Tax & Trade Blog

The Supreme Court of Canada rendered its first decision on the Customs Tariff in Canada v.Igloo Vikski Inc. (2016 SCC 38).  The decision provides guidance on applying the General Rules for the Interpretation of the Harmonized System (“General Rules”), particularly in the context of how the General Rules inform one another.

Section 165 of the ETA imposes GST in respect of supplies “made in Canada”.  The so-called “place of supply rules” in section 142 of the ETA serve to deem particular supplies to be made either inside or outside of Canada.  As a result of a legislative inconsistency these rules can conceivably deem a particular supply to be made both inside and outside of Canada.  This inconsistency was analyzed by the TCC in the recent decision of Club Intrawest (2016 TCC 149).  In doing so, the TCC arguably expanded the place of supply rules such that GST now applies to more supplies than even CRA had previously contemplated.

An out-of-court statement is generally inadmissible as evidence in court to prove the truth of the statement’s contents – this is the general rule against hearsay.  There are a number of exceptions to this rule including an admission – where a party wishes to use a statement made by the opposing party against that opposing party.  An admission is admissible as evidence of the contents of that admission.  Where that opposing party’s agent makes such a statement, it is also admissible as evidence of the truth of its contents.  The recent decision in Spears et al. (2016 NSPC 20) stands for the proposition that a taxpayer’s accountant’s statement to CRA can be admitted as evidence for the truth of its contents.  This is an important case for business-owners who rely on their accountants to deal with the CRA on behalf of the business.

There has been significant jurisprudence on the extent to which recipients are entitled to ITCs in respect of GST paid to so called “rogue suppliers” – suppliers who collect but fail to remit GST to the fisc.  The CRA has often taken the position that where the recipient fails to make efforts to confirm the identity of its supplliers or where the recipient is wilfully blind to the bona fides of its suppliers, the recipient will not be entitled to ITCs. The recent decision of SNF LP (2016 TCC 12) adds another layer to this analysis.  Although the TCC makes a number of distinct findings, the most interesting aspect might be with respect to a briefly explained conclusion regarding a claim for a rebate of tax paid in error.

 The principle of solicitor-client privilege holds that communications between a client and his or her lawyer cannot be compelled to be disclosed without permission of the client.  Although this principle started as an evidentiary rule, it has developed into a principle of fundamental justice. 

Canadian tax legislation endows the CRA with various powers to compel individuals and businesses to disclose information and documentation in support of administering or enforcing that tax legislation.  Failure to comply with CRA’s requirements undert these rules can result in fines or imprisonment.  Solicitor-client privilege and these disclosure rules collide where CRA attempts to compel client-related information and documentation from lawyers.  The Supreme Court of Canada has recently dealt with this issue in Chambre des notaires du Québec (2016 SCC 20) and its companion case Thompson (2016 SCC 21).  The decisions make clear that solicitor-client privilege will be upheld in the face of these disclosure provisions.

CRA has recently been issuing assessments to taxicab fleet management companies for failing to charge GST/HST on pass-through insurance premium expenses. 

Disgruntled taxpayers have often attempted to seek remedies against tax authorities through civil actions – albeit with very limited success.  A 2014 BC Supreme Court’s decision in Leroux v. CRA (2014 BCSC 720) did confirm that CRA owes a duty of care to the taxpayer, and has likely lead to an increase in these types of proceedings.

A recent motions decision in the BCSC case in Samaroo v. CRA et al. (2016 BCSC 531), deals with the extent to which a taxpayer in one of these types of suits against the Crown is able to rely on information produced by the Crown in that action during the Tax Court of Canada appeal – and the news was good for the taxpayer!  But the case remains an interesting example of the “implied undertaking rule” – perhaps a little known rule to anyone other than a litigator – and the balance of this article explains the in’s and the out’s of that rule, with reference to the Samaroo decision.

When faced with Notices of Assessment from CRA that run contrary to a particular tax practice, taxpayers often defend their practice on the basis that CRA had not previously taken issue with it.  For tax litigators it is common to hear from clients: “CRA did not take issue with our tax compliance procedures in the past, so they should not be able to now!” 

Unfortunately, this argument will not be successful in the Tax Court of Canada, as was the case in the recent case of Academy of Applied Pharmaceutical Sciences (2014 TCC 171) – which reinforces that there is really no substitute for proper professional advice when determining GST/HST compliance.

