Tax & Trade Blog

In a recently released GST/HST ruling, CRA seems to place a high bar on the exempt treatment of administrative services acquired by an Insurance Company in operating its insurance business.  In RITS 154220 (Application of GST/HST to Insurance-related Administrative Services), the CRA effectively takes the view that virtually all administrative services acquired by an insurer are viewed by CRA as excluded from the financial services exemption, and therefore taxable for GST/HST purposes.

The Ontario Ministry of Finance has threatened to turn the Ontario cigar industry upside down, by beginning to assess vendors selling cigars and other non-cigarette tobacco to status indians on federal indian reserves, for Ontario provincial tobacco tax (PTT). Previously most industry insiders would have assumed - just from Ontario's acquiescence to wide-spread industry practice of exempting all sales of non-cigarette tobacco sold to Indians that sales of cigars, pipe tobacco and chewing tobacco to status Indians on federal Indian reserves was exempt of PTT.

Non-residents carrying on business in Canada must be cognizant of the potential to be involuntary registered for the GST/HST. 

Subsections 241(1.3) to (1.5) of the ETA (which came into effect in June 2014) empower the CRA to unilaterally register a person who has not registered for GST/HST but, in the CRA’s view, is required to do so. The budget states that these amendments will strengthen GST/HST registration compliance and help the CRA to combat the underground economy.

An undisclosed agency exists if an agent enters into a contract with a third party on behalf of a principal, but does not reveal to the third party either the identity of the principal or the fact that the agent is acting on behalf of any principal.

On October 18, 2013 the Prime Minister of Canada announced that Canada had reached an agreement in principle for a “Comprehensive Economic and Trade Agreement” (CETA) with the European Union. While not yet in force, and expected to take upwards of two years to be translated and ratified by all 28 EU member states and the European Parliament, the Agreement has generated a lot of excitement about the EU – already Canada’s second biggest trading partner behind the US.

What many businesspeople do not realize is that Canada already has a Free Trade Agreement with a group of European countries – The Canada-European Free Trade Association Free Trade Agreement (CEFTA).

Like many areas of law, in customs valuation there are cases that represent so-called high and low water marks – cases that represent the extremes of possible outcomes, given a set of facts. Every once in a while, a case comes along that moves these marks around – often surprising practitioners. The recent case of Skechers USA Canada Inc. v. CBSA is one of those cases, and the decision of the Canadian International Trade Tribunal (the “CITT”) has caught the attention of many practitioners.

The CRA's treatment of "bare trusts" has been problematic from the first days of the GST.

When the GST was first implemented in January 1991, the CRA was initially advising bare trustees of bare trusts (trusts that operating at the behest of their beneficiaries, and where the trustee has no independent authority other than following express directions of the beneficiaries) that it was the bare trustee that was viewed as the supplier for GST purposes, and the person required to register for GST purposes. This position was changed in mid-1992, when the CRA flipping its position, and now advising that bare trustees were not allowed to register, and that the beneficiaries of these bare trusts were the one's required to register.

Directors often ask about creditor-proofing personal assets when facing a possible assessments for "Director's Liability" under Canada's income tax and GST legislation. That question usually follows the director's first understanding that the Canada Revenue Agency (CRA) has special powers in both the Income Tax Act (ITA) and the Excise Tax Act (ETA) to assess a director where a corporation leaves behind unpaid income tax or GST debts, and to realize on (seize) a director's personal assets (e.g,, homes, cottages, cars, monetary savings) to satisfy those debts. (These rules are more specifically found in section 227.1 of the ITA and section 323 of the ETA, and is almost identical.)

Also surprising most directors are special rules in the ITA and ETA allowing the CRA to attack transfers of a director's personal assets to non-arm's-length parties (e.g. wives, children, siblings, parents, etc.) where the value paid by the relatives is less than the fair-market value of the property being transferred. (These rules are found in subsection 160(1) of the ITA and section 325 of the ETA, and are also fairly similar.)

Canada's new "Anti-Spam" Legislation will come into effect on July 1, 2014 (for simplicity, Canada's "ASL").

