a client must start charging GST and HST on July 1, 2010 (or starting on May 1, 2010 if the transition rules apply) and the Ontario Government comes out with Tax Information Notice 6 "HST Notice for Suppliers of Taxable Property and Services to the Ontario Government"?  Probably it was a coincidence.

Tax Information Notice 6 states:

Under the sales tax harmonization agreement between the Government of Ontario and the Government of Canada, the Canada-Ontario Comprehensive Integrated Tax Coordination Agreement (CITCA), Ontario has agreed that, effective July 1, 2010, all Ontario government ministries, agencies, boards, commissions and Crown corporations ("Ontario government entities") will pay Goods and Services Tax (GST) / Harmonized Sales Tax (HST) on their purchases of taxable property and services. Property could be goods, real property or intangible personal property such as trademarks, rights to use a patent, and digitized products downloaded from the Internet.

What this means is that existing contracts where suppliers do not charge goods and services tax (GST) and/or Ontario retail sales tax (ORST) may be subject to GST and HST after May 1, 2010.  It used to be that Ontario Government ministries, departments and crown corporations told suppliers that they are GST-exempt.  This was not the correct term: the Ontario Government ministries, departments and crown corporations were not exempt under a provision of the GST legislation (a.k.a, the Excise Tax Act (Canada)).  The correct term is that the supplies were not taxable (but were not in the non-taxable importations schedule to the GST Legislation).  In simple terms, the federal government could not request that the provincial government pay tax and entered into a reciprocal taxation agreement.

Tax Information Notice 6 goes on to state:

Ontario government entities that are currently paying GST, as well as those that are currently claiming an exemption from GST (i.e., ministries and other provincial entities listed on Schedule A of the current Canada-Ontario Reciprocal Taxation Agreement (RTA) – see Appendix for list of entities, will pay GST/HST on their purchases of taxable property and services effective July 1, 2010. (Emphasis added)

Suppliers to the Ontario Government need to revisit existing contracts and change their invoicing and record keeping.  More importantly, the suppliers may need to educate their Ontario Government clietns/customers that they need to pay GST and HST. Information Notice 6 contains a warning not to be fooled by Ontario Government clients/customers:

Accordingly, suppliers must generally charge and collect GST/HST on any consideration that becomes due on or after July 1, 2010 in respect of a taxable supply to an Ontario government entity. In these cases, suppliers should not rely on or accept any Crown funds exemption requests or certifications requesting GST/HST relief at the point-of-sale.

Can you imagine the conversation between suppliers and their Ontario Government customers/clients where the Ontario Government customers/clients say they do not have to pay the GST/HST and the supplier must "respectfully disagree"?

I have to warn you about the May 1, 2010 - June 30, 2010 period.  The Ontario Government is telling suppliers in Information Notice 6 that if they currently have to pay GST (because they are not in Appendix A), they have to continue to pay GST.  If they currently are not required to pay GST (because the client/customer is listed in Appendix A), they do not have to pay GST during the May 1, 2010 to June 30, 2010 transition period (but will after July 1, 2010).  If they have to pay HST during the May 1, 2010 to June 30, 2010 transition period (and Appendix A does not apply when one talks about OHST), they must pay such OHST. Thanks for clearing up that up! 

Some suppliers who are not currently registered for GST purposes (because they only make non-taxable supplies to the Ontario Government) will have to get registered for GST/HST purposes.  Some suppliers who are not collecting and GST will have to adjust their record keeping to charge GST and HST on invoices and record such collections in their accounting records.  In addition, such businesses who have not been claiming input tax credits will need to record input tax credits in accounting records in connection with purchases.  Large businesses may be affected by the restricted input tax credits rules and cannot claim all OHST paid on business inputs. Some suppliers will need to file GST/HST returns electronically and be in a position to retrieve information from accounting records with respect to GST/HST collected, GST/HST invoiced and collectible, and input tax credits on purchased inputs. There is a lot more suppliers to the Ontario Government need to do to prepare for HST.

One last word of warning is that suppliers to the Ontario Government should prepare to be audited after implementation of HST.  They will be "low hanging fruit" for Canada Revenue Agency auditor as some will be making mistakes.  These changes are big changes.

Beware: Some Tips to Save HST Are Wrong

On May 12, 2010, the Globe and Mail ran a print article entitled "Tips for cheating the harmonized sales taxman".  Some of the tips provided in the origin version were incorrect and have been removed in the online version.

