When you would like to communicate with the Canada Revenue Agency that you have hired a lawyer, accountant or other consultant to represent your interests and that the CRA may communicate with your representative you must complete a Business Consent Form. The Business Consent Form has been around for some time. It was recently revised and newly released on August 12, 2011.
The Globe and Mail newspaper is reporting that the Canada Revenue Agency (CRA) has obtained Court orders from the Federal Court of Canada ordering 146 Quebec municipalities to provide records on payments to outside contractors and consultants. In the article entitled "CRA seeks court orders to open books of 146 Quebec municipalities", the Globe and Mail reports that based on affidavits filed with the Federal Court, the CRA is focusing on unreported income of persons to whom the municipalities make payments. The report indicates that the CRA has obtained Court orders previously in respect of 88 municipalities in and around the Eastern Townships and Department of Justice lawyers are scheduled to be back in Federal Court in Montreal on Monday to obtain similar orders for the towns in and around the Quebec City’s north and south shore.
I have concerns that the CRA's Court orders set a precedent. The CRA may be emboldened to obtain similar Court orders for municipalities everywhere. It sounds (and smells) like a fishing expedition on the part of the CRA. The CRA believes (rightly or wrongly) that certain illegal activity is happening in the area of Quebec municipal contracting (there are news reports of mob activity in Quebec in the construction industry) and yet the CRA affidavits that accompanied the motion filed with the Federal Court is not focused on named companies. Based on the news reports, the affidavits seek information on "unnamed persons" and are extraordinarily broad in scope (meaning large volumes of documents and information are required to be provided by municipalities to the CRA).
I have concerns that the CRA's Court orders are not limited to just income tax and failures by contractors and consultants to pay income tax. What about goods and services tax ("GST") and Quebec sales tax ("QST")? If there is unreported income tax, there is surely unremitted GST and QST. If municipalities and townships paid contractors and consultants "under the table", there could be assessments against the municipality/township for failure to pay GST and QST. These assessments could get quite large if there are indeed "payment issues". Municipalities already have budget deficit issues - large assessments may prove to be financially problematic (not to mention that the provincial government and federal government (depending on whether federal or provincial taxes are assessed) would receive a penalty and interest payment from the municipalities.
What is ironic is that the recent judicial review applications (e.g., Tele-Mobile) have been denied by the Federal Court on the basis that the Tax Court of Canada has jurisdiction over tax matters and tax statutes contain a complete code. A resolution will be tabled at the Canadian Bar Association meeting in Halifax in August to expand the jurisdiction of the Tax Court of Canada.
Municipalities throughout Canada should watch these cases carefully and any municipality could be next (the Department of Justice lawyers have the motion materials precedent ready amend and file). There should be a cause for concern not only to municipalities, but also businesses. If the CRA would go to the Federal Court and ask for broad access to the books and records of municipalities, would they not make similar requests against businesses?
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.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity TaxMore...
Add this blog to your feeds. Or, receive email notifications by typing your email address in the box below.
Enter keywords: