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When a supplier pays GSTH/HST on a property or service acquired for consumption, use or supply in the course of commercial activities, the supplier is entitled to claim an input tax credit (“ITC”) equal to the tax paid on expenses incurred:  see section 169 of the Excise Tax Act (“ETA”). 

“Commercial activity” excludes exempt supplies listed in Schedule V of the ETA.  (Suppliers that make exempt supplies do not charge and collect GST on their outputs, and are thus also ineligible to claim ITCs on inputs.)

This area has been ripe for recent assessments, with the CRA often struggling to determine whether exempt or commercial (taxable) supplies are being made.   In many instances, the CRA assesses suppliers making “exempt” supplies on the basis that their supplies are actually taxable, assessing large amounts for “GST not collect”:  see, for example, Applewood Holdings Inc. v. The Queen and Zomaron Inc. v. The Queen, the suppliers challenged the CRA’s conclusion of “taxable” supplies in the Tax Court of Canada (“TCC”), arguing that their services were in fact exempt financial services.  The suppliers won on “exempt” supplies argument at the court, thus, relieving them from any obligation to charge and collect GST/HST on their services.  (Note the possible downside of the “winning” such an assessment, as that usually leads to a denial of ITCs that may have been inadvertently claimed by the exempt supplier, which was highlighted in our prior blog on Applewood.) 

In other cases, the CRA makes a 180 degree-turn and takes the position that the suppliers providing “taxable supplies” (and collecting GST, and claiming ITCs) are in fact either not making supplies for consideration, or are making exempt supplies – in an attempt to deny the ITCs that have been historically claimed.   Such is the case in Canadian Legal Information Institute v. The Queen2020 TCC 56 (CanLII).

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One of the CRA’s latest projects appears to involve the scrap gold and telecommunications industries, which has been the subject of a number of recent CRA audits, culminating in a number of legal challenges in various contexts.

In the May 2020 case of Express Gold Refining Ltd. v. Canada, the taxpayer was in the business of buying scrap gold and other precious metals, and getting it refined for resale in a pure form.  It paid the GST/HST on its purchases, but did not collect this tax on its sales on the basis that sales of refined precious metals are not subject to GST/HST.  It generally filed credit returns, and the CRA began an audit – while delaying a GST refund of near $10 million.  While not identifying this as a “GST carousel” audit, the CRA did admit that the taxpayer’s GST return had initially been flagged by an automatic system for further screening, and that the CRA had identified the scrap gold business as “a high risk industry”.

In Iris Technologies Inc. v. Canada, a more recent “GST carousel” case released over the summer months – albeit in the telecommunications sector – the CRA did appear to accuse the taxpayer of participating in a “carousel scheme”, all the while attempting to deny ITCs of over $62 million!

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In a prior blog, we had suggested that rectification, rescission, and other equitable remedies would likely no longer be available to correct most tax mistakes.  This conclusion stemmed from the Supreme Court of Canada (SCC) decision in Canada (Attorney General) v. Fairmont Hotels Inc. (2016 SCC 56) (“Fairmont”) and the subsequent Ontario Court of Appeal decision in Canada Life Insurance Company of Canada v. Canada (Attorney General) (2018 ONCA 562) (“Canada Life”). Both of these decisions highlighted the Courts’ concerns with taxpayers using equitable remedies to effect what might be considered “retroactive tax planning”.

However, in a recent decision, the British Columbia Court of Appeal (BCCA) has kept a window open for rescission in tax matters!

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Unreported income discovered by the CRA may lead to consequences on the GST/HST component related to that income which, in turn, can sometimes result in personal liability to the director.

This situation arose in the recent case of Duque v. Canada, 2020 FCA 73.  Mr. Duque was the sole director of a corporation providing carpentry services, which was incorporated in 1996 and ceased to carry on business sometime before February 28, 2007.

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As the world struggles with COVID-19, and small and medium businesses endure the worldwide economic slowdown, directors of Canadian corporations need to know about the long arm of the CRA when it comes to ensuring that GST net tax obligations and ITA source withholding requirements are met by corporations!

One particularly egregious collections power that the CRA has is its ability to issue so-called derivative assessments to relatives of taxpayers who have received money, property or dividends from the corporate tax debtor, at a time that the corporation or the director are liable for tax.

A “derivative assessment” refers to an assessment whereby the CRA collects from a third party an amount owing that it is unable to collect from the taxpayer.  Where a tax debtor transfers property to a non-arm’s length party for less than fair market value (FMV) consideration, section 325 of the Excise Tax Act (ETA) and section 160 of the Income Tax Act (ITA) may apply to allow the CRA to assess the transferee personally.

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