In the recent case of Club Intrawest v. Her Majesty the Queen (2017 FCA 151), the Federal Court of Appeal (the "FCA") was faced with a unique fact pattern not contemplated by the legislation. In dealing with this unusual situation, the FCA did what common law courts do best, and improvised a solution which it considered both fair and legally justifiable. In the process, the FCA has introduced a new gloss on the common law "single versus multiple supply analysis" and held that even where a recipient is only charged a single amount of consideration, a court may nevertheless find that there were two separate supplies, each with different tax treatment.
Tax & Trade Blog
In a previous blog (click here) we wrote about the case of CBS Canada Holdings Co. v. The Queen (2016 TCC 85), and the limitations that decision placed on a lawyer acting as an advocate. In particular, the Tax Court of Canada (the "TCC") held that the law firm representing CBS had sworn an affidavit on a controversial issue, and in doing so had crossed the line between being an advocate for the client and inappropriately become involved in the facts of the case as a witness.
As we noted at the time, the decision was appealed to the Federal Court of Appeal (the "FCA"). The FCA has now issued its decision (2017 FCA 65), completely exonerating the lawyers for CBS!
Given that financial services are exempt from GST/HST under Part VII of Schedule V of the Excise Tax Act, the “financial services” definition in section 123(1) is subject of regular litigation before the Tax Court.
In SLFI Group - Invesco Canada Ltd. (2017 TCC 78), the Tax Court of Canada recently had another opportunity to deal with these inclusions and exclusions in the financial services definition. In doing so, the Tax Court applied an unexpectedly broad interpretation of the exclusion found in paragraph 123(1)(q), which deals with the supply of “management services”.
A director can defeat personal liability for his/her corporation’s tax debt by establishing that the director’s assessment was made more than two years after he/she has ceased to be a director of the corporation (section 325(5) of the Excise Tax Act (“ETA”); section 227.1(4) of the Income Tax Act). What a director needs to do in order to demonstrate that there was an effective resignation? As discussed in the following cases, an objectively verifiable communication of a resignation to the corporation is required and that any mess up in the requirements of Ontario’s Business Corporations Act (“OBCA”) will affect the efficacy of the resignation. When in doubt, it is advisable for directors to seek legal advice.
Most businesses will, at some point, have to deal with a situation where they have made advance payments for goods and services that never end up being provided. The cause for this non-supply is often due to the fact that the supplier has become impecunious. This results in obvious commercial headaches for the recipient, which can be exacerbated by corresponding GST implications.
Typically in such situations, the recipient will pay GST to the supplier in respect of the advance payment and take a corresponding Input Tax Credit (“ITC”) in its next GST Return. The supplier is required to remit that GST collected to the fisc. Pursuant to subsections 232(1) and (3) of the ETA, where the supplier will not be making the supply (or, for other reasons, reduces the consideration owed for the supply), it can adjust, refund or credit the amount collected (including the GST collected), and issue a “credit note” to the recipient. In turn, pursuant to paragraph 232(3)(b), the supplier can apply an adjustment in its next GST return to reduce its net tax by the GST amount in the credit note. Correspondingly, pursuant to paragraph 232(3)(c) the recipient is required to apply an adjustment to increase its net tax by the same amount (to account for the portion of the ITC previously taken, but now credited).
To the extent that the supplier is impecunious, the recipient will be left with a situation where it has had to increase its net tax, pursuant to a credit note received that will never actually be honoured. This was exactly the situation in the TCC decision in North Shore Power Group Inc. (2017 TCC 1).
The recent Tax Court decision in Persepolis Contracting (2017 TCC 89) is another example of how the concept of agency is so important in the GST context. The case serves as a reminder that written documents will be central to the determination of whether an agency relationship exists, and suggests that it might be difficult to establish that written agreements constitute evidence of agency.
