Tax & Trade Blog

A director can defeat personal liability for his/her corporation’s tax debt by establishing that the director’s assessment was made more than two years after he/she has ceased to be a director of the corporation (section 325(5) of the Excise Tax Act (“ETA”); section 227.1(4) of the Income Tax Act).  What a director needs to do in order to demonstrate that there was an effective resignation? As discussed in the following cases, an objectively verifiable communication of a resignation to the corporation is required and that any mess up in the requirements of Ontario’s Business Corporations Act (“OBCA”) will affect the efficacy of the resignation.  When in doubt, it is advisable for directors to seek legal advice. 

Most businesses will, at some point, have to deal with a situation where they have made advance payments for goods and services that never end up being provided.  The cause for this non-supply is often due to the fact that the supplier has become impecunious.  This results in obvious commercial headaches for the recipient, which can be exacerbated by corresponding GST implications. 

Typically in such situations, the recipient will pay GST to the supplier in respect of the advance payment and take a corresponding Input Tax Credit (“ITC”) in its next GST Return.  The supplier is required to remit that GST collected to the fisc.  Pursuant to subsections 232(1) and (3) of the ETA, where the supplier will not be making the supply (or, for other reasons, reduces the consideration owed for the supply), it can adjust, refund or credit the amount collected (including the GST collected), and issue a “credit note” to the recipient.  In turn, pursuant to paragraph 232(3)(b), the supplier can apply an adjustment in its next GST return to reduce its net tax by the GST amount in the credit note.  Correspondingly, pursuant to paragraph 232(3)(c) the recipient is required to apply an adjustment to increase its net tax by the same amount (to account for the portion of the ITC previously taken, but now credited). 

To the extent that the supplier is impecunious, the recipient will be left with a situation where it has had to increase its net tax, pursuant to a credit note received that will never actually be honoured.  This was exactly the situation in the TCC decision in North Shore Power Group Inc. (2017 TCC 1).

The recent Tax Court decision in Persepolis Contracting (2017 TCC 89) is another example of how the concept of agency is so important in the GST context.  The case serves as a reminder that written documents will be central to the determination of whether an agency relationship exists, and suggests that it might be difficult to establish that written agreements constitute evidence of agency.

In Thangarajah v. Her Majesty the Queen (2017 TCC 72), the applicant and her corporation (collectively, the “applicants”) were issued Notices of Assessment in November 2014 for unreported income under the Income Tax Act.  When the corporate applicant was audited by the CRA in early 2014, the applicant retained the services of an agent who held himself out to be a lawyer (the “agent”).  It was the applicant’s understanding that the agent would do whatever was required to deal with the Notices of Assessment.  In the months that followed, the applicant received calls from CRA Collections and the agent was informed and asked to take action.  It was unclear what the agent had actually accomplished for the applicants except that he sent a letter to a CRA Collection Officer dated September 10, 2015 advising, among others, that he would initiate the “appeal process” soon (the “Letter”).  The Collection Officer responded the following day indicating that the collection files had been updated with a further notation that an appeal had to be done as soon as possible.  CRA Collections eventually seized the applicant’s bank accounts, leading to the firing of the agent.  The applicants then found out that the agent was, in fact, a paralegal and that they suffered as a result of the agent’s failure to file the notices of objection.

The TCC in Andrews (2017 TCC 23) distinguished between transportation services that transport vehicles by towing them and those that transport vehicles by driving them, subjecting only the latter to GST/HST. The TCC thus narrowed freight transportation services to mean only services that involve a mode of transportation that is separate from what is transported.