Printed Version:

Tip 1 "Buy Now, Use Later

Even if you prepay, you still pay HST on services used after July 1.  But products aren't subject to that rule.  So if you know the purchase of some durable product (e.g. washing machine, fall wardrobe, camping gear) is in your near future, buy it before July 1, even if it sits unused.  In fact, since HST adds 8 per cent and you can borrow money at a much lower rate, do this even if you save to take a short term loan to do so."

This advice is INCORRECT.  First, durable goods, including washing machines, fall wardrobes and camping equipment, are subject to Ontario retail sales tax (ORST) at the rate of 8%.  So, if a consumer buys goods before July 1, 2010, they will be paying a combined sales tax rates (GST and ORST) of 13%. Second, the transition rule applies to services and goods.  If you buy a good to be delivered before July 1, 2010, ORST and GST are payable.  If you buy a good before July 1, 2010 and the good is delivered after July 1, 2010, the good will be subject to GST and HST.

Printed Version:

Tip 2 "Get to Know the Internet

Look for retailers in Alberta and other "tax havens". They won't charge you HST or even PST if you have an out-of-their province shipping address.  Even after paying shipping and handling, you'll save money."

This advice is also INCORRECT.  Due to the HST place of supply rules for goods (also known as tangible personal property), a GST registrant in Alberta would be required to charge, collect and remit HST if the goods are shipped to an address in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick or Newfoundland/Labrador).  if you buy goods in Alberta and pay for shipping to Manitoba, you will not be required to pay HST.  However, if you live in Ontario, you will have to pay for someone to ship the goods from Manitoba to Ontario.  This second shipping may wipe out any HST savings.  Further, the transshipment may add risk of loss or damage to the transaction.

Printed Version:

Tip 5 "Get on the Internet

The government has a rebate program and the exempted products and services are many and varied.  You can't adjust your spending until you know where the tax applies and doesn't"

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What Are The HST Place of Supply Rules For Services

Businesses in the HST Zone (Ontario, British Columbia, Nova Scotia, New Brunswick and Newfoundland/Labrador) will have to use the newly released harmonized sales tax (HST) 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: 15% (5% GST and 10% provincial HST component starting July 1)
• 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 Canada’s 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 an administrative document containing its proposed 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. The Canada Revenue Agency subsequently issued, 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.


On April 30, 2010, the Department of Finance released Draft Regulations in relation to Place of Supply for Property and Services.


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), then the general place of supply rules for services will apply. There are 5 general place of supply rules for services, which must be applied in the following order. Rule 1, 2 and 5 are the fundamental rules. Rules 3 and Rule 4 are tie-breaker rules
 

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What Are The HST Place of Supply Rules For Customs Brokers?

On February 25, 2010, the Department of Finance released a News Release summarizing the proposed harmonized sales tax (“HST”) place of supply rules and shortly thereafter the Canada Revenue Agency released a GST/HST Technical Information Bulletin setting out its administrative position. On April 30, 2010, the Department of Finance released “Draft Regulations in respect of the Place of Supply of Property and Services” (the “Draft Regulations”). There is a separate HST place of supply rule for customs brokerage services.


Section 24 of the Draft Regulations sets out the HST place of supply rules for customs brokerage services:


24.(1) Where a supply of a service is made in respect of the importation of goods and the service is the arranging for their release (as defined in subsection 2(1) of the Customs Act) or the fulfilling, in respect of the importation, of any requirement under that Act or the Customs Tariff to account for the goods, to report, to provide information or to remit any amount,


(a) if the goods are accounted for as commercial goods (as defined in subsection 212.1(1) of the Act) under section 32 of the Customs Act, the supply is made in the province in which the goods are situated at the time of their release;
(b) if paragraph (a) does not apply and tax, calculated at the tax rate for a participating province, is imposed under subsection 212.1(2) of the Act, or would be so imposed if subsections 212.1(3) and (4) and section 213 of the Act did not apply, in respect of the importation, the supply is made in that participating province; and
(c) in any other case, the supply is made in a non-participating province.


(2) Subsection (1) does not apply to the supply of any service provided in relation to an objection, appeal, redetermination, re-appraisal, review, refund, abatement, remission or drawback, or in relation to a request for any of the foregoing.


This means that:


Rule 1: If commercial goods are imported into Canada, the place of supply of the customs brokerage and related services is in the province in which the goods are released. Therefore, if the goods are released at Toronto Pearson International Airport, the Ontario HST (13%) would apply. If the goods are released at the Vancouver Port, then British Columbia HST (12%) will apply. If the goods are released at the Halifax Port, the Nova Scotia HST (15%) will apply after July 1, 2010.

