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
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.
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 Masa Sushi Japanese Restaurant Inc. v. The Queen, 2017 TCC 239 (“Masa Sushi”), the Tax Court of Canada (“TCC”) confirmed that lawyers are the only representatives that are authorized to represent tax appellants in court under General Procedure tax appeals.
In Canada, legal costs are generally awarded to the successful litigant in a tax appeal (or in most civil cases for that matter) based on actual costs incurred, but are often a mere fraction of the actual costs that a litigant has incurred. As such, the first thing that many taxpayers contemplate when deciding whether to appeal a CRA assessment is whether or not it is worth it, particularly where it appears likely that the costs of a tax appeal will probably exceed the amount of tax in dispute.
While the decision on whether or not to appeal a tax assessment should be made on a case by case basis, the Tax Court of Canada (“TCC”) in Ike Enterprises Inc. v. The Queen, 2017 TCC 160 (“Ike Enterprises”) recently confirmed that in appropriate circumstances, a taxpayer can be awarded legal costs that exceed the amount of tax in dispute. In fact, the CRA was ordered to pay costs equal to approximately 140% of the amount in dispute!
During a tax appeal it is quite common for a tax appellant and the CRA to disclose information and to formally agree on certain facts. For example, at the outset of most tax appeal trials the parties often prepare a document commonly referred to as a “Statement of Agreed Facts” or “Partial Statement of Agreed Facts” that outlines the facts that the parties agree on.
The Tax Court of Canada (“TCC”) decision in Athabasca University v. The Queen, 2016 TCC 252 (“Athabasca”) is a perfect example of why it is imperative that no concessions or agreement of facts be made without a careful analysis of the potential implications that this could have on the ultimate issues in dispute in the tax appeal.
Over the past number of years the CRA has been taking an increasingly aggressive stance against Canadian taxpayers who don’t meet their tax obligations. This approach has only intensified – and perhaps very rightly so – since the Panama Papers scandal broke. Since then the Canadian government has earmarked an additional $444.4-million between 2016 and 2021 to help the CRA crackdown on tax evaders.
In years past, tax evaders caught by the CRA could expect hefty fines and penalties, but would rarely face jail time. More recently however the CRA has been trying to put people engaged in tax fraud or tax evasion in jail.
A common step in the Tax Court of Canada litigation process is the Examination for Discovery (“Discovery”). A Discovery is where each side (the taxpayer and the Canada Revenue Agency or “CRA”) will have the opportunity to examine witnesses from the other side, under oath. This is typically done with the assistance of a tax lawyer, and affords each side the opportunity to ask questions and request documents relevant to the issues in the tax appeal. The Witnesses are under oath and must answer questions truthfully, with the Discovery recorded, and transcripts produced after-ward.
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!
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.)
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.
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.
Section 141.1(3) of the of Excise Tax Act (“ETA”) broadens the scope of what is considered to be in the course of commercial activities to activity done “in connection with” extraordinary transactions such as starting and winding-up commercial activities. The Tax Court of Canada (“TCC”), in Onenergy Inc. v. The Queen (2016 TCC 230), discussed how the section should be interpreted.
In order to be successful in tax appeals, the rules of evidence can sometimes play a key role.
In Boroumand, the Appellant appealed assessments for unreported income under the Income Tax Act to the Tax Court of Canada (“TCC”) (2015 TCC 239). The Appellant’s position was that the funds came from non-taxable sources, including primarily an inheritance from family in Iran. The Appellant sought to introduce documents from money exchange enterprises purporting to show that he received nearly $2 million from Iran. The Minister objected to admitting the documents as they were hearsay and under normal circumstances were inadmissible.
The Canada Revenue Agency ("CRA") recently reversed its long standing administrative policy regarding the exempt nature of nursing staffing agencies, taking the position that these services are taxable and not exempt: see Excise and GST/HST News No. 89 (issued without much fanfare in late Summer 2013).
This effectively decision has effectively reversed the CRA's twenty year old position in GST Memorandum 300-4-2 (Health Care Services, September, 17, 1993) which had previously concluded that these services were all exempt, under section 6 of Part II of Schedule V of the Excise Tax Act.
When things go awry in one’s business or personal affairs, taxes often get neglected. The Canada Revenue Agency (CRA) does not forget about these tax obligations, however, and has extensive collections powers available to it, including “directors liability” assessments which can transform corporate tax debts into personal tax debts of the affected directors.
The question that many directors and affected personal taxpayers often ask is whether these personal tax debts can be avoided on personal bankruptcy.
The answer is that “it depends”. Recent case law has been swinging toward forcing substantial payments by bankrupts where there are taxes owing to the CRA, as was seen in a recent British Columbia Supreme Court decision in Re Van Eeuwen  GSTC 142.