Tax & Trade Blog

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.

Both the “Large Corporation rules” in the Income Tax Act (the “ITA”) and the “Specified Person rules” under the Excise Tax Act (the “ETA”) are probably unfamiliar to most people other than experience tax practitioners.  However, they can impact the ability of large corporations to properly appeal income tax and GST issues, since if they are not complied with - to the letter - the government will take steps towards barring the taxapyer from further appealing the matter beyond the Canada Revenue Agency's Appeals Process. 

Generally, the overall effect of these provisions is to attempt to prevent a Specified Person (or a Large Corporation) from appealing to the Tax Court of Canada where the Notice of Objection does not contain certain required pieces of information.