 

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Real Estate Agents Have A Good HST Question

I have been contacted by an old friend (an Ottawa lawyer that I know and respect from my days at Goodmans LLP) who asked whether residential real estate commissions are subject to harmonized sales tax (HST) if the fees are in respect to activities performed by a real estate agent before July 1, 2010 and where the agreement of purchase of sale was signed before July 1, 2010, but the actual transfer of the residential real estate to the purchaser(s) occurred after July 1, 2010.  Obviously, the real estate at issue is located in Ontario.

What was explained to me was that all or substantially all of the real estate agent's services are performed prior to the conclusion of an agreement of purchase and sale by the vendor and purchaser.  Based on my personal experience buying a new home and selling an old home is that most of the services of the real estate agent are provided before the agreement is signed.  The vendor's real estate agent makes the house or condominium unit pretty and takes pictures.  Then they make a promotional brochure.  Then they advertise the property.  Then they take appointments for showings and sometimes attend the showings.  They sometimes host open houses.  The vendor's agent works to bring together a group of persons who would be interested in the property and often aims to create the environment of a bidding war between potential buyers.  The vendor's real estate agent then receives the offer(s) to purchase and forwards the offer(s) to the homeowners.  The negotiation process proceeds and eventually the vendor accept an offer an the paperwork is drawn up and signed.  Very little in the way of services is required from the vendor's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.

The purchaser's real estate agent performs services of identifying properties that meet the purchaser's requirements, setting up appointments with other agents for listed properties and takes the purchasers to the various appointments.  These services can take place over a number of months.  Eventually the perfect property is located and the purchaser's agent assists the purchaser in arranging financing and drafting an offer.  The purchaser's agent assists the purchaser with the negotiation of the deal and the final step is the agreement of purchase and sale.  It is possible that the offer/negotiation stage may transpire on many homes until the purchaser concludes a contract with a vendor.  In my experience, the purchaser's agent may also assist the purchaser find a lawyer and an inspector. Very little in the way of services is required from the purchaser's real estate agent after the agreement of purchase and sale is signed and sent to the lawyers.

That being said, after the date the agreement of purchase and sale is signed, there may be conditions in the agreement that must be satisfied (e.g. arranging financing, a home inspection, selling an existing home, etc.) before the contract is perfected. As a result, the important date is either the date of signing the agreement of purchase and sale or the date that the conditions are satisfied or expire. 

The question is whether under the transition rules, the real estate agent must charge HST.  The transition rule for services is that HST would generally apply to the supply of a service to the extent that the service is performed on or after July 1, 2010.  HST would generally not apply to a supply of a service if all or substantially all (90 per cent or more) of the service is performed before July 2010.  Consideration due or paid on or after July 1, 2010 would be subject to HST to the extent that  the consideration is for the part of a service that is performed on or after July 1, 2010 (See Ontario Ministry of Revenue Information Notice #3 "General Transition Rules for Ontario HST")

Based on the transition rules:

1) With respect to residential real estate deals signed before July 1, 2010 and all conditions are satisfied before July 1, 2010, it should be that HST is not payable if all or substantially all of the real estate agent's services are performed before July 1, 2010.  If the agreement of purchase and sale is signed and the conditions expire before July 1, 2010, it should be that all or substantially all of the services are considered to be performed before July 2010 and, therefore HST should not be payable. 

That being said, it would be useful for the Canada Revenue Agency (CRA) to issue an administrative statement that they agree with the timing of the services.  I cannot imagine what basis the CRA would give that 10% or more of the services are performed after the satisfaction of all conditions.

Real estate agents should help themselves by taking detailed records of when they performed services for clients so that they can do the math for the auditors.

2) With respect to residential real estate deals that are signed before July 1, 2010 and some of the conditions expire after July 1, 2010, the facts and the HST status of the supply will have to be considered on a case-by-case basis.  It is possible that more than 10% of the services will be performed after July 1, 2010 if the conditions create particular complications or if the buyer picked the first home they saw and the real estate agent's time was required to keep a deal together.

3) With respect to residential real estate deals that are signed before July 1, 2010 and fall apart after July 1, 2010, the facts and HST status of the supply will have to be considered on a case-by-case basis with respect to amounts received by real estate agents from the deposits.

