Tax & Trade Blog

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!

In what may well be one of the last decisions Canadian Courts make with respect to Chapter 11 of the North American Free Trade Agreement (“NAFTA”), the Ontario Court of Appeal (“OCA”) in United Mexican States v. Burr dismissed Mexico’s appeal from an Ontario Superior Court decision. The Superior Court had upheld the decision of an arbitral tribunal established under Chapter 11 of NAFTA in response to complaints by individual investors against Mexico.

While presenting an interesting issue, the implementation of the Canada – United States – Mexico Agreement (“CUSMA”) has effectively put an end to these investor-state dispute provisions as far as Canada is concerned, although a limited investor-state dispute mechanism remains in effect between Mexico and the United States.

The World Customs Organization (“WCO”) revises its Nomenclature of Harmonized Commodity Description and Coding System used for the uniform classification of goods traded internationally (“Harmonized System” or “HS Codes”), every five years. This is done to adapt to technological advancements and emerging global changes. As this nomenclature forms the basis for the Tariff Schedules of around 211 WCO member countries worldwide (including US and Canada), these changes are important!

Canada is expected to implement these changes in 2022, and importers will need to re-evaluate their tariff classification, declaration, and HS Coding systems to ensure conformity with the new Customs Tariff.

The FCA has ruled against the Bank of Montreal (“BMO”) (2021 FCA 189) in its challenge of the Minister’s decision to deny BMO’s input tax credit (“ITC”) allocation methodology under section 141.02(18) of the Excise Tax Act. This will likely be bad news for certain institutions that elect to use their own methods for allocating ITCs within complex corporate groups.

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 January 2020 Canadian International Trade Tribunal (“CITT”) decision in Landmark Trade Services v. President of the CBSA (Case No. AP-2019-002) was a welcome relief for customs brokers because the CITT held that Landmark (acting as a customs broker for what can loosely be described as a freight-forwarding situation) was not liable as the "importer" of the goods, despite the fact the import documentation described Landmark as the importer and purchaser. Accordingly Landmark would not be on the hook for the additional duty owing from the incorrect tariff classifications used on those import documents.   

Over a year later, Landmark's victory has resulted in headaches for businesses that use similar freight-forwarding structures, as the CBSA looks to re-assess them and hold them liable for additional duty on the basis they were the owners of the goods at the time of import. To understand why, one must understand what Landmark was doing.

One of the least understood areas of CBSA administrative policy are the rules surrounding the operation and licensing of customs warehouses. These warehouses (of which there are several types) allow goods brought into Canada to be stored within the country while deferring the payment of applicable duties and taxes in respect of their import until they are ‘released’. The rules in this area are administratively complex, and expert legal advice should be considered for any business looking to use or operate a customs warehouse.

After suspending most audits for the early part of 2020 due to the COVID-19 pandemic, the Canada Revenue Agency (the “CRA”) has been slowly but steadily gearing up its audit activity through 2020 and the first half of 2021. This is expected to continue through the second half of 2022 as the CRA resumes a regular level of audit activity.

While the CRA always has a number of different audit priorities on the go simultaneously, Budget 2021 specifically announced an additional $304.1 million in funding for the CRA spread over five years for, among other things, GST/HST audits of large corporations.

This announcement seems, at least in part, designed to reverse the decline in new corporate audits which recently made headlines when it was reported that new large corporation audits dropped by over 30% from 2016/2017 (6,281 new audits) to 2019/2020 (4,257 new audits).

As with have blogged about many times in the past (see here, here, here, and here), one of the most misunderstood areas of the law around corporate directors is the concept of director’s liability for the corporation’s unremitted tax.

Several recent cases in our practice have reminded us of the critical importance of these rules and how all directors can benefit from a refresher of their basic structure.

In Budget 2021 the Government of Canada proposed a “luxury tax” effective January 1, 2022 on sales of certain luxury vehicles – cars/trucks, aircraft, and boats - whose selling price exceed a $100,000 threshold for cars/trucks and aircraft, and a $250,000 threshold for boats. The proposed tax would be the lesser of 20% of the value above the threshold, or 10% of the full value of the luxury vehicle. At the time the government said the luxury tax is expected to raise $604 million over 5 years.

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.

The Government of Ontario has now made a long-hoped for change to the Ontario Business Corporations Act (“OBCA”) removing the director residency requirement effective July 5, 2021.

This means that corporations incorporated or continued into Ontario no longer need to have any Canadian resident directors and will help put Ontario on a level playing field with provinces like British Columbia which have been without a director residency requirement for nearly two decades!

On June 4, 2021, the Government of Canada published an Order Amending the Export Control List (the “Order”), changing the regulatory landscape for businesses that deal with controlled goods and technologies in Canada. While a seemingly minor update — set to come into force after July 23^rd, 2021 — this change actually has very far-reaching implications for firms looking to stay in compliance with these important rules!

One of the most hotly contested areas in trade litigation is the “value for duty” (“VFD”) of goods being imported to Canada. “Value for duty” is the base on which one calculates and pays duties and taxes. Canada Border Services Agency (“CBSA”) typically audits in this area with a view to increasing the VFD of the imported goods, increasing revenues.

In a recent Canadian International Trade Tribunal (the “CITT”) case, CBSA was forced to allow non-resident importer to use its ‘factory prices’ as the proper base for duties – which has potentially far-reaching implications for importers!

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.