Tax & Trade Blog

Subsection 141.01(2) of the Excise Tax Act (“ETA”) deems a property or service acquired for use in a business to be for use in commercial activities only to the extent that it is used in the making of taxable or zero-rated supplies. On the other hand, subsection 141.1(3) provides that any action of a person in connection with the acquisition, establishment, disposition, or termination of a commercial activity is deemed to occur in the course of commercial activities. An apparent conflict therefore exists where a property or service is acquired by a registrant in connection with the acquisition, establishment, disposition or termination of a commercial activity, but where taxable supplies have not yet been made or have ceased: a registrant is deemed to have incurred the property or service in the course of commercial activities by subsection 141.1(3), but also deemed to have incurred same in the course of non-commercial activities by subsection 141.01(2).

The Ontario Court of Appeal’s recent decision in Canada Life Insurance Company of Canada v. Canada (Attorney General) (2018 ONCA 562) seems to have put a final stake in the heart of equitable remedies in tax matters.  The case dealt with rescission, and has the effect – along with prior Supreme Court jurisprudence – of clarifying that the equitable remedies of rescission and rectification will not generally be available to taxpayers seeking to correct drafting or planning mistakes.

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). 

Section 223(1) of the Excise Tax Act (“ETA”) requires a registered supplier to indicate clearly on its receipt or invoice to a purchaser/recipient of supply the consideration paid or payable by the purchaser and the GST/HST payable in respect of the taxable supply, or that the amount paid or payable by the purchaser includes the tax.  However, the section is silent as to when a supplier must give the tax disclosure to a purchaser.  The Ontario Court of Appeal (“ONCA”) was asked to determine if after-the-fact invoices could satisfy section 223(1) obligations in National Money Mart Company v. 24 Gold Group Ltd. (2018 ONCA 812).  The answer is yes!

A New Housing Rebate (“NHR”) is available under ss. 254(2) of the Excise Tax Act (“ETA”) to enable those who qualify to obtain a rebate of GST/HST paid on the purchase of a new residential property. To qualify para. 254(2)(b) says a “particular individual” must acquire a property for use as a primary place of residence of that individual or a family member.

In Cheema v. The Queen, 2016 TCC 251, the Tax Court of Canada (“TCC”) held that based on the general principle that a bare trust is considered a non-entity for tax purposes, a guarantor that signs an agreement of purchase and sale as a bare trustee for the beneficial owners was not a “particular individual”.

The TCC decision was recently overturned by the Federal Court of Appeal (“FCA”) in Cheema v. The Queen, 2018 FCA 45 (“Cheema”) where a 2-1 majority held that a bare trustee was a “particular individual”.

Canadian energy traders often misunderstand their tax collection obligations for the GST/HST and other sales taxes.

The issue may relate to a 2014 administrative decision by the CRA to begin to take a very restrictive approach to the application of section 144 of the Excise Tax Act (ETA), and a very broad approach to other deeming provisions in the ETA, which has arguably changed how the GST/HST applies to many Canadian energy transactions.

The Ontario Ministry of Finance continues to turn the Ontario tobacco industry upside down – continuing to assess companies for failure to collect the Ontario Provincial Tobacco Tax (PTT) on sales of cigars and other non-cigarette tobacco (loose tobacco, pipe tobacco, chewing tobacco, snuff, etc.) to Status Indians on Federal Indian reserves.

Section 182 of the Excise Tax Act (“ETA”) generally deems any payment made to a registrant as a consequence of a breach, modification, or cancellation of an agreement (other than as consideration for a supply), to be a taxable supply. This rule, in effect, means that where there is a breach of an agreement to supply property or services, a payment to the supplier by the recipient to compensate for that breach will generally be deemed to include GST/HST.

Unfortunately, section 182 is often overlooked by parties resolving legal disputes, as the recent Tax Court of Canada (“TCC”) decision in THD Inc. c. La Reine, 2018 CCI 147 demonstrates.

On October 29, 2018, Canada became fifth country to ratify the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the “CPTPP”), joining Mexico (June 28, 2018), Japan (July 6, 2018), Singapore (July 19, 2018), and New Zealand (October 25, 2018).

Canada’s ratification meant that only one other country needed to ratify the agreement to trigger implementation of the CPTPP. Fortunately, Canada did not have to wait very long because on October 30, 2018 Australia became the sixth country to ratify the CPTTP, triggering a 60-day countdown to the implementation of the agreement on December 30, 2018.

