Tax & Trade Blog

As we initially described here, the Canada Revenue Agency (“CRA”) continues auditing and assessing individual home-owners who have either substantially re-built their homes or commissioned the construction of a new home for their own use on the resale value of those homes in a number of alarming instances.

Direct Sellers and the distributor and representative businesses that work closely with them should be no stranger to oversight and scrutiny from all levels of government, no matter where they operate.

The Canada Revenue Agency (“CRA”) recently added one more headache for in-house Law Departments and other Compliance Professionals with Direct Selling Companies, issuing a warning exclaiming: “Watch out for tax schemes involving multilevel marketing businesses!” (the “Warning”).

Tax assessments are difficult to appeal in Canada because the Canada Revenue Agency (“CRA”) is allowed to make factual ‘assumptions’ which the taxpayer must disprove – or lose its case!

Two recent Federal Court of Appeal (FCA) decisions have seemingly expanded these powers to assumptions of “mixed fact and law” – although the second FCA seemingly walks back the first.

Whether a supply is taxable under the Excise Tax Act (“ETA”) can depend, in part, on how that supply is characterized. In normal commercial relations, businesses will often bundle many diverse services together – including both taxable and exempt services. Once bundled together, one must consider whether they remain multiple supplies, or whether they now constitute one single supply. If a single supply, one must then determine the character of that supply, which can impact whether it is taxable or exempt.

The courts’ approach to characterizing bundled supplies has evolved over the last few years. This was especially apparent in last year’s Federal Court of Canada (“FCA”) decision in Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 96 (“CIBC 2021”), which was recently denied leave to appeal to the Supreme Court of Canada (“SCC”) — making it the law of the land.

The recent Tax Court of Canada (“TCC”) decision in Canadian Imperial Bank of Commerce v. The Queen, 2022 TCC 83 (“CIBC 2022”), is an example of how the TCC is now applying the FCA’s text-focused approach to other GST/HST characterization cases.

Last March 18th, the CRA announced the suspension of the vast majority of audit activities as a result of the COVID-19 pandemic. How quickly things change!

As a result of the COVID-19 pandemic, the Tax Court of Canada (the "TCC") has been closed with all hearings cancelled since March 16, 2020.

A recent Notice to the Public and Profession (the "Notice") issued by the TCC has indicated this cancellation of hearings will extend to July 17, 2020 (which would have been the last day of hearings before the TCC's previously scheduled 4-week summer recess).

The Notice also reveals that the TCC has been preparing to re-open.

Before 2010, Canadian direct selling companies were often organized as Unlimited Liability Companies ("ULCs"), for good reason.

The ULC structure could operate under the US "check-the-box" rules as a flow-through entity, which was often desirable from the perspective of the US corporate owner, which was usually structured as an S Corp or LLC.

Changes to the US-Canada Tax Treaty (the "Treaty") made effective in 2010 threw a wrench into these historically common structures – exposing some to a 25% unrecoverable tax under Part XIII of the Canadian Income Tax Act on any payments of dividends, interest, and royalties.

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.

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.

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.

In a recent blog, we introduced the ongoing tax saga of Tony and Helen Samaroo, a husband and wife that owned and operated a restaurant, a nightclub and a motel, who were charged with 21 counts of tax evasion.

The Samaroos were acquitted of all charges in a 2010 criminal trial where the trial judge found the Crown’s case “weak” and supported by “unreliable” and “highly uncertain” evidence which contained “significant flaws” and “discrepancies”.

Following their acquittals, the Samaroos sued the prosecutor and CRA for malicious prosecution. The claim against the prosecutor was dismissed; however, in a scathing 70 page decision Justice Punnett of the British Columbia Supreme Court found the CRA guilty of malicious prosecution and ordered the CRA to pay approximately $1.7 million in damages to the Samaroos.

Over the past several years, the CRA Audit Division has directed more attention to businesses that use Employment Agencies for their staffing needs. We understand that many businesses dealing with Employment Agencies, Temporary Labour, Staffing Agencies, or other similar entities, have already been contacted by CRA Auditors looking to confirm their eligibility for Input Tax Credits (ITCs).

