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Should you really dispute the CRA’s finding that your supplies are taxable and not exempt?

Many of the “exempt” versus “taxable” cases that we see from the GST/HST perspective put the recipient (the one usually arguing for “exempt” treatment) and the supplier at odds.

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The recent decision of the Federal Court of Canada (the “FC”) in Canada v. Toronto Dominion Bank, 2018 FC 538, (“TD Bank”) could make it much more difficult for business owners to get personal loans and mortgages.

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Subsection 141.01(2) of the Excise Tax Act (“ETA”) deems a property or service acquired for use in a business to be for use in commercial activities only to the extent that it is used in the making of taxable or zero-rated supplies. On the other hand, subsection 141.1(3) provides that any action of a person in connection with the acquisition, establishment, disposition, or termination of a commercial activity is deemed to occur in the course of commercial activities. An apparent conflict therefore exists where a property or service is acquired by a registrant in connection with the acquisition, establishment, disposition or termination of a commercial activity, but where taxable supplies have not yet been made or have ceased: a registrant is deemed to have incurred the property or service in the course of commercial activities by subsection 141.1(3), but also deemed to have incurred same in the course of non-commercial activities by subsection 141.01(2).

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The Ontario Court of Appeal’s recent decision in Canada Life Insurance Company of Canada v. Canada (Attorney General) (2018 ONCA 562) seems to have put a final stake in the heart of equitable remedies in tax matters.  The case dealt with rescission, and has the effect – along with prior Supreme Court jurisprudence – of clarifying that the equitable remedies of rescission and rectification will not generally be available to taxpayers seeking to correct drafting or planning mistakes.

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Recent experience suggests that the CRA may have an ongoing project (internal code for either tax evasion special investigations, or civil auditing of possible sham transactions – or both) in the Staffing Agency context.

While the following example is totally hypothetical, it does tend to follow the situations first identified in recent Quebec jurisprudence, where GST/HST non-compliance by staffing agencies first came to light:

Aco, a GST Registrant, acquires temporary workers through a third-party Staffing Agency, Bco.  The temporary workers are often undocumented, for whatever reason, and are unknown to Aco, other than through its relationship to Bco.  Bco charges Aco for the cost of the workers, plus a profit element, plus GST/HST.  Aco pays that, and takes an ITC for the GST/HST on the strength of the invoice from Bco.  Bco later absconds with the GST/HST (does not remit it to the CRA), and CRA finds reason to deny the ITCs in the hands of Aco (perhaps Bco was not validly registered for the GST/HST at the time that Aco was invoiced for it). 

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