On October 23, 2018, the Conservative-led Government of Ontario announced Bill 47, Making Ontario Open for Business Act, 2018. If Bill 47 passes, it would make a number of significant changes to the Employment Standards Act, 2000 and the Labour Relations Act, 1995, including repeals of many of the workplace reforms made last year by the then-Liberal government.

Special rules in the Excise Tax Act (“ETA”) provide the Canada Revenue Agency (“CRA”) with tools to request or require information for verification and administrative purposes. The CRA can send out a “requirement to provide information” – known as RFI – relating to the enforcement of Part IX of the ETA to a registrant or third party (section 289). Where the person refuses to comply with an RFI, the Minister may make an application to the Federal Court and obtain a “compliance order” and, if the person still fails to comply with the compliance Order and provide the information as ordered, the person can be subject to contempt of court penalties (section 289.1). (Note that there are parallel provisions under the Income Tax Act (“ITA”): see section 231.2(1) and section 231.7 of the ITA).

As shown in the recent federal court decision, Minister of National Revenue v. Chi (2018 FC 897), contempt of court is a serious offence and failure to properly respond to a CRA RFI can lead to substantial fines and/or imprisonment.

The Canadian government has chosen to make many financial services tax exempt under the Excise Tax Act (“ETA”). In particular, under the definition of “financial service” in ss. 123(1) of the ETA, a service is an exempt financial service where it is included in any of paras. (a) to (m), and not excluded by any of paras. (n) to (t). Unfortunately, determining what constitutes a financial service and what ancillary or supporting activities are subject to GST/HST is not always clear. It’s been particularly difficult since the introduction of Bill C-9, the Jobs and Economic Growth Act (“Bill C-9”) on March 29, 2010, which refined the definition of “financial service” in ss. 123(1) to clarify that that services that support the delivery of a financial service that are in the nature of management, administration, marketing or promotional activities are not themselves financial services and are thus taxable.

The Bill C-9 changes have created considerable uncertainty in many industries as to whether exempt financial services under ss. 123(1) prior to the enactment of Bill C-9 remained exempt after the Bill C-9 changes. The uncertainty was particularly felt by issuers, acquirers, merchants, credit card companies, and any other entity that operates in the payment/credit card processing industry where prior to Bill C-9 the ss. 123(1) definition of financial service had been broadly applied to ancillary services in cases such as Costco Wholesale Canada Ltd. v The Queen, 2009 TCC 134.

That said, the question of whether or not parties operating in the payment/credit card processing are supplying exempt financial services has gotten even more uncertain after the recent decision of the Tax Court of Canada (“TCC”) in CIBC v The Queen, 2018 TCC 109 (“CIBC”).

Amendments to Canada’s federal privacy legislation, the Personal Information Protection and Electronic Documents Act (PIPEDA), are coming into force on November 1, 2018. These amendments impose upon organizations mandatory reporting, notification, and record-keeping requirements in the event of a privacy breach. The new rules are intended to ensure that Canadians receive sufficient information about privacy breaches regarding their personal information, to promote better data security practices by organizations, and to harmonize with the privacy laws in other jurisdictions (most notably with the European Union’s General Data Protection Regulation).

The distinction between employees and independent contractors has always been an important one in Ontario because while employees are covered by the protections of the Employment Standards Act, 2000 (e.g. sick pay, maternity leave, etc.), independent contractors are not.

While there is no simple formula to determine whether a worker is an employee or an independent contractor, the Ontario government has outlined some factors to consider when trying to make this determination.

Section 165 of the Excise Tax Act imposes GST/HST on taxable supplies "made in Canada". A supply is deemed to be made in Canada if “delivered or made available” to the supply’s recipient in Canada (para. 142(1)(a)), but deemed to be made outside Canada if “delivered or made available” outside Canada (para. 142(2)(a)). “Delivery” refers to physical delivery, and “made available” refers to constructive or “legal” delivery.

The recent decision of the Tax Court of Canada (“TCC”) in Jayco, Inc. v. The Queen, 2018 TCC 34(“Jayco”) is a good example of issues that can arise when a contract is silent as to the place of physical or legal delivery.

