Tax & Trade Blog

Taxpayers who seek to challenge tax assessments made by the Canada Revenue Agency (“CRA”) usually have the right to file a Notice of Objection (“Objection”), and those Objections are usually due within 90 days of the mailing date of the assessment.

Objection is the first and most important step of the taxpayers appeal process for any tax assessment, and the 90-day deadline generally should not be missed. For taxpayers that have missed the 90-day deadline, all hope is not lost, as there are special rules that might allow for a late-filed Objection. Taxpayers seeking to benefit from these rules should generally seek legal advice to understand and select the most appropriate next steps!

In December 2021, the Department of Finance (“DOF”) released its draft Digital Services Tax Act (“DSTA”) announced in the 2021 Federal Budget. The proposed tax will impose a 3% digital services tax (“DST”) on large businesses providing taxable digital services to Canadian users – mirroring recent efforts discussed at the OECD to address the tax challenges of the digital economy.

While the DOF indicates that these measures will not be imposed earlier than January 1, 2024, and only if the treaty implementing the OECD Pillar One tax regime has not come into force, taxpayers should prepare for these changes now, since the revenue calculation requirements start as early as January 2022!

The Customs Act (the “Act”) requires all persons arriving in Canada to report their imported goods brought into Canada. Accordingly, travellers arriving in Canada can expect to be investigated by the Canadian Border Services Agency (“CBSA”) who has been mandated to detect and apprehend violators of the Act. CBSA officers are vested with broad search and seizure powers.

Those in contravention of the Act may face enforcement actions including seizures, ascertained forfeitures, penalties and even potentially criminal smuggling charges!

On the civil side of things, CBSA’s enforcement actions can usually be challenged by acting timely and taking prudent steps such as, by engaging an experienced professional!

Canada Border Services Agency (“CBSA”) resets it “audit priority areas” twice a year. This sees CBSA designate certain tariff classification codes as CBSA’s priority areas for custom verifications (i.e., “audits”), which is based on the program areas that the CBSA believes pose significant risks for non-compliance generally in tariff classification, valuation and origin of goods imported. 

Right on schedule, CBSA has now released its January 2022 Trade Compliance Verifications, setting the stage for this year, and we have summarized some of the notable issue areas here.

Public law (or restitutionary) remedies are usually relied on as a last resort by taxpayers facing CRA assessments. They are last resorts because they are only available in exceptional circumstances, and the CRA almost never applies them, while the Courts rarely apply them.

One interesting historic restitutionary remedy, first established by the Supreme Court in Kingstreet Investments Ltd. v. New Brunswick (Finance)– and now called the “Kingstreet” remedy – allows a taxpayer the right to recover the taxes levied under unconstitutional legislation which before Kingstreet was doomed to fail under a claim for unjust enrichment against Crown.

The Federal Court in Canadian Pacific Railway Company v. Canada (“CPRC”) had the opportunity to consider this special remedy, and underlines its limited application: only being triggered when a tax charged by a government is constitutionally ultra vires (i.e., by virtue of unlawful legislation), and not triggered because of some unlawful government administrative actions!  

In 2018, eleven counties including Canada and Mexico entered into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) for free trade between the signatory states. Formerly known as “Trans-Pacific Partnership”, CPTPP was initiated by the US to impede China’s non-market trade strategies and influence in the Indo-Pacific.

In 2021, the irony is that the US exited CPTPP in 2017 and China is now requesting to join.

The request does not seem to have been greeting with open arms, as CPTPP members undoubtedly worry about the impact of accepting China on other global trade agreements like the Canada-US-Mexico Trade Agreement (“CUSMA”) and others.

A CRA Audit is often a lengthy and tedious process, but if an assessment is ultimately issued, that can be its own uphill battle! CRA’s dispute resolution process – also referred to as the Notice of Objections (generally “Objections”) process – often takes multiple years to complete, draining taxpayer time and resources along the way!

In this context, taxpayers need to know their right to by-pass the CRA Appeals process after 180 days (or 90 days in case of income tax matters), and bring their tax disputes directly to the Tax Court of Canada (“TCC”) for resolution!

