Recent experience suggests that the CRA may have an ongoing project (internal code for either tax evasion special investigations, or civil auditing of possible sham transactions – or both) in the Staffing Agency context.
While the following example is totally hypothetical, it does tend to follow the situations first identified in recent Quebec jurisprudence, where GST/HST non-compliance by staffing agencies first came to light:
Aco, a GST Registrant, acquires temporary workers through a third-party Staffing Agency, Bco. The temporary workers are often undocumented, for whatever reason, and are unknown to Aco, other than through its relationship to Bco. Bco charges Aco for the cost of the workers, plus a profit element, plus GST/HST. Aco pays that, and takes an ITC for the GST/HST on the strength of the invoice from Bco. Bco later absconds with the GST/HST (does not remit it to the CRA), and CRA finds reason to deny the ITCs in the hands of Aco (perhaps Bco was not validly registered for the GST/HST at the time that Aco was invoiced for it).
Multiple derivations are associated with this fact pattern. Sometimes there are multiple layers of Staffing Agencies involved: some legitimate operators, some not. There is usually one financial services intermediary involved (often a third party unaware of any issues with the Staffing Agencies) but critical to the Staffing Agency’s ability to pay the workers. Cheque cashing businesses were commonly used in the Quebec cases, but other payment processors can also be involved.
The CRA has recently begun issuing a spate of section 288 and 289 requests for information, all seeking to get to the bottom of this issue on a national level (the “RFIs”).
The RFIs, on close inspection, often leave a number of unanswered questions:
- Is the CRA using its powers legitimately, given its obligations to unnamed parties, and its obligations to keep separate civil audits from criminal investigations?
- Is the person receiving the RFI likely to be a target of a similar assessment or investigation, depending on the information/response given?
- Should the CRA’s RFI be answered carte blanche, or are other appropriate steps required?
Persons receiving these RFIs should consider consulting with legal representatives in order to better understand both their obligations to respond to the CRA and the limitations and protections which may be available when dealing with the CRA.
For persons involved in either the Staffing Agency industry, or recipients of these Staffing Agency services, it appears likely that 2019 will be a year in which the CRA gives some added attention to these issues. We expect that the RFIs the CRA is issuing now will result in a number of assessments later in the year as the CRA analyzes the information it has gathered.
While there is no “one size fits all” approach to what to do in these circumstances, there are some legal options for working one’s way out of this situation, no matter how bleak the situation looks.
Best to understand those before CRA or Special Investigations comes knocking, however.
Millar Kreklewetz LLP has strong experience with this issue, and is available to assist.
Do you require assistance in this area? If so, contact us here.