The determination of whether a transaction is a ‘sham’ has been a longstanding issue in tax law, but one that has seemingly been the focus of a number of CRA projects across a number of different industries, including a current project in the international long-distance minutes business, where the CRA says that businesses are involved in the so-called carousel sham!
Tax & Trade Blog
On Monday, November 30, 2020, the Government of Canada delivered its Fall Economic Update, entitled Supporting Canadians and Fighting COVID-19. As reported in the National Post, the Update will be particularly noteworthy for online businesses selling goods/services to Canadians, as it announced that the government would soon “force foreign digital vendors like Netflix and Amazon to collect sales taxes on a bevy of products and services sold to Canadians”.
The tax measures cover a variety of online services, from streaming platforms to short-term rental accommodations, and are expected to be in effect Canada-wide for GST/HST purposes by July 21, 2021.
Following the United Kingdom’s (“UK”) exit from the European Union earlier this year, Canada had agreed to allow its current free-trade agreement with the EU continue to apply to the UK. That agreement is called the Comprehensive Economic and Trade Agreement (“CETA”), and Canada’s agreement to continue providing similar benefits to the UK was set to expire at the end of 2020.
Canada and the UK have now agreed on a new interim trade deal, titled the Canada-United Kingdom Trade Continuity Agreement (“TCA”).
When it comes to the payment on taxes for goods sold on-reserve, Canadian First Nations Persons enjoy a special tax status. Section 87 of the federal Indian Act provides that First Nations persons are not liable to taxation in respect of their personal property on reserve:
87 (1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83 and section 5 of the First Nations Fiscal and Statistical Management Act, the following property is exempt from taxation:
(a) the interest of an Indian or a band in reserve lands or surrendered lands; and
(b) the personal property of an Indian or a band situated on a reserve.
This special status is reflected in both federal and provincial taxation measures.
When a supplier pays GSTH/HST on a property or service acquired for consumption, use or supply in the course of commercial activities, the supplier is entitled to claim an input tax credit (“ITC”) equal to the tax paid on expenses incurred: see section 169 of the Excise Tax Act (“ETA”).
“Commercial activity” excludes exempt supplies listed in Schedule V of the ETA. (Suppliers that make exempt supplies do not charge and collect GST on their outputs, and are thus also ineligible to claim ITCs on inputs.)
This area has been ripe for recent assessments, with the CRA often struggling to determine whether exempt or commercial (taxable) supplies are being made. In many instances, the CRA assesses suppliers making “exempt” supplies on the basis that their supplies are actually taxable, assessing large amounts for “GST not collect”: see, for example, Applewood Holdings Inc. v. The Queen and Zomaron Inc. v. The Queen, the suppliers challenged the CRA’s conclusion of “taxable” supplies in the Tax Court of Canada (“TCC”), arguing that their services were in fact exempt financial services. The suppliers won on “exempt” supplies argument at the court, thus, relieving them from any obligation to charge and collect GST/HST on their services. (Note the possible downside of the “winning” such an assessment, as that usually leads to a denial of ITCs that may have been inadvertently claimed by the exempt supplier, which was highlighted in our prior blog on Applewood.)
In other cases, the CRA makes a 180 degree-turn and takes the position that the suppliers providing “taxable supplies” (and collecting GST, and claiming ITCs) are in fact either not making supplies for consideration, or are making exempt supplies – in an attempt to deny the ITCs that have been historically claimed. Such is the case in Canadian Legal Information Institute v. The Queen, 2020 TCC 56 (CanLII).
In a prior blog, we had suggested that rectification, rescission, and other equitable remedies would likely no longer be available to correct most tax mistakes. This conclusion stemmed from the Supreme Court of Canada (SCC) decision in Canada (Attorney General) v. Fairmont Hotels Inc. (2016 SCC 56) (“Fairmont”) and the subsequent Ontario Court of Appeal decision in Canada Life Insurance Company of Canada v. Canada (Attorney General) (2018 ONCA 562) (“Canada Life”). Both of these decisions highlighted the Courts’ concerns with taxpayers using equitable remedies to effect what might be considered “retroactive tax planning”.
However, in a recent decision, the British Columbia Court of Appeal (BCCA) has kept a window open for rescission in tax matters!
Unreported income discovered by the CRA may lead to consequences on the GST/HST component related to that income which, in turn, can sometimes result in personal liability to the director.
This situation arose in the recent case of Duque v. Canada, 2020 FCA 73. Mr. Duque was the sole director of a corporation providing carpentry services, which was incorporated in 1996 and ceased to carry on business sometime before February 28, 2007.
As the world struggles with COVID-19, and small and medium businesses endure the worldwide economic slowdown, directors of Canadian corporations need to know about the long arm of the CRA when it comes to ensuring that GST net tax obligations and ITA source withholding requirements are met by corporations!
One particularly egregious collections power that the CRA has is its ability to issue so-called derivative assessments to relatives of taxpayers who have received money, property or dividends from the corporate tax debtor, at a time that the corporation or the director are liable for tax.
A “derivative assessment” refers to an assessment whereby the CRA collects from a third party an amount owing that it is unable to collect from the taxpayer. Where a tax debtor transfers property to a non-arm’s length party for less than fair market value (FMV) consideration, section 325 of the Excise Tax Act (ETA) and section 160 of the Income Tax Act (ITA) may apply to allow the CRA to assess the transferee personally.
