Tax & Trade Blog

The Canada Revenue Agency (CRA) has recently been assessing tobacco wholesalers that sell their cigarettes and other tobacco products to status Canadian Indians, on federal Indian reserves, for GST/HST that CRA says should have been collected because their purchasers were dealing with the tobacco on a commercial basis -- something that we would have thought was completely contrary to section 87 of the Indian Act, and the historic exemption from all taxation provided to Indians in respect of property situation on a reserve.

Indeed, one would have thought that the question as to whether tobacco sold and delivered on reserve to a status Indian was exempt of GST/HST was rhetorical (the answer being “yes” per the very clear wording of section 87 of the Indian Act, and over 20 years of CRA policy to the same effect), but it appears that the CRA is attempting to float a “commercial mainstream” argument in favour of its position.

When things go awry in one’s business or personal affairs, taxes often get neglected. The Canada Revenue Agency (CRA) does not forget about these tax obligations, however, and has extensive collections powers available to it, including “directors liability” assessments which can transform corporate tax debts into personal tax debts of the affected directors.

The question that many directors and affected personal taxpayers often ask is whether these personal tax debts can be avoided on personal bankruptcy.

The answer is that “it depends”. Recent case law has been swinging toward forcing substantial payments by bankrupts where there are taxes owing to the CRA, as was seen in a recent British Columbia Supreme Court decision in Re Van Eeuwen [2012] GSTC 142.

The first class in Tax law 101 features a discussion on the Duke of Westminster ([1936] A.C. 1), wherein the Appeals Court of England ruled that:   “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be.”

Even in Canada today, home of what some would say much over-regulation, it remains generally permissible for taxpayers to structure their affairs in a more tax effective manner.  (Lest we over-generalize, an exception does exist for abusive tax planning, which the CRA refers to as "tax avoidance").

As is often the case with tax planning, however, implementation is the key.

When all else fails, taxpayers will often take the path of last resort to recover taxes, interest or penalties, called "Remission Applications", which are made under the Financial Administration Act (FAA).  Specifically, section 23 of the FAA confers discretion on the Governor in Council, exercisable on the recommendation of the Minister, to remit any tax or penalty when it considers that the collection of the tax would be “unreasonable or unjust” or that it is “otherwise in the public interest to remit the tax or penalty” – a hugely powerful discretion.

Yet the Canada Revenue Agency (CRA) tends to administer these provisions with an alarmingly tight fist, essentially allowing such applications only in instances of (their words):  extreme hardship, incorrect action or advice by the CRA, financial setback combined with extenuating factors, or the unintended result of legislation.

Generally input tax credits (ITCs) can be claimed if a property or service is acquired for consumption, use, or supply in the course of a GST registrant’s commercial activities. The presence or absence of consideration does not appear to be critical to the finding of a supply as defined under the ETA. However, the FCA in Lyncorp International Ltd. (2011 FCA 352) concluded that ITCs cannot be claimed for GST paid on inputs acquired in providing free management and consulting services to related companies.