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GST/HST Sham Assessments

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As a tax lawyer assisting clients in defending themselves against the all-powerful CRA (and its equally powerful ally, the Department of Justice – Canada’s largest and best-equipped law firm), I welcome any judicial decisions that help to right that power imbalance. 

Justice Patrick Boyle’s recent decision in Frigorific Warehouse is an exceptional attempt at addressing an inherent problem with Canada’s GST/HST system, which lacks proper mechanisms to deal with tax rogues who gain access to the CRA’s registration system to charge, collect and abscond with GST/HST funds from unsuspecting Canadian businesses. The CRA’s traditional position has been to attempt to recover the lost GST/HST from these unsuspecting businesses (by denying them input tax credits – “ITCs”). Justice Boyle’s decision seems to put that ability into serious question!

GST Shams & the Problem Presented for Bona Fide Businesses

We have written about alleged GST shams and carousel schemes before.   In short, a rogue registers for GST/HST and becomes one of the CRA’s trusted statutorily powered GST collection agents: see s.221 of the Excise Tax Act (“ETA”).  Armed with its GST registration and the GST/HST collection powers, the rogue then begins to operate what looks outwardly to be a legitimate business, selling real goods or providing real services to unsuspecting Canadian business intermediaries (i.e., gold, staffing agency services, phone cards and/or telco services).  The rogue charges unsuspecting businesses the applicable GST/HST and collects it using its statutory collections powers.  The unsuspecting businesses pay the tax (because they are required to do so), and claim ITCs to recover that tax on their next GST returns – which is how the GST/HST system is supposed to work:  see  s.169 of the ETA.

When the CRA discovers that the rogues have absconded with the collected tax, leaving the CRA out-of-pocket for the ITCs reimbursed to unsuspecting businesses, the CRA typically resolves the situation by assessing the unsuspecting business for the shortfall, claiming their alleged involvement in a sham or carousel scheme

Two concocted theories are advanced in support of the CRA’s assessing position, including allegations that: (1) the unsuspecting businesses ought to have known that the rogues – who possessed valid and NOT suspended GST Registrations numbers when collecting the tax – were somehow tax frauds; or (2) suggesting that the businesses ought to have done MORE to verify the bona fides of the alleged rogues (i.e., do corporate searches, verify business locations, verify ownership of substantial or usual business equipment, etc.).  Where these sorts of due diligence activities are not carried out, the CRA concludes that either the unsuspecting businesses were either complicit in the tax fraud, or wilfully blind to it.

Following assessment, life effectively stops for the unsuspecting businesses: they are forced to repay huge assessments and required to incur significant costs to defend themselves.

Frigorific Warehouse:  Someone Finally Gets it!

In Frigorific, Justice Boyle rights the power imbalance facing Canadian businesses in such unfortunate situations, concluding that the GST/HST rules in the ETA do NOT create any “undeclared obligation on every Canadian business [purchasing] commercial supplies to exercise additional due diligence with respect to each of [the CRA’s] duly registered suppliers”.  To the contrary, Justice Boyle concluded that Frigorific’s procedures were sufficient (i.e., verifying that new suppliers appeared in the provincial register of businesses and had valid GST and provincial tax registration numbers).


The CRA has held an unreasonable standard in these cases for too long, as its historic position has been aspirational - rather than based on the actual rules of the ETA.  Justice Boyle’s decision prompts a helpful reset.  The CRA and the Department of Finance must revise these rules to better police the CRA’s own collection agents, and perhaps abandon their concepts of “tax purity” to do so.

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