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).
These CRA audits come in response to some questionable business practices in the Employment Agency sector recently. In particular, some Employment Agencies collect GST/HST from their clients but do not remit the tax to the government. In these cases, the Employment Agency that is being operated profits, while putting its clients in jeopardy of serious tax liabilities. The best way to protect your business from these situations is getting professional tax advice so that you can be alert to any red flags.
Where the CRA finds such an Employment Agency, it will often commence audits of the Employment Agency's clients. Typically, the people behind this type of Employment Agency – which collects but does not remit GST/HST – disappear as soon as an audit commences because nothing is in their real name.
While auditing the clients of the Employment Agency, the CRA Auditors will try and gather evidence that the business knew, or ought to have known, that the Employment Agency was a sham or façade – nothing more than an empty shell meant to hide the true suppliers of the workers.
If the CRA believes they have found this kind of evidence, the CRA will generally reassess to deny the ITCs claimed on the Employment Agency fees. The rationale for this disallowance is that the Employment Agency that wrote the invoices was not the true supplier of the workers to the business. The CRA often uses the term "Invoices of Accommodation" to describe these types of invoices from persons who are not the true suppliers.
However, if the CRA believes that the business was an innocent third party and exercised the due diligence of a reasonable person, then the CRA may decide not to reassess.
The case of Salaison Lévesque Inc. v. The Queen (2014 TCC 36, upheld on appeal 2014 FCA 296) is an example of a situation where the CRA denied the ITCs of a business that used Employment Agencies. Fortunately for Salaison Lévesque Inc. both the Tax Court of Canada and the Federal Court of Appeal found in their favour and reinstated their ITCs.
Unfortunately these cases are often very fact-specific, and based on cases heard to date, the CRA (or Revenu Québec) appears to succeed more than half the time when these disputes go to Tax Court. For example, around the same time that Salaison Lévesque was being decided, the Tax Court of Canada and the Federal Court of Appeal considered the case of Kosma-Kare Canada Inc. v. The Queen (2014 TCC 13, sent for redetermination 2014 FCA 225, and redetermined 2015 TCC 182).
Although the facts of the two cases were superficially similar, in Kosma-Kare the Tax Court of Canada ultimately concluded that the employment agencies who had invoiced Kosma-Kare "did not act as employment agencies, or as intermediaries between sub-contractors in that field." Accordingly, Kosma-Kare was denied its ITCs, and the CRA was permitted to go back beyond the normal reassessment period, and impose gross negligence penalties on Kosma-Kare.
If your business deals with Employment Agencies, Temporary Labour, Staffing Agencies, or any other type of business that provides workers on a contract basis, ask us how to perform due diligence on your suppliers to ensure that you get the ITCs you deserve!
If you face this issue, or any other issue with respect to GST/HST, we are here to help, providing legal support and advocacy, business strategies, and over 30 years of experience.
Do you require assistance in this area? If so, contact us here.