The Ontario Ministry of Finance continues to turn the Ontario tobacco industry upside down – continuing to assess companies for failure to collect the Ontario Provincial Tobacco Tax (PTT) on sales of cigars and other non-cigarette tobacco (loose tobacco, pipe tobacco, chewing tobacco, snuff, etc.) to Status Indians on Federal Indian reserves.
Tax & Trade Blog
Section 182 of the Excise Tax Act (“ETA”) generally deems any payment made to a registrant as a consequence of a breach, modification, or cancellation of an agreement (other than as consideration for a supply), to be a taxable supply. This rule, in effect, means that where there is a breach of an agreement to supply property or services, a payment to the supplier by the recipient to compensate for that breach will generally be deemed to include GST/HST.
Unfortunately, section 182 is often overlooked by parties resolving legal disputes, as the recent Tax Court of Canada (“TCC”) decision in THD Inc. c. La Reine, 2018 CCI 147 demonstrates.
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.
The term "arranging for", which is not statutory defined, is generally interpreted to include activities performed by financial intermediaries such as agents, brokers and dealers in financial instruments. If it is determined that an intermediary is providing a supply of a financial service under paragraph (l) of "arranging for" a service (and not excluded by any of paragraphs (n) to (t)) of the definition of “financial service” under section 123(1) of the Excise Tax Act (“ETA”)), the service is exempt under Part VII of Schedule V of the ETA. In Barr v. The Queen (2018 TCC 86), the Tax Court of Canada (“TCC”) determined that the activities performed by the brokers in relation to a private sale of a business were not exempt from GST/HST as “arranging for” services and, therefore, the commission received by the brokers was subject to GST/HST.
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).
Subsection 223(1)of the Excise Tax Act (ETA) requires registrants to disclose sufficient information to their customers in respect of their customers’ GST/HST liabilities by indicating on any invoices/receipts issued to customers the net-of-tax price and the GST/HST thereon or if prices are on a tax-included basis, noting this on invoices/receipts issued to customers.
Where a sales contract is silent with respect to the obligation to pay the GST/HST, disputes often arise as to whether the quoted price is tax-extra or tax-included.
A recent case is a good example of the general disposition of Courts to conclude that where contracts are silent, GST/HST will generally still be payable!
Section 224 of the Excise Tax Act (ETA) allows a supplier who has remitted GST/HST collectible from, but as yet unpaid by, a recipient, to sue the recipient for the tax remitted as if it were a debt owed to the supplier.
There has been little case law or helpful interpretative materials from the CRA on this provision.
A recent case seems to clarify that where a supplier fails to charge and collect the GST/HST initially, the two-year limitation period on such a claim runs from the time that the supplier pays same to the CRA when assessed for the unremitted GST/HST.
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.
Under section 323 of the Excise Tax Act (“ETA”), directors of a corporation are personally liable for a corporation’s unremitted GST/HST. There is no definition of “director” in the ETA, but section 323 has been found to apply to individuals who are formally registered as directors (i.e. de jure directors) and individuals who are not formally registered as directors but in effect carry out the same duties and make the very same decisions as directors (i.e. de facto directors).
The Canada Revenue Agency’s (“CRA”) formal policy on Directors’ Liability, including its position on de jure vs. de facto directors, is outlined in IC89-2R3. However, the ETA itself does not provide any guidance on when an individual who has formally resigned from de jure directorship ceases to be a de facto director for the purposes of section 323 liability. As such, whether or not a director who has resigned but continues to be involved in corporate activities can be deemed a de facto director of a corporation is a factually complicated issue that the Tax Court of Canada (“TCC”) has frequently been asked to answer.
The relatively recent decision in Koskocan c. La Reine, 2016 CCI 277 (“Koskocan”) stands for the proposition that it is possible for a former director to remain involved in a business (and even perform some tasks that one may associate with a de jure director) without rising to the level of a de facto director.
After the recent decision of the Federal Court of Appeal (“FCA”) in Canada v. Callidus Capital Corporation, 2017 FCA 162 (“Callidus”), any secured creditors dealing with debtors that also have CRA issues, should immediately seek professional advice about the implications of this case before acting on their security interests to seize funds or property.
The reason for this gratuitous advice follows!
Subject to a few narrow exceptions, there are special income tax and GST/HST provisions giving the CRA super-priority to certain tax amounts in the possession of a tax debtor. Specifically, unremitted GST/HST and unremitted income tax withholdings are both subject to a “deemed trust” in the hands of the taxpayer under special provisions in Excise Tax Act (ETA) and the Income Tax Act (ITA). When funds or property of a tax debtor are paid over or seized by a tax debtor’s secured creditors that deemed trust remains intact, and the CRA holds a “super-priority” over those funds and that property.
In the past, secured creditors took the position that these rules and the “super-priority” disappeared on the subsequent bankruptcy of a debtor.
However, the Federal Court of Appeal in Callidus held that a tax debtor’s bankruptcy does not extinguish the Crown’s deemed trust over assets that were received or obtained by a secured creditor prior to the tax debtor’s bankruptcy. More importantly, the FCA confirmed that secured creditors in these situations remained personally liable to the CRA for the tax debtor’s unremitted GST/HST and unremitted source withholdings, up to the value of the assets received or realized upon.
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!
The Tax Court of Canada (TCC) recently considered how the GST/HST works in situations where individuals and businesses buy and sell used motor vehicles, and the case is instructive.
In Brian & Deborah Dewan Enterprises Ltd. v. The Queen (2017 TCC 135), the TCC dismissed the appeal of the appellant which failed to collect and remit the GST/HST on disposition of vehicles used in its commercial activities on the mistaken belief that the GST/HST was paid by the purchaser to the Ministry of Transportation (MTO) on registration of the vehicles.
Businesses which fail to understand the possible interaction of the federal GST/HST and provincial sales tax in certain circumstances, for example, in this case, the Ontario Motor Vehicle Tax (MVT) on disposition of used vehicles, would be put in a disadvantageous position and suffer losses.
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.
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”.
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.
The CRA has a mandate to improve compliance of GST/HST registrants and to encourage GST/HST registrants to meet their filing requirements. As part of its commitment to this mandate, the CRA will be implementing changes to its current processes.
In The Great-West Life Assurance Company v The Queen (2016 FCA 316) [“Great-West Life”], the Federal Court of Appeal upheld the TCC’s decision that services related to processing claims for drug benefits were not financial services, and so not exempt from GST/HST.
Section 165 of the ETA imposes GST in respect of supplies “made in Canada”. The so-called “place of supply rules” in section 142 of the ETA serve to deem particular supplies to be made either inside or outside of Canada. As a result of a legislative inconsistency these rules can conceivably deem a particular supply to be made both inside and outside of Canada. This inconsistency was analyzed by the TCC in the recent decision of Club Intrawest (2016 TCC 149). In doing so, the TCC arguably expanded the place of supply rules such that GST now applies to more supplies than even CRA had previously contemplated.