The term "arranging for", which is not statutory defined, is generally interpreted to include activities performed by financial intermediaries such as agents, brokers and dealers in financial instruments. If it is determined that an intermediary is providing a supply of a financial service under paragraph (l) of "arranging for" a service (and not excluded by any of paragraphs (n) to (t)) of the definition of “financial service” under section 123(1) of the Excise Tax Act (“ETA”)), the service is exempt under Part VII of Schedule V of the ETA. In Barr v. The Queen (2018 TCC 86), the Tax Court of Canada (“TCC”) determined that the activities performed by the brokers in relation to a private sale of a business were not exempt from GST/HST as “arranging for” services and, therefore, the commission received by the brokers was subject to GST/HST.

Under section 230 of the Income Tax Act (“ITA”) and section 286 of the Excise Tax Act (“ETA”) all taxpayers must keep records that are adequate to determine the amount of taxes owing. When these sections are complied with and a taxpayer maintains adequate records, the Canada Revenue Agency (“CRA”) will generally rely on those records when conducting an audit to determine the taxpayer’s tax obligations. However, if a taxpayer does not maintain adequate records, the CRA can use alternative assessment methodologies to assess a taxpayer under subsection 152(7) of the ITA and subsection 299(1) of the ETA.

In the recent decision of Truong v. Canada, 2018 FCA 6 (“Truong”), the Federal Court of Canada (“FCA”) confirmed that alternative assessment methodologies are permissible when the CRA is unable to audit a taxpayer using the traditional method.

In a recent blog, we introduced the ongoing tax saga of Tony and Helen Samaroo, a husband and wife that owned and operated a restaurant, a nightclub and a motel, who were charged with 21 counts of tax evasion.

The Samaroos were acquitted of all charges in a 2010 criminal trial where the trial judge found the Crown’s case “weak” and supported by “unreliable” and “highly uncertain” evidence which contained “significant flaws” and “discrepancies”.

Following their acquittals, the Samaroos sued the prosecutor and CRA for malicious prosecution. The claim against the prosecutor was dismissed; however, in a scathing 70 page decision Justice Punnett of the British Columbia Supreme Court found the CRA guilty of malicious prosecution and ordered the CRA to pay approximately $1.7 million in damages to the Samaroos.

In Canada, most financial services are exempt from tax under the Excise Tax Act (“ETA”). This means that financial institutions cannot charge GST/HST and cannot claim input tax credits (“ITCs”) to recover the GST/HST that they have paid to provide these exempt financial services.

The inability to claim ITCs could incentivize financial institutions to purchase goods and services in non-harmonized provinces (where only the 5% GST would normally apply) to the detriment of harmonized provinces. To prevent this from happening the ETA and the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations(“SLFI Regulations”) outline special attribution method rules (the “SAM rules”) under which Selected Listed Financial Institutions (“SLFIs”) must determine their provincial HST component based on where they supply the exempt financial services rather than where they purchase their inputs. In this context, net tax is calculated using “attribution percentages” that are based on the type of financial institution.

The Federal Court of Appeal (“FCA”) recently dealt with these complex SAM Rules in Farm Credit Canada v. Canada, 2017 FCA 244. In this case, the Appellant was a federal Crown corporation that provided specialized financial services to the farming industry. Unlike most of its private financial institution competitors, the Appellant did not accept or fund its loans from public deposits. 

When a corporation finds itself in the midst of huge potential tax liability, that is often not the end of the story for the various parties involved. Directors may find themselves pursued for civil director’s liability for any taxes, interest or penalties remaining unpaid by the corporation, and directors, officers, employees and other involved parties may also find themselves being pursued by the CRA for possible criminal offences, and being charged criminally pursuant to section 327(1)(c) of the Excise Tax Act (the “ETA”). Criminal charges will generally follow any situation where the CRA is of the view that the corporation by dishonest means, sought to evade payment or remittance of the GST/HST and/or repurposed the funds to serve its own uses. In these instances, the CRA will be looking to the operating minds of the corporation, and any other persons (e.g., directors, officers, employees, agents, aiding and abetting parties) having a hand in the criminal activities (the “Underlying Parties”).

If convicted, the Underlying Parties are subject to their own fines, and could also face both a fine and imprisonment.

While the CRA often has a very low threshold for what it considers “criminal activity”, a recent Nova Scotia Provincial Court (the “NSPC”) decision appears to confirm that a person’s “suspicious conduct” alone may be insufficient to ground a criminal conviction for “tax evasion”.