Judicial review applications for injunctive relief attempting to circumscribe or prohibit the CRA’s collections powers are usually doomed to failure – the test requires a high threshold to meet! Such matters must be dealt with immediately on audit, as unlike in the Income Tax situation, all GST/HST is due and payable immediately and cannot be delayed by filing a Notice of Objection!

In Iris Technologies Inc. v. Canada (National Revenue), the Federal Court denied a motion for injunctive relief to prohibit the CRA’s collections actions after a $79 million GST/HST Assessment – demonstrating in spades how difficult it is to obtain an order prohibiting CRA collections!

NEXUS is a bi-national, Canada-US privilege program for pre-approved, low-risk travellers, allowing them to enter either country’s ports of entry swiftly.

Recently, however, thousands of NEXUS cards from Canadian and US citizens, have been confiscated either by the Canada Border Services Agency (“CBSA”) or U.S. Customs and Border Protection (“CBP”) – often for minor infractions.

Generally speaking, this administrative action can and should be challenged!

The Canadian dairy industry is one of the most protected industries in the world, which while good news for Canadian diary producers is decidedly bad news for Canadian importers looking to import and distribute specialty dairy products like fine or specialty cheeses. These importers will face requirements for both import licenses and quota allocation, with the latter usually difficult if not impossible to obtain for first time entrants!

Regulatory Background

As indicated, Canadian importers must have access to a Tariff Rate Quota (“TRQ”) in order to import supply-managed goods that fall within Canada’s Import Control List (“ICL”) at “preferential tariff” rates.

The Canada Revenue Agency’s (“CRA”) administrative position on computation of interest and penalty for late-filed GST/HST returns has been that it applies on “all amounts outstanding” (notwithstanding possible available refunds, rebates or input tax credits (“ITCs”) that could reduce the amounts outstanding, if properly claimed). This approach has recently been corrected by the Federal Court of Appeal (“FCA”) in Canada v Villa Ste-Rose Inc. 2021 FCA 35, which has confirmed that this interest and penalty only applies to the amount of “net tax” that remains after deducting (in this case) possible rebate claims.

Canada Border Services Agency (“CBSA”) resets it “audit priority areas” twice a year. This sees CBSA designate certain tariff classification codes as CBSA’s priority areas for custom verifications (i.e., “audits”), which is based on program areas that the CBSA believes pose significant risks for non-compliance. The non-compliance risk is generally in tariff classification, valuation and origin of goods imported.

Right on schedule, CBSA has now released its July 2021 Trade Compliance Verifications, which update where CBSA started in January of this year.

The Canada Revenue Agency (“CRA”) has been rigorously challenging intermediaries in the financial services industry, categorizing their services as taxable promotional, advertisement or taxable administrative services (as opposed to treating them as GST/HST exempt financial services).

While this aggressive approach seems (at first blush) consistent with the definition of a “financial service” under 123(1) of the Excise Tax Act (“ETA”) (which exempts the “arranging for” processing of credit and debit card payments, while excluding from exemption “promotional or advertising services”), many have suggested that contrary:   that CRA was trying to pigeon-hole what these service providers do in order to find “taxable” services.

In the recent Zomaron Inc. v. The Queen case (“Zomaron”), the Tax Court of Canada (“TCC”) found against CRA, and concluded that the dominant element of the services being provided were “exempt” in nature, and that the promotional, advertisement or administrative elements of the services did not serve to disqualify from GST/HST exemption.

We said then: “An individual buying a run-down house, fixing it up, and living in it a while, and then selling for a tidy income tax exempt profit (the house being the individual’s principal residence) sounds like a recipe for success. [But repeat] that 21 times in a row, and you may have a different kettle of fish!”

Apparently, all you have to do is “repeat 2 times in a row” to be liable for income taxes on our profits, and uncollected GST/HST on your sales revenue!

The Canada Revenue Agency (“CRA”) has broad audit powers, allowing it to request any documents, records, and information from taxpayers and third parties under audit. The 2021 Federal Budget proposed an expansion (!) to these powers – allowing CRA to compel interview and answers from an owner-manager and any other employees of the business. The changes are aimed at making it easier for the CRA to get information and issue assessments, but those in the know predict real problems for unrepresented taxpayers and their employees! The worry is that CRA will have a single mindset heading into these interviews and will use them to simply gain ammunition for an Assessment.