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 Will Cost Municipalities

The Sudbury Star has posted an article that harmonized sales tax will cost the City of Sudbury $450,000 per year.  This will mean a budget shortfall and potentially higher municipal taxes. 

Under the federal Excise Tax Act (Canada), where a municipality makes exempt supplies (and cannot recover the amounts paid as GST as input tax credits), the municipality may claim a rebate of 100% of the GST.  So, under the GST regime, municipalities are tax neutral.  This will continue for the 5% GST portion of expenditure by municipalities.

However, under the HST, the 8% provincial component in Ontario is not fully recoverable.  There are two scenarios.  First, if the HST paid by the municipality matches with a exempt supply by the municipality, the rebate is 78% of the 8% provincial HST component.  For example, if a municipality paid $100,000 for third party snow removal services, the municipality would pay $5,000 GST (that is fully recoverable) and $8,000 OHST.  Only 82% of the $8,000 is recoverable by the municipality by way of a rebate.  The remaining 22% is an unrecoverable cost to the municipality.

Second, the municipality may be caught by the restricted input tax credit rules if the municipality sells more than $10 million in taxable supplies in a year.  I would expect that the City of Sudbury would fit into this category.  Under the restricted input tax credit rules, the OHST component of purchases of energy, certain telecommunications, certain vehicles and fuel and meals and entertainment are not recoverable for a number of years after implementation of HST.  For example, if the municipality purchases electricity that is allocable to taxable activities (e.g., the municipal skating rink, swimming pools, etc.) and the cost over a year is $1,000,000, the $80,000 in HST is unrecoverable if incurred in after July 1, 2010 to June 30, 2013.

HST also means that consumers will pay more for certain property and services acquired from the City.  The article provides the following examples:

* A one-year adult membership at Howard Armstrong Recreational Centre will jump from $218.25 to $235;

* A three-month child, youth or senior pass to city swimming pool will jump from $59.50 to $64;

* The 25-week Walk Your Way to Wellness Program for seniors will jump from $92 to $99;

* Ice rental for the Walden Oldtimers Hockey Tournament will go from $209 to $260;

* A plot in the city's Veteran's cemetery will go from $954 to $1,027;

* Adult athletic field rates will go from $57.50 per game to $62 per game. The cost of lights, if needed, will go from $17.75 an hour to $19 an hour;

* Renting the chalets at Adanac or Fielding Park for a Saturday night will jump from $174.75 to $188;

* Use of weigh scales at city landfill sites will jump from $16.25 to $17.50.
 

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

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

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

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

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

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

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
 

More Horror Flicks - Transitional Rules for Intangible Personal Property; Admissions Memberships and Transportation Passes

The Canada Revenue Agency has released a new Web Cast on harmonized sales tax transition rules for intangible personal property, admissions to places of amusement and transportation passes - some of the hot topics on April 29 & 30th.

Under the Ontario retail sales tax (ORST) regime, intangible personal property and transportation passes are not subject to ORST.  However, admissions to places of amusement are subject to ORST unless exempted (e.g. theaters with less than 3200 seats).  As a result of HST, previously non-taxable tickets are subject to 13% (5+8) tax.

Passenger transportation passes, memberships, and admissions have special transitional rules.

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

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

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

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

to:

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

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

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

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

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

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

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

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

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

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

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

"Real property" is defined to include:
 

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

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

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

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

More Horror Flicks - CRA Web Cast on Transition Rules on Supply and Install Contracts

The Canada Revenue Agency has released a WebCast on harmonized sales tax (HST) transition rules for supply and install contracts that straddle the July 1, 2010 HST implementation date.  This WebCast is intended to help supply and install businesses in Ontario and British Columbia.

An example in the WebCast relates to the installation of a home theatre system.  However, the example presumes that the equipment is delivered to the home on June 30, 2010 and installed on July 2, 2010.  This is not a typical scenario supply & install contract.

Another example relates to the provision of a computer program on June 15th and training is supplied in July 2010.  Again, not a typical supply and install situation in an Ontario retail sales tax context.

Under the ORST regime, some businesses in Ontario and British Columbia currently do not charge ORST or BCSST because in their business tangible personal property becomes real property upon installation.  A carpet installer would supply installed carpet and no ORST is payable (but the installer pays ORST on its purchases and builds it into the price of the installed carpet).  A kitchen design store/contractor may supply installed kitchen cabinets, kitchen counters, a sink, tiles and appliances and not charge ORST to the homeowner (but the supplier pays ORST on its purchases and builds it into the price of the installed kitchen).  These scenarios are not adequately addressed in the WebCast.