Section 254 of the ETA allows the purchaser of a new residential unit to claim a partial GST/HST Rebate (often called a New Housing Rebate – “NHR”).  The NHR was intended to off-set GST/HST payable on new housing, back to the point where the GST/HST actually paid on the purchase of new housing equates, more-or-less, with the expected former federal sales tax (“FST”) component of comparable housing.  The NHR was designed to ensure that the GST did not pose a barrier to affordable housing. 

The NHR is only available where the builder makes a supply by sale to a person, which makes that person a “particular individual” for purposes of the NHR rules (s. 254(2)(a)). The particular individual (or their relation) generally must be first to occupy the new home as their primary residence (s. 254(2)(d)(i)).  Each buyers of a new home (i.e. each particular individual) must meet each NHR requirement (s. 262(3)).  Where new home ownership structures are slightly complicated, meeting these requirements can become tricky. 

This was the issue in Crooks v. The Queen (2016 TCC 52). 

The concept of claiming input tax credits (“ITC”) for private businesses that provide both taxable and exempt services has recently been explored by the TCC (see for example: Sun Life (2015 TCC 37) and BC Ferry Services (2014 TCC 305)).  For real property, those businesses must determine the extent to which its property is used in making taxable or exempt supplies, and claim ITCs in line with that amount.  Although the same general principles apply with respect to public service bodies (“PSB”), PSBs can generally only claim ITCs in respect of real property where 50% or more of its property is used in making taxable supplies.  However, PSBs can make an election to have the same general proportional allocation rules apply.  In the recent decision of University of Calgary (2015 TCC 321) (with an identical decision reached in University of Alberta (2015 TCC 336)), the TCC considered PSBs that made such an election.  

As a general rule, non-resident employers who send their employees to Canada to perform various tasks for them are required to withhold tax in respect of the employees earnings while in Canada, and remit same to the Canada Revenue Agency (CRA).  Employees, are then required to file Canadian income tax returns to recover those taxes, if meeting certain tax treaty tests for determining taxability of those earnings in Canada.

Perhaps not surprisingly, these rules have made sending US employees to Canada an extremely cumbersome process for US employers, with full technical compliance with these rules perhaps honored more in the breach that the observance.

Thankfully, the CRA has instituted a brand new program addressing this situation, aimed at certifying non-resident employers, and then allowing a stream-lined process for sending US employees to Canada.   The program will apply for all payments made to US employees after 2015, and offers possible relief from the withholding tax requirements referred to above, upon certification.

The discovery process allows litigating parties to collect and consider all pertinent facts, to use those facts to assess the strengths and weaknesses of their case and to otherwise prepare for trial.  A general exception to the requirement to disclose relevant documentation and information during the discovery process relates to documents or information that are “privileged”. 

The recent decision of the Chief Justice of the Tax Court of Canada in CIBC v. The Queen (2015 TCC 280) is an excellent review of the strict rules surrounding privilege in this context, and a cautionary tale for litigants taking an overly obstructionist approach to the principles of full and proper disclosure.

The liberalization of Canada’s trade policies over the years has now lead to a situation where goods may often be capable of being imported to Canada on a duty free basis under Canada’s most favoured nation (MFN) tariff, without needing the benefits of Canada’s various preferential trade agreements (PTAs) like the NAFTA.

A problem arises, however, when after importing such goods on the basis of the MFN tariff, an importer discovers, or is assessed, on the basis that the original tariff classification was incorrect.   The problem specifically arises where, more than one year has passed from the original date of accounting, and the new “correct” tariff classification is duty-positive under MFN.  

In Canada Border Services Agency’s (CBSA) historic view of these situations, an importer is obliged to correct the tariff classification and treatment under s. 32.2(2) of the Customs Act, and pay the required MFN duties owing (with no application of the relevant PTA).  CBSA has historically denied application of PTA benefits in these situations on the basis that PTA refunds are usually limited to one year from accounting: see for example section 74(3)(b)(ii) of the Customs Act.

CBSA’s historic practice has been overturned by the Canadian International Trade Tribunal (CITT) in the recent decision in Bri-Chem Supply Ltd. v. CBSA ((October 2, 2015) AP-2014-017 (CITT)).

Rules regarding cost awards and settlement offers are important tools to promote settlement in the context of general civil litigation and are generally seen as an important tool to minimize use of scarce court resources. 