While a step forward for Canada in this legislative area, a more pessimistic view of it might position it as largely ineffectual when it comes to removing spam from my inbox and your inbox (because it does not contain any real measures aimed at enforcement on foreign owned computer systems or internet providers where much of Canadian spam actually originates), and the spam that it does effectively remove (Canadian-based spam) seems to be at a huge cost to legitimate Canadian businesses that seek to market their legitimate products and services to Canadians in the digital market-place).

A recent decision in the Federal Court ends up being a real good lesson for (mostly) all of the bad things that Canadian's can face when tempted to either non-report or undervalue their purchased goods when returning to Canada from abroad - all in the pursuit of saving a few dollars in duties or GST/HST. Indeed, what the CBSA was able to do to ferret out the non-reporting and under-valuation may be surprising to the average Canadian, and the facts of the case itself are probably a good heads up on what can face an importer when lying about his or her purchases.

The Canada Border Services Agency ("CBSA") recently issued Customs Notice N-13-011 ... well maybe not so recently ... in May ... but it sometimes takes that long to keep up to date with these pressing announcements :). 

The changes relate to CBSA”) administration of customs Administrative Monetary Penalties(“AMPs”) which may apply to the most basic of errors by Canada’s commercial importers, and can in some instances be as high as $500,000.  These penalties are often imposed in connection with CBSA customs verifications -- short terms of "audit" and are aimed at securing compliance with customs legislation.

The Canada Revenue Agency ("CRA") recently reversed its long standing administrative policy regarding the exempt nature of nursing staffing agencies, taking the position that these services are taxable and not exempt:   see Excise and GST/HST News No. 89 (issued without much fanfare in late Summer 2013).

This effectively decision has effectively reversed the CRA's twenty year old position in GST Memorandum 300-4-2 (Health Care Services, September, 17, 1993) which had previously concluded that these services were all exempt, under section 6 of Part II of Schedule V of the Excise Tax Act.

CBSA Valuation Verifications Target Apparel Imports

The Canada Border Services Agency ("CBSA") publishes a list of its active trade compliance verification priorities twice a year, outlining the industries or goods that it is prioritizing for compliance verification. This year the Canadian Apparel industry has been targeted, and has been issued a spate of Trade Compliance Notification Letters. The five most critical things that Apparel importers need to know before responding to these Notification letters are as follows.

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.

Instead of filing a notice of objection, a taxpayer may enter into negotiations with the Canada Revenue Agency (CRA) with the purpose of resolving tax issues in dispute.  When a settlement is reached, the CRA may request the taxpayer to sign a waiver, agreeing to the proposed changes to the assessment and confirming that the taxpayer will not appeal the assessment (made on the agreed terms) to the Tax Court of Canada (TCC).  Such waiver of right is expressly provided for in sections 301(1.6) and 306.1(2) of the Excise Tax Act (ETA) and sections 165(1.2) and 169(2.2) of the Income Tax Act (ITA).

Like any contractual agreements, undue pressure, lack of proper legal advice, or unconscionable bargains may void a settlement agreement. The Federal Court of Appeal (FCA) recently confirmed in Taylor v. The Queen (2012 FCA 148) that a waiver of right to object or appeal an assessment signed by a taxpayer pursuant to a settlement is valid and binding on the taxpayer.

What is really required for GST ITC Claims?

For more years that we can remember, “ITC Documentation” has been a “Top 10” Audit Issue with Canada Revenue Agency GST Audits. This is a reference to the evidentiary requirements imposed by ss. 169(4) of the Excise Tax Act (ETA) and the Input Tax Credit Information (GST/HST) Regulations (the “ITC Regulations”) – which the CRA has been prone to interpret as a “documentation requirement”, reviewing and disallowing ITCs claimed for “lack of required documentation”.

The law in this area is fortunately changing, with a recent decision of the Tax Court of Canada (TCC) Forestech Industries v. The Queen. (2009 TCC 591) providing a helpful review on the actual requirements of subsection 169(4) -- which pointedly are not exactly what many CRA auditors would have taxpayers believe.