The recent Tax Court decision in Les Ventes et Façonnage du Papier Reiss Inc. v The Queen (2016 TCC 289) (the “Reiss Case”) places new emphasis on the verification obligations of GST/HST and QST registrants claiming input tax credits (“ITCs”), confirming and expanding the “duty of verification” first asserted by the CRA in Salaison Lévesque Inc v The Queen (2014 TCC 36: at para 86).
Of note, the duty of verification requirements are not explicitly stated in either the Excise Tax Act (“ETA”), the Input Tax Credit Information (GST/HST) Regulation [SOR/91-45], or the Règlement sur la taxe de vente du Québec, but appear to be new judge-made law.
Les Ventes et Façonnage du Papier Reiss Inc. (“Reiss Inc.”) was a paper recycling business that bought paper from multiple suppliers. The Agence du revenue du Québec (“ARQ”) acting on behalf of the Minister of National Revenue (the “Minister”), assessed Reiss Inc. for periods between April 2005 and April 2009. The assessment adjusted the net tax and rejected $53,203.27 of ITCs claimed by Reiss Inc.
Reiss Inc. appealed the ARQ’s assessment, arguing that the invoices submitted in support of the rejected ITCs met the requirements under the ETA and the relevant regulations.
In response, the ARQ and the Minister argued that the invoices relating to six of Reiss Inc.’s suppliers were fake invoices and the suppliers listed on the invoices were not the genuine suppliers. The ARQ and the Minister supported their position, noting that red flags for invoices of convenience schemes were observed in Reiss Inc.’s operations: the use of cheque cashing centres, alleged suppliers with no commercial capacity, evidence of collusion between various suppliers, and alleged suppliers who were tax offenders.
The TCC first emphasized the mandatory nature of the legislative provisions governing ITC documentation, and the requirement that ITCs are available only if the information required by the regulations has been obtained.
The TCC then surveyed the current jurisprudence regarding the obligations of GST and QST registrants prior to claiming ITCs, summarizing the following principles:
- The name of the true supplier or of his or her intermediary must appear on invoices submitted in respect of ITCs - Kosma-Kare Canda Inc. v Her Majesty the Queen, 2014 FCA 225 (at para 7);
- Registrants must have valid GST registration numbers for their suppliers - Systematix Technology Consultants Inc. v The Queen, 2007 FCA 266 (at para 4);
- A registrant’s good faith is irrelevant and registrants should develop risk management procedures - Comtronic Computer Inc. v The Queen, 2010 TCC 55 (at para 29); and
- Registrants have a duty to verify supplier identity - Agence du revenue du Québec c. Système intérieur GPBR Inc., 2015 QCCA 1402 (at para 46 -49)(“GPBR”).
With this in place, the TCC proceeded to expand the requirements flowing from words of the ETA and regulations to define the “duty of verification” (at para 198), as requiring the following three elements:
- the verification of supplier’s tax registration with the underlying governmental authority (at para 218);
- an inquiry of the Registraire des entreprises du Québec with regard to the corporations or business status (the Ontario equivalent being the Ministry of Government and Consumer Affairs) (at para 218); and
- verification of supplier identity (at para 218).
In reviewing Reiss Inc.’s compliance with this “duty of verification”, the TCC found that with respect to the six suppliers in question, Reiss Inc. had failed to perform the required minimum of verification. More specifically, Reiss Inc. only verified supplier tax registration, without checking on the supplier’s identity. The TCC explained that while the world of business is fast-paced and often frantic, Reiss Inc. could have easily verified the identity of its suppliers:
The Reiss Case appears to go two or three steps past the standard set in the SNF case for ITC due diligence, and frankly in our view, without clear basis in the legislation.
More problematically, after establishing a new “duty of verification” – with the three elements above requiring satisfaction – the Tax Court of Canada is remarkably silent on what steps a GST/HST registrant is required to take in order to “verify” a supplier’s identity. In a world of corporate registrants, one can hardly ask for the corporation’s driver’s license or passport. What exactly is required? How does this square with situations where a supplier may be using undisclosed agents? All good questions, with no obvious answers.
If the Reiss Case is to stand as good law, it would seem that all GST registrants will be required to employ detailed risk management procedures to safe-guard their ITC claims from after-the-fact government audit and denial – but without much judicial guidance on exactly what to do.
In the past, it has been argued that responsibility for errant suppliers ought to be with the governmental authority, because it is the government who has given the GST/HST collections authority to the registered supplier, and the registered supplier operates as the government’s collections agent. The governmental authority also has the resources to more-readily identify fraudulent suppliers, and arguably, the legal obligation to properly police its own agents. Putting this burden on businesses creates an economic drag.
The Reiss Case shows that the TCC has not been convinced by these arguments.
One hopes that this line of case law will be corrected by the Federal Court of Appeal, or ultimately the Supreme Court of Canada. It goes too far, and ignores the fact, frankly, that every tax collector is an agent of the Canada Revenue Agency (“CRA”).
Alternatively, the CRA ought to develop a certification procedure for its agents, and/or allow GST/HST registrants to remit GST/HST directly to the Receiver General of Canada wherever a supplier lacks certification.
The current system, which leaves the innocent registrant holding the proverbial bag whenever the Minister’s own agent turns out to be a fraudster, is an unjust system, that needs repair.
On January 12, 2017, Reiss Inc. appealed the TCC’s judgment. We look forward to the Federal Court of Appeal’s decision.
Kathryn Walker and Robert G. Kreklewetz
A version of this article appeared in Sales Tax, Customs and Trade, Volume XIII, No. 1 2017.