In tax cases, settlement offers have historically tended not to play as important a role, which is perhaps attributable to the fact that tax appeal outcomes tend to be mostly binary in nature (i.e. a complete success or complete failure).  This differs markedly from most other civil litigation where the quantum of damages is often the central contested issue.  Furthermore, Canada’s Tax Court Rules have historically only considered settlement offers as one of many factors to be considered when making a costs award, without setting out more definite implications of settlement offers for awarding costs.

This may be changing under new Tax Court Rules 147(3.1) and (3.2) which grant a party “substantial indemnity” costs after the date of its offer to settle (defined to be 80% of solicitor and client costs in Rule 147(3.5)), if judgment is as or more favourable than the offer. 

Although these rules have recently operated in favour of successful appellant taxpayers (see for example: Sunlife (2015 TCC 171) and Repsol Canada Ltd. (2015 TCC 154))  the TCC’s cost award in Standard Life (2015 TCC 138) serves as a warning to taxpayers that they may be liable for significant costs, where a settlement offer from the Crown has been rejected.

The issue of single versus multiple supplies in the context of the GST is the subject of frequent litigation.  This is likely attributable to the fairly fact-driven analysis employed by the courts in determining the existence of single or multiple supplies and the arguably subjective nature of the test applied to those facts. 

The recent Tele-Mobile decision (2015 TCC 197) will likely do little to reduce the frequency of this issue coming before the courts; however, it does provide some additional clarity on how the issue should be analyzed.

Litigating parties must consider cost implications at every stage in litigation, which generally requires a cost-benefit analysis of starting litigation in the first place, proceeding with litigation at any given stage, and negotiating towards settlement.  In tax litigation, the cost-benefit analysis is often the same, and can be a comparatively simple exercise, requiring an analysis of anticipated costs of litigation, chance of success at trial or on appeal, consideration of the assessed amount in dispute, and the effect of a judicial decision on the taxpayer’s position going forward.  Court costs have generally not factored into this analysis, since they have historically been negligible.

Things are changing.

CRA assessments can have devastating financial consequences that commonly push taxpayers into bankruptcy.  In considering bankruptcy, the taxpayer should take into account the extent to which the bankruptcy will impose limitations on the taxpayer’s ability to contest the assessment itself.  Section 71 of the Bankruptcy and Insolvency Act (BIA) specifies that a bankrupt ceases to have any capacity to deal with its “property”, which is a broadly defined term and has the effect of virtually eliminating the bankrupt’s ability to maintain legal actions.  The extent to which the BIA has a limiting effect on a bankrupt taxpayer’s ability to contest an assessment in the Tax Court of Canada (“TCC”) was at issue in the decision in Schnier (2015 TCC 160).

In order to maintain some level of taxpayer certainty, there are general time limits applied to CRA’s ability to assess taxpayers for previous periods. The normal assessment period is three years under ITA clause 152(3.1)(b) and four years under ETA subsection 298(1) and ITA clause 152(3.1)(a). However, CRA can assess a taxpayer in respect of a matter at any time where,inter alia, the taxpayer has made a misrepresentation attributable to neglect, carelessness or wilful default in respect of that matter (ITA subclause 152(4)(a)(i); ETA subsection 298(4)(a)). The recent Inwest decision (2015 BCSC 1375) considers what “misrepresentation” actually means in this context, and just when a misrepresentation will be “attributable to neglect or carelessness”.

Although section 323 of the Excise Tax Act imposes joint and several liability onto the corporate director for a corporation’s failure to remit GST/HST, this liability is negated if the director “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.”  In order to establish this due diligence defence, a director has to meet a fairly high threshold according to current jurisprudence.  The recent decision of Cherniak (2015 TCC 53), suggests that this defence will be very difficult to meet where the corporation assessed was involved in “artificial” transactions.

In light of the inherent risks of serving as director of a corporation, business owner-operators may be tempted to appoint their spouse or family member as the sole director of their corporation, despite the fact that that person may be completely uninvolved with or unknowledgeable about the corporation’s operations.  This is primarily done with a view to “creditor-proofing”.  However, as the Federal Court of Appeal (FCA) decision of Constantin v. The Queen (2013 FCA 233) illustrates, this strategy is far from invincible when it comes to GST/HST remittances.