Tax & Trade Blog

As the world struggles with COVID-19, and small and medium businesses endure the worldwide economic slowdown, directors of Canadian corporations need to know about the long arm of the CRA when it comes to ensuring that GST net tax obligations and ITA source withholding requirements are met by corporations!

One particularly egregious collections power that the CRA has is its ability to issue so-called derivative assessments to relatives of taxpayers who have received money, property or dividends from the corporate tax debtor, at a time that the corporation or the director are liable for tax.

A “derivative assessment” refers to an assessment whereby the CRA collects from a third party an amount owing that it is unable to collect from the taxpayer.  Where a tax debtor transfers property to a non-arm’s length party for less than fair market value (FMV) consideration, section 325 of the Excise Tax Act (ETA) and section 160 of the Income Tax Act (ITA) may apply to allow the CRA to assess the transferee personally.

Many will remember the almost hysteric approach that some professional advisors took to “Y2K” (e.g., the one conference topic that burned deep into my brain was “The Commodity Tax Implications of Y2K”) – which ultimately proved to be either entirely alarmist, or just good marketing or both. 

While Y2K was a bit of a strawman in terms of “tax issues”, it appears that the economic realities of the COVID-19 pandemic have in fact already given rise potential indirect tax issues for those in the real estate sector.

Two areas of particular concern are commercial rent deferrals and conversions of short-term Airbnb accommodations into long-term residential rentals.

A sad and unfortunate situation for an online shopper in Australia highlights the importance of import and export permits and licenses in international trade.

While the purchaser in this particular situation was engaged in a B2C transaction, import and export permits and licenses are often required in B2B transactions, and can give rise to seizure and confiscation of goods being imported or exported from Canada in a variety of different contexts.

In this case, the purchaser was in Australia and paid over AUD $26,000 for an alligator-skin handbag – ordered online from a boutique in France.  When the handbag arrived in Australia, it was seized by customs officials and subsequently destroyed – all because it lacked the proper import permit!

In the current global business environment, increasingly many US companies are selling their goods into Canada, and using a variety of business structures to do so.  However, many companies continue to struggle with their tax and customs obligations on these transactions.  In particular, issues often arise with determining the proper value for duty of the goods at the border, and companies are often further confused between their Division II and Division III GST/HST obligations under Canada’s Excise Tax Act.

The Supreme Court of Canada (“SCC”) has confirmed the advice we gave in our February eNewsFlash (and our previous blog) that arbitration clauses will NOT BE ENFORCED in Canada where they are viewed as unconscionable and effectively constitute a denial to the access to justice.

One of the emerging areas in criminal law in the 21^st century are the rules that surround the search and seizure of electronic devices like computers, notebooks and smartphones – particularly where those devices contain information covered by Solicitor-Client Privilege.

When the CRA executes a Search Warrant in the tax consequence, and seizes electronic storage devices like a notebook or an iPhone, the party subject to the Warrant may still rely on a claim of Solicitor-Client Privilege. This results in a unique court process which deals with how to isolate privileged documents that are otherwise stored in the device alongside non-privileged ones.

A recent case before British Columbia Supreme Court dealt with this issue, and is a good read for persons finding themselves subject to such a seizure.

One of the messier areas in tax law tends to be the case where “civil” tax default meets potential “criminal” tax fraud – with the consequences to the taxpayer moving beyond tax assessments and interest, to fines and potential time sentenced in the ‘Crow Bar Hotel’.

Last March 18th, the CRA announced the suspension of the vast majority of audit activities as a result of the COVID-19 pandemic. How quickly things change!

As a result of the COVID-19 pandemic, the Tax Court of Canada (the "TCC") has been closed with all hearings cancelled since March 16, 2020.

A recent Notice to the Public and Profession (the "Notice") issued by the TCC has indicated this cancellation of hearings will extend to July 17, 2020 (which would have been the last day of hearings before the TCC's previously scheduled 4-week summer recess).

The Notice also reveals that the TCC has been preparing to re-open.