In Thangarajah v. Her Majesty the Queen (2017 TCC 72), the applicant and her corporation (collectively, the “applicants”) were issued Notices of Assessment in November 2014 for unreported income under the Income Tax Act. When the corporate applicant was audited by the CRA in early 2014, the applicant retained the services of an agent who held himself out to be a lawyer (the “agent”). It was the applicant’s understanding that the agent would do whatever was required to deal with the Notices of Assessment. In the months that followed, the applicant received calls from CRA Collections and the agent was informed and asked to take action. It was unclear what the agent had actually accomplished for the applicants except that he sent a letter to a CRA Collection Officer dated September 10, 2015 advising, among others, that he would initiate the “appeal process” soon (the “Letter”). The Collection Officer responded the following day indicating that the collection files had been updated with a further notation that an appeal had to be done as soon as possible. CRA Collections eventually seized the applicant’s bank accounts, leading to the firing of the agent. The applicants then found out that the agent was, in fact, a paralegal and that they suffered as a result of the agent’s failure to file the notices of objection.
The TCC in Andrews (2017 TCC 23) distinguished between transportation services that transport vehicles by towing them and those that transport vehicles by driving them, subjecting only the latter to GST/HST. The TCC thus narrowed freight transportation services to mean only services that involve a mode of transportation that is separate from what is transported.
Registrants are required to keep adequate books and records that provide the information necessary to ensure taxes payable under the Excise Tax Act (“ETA”) can be determined. What may happen if a taxpayer has failed to file tax returns, filed patently deficient ones and/or a taxpayer’s books and records are not reliable or do not exist? Subsection 299(1) of the ETA states that the Minister is not bound by the contents of the return, but may assess by alternative means including the use of estimates or net worth approach. (Parallel provisions can be found under subsection 152(7) of the Income Tax Act.)
The recent Tax Court decision in Les Ventes et Façonnage du Papier Reiss Inc. v The Queen (2016 TCC 289) (the “Reiss Case”) places new emphasis on the verification obligations of GST/HST and QST registrants claiming input tax credits (“ITCs”), confirming and expanding the “duty of verification” first asserted by the CRA in Salaison Lévesque Inc v The Queen (2014 TCC 36: at para 86).
The Customs Act requires corrections of errors in import declarations – such as a tariff classification, country of origin, or value for duty. Each correction requires the filing of a form B2 adjustment request, which can be an onerous task when multiple corrections are required. The CBSA has an administrative practice that streamlines the procedure for authorized importers by allowing them to file a single blanket adjustment request - a single form with an attached spreadsheet - to process multiple corrections with one form. However, the CITT decision in Worldpac Canada (AP-2014-021) shows that administrative practice does not have the force of law and a taxpayer’s reliance thereon involves risk.
Over the past several years, the CRA Audit Division has directed more attention to businesses that use Employment Agencies for their staffing needs. If your business deals with Employment Agencies, Temporary Labour, Staffing Agencies, or other similar entities, consider consulting us for strategies on safeguarding your ITCs.
In AG v. Bri-Chem Supply Ltd. et al. (2016 FCA 257), the Federal Court of Appeal (FCA) reproached the Canadian Border Services Agency (“CBSA”) for administrative practices that amounted to an abuse of process.
The TCC applied fundamental principles of statutory interpretation to conclude that the supply of police services by the Ontario Provincial Police (“OPP”) to the 407 ETR Concession Company Limited (“407 ETR”) constituted an exempt supply of a “municipal service” under section 21.
The Supreme Court of Canada rendered its first decision on the Customs Tariff in Canada v.Igloo Vikski Inc. (2016 SCC 38). The decision provides guidance on applying the General Rules for the Interpretation of the Harmonized System (“General Rules”), particularly in the context of how the General Rules inform one another.
Two recent decisions advance the law of privilege. Lizotte v Aviva Insurance Company of Canada (2016 SCC 52) and MNR v Iggillis Holdings Inc. (2016 FC 1352) respectively clarify the difference between solicitor client privilege (SCP) and litigation privilege (LP), and also establish that so-called advisory common interest privilege (CIP) - privilege that protects transactional negotiations between parties with separate legal representation - does not exist in Canada. The two decisions are reminders of the scope of privilege in the tax context, and also highlight the importance of understanding the proper ambit of privilege when engaging in tax transactions or tax litigation.