Ontario Government Email Alert at 5:02AM Today About HST Starting

At 5:02AM this morning I received an email alert from the Ontario Ministry of Revenue about harmonized sales tax obligations starting today.  First, I must say "Thank you for the notice".

Here is the contents of the emailed "Revenue Alert:

Reminder: Helping Businesses Transition To The Harmonized Sales Tax


What You Need To Know For May 1
On July 1, 2010, the retail sales tax will be replaced with a more modern, value-added tax that will be combined with the federal GST to create a harmonized sales tax for Ontario.
To help ease the transition to the HST, Ontario released general transitional rules in October 2009. Some of these rules take effect May 1.


What You Need to Know
 

• As of May 1, the HST will generally apply on pre-payments for products and services that are going to be provided or performed on or after July 1.
• The HST should not be charged for any goods received or services performed before July 1.


These transition rules are consistent with the approach used in the Atlantic provinces and Quebec. They are also similar to the transition rules that were used for the GST. BC has also largely adopted these transition rules.
The HST and cuts to business taxes will cut Ontario's marginal effective tax rate on new investment in half. Ontario will be providing $4.6 billion in tax relief over three years, including Corporate Income Tax cuts starting July 1, 2010.


• Find out more about the General Transitional Rules for Ontario HST
• Read about the Canada Revenue Agency's HST transitional rules
• Read more about What You Need to Know to prepare for the HST
• Get the list of Important Dates to Remember
 

Not the most helpful.  There were no attachments (but there were the four links that I am able to click on).

The Ontario Ministry of Revenue is not asking the most important question "How can the Government of Ontario help businesses comply with the HST rules that result from our tax reform decisions?"  The Ontario Government should do more to make it as easy as possible for Ontario businesses and businesses selling to people in Ontario to be able to comply with the new HST rules.

The fact that this is a similar approach to the approach in Nova Scotia, New Brunswick, Newfoundland and Labrador is irrelevant to the business owner who is struggling in the current economic climate.  The fact that marginal rate rates may be lower and may encourage new businesses to come to Ontario is also not important to the existing businesses.

Business owner wants someone to help them understand what they have to do to keep auditors happy.  No business owner wants auditors to find mistakes.  No Ontario business owner wants to be assessed in 1-2-3-or 4 or more years.

What is glaringly missing from today's email is basic instructions.

1) If you take on order after April 30, 2010 to sell a good AND will deliver the good after June 30, 2010, HST is collectible.  if you take an order after April 30, 2010 to sell a good AND deliver the good before July 1, 2010, HST is not collectible.

2) If you enter into a lease after April 30, 2010 to lease a good AND the lease term extends beyond June 30, 2010, HST is collectible on the part of the lease that takes place after June 30, 2010, but not the part before July 1, 2010).

3) If you enter into a verbal or written contract after April 30, 2010 to provide services AND the services are to be performed in whole or in part after June 30, 2010, HST is collectible in respect of services to be performed after June 30, 2010 (unless 90% of the services are performed before July 1, 2010 and certain other conditions are satisfied).  if you enter into a contract after April 30, 2010 to provide services and the services are performed in whole before July 1, 2010, HST is not collectible.

4)  If you entered into a written agreement of purchase and sale for residential real property in Ontario into after June 18, 2009, AND both ownership and possession are transferred after June 2010, HST is collectible.

5) If you sell a subscription to a magazine or periodical or newspaper and receive payment for the subscription in full before July 1, 2010, then HST is not collectible. If you sell a subscription to a magazine or periodical or newspaper and receive payment for the subscription in full after June 30, 2010, then HST is collectible.

6) I you collect HST before July 1, 2010, DO NOT add it to your GST/HST return until after July 1, 2010.  DO NOT include the HST in tax collected on your GST/HST filed in May or June 2010.  Include the HST in GST/HST return after July 1, 2010.

7) If your situation is not covered by the above rules because your business activity straddles the pre-July and post-HST periods, consult with an expert or the Ontario Ministry of Revenue (and take notes of who you spoke with and the advice they gave in case you need a due diligence defence in the future).

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

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

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

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

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

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

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

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

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

Where the Government of Ontario would be out money is with respect previously non-taxable services and previously exempt goods.  With respect to the ORST exempt goods, Ontario taxation pol