Unreported income discovered by the CRA may lead to consequences on the GST/HST component related to that income which, in turn, can sometimes result in personal liability to the director.
This situation arose in the recent case of Duque v. Canada, 2020 FCA 73. Mr. Duque was the sole director of a corporation providing carpentry services, which was incorporated in 1996 and ceased to carry on business sometime before February 28, 2007.
The CRA determined that the corporation had unreported income for its 2006 and 2007 taxation years, and the corporation was reassessed under the Income Tax Act for this unreported income.
The amount of income determined through the income tax audit was then assumed to be on account of taxable supplies made by the corporation. When compared with the amount of taxable supplies reported by the corporation on its quarterly GST/HST filings, the CRA found that there was a discrepancy relating to unreported taxable supplies. Accordingly, the corporation was assessed for net tax under the Excise Tax Act in relation to the unreported taxable supplies.
The corporation did not file a Notice of Objection to the GST/HST assessment, and on December 18, 2014, Mr. Duque was personally assessed for director’s liability in relation to the corporation’s unremitted net tax, interest and penalties.
The Tax Court of Canada dismissed Mr. Duque’s appeal and found that he did not meet the requirements of the due diligence defence.
On appeal to the Federal Court of Appeal (“FCA”), the remaining issues related to (1) whether the unreported taxable supplies of the corporation were allocated to the proper reporting period, and (2) whether there was a double-counting of certain amounts.
The FCA ultimately allowed the appeal in part. As the issues pertained to questions of fact, much of the Court’s analysis is specific to the factual circumstances of this case.
However, for companies and directors more generally, there are two main takeaways.
First, the FCA found that a director that has been personally assessed for the corporation’s GST/HST liability can challenge the underlying assessment of net tax payable by the corporation. A director should not be personally liable for more than what should have been properly assessed to the corporation. As a result, although the corporation did not file a Notice of Objection in this case, the director was nevertheless entitled to challenge the underlying assessment.
The second point to note is that income tax audits and assessments can lead to related GST/HST assessments down the line, and result in potential director’s liability that is personal in nature.
Corporations and directors that are dealing with income tax issues should keep in mind that there may be possible implications on the GST/HST side and take proactive steps to address same, including seeking the appropriate legal advice.
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