Tax & Trade Blog

Special rules in the Excise Tax Act (“ETA”) provide the Canada Revenue Agency (“CRA”) with tools to request or require information for verification and administrative purposes. The CRA can send out a “requirement to provide information” – known as RFI – relating to the enforcement of Part IX of the ETA to a registrant or third party (section 289). Where the person refuses to comply with an RFI, the Minister may make an application to the Federal Court and obtain a “compliance order” and, if the person still fails to comply with the compliance Order and provide the information as ordered, the person can be subject to contempt of court penalties (section 289.1). (Note that there are parallel provisions under the Income Tax Act (“ITA”): see section 231.2(1) and section 231.7 of the ITA).

As shown in the recent federal court decision, Minister of National Revenue v. Chi (2018 FC 897), contempt of court is a serious offence and failure to properly respond to a CRA RFI can lead to substantial fines and/or imprisonment.

The Canadian government has chosen to make many financial services tax exempt under the Excise Tax Act (“ETA”). In particular, under the definition of “financial service” in ss. 123(1) of the ETA, a service is an exempt financial service where it is included in any of paras. (a) to (m), and not excluded by any of paras. (n) to (t). Unfortunately, determining what constitutes a financial service and what ancillary or supporting activities are subject to GST/HST is not always clear. It’s been particularly difficult since the introduction of Bill C-9, the Jobs and Economic Growth Act (“Bill C-9”) on March 29, 2010, which refined the definition of “financial service” in ss. 123(1) to clarify that that services that support the delivery of a financial service that are in the nature of management, administration, marketing or promotional activities are not themselves financial services and are thus taxable.

The Bill C-9 changes have created considerable uncertainty in many industries as to whether exempt financial services under ss. 123(1) prior to the enactment of Bill C-9 remained exempt after the Bill C-9 changes. The uncertainty was particularly felt by issuers, acquirers, merchants, credit card companies, and any other entity that operates in the payment/credit card processing industry where prior to Bill C-9 the ss. 123(1) definition of financial service had been broadly applied to ancillary services in cases such as Costco Wholesale Canada Ltd. v The Queen, 2009 TCC 134.

That said, the question of whether or not parties operating in the payment/credit card processing are supplying exempt financial services has gotten even more uncertain after the recent decision of the Tax Court of Canada (“TCC”) in CIBC v The Queen, 2018 TCC 109 (“CIBC”).

Section 165 of the Excise Tax Act imposes GST/HST on taxable supplies "made in Canada". A supply is deemed to be made in Canada if “delivered or made available” to the supply’s recipient in Canada (para. 142(1)(a)), but deemed to be made outside Canada if “delivered or made available” outside Canada (para. 142(2)(a)). “Delivery” refers to physical delivery, and “made available” refers to constructive or “legal” delivery.

The recent decision of the Tax Court of Canada (“TCC”) in Jayco, Inc. v. The Queen, 2018 TCC 34(“Jayco”) is a good example of issues that can arise when a contract is silent as to the place of physical or legal delivery.

The term "arranging for", which is not statutory defined, is generally interpreted to include activities performed by financial intermediaries such as agents, brokers and dealers in financial instruments. If it is determined that an intermediary is providing a supply of a financial service under paragraph (l) of "arranging for" a service (and not excluded by any of paragraphs (n) to (t)) of the definition of “financial service” under section 123(1) of the Excise Tax Act (“ETA”)), the service is exempt under Part VII of Schedule V of the ETA. In Barr v. The Queen (2018 TCC 86), the Tax Court of Canada (“TCC”) determined that the activities performed by the brokers in relation to a private sale of a business were not exempt from GST/HST as “arranging for” services and, therefore, the commission received by the brokers was subject to GST/HST.

Under section 230 of the Income Tax Act (“ITA”) and section 286 of the Excise Tax Act (“ETA”) all taxpayers must keep records that are adequate to determine the amount of taxes owing. When these sections are complied with and a taxpayer maintains adequate records, the Canada Revenue Agency (“CRA”) will generally rely on those records when conducting an audit to determine the taxpayer’s tax obligations. However, if a taxpayer does not maintain adequate records, the CRA can use alternative assessment methodologies to assess a taxpayer under subsection 152(7) of the ITA and subsection 299(1) of the ETA.

In the recent decision of Truong v. Canada, 2018 FCA 6 (“Truong”), the Federal Court of Canada (“FCA”) confirmed that alternative assessment methodologies are permissible when the CRA is unable to audit a taxpayer using the traditional method.