Whenever a person imports commercial goods into Canada they are required to pay the GST at the border at the time of importation pursuant to Division III of Part IX of the Excise Tax Act (the “ETA”).   This GST rate is currently set at 5%. 

Those who are insufficiently familiar with Canada’s GST/HST system may find themselves treating this tax as a hard cost, or charging the GST/HST to Canadian customers and then keeping it as a form of reimbursement for the tax previously paid at the border.  Neither approach is correct.  

If the CRA believes that taxpayers have knowingly failed to report income or remit GST and other taxes owing they will often bring concurrent criminal tax evasion charges in addition to simply re-assessing a taxpayer. In this scenario, the protections afforded to taxpayers in the criminal tax evasion matter – the burden of proof being on the Crown to prove the charges beyond a reasonable doubt – are not present in the tax appeals.  Similarly, unlike in the criminal context, the burden of proof in tax appeals is on the taxpayer, who must demolish the CRA’s assessment and any relevant assumptions of fact. 

Given the differing standards in criminal versus civil proceedings, criminal acquittals typically have little, if any, impact on a subsequent civil proceeding. The CRA is therefore often successful in tax appeals before the Tax Court of Canada (“TCC”) even after a taxpayer has been acquitted in a criminal prosecution based on the same fact pattern.

Samaroo v. The Queen, 2016 TCC 290 (“Samaroo”) is an exception to the general rule.

It is not uncommon for the CRA to issue administrative policies or directives that provide CRA auditors and the public with direction on how the Excise Tax Act (ETA) or Income Tax Act (ITA) should be applied to certain industries/situations. While people may believe that following these directives means they are following the law, these directives are simply the CRA's view of how the law should be applied. Accordingly, they can sometimes be a source of false comfort, and not accurately reflect the law. Such was the case in the recent Tax Court of Canada (TCC) decision of Dr. Brian Hurd Dentistry Professional Corporation v. The Queen, 2017 TCC 142 (Brian Hurd) where the Court found the CRA GST policy statement was wrong and misleading.

The recent Auditor General Report is not good news for the Canada Revenue Agency (CRA).

The CRA has nine call centres located across Canada that are supposed to provide taxpayers with timely and accurate information about their taxes, credits and benefits.

Based on the Auditor General of Canada’s report, however, a taxpayer calling the CRA is more likely to get blocked than to speak to a live agent, and when reaching a live agent, often has a fairly good chance of obtaining incorrect information.

Not good news at all, if you are the CRA.

In a previous blog post titled “CRA coming for contractors?” we discussed the recent decision of the Federal Court of Appeal in Rona Inc. v. Canada (Minister of National Revenue), which seemed to suggest that CRA may have a special project on the go to target Canadian home improvement contractors that are currently operating in the underground economy.

An email and website post from PayPal to its users earlier this week seems to indicate that the CRA is now going after all Canadians that buy and sell online.

In Canada, the CRA can often pursue a corporation’s directors for unpaid tax debts of the corporation.  But there are certain “pre-conditions” that must be met.

One of these, which rarely gets any attention at all is the requirement that “a certificate for the amount of the liability of the corporation [be] registered in the Federal Court… and execution for that amount [be] returned unsatisfied in whole or in part”:  see section 323(2)(a) of the Excise Tax Act (ETA) and section 227.1(2)(a) of the Income Tax Act (ITA).

Historically, the Courts have considered that these provisions do not impose an obligation upon the CRA to make reasonable efforts to search for assets of a corporate debtor; rather, all the CRA needs to do is “act in good faith”:  see Barrett (2012 FCA 33).

In Tjelta (2017 TCC 187), the Tax Court of Canada (TCC) was asked to determine what the FCA meant in respect of the CRA’s good faith requirement. 

Not much it seems!

A recent tax case in the Federal Court of Appeal (FCA) involving the RONA home improvement chain (Rona Inc. v. Canada (Minister of National Revenue) seems to suggest that CRA may have a special project on the go to target Canadian home improvement contractors that are currently operating in the underground economy.

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.