Many will remember the almost hysteric approach that some professional advisors took to “Y2K” (e.g., the one conference topic that burned deep into my brain was “The Commodity Tax Implications of Y2K”) – which ultimately proved to be either entirely alarmist, or just good marketing or both.
While Y2K was a bit of a strawman in terms of “tax issues”, it appears that the economic realities of the COVID-19 pandemic have in fact already given rise potential indirect tax issues for those in the real estate sector.
Two areas of particular concern are commercial rent deferrals and conversions of short-term Airbnb accommodations into long-term residential rentals.
A sad and unfortunate situation for an online shopper in Australia highlights the importance of import and export permits and licenses in international trade.
While the purchaser in this particular situation was engaged in a B2C transaction, import and export permits and licenses are often required in B2B transactions, and can give rise to seizure and confiscation of goods being imported or exported from Canada in a variety of different contexts.
In this case, the purchaser was in Australia and paid over AUD $26,000 for an alligator-skin handbag – ordered online from a boutique in France. When the handbag arrived in Australia, it was seized by customs officials and subsequently destroyed – all because it lacked the proper import permit!
In the current global business environment, increasingly many US companies are selling their goods into Canada, and using a variety of business structures to do so. However, many companies continue to struggle with their tax and customs obligations on these transactions. In particular, issues often arise with determining the proper value for duty of the goods at the border, and companies are often further confused between their Division II and Division III GST/HST obligations under Canada’s Excise Tax Act.
The Supreme Court of Canada (“SCC”) has confirmed the advice we gave in our February eNewsFlash (and our previous blog) that arbitration clauses will NOT BE ENFORCED in Canada where they are viewed as unconscionable and effectively constitute a denial to the access to justice.
One of the emerging areas in criminal law in the 21st century are the rules that surround the search and seizure of electronic devices like computers, notebooks and smartphones – particularly where those devices contain information covered by Solicitor-Client Privilege.
When the CRA executes a Search Warrant in the tax consequence, and seizes electronic storage devices like a notebook or an iPhone, the party subject to the Warrant may still rely on a claim of Solicitor-Client Privilege. This results in a unique court process which deals with how to isolate privileged documents that are otherwise stored in the device alongside non-privileged ones.
A recent case before British Columbia Supreme Court dealt with this issue, and is a good read for persons finding themselves subject to such a seizure.
One of the messier areas in tax law tends to be the case where “civil” tax default meets potential “criminal” tax fraud – with the consequences to the taxpayer moving beyond tax assessments and interest, to fines and potential time sentenced in the ‘Crow Bar Hotel’.
As a result of the COVID-19 pandemic, the Tax Court of Canada (the "TCC") has been closed with all hearings cancelled since March 16, 2020.
A recent Notice to the Public and Profession (the "Notice") issued by the TCC has indicated this cancellation of hearings will extend to July 17, 2020 (which would have been the last day of hearings before the TCC's previously scheduled 4-week summer recess).
The Notice also reveals that the TCC has been preparing to re-open.
Section 231.1 of the Income Tax Act (“ITA”) provides the Canada Revenue Agency (“CRA”) with broad powers to examine records of taxpayers that may be relevant for audit and for the administration or enforcement of the legislation. If a taxpayer fails to provide the required information, the CRA may seek a compliance order from the Federal Court (“FC”) pursuant to section 231.7(1). (Parallel provisions in the Excise Tax Act are sections 288 and 289.1.)
As section 231.1(a) says “any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer”, what is the legal test for relevance? In The Minister of National Revenue v. Atlas Canada ULC (2018 FC 1086), the FC confirmed that the Minister is only required to meet the very low threshold for relevance in respect of production of documents.
As we blogged about here and here, the CRA has an often forgotten power to issue ‘Requirements for Information’ (“RFIs”) on third parties which can be used to compel them to hand over evidence in their possession to the CRA to be used to determine if another taxpayer has unremitted tax or undeclared income. The recent case in Minister (National Revenue) v Roofmart Ontario Inc (2019 FC 506) dealt with those RFI powers, in particular the CRA’s ability to issue an RFI when it did not know the identity of the taxpayer it ultimately wanted to investigate (the so-called ‘unnamed person requirement’).
That case was appealed to the Federal Court of Appeal (“FCA”), and the decision in favour of the CRA was released earlier this month.
Importers of goods have both current and ongoing responsibility and obligations under the Customs Act (the “Act”) and its Regulations. On a “current” basis (i.e., at time of importation), include reporting the goods for import, and proper declarations of value, tariff class and origin, and payment of applicable duties and other taxes. On an “ongoing basis”, the importer is required to correct errors in those declarations up to four years after the time of importation.
What if an “importer” is neither the owner nor purchaser of the goods? Does that “importer” escape liability for the duties and GST imposed under the Act?
With the passage of the Canada United States Mexico Agreement’s (“CUSMA”) implementing legislation on March 13, 2020, the Canada Border Services Agency (“CBSA”) has released several new Customs Notices which outline the specific implementation steps for when the agreement comes into force (which is scheduled to be July 1st, 2020).