Tax & Trade Blog

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.

As a general rule in tax litigation, the initial onus is on the appellant-taxpayer to “demolish” the Minister’s assumptions that form the basis of the disputed assessment. This initial onus is met where the appellant makes out at least a prima facie case. If this is done, the burden then shifts to the Minister to prove, on a balance of probabilities, that the assumptions were correct.  The primary reason for this rule is that the taxpayer generally has the best knowledge of his/her own affairs in a self-reporting tax system.

However, the TCC has held that the initial onus may not be on the taxpayer in the context of so-called “derivative assessments” such as assessments against directors pursuant to director’s liability provisions for underlying corporate assessments (ss. 323 ETA and 227.1 ITA) and against transferees pursuant to non-arm’s length transfer rules for underlying assessments against the transferor (ss. 325 ETA and 160(1) ITA).  

Businesses (other than financial institutions) that provide a mix of both taxable and exempt supplies must utilize the allocation rules found in section 141.01(5) of the Excise Tax Act (ETA) to determine the proper amount of input tax credits (ITCs) to claim in their GST/HST return.  This generally requires that the taxpayer employ a fair and reasonable method to determine the extent to which its inputs are each used in making taxable or exempt supplies.   

The TCC decision in BC Ferry Services (2014 TCC 305) provides a good overview of various aspects of the ITC allocation rules for non-financial institutions. 

Both the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”) include an increased burden on entities considered “large corporations” or “specified persons”, respectively, when it comes to the level of detail required in a notice of objection.  Specifically, the “large corporation rule” in section 165(1.11) of the ITA requires that a large corporation, inter alia, “reasonably describe each issue to be decided” and “provide facts and reasons relied on by the corporation in respect of each issue” in its notice of objection.  The “specified person rule” in section 301(1.2) of the ETA includes the same requirements.  In each instance, the taxpayer is only allowed to appeal to the tax court in respect of the issues described in its notice of objection that meet the requirements of the large corporation/specified person rule.

Prior to the enactment of these rules, a number of large corporations had their tax years left open through outstanding notices of objection or appeals such that they had been able to raise new issues based on emerging interpretations and court decisions challenged by other taxpayers. The rules were intended to identify disputed issues sooner so that a taxation year's ultimate tax liability can be timely determined, and avoid appeals from dragging on.

Recently, in Ford Motor Company of Canada v. The Queen, 2015 TCC 39, Justice Boyle of the Tax Court of Canada (“TCC”) considered a Crown motion to strike portions of a Notice of Appeal under the ETA on the basis that the issues identified in the Notice of Appeal were not “reasonably described” in the Notice of Objection.  The decision includes a thorough analysis of the existing case law on the rule and a serves as an example of its sound, practical application.

Liquefied Natural Gas (LNG) has been making the headlines for the past year as a result of significant interest in potential sales to energy-hungry Asian markets from the coast of British Columbia. There are at least 19 LNG proposals for British Columbia, but so far none of the proponents have commenced construction.