Section 231.1 of the Income Tax Act (“ITA”) provides the Canada Revenue Agency (“CRA”) with broad powers to examine records of taxpayers that may be relevant for audit and for the administration or enforcement of the legislation.   If a taxpayer fails to provide the required information, the CRA may seek a compliance order from the Federal Court (“FC”) pursuant to section 231.7(1).  (Parallel provisions in the Excise Tax Act are sections 288 and 289.1.) 

As section 231.1(a) says “any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer”, what is the legal test for relevance?  In The Minister of National Revenue v. Atlas Canada ULC (2018 FC 1086), the FC confirmed that the Minister is only required to meet the very low threshold for relevance in respect of production of documents.

As we blogged about here and here, the CRA has an often forgotten power to issue ‘Requirements for Information’ (“RFIs”) on third parties which can be used to compel them to hand over evidence in their possession to the CRA to be used to determine if another taxpayer has unremitted tax or undeclared income. The recent case in Minister (National Revenue) v Roofmart Ontario Inc (2019 FC 506) dealt with those RFI powers, in particular the CRA’s ability to issue an RFI when it did not know the identity of the taxpayer it ultimately wanted to investigate (the so-called ‘unnamed person requirement’).

That case was appealed to the Federal Court of Appeal (“FCA”), and the decision in favour of the CRA was released earlier this month.

Importers of goods have both current and ongoing responsibility and obligations under the Customs Act (the “Act”) and its Regulations. On a “current” basis (i.e., at time of importation), include reporting the goods for import, and proper declarations of value, tariff class and origin, and payment of applicable duties and other taxes. On an “ongoing basis”, the importer is required to correct errors in those declarations up to four years after the time of importation.

What if an “importer” is neither the owner nor purchaser of the goods?  Does that “importer” escape liability for the duties and GST imposed under the Act?

With the passage of the Canada United States Mexico Agreement’s (“CUSMA”) implementing legislation on March 13, 2020, the Canada Border Services Agency (“CBSA”) has released several new Customs Notices which outline the specific implementation steps for when the agreement comes into force (which is scheduled to be July 1^st, 2020).

The recent decision in Canada v. Colitto (2020 FCA 70) has seen the FCA weigh in on a huge issue for so called “derivative assessment” of directors and other person potentially at risk for a corporate taxpayer’s tax liability. With the financial pressures of COVID 19, this may come as bad news for corporate directors!

A recent case highlights the fact that at law, an agency agreement can be implied to exist based on the conduct of the parties alone – without any explicit written or verbal references to “agency”.  This is often referred to as an “Implied Agency”.

The case of Lohas Farm Inc. v. the Queen (2019 TCC 197) cites a number of past cases and textbooks for the concept of implied agency, and serves as a useful resource for taxpayers and counsel making similar arguments.

The Canada Border Services Agency (CBSA) is responsible for reviewing imports to ensure compliance with Canada’s trade laws. In doing so, the CBSA sometimes focuses on what it deems “audit priority” areas. These are tariff classification codes where the agency believes that there is significant risk for misclassified imports under the Customs Tariff, which leads to the unlawful evasion of duties on those goods.

The CBSA recently released a new round of 2020 Trade Compliance Verifications, which dealt with a number of these priority areas.

In the report, the following “audit priority” areas had updated enforcement information, leading to several million dollars in fines and penalties for importers who misclassified their goods.

A recent case has hopefully clarified a huge issue for so called "derivative assessment" of directors and other person potentially at risk for a corporate taxpayer's tax liability.

The International Chamber of Commerce’s (“ICC”) Incoterms® are relied on across the world by businesses to simplify and standardize the delivery of internationally shipped goods. The terms function so that the obligations on both buyers and sellers are clear, which eliminates surprises in the case of disputes. Use of the terms, in a manner consistent with the underlying international sales agreement, is critical to not only commercial obligations, but critical to the application of international taxes, including the Canadian GST/HST valued added tax.

The ICC updates Incoterms® periodically to stay up to date with modern realities in global trade and a new set of terms, to be called Incoterms® 2020, comes into effect on January 1, 2020.