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ITCs and Supplier Nominees: The SNF Case

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There has been significant jurisprudence on the extent to which recipients are entitled to ITCs in respect of GST paid to so called “rogue suppliers” – suppliers who collect but fail to remit GST to the fisc.  The CRA has often taken the position that where the recipient fails to make efforts to confirm the identity of its supplliers or where the recipient is wilfully blind to the bona fides of its suppliers, the recipient will not be entitled to ITCs. The recent decision of SNF LP (2016 TCC 12) adds another layer to this analysis.  Although the TCC makes a number of distinct findings, the most interesting aspect might be with respect to a briefly explained conclusion regarding a claim for a rebate of tax paid in error.

SNF was a metal recycler that purchased scrap metal from a number of entities for which it paid GST and claimed corresponding ITCs.  Revenu Québec (RQ) denied ITCs in respect of 12 entities on the basis that the s. 3(a)(i) requirement of the ITC Information Regulations was not met because the entities appearing on the invoices were not the names of the real suppliers, but were “prête-noms” (i.e. nominees) for the actual suppliers.  SNF would open accounts for new suppliers after confirming the supplier’s GST number, typically by receiving a copy of the RQ stamped receipt of a GST registration application.  RQ issued registration numbers to all of the suppliers appearing on the invoices despite some being flagged as risky applications.  Although the 12 entities charged and collected GST from SNF, they were fraudsters and did not remit the GST to the fisc.

The former Chief Justice of the TCC accepted as a fact that the suppliers appearing on the invoices were not the real suppliers and were in fact prête-noms of the actual suppliers.   Nevertheless, the TCC concluded that that fact alone did not disentitle SNF to the ITCs at issue.  Although it is not entirely clear from the decision, this was presumably on the basis that the “prête-noms” appearing on the invoices were “intermediaries” (defined to include agent) of the actual suppliers, thus meeting the s. 3(a)(i) requirement.  For the purpose of claiming ITCs, it was sufficient for the recipient to make reasonable inquiries as to the identity of the purported supplier and whether the purported supplier had a proper GST number at the time supplies are initially purchased.  The recipient is not required to make such inquiries of the suppliers on an on-going basis unless their legitimacy as a supplier becomes suspect. 

By and large, SNF was considered by the TCC to have made reasonable efforts to ensure that the purported suppliers and registration numbers on the invoices were legitimate.  ITCs were denied in respect of one purported supplier because SNF ought to have known that the supplier listed on the invoice was not the actual supplier, since, for those supplies, SNF was dealing exclusively with an individual shortly after that individual’s own GST and PST numbers had ceased to be valid (i.e. once that individual’s own GST and PST numbers had ceased to be valid, a prête-nom was used instead).  The TCC took issue with the fact that RQ was attempting to hold SNF to a high standard of supplier vetting, while there was “a suggestion, if not actual evidence, of possible negligence” by RQ in issuing the prête-noms GST numbers to begin with. 

Despite the TCC’s caution on placing too much burden on recipient businesses regarding supplier identity and registration, the TCC concluded that SNF was not entitled to ITCs in respect of a transaction occurring on the day that the GST number of a prête-nom had expired.  SNF was also held not to be entitled to a rebate for tax paid in error on that transaction because it “was not paid as GST” (because the prête-nom was no longer registered).

The TCC’s conclusion that SNF’s initial vetting of the suppliers was sufficient to establish entitlement to ITCs is a welcome one.  That being said, the rejection of ITCs on the basis that the suppliers GST number was cancelled on the date of the transaction suggests that there is in fact a significant on-going responsibility for a recipient to verify GST numbers for every day that a transaction is completed with a particular supplier. 

Even if the TCC’s conclusion on this point is technically correct, SNF ought to have been entitled to a rebate for these amounts because they were paid in error.  The fact that the supplier was not registered for GST on the date of the transaction is irrelevant, as the requirement for a rebate of payment made in error under s. 261(1) is that the amount have been paid as or on account of tax – such payments need not be (and arguably cannot be) actual GST.  In our view, the TCC ought to have more carefully considered this argument, as it appears to have overlooked prior jurisprudence on the matter.

In any event, this case serves as another reminder that recipients should establish proper procedures when dealing with new suppliers, in order to ensure entitlement to ITCs. 

* A version of this article appeared in the June 2016 edition of Canadian Tax Highlights.

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Guest Wednesday, 20 November 2019

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