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 Queen, 2020 TCC 56 (CanLII).