Tax & Trade Blog

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.

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.