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.

In Forestech Industries, the taxpayer was in the business of logging and building logging roads in B.C. For various reasons, it took the taxpayer until 2005 to file its income tax and GST returns for the 1996 to 2003 period. In order to do that, the taxpayer’s accountant relied on documentation provided by the taxpayer, including bank statements and cancelled cheques. In preparing the GST returns, the accountant claimed ITCs of $152,534.15, based on a reasonably detailed analysis of the taxpayer expenses.   When the taxpayer’s GST returns were assessed, the CRA disallowed over 90% of the ITCs claimed. On reassessment in 2008, the CRA amended that to disallow 80% of the ITCs claimed ($123,187.77).

The primary issue for the TCC was whether the taxpayer had satisfied the evidentiary requirements in subsection 169(4) and the ITC Regulations. Justice Webb began by reviewing the case law on subsection 169(4), noting first that the requirements of the provision were mandatory (see: Systematix Technology Consultants Inc. v. The Queen, 2007 FCA 226). In considering the wording of the provisions themselves, however, Justice Webb then reviewed a line of TCC cases to conclude that the requirements of the provisions could properly be viewed as met if the Court could be satisfied that the registrant claiming the ITCs had the required documentation “before filing the return in which the credit is claimed”.

In considering the evidence before him, which was provided by the Appellant’s accountant and one of its shareholders, and affidavit evidence filed by the other shareholder, the Court observed that the Appellant had experienced substantial hardships in 2005 which resulted in various documents which would have supported the ITC claim being misplaced. Relying on cancelled cheques that included invoice numbers/account numbers, live testimony, and affidavit evidence, Justice Webb held that prior to filing its GST returns the taxpayer did have documentary evidence supporting their ITC claim in the form of invoices.

The remaining question was whether those invoices contained all the information prescribed in the ITC Regulations – a difficult question given that original invoices were not available for examination. Justice Webb dealt with this point by concluding that the prescribed information required by the ITC Regulations was what “one would typically expect to find in an invoice issued by a supplier”. Relying on the proposition that the strength of evidence required to prove an event should be inverse to that event’s probability, Justice Webb concluded that “it was more likely than not that the Appellant would have received an invoice from its suppliers prior to paying such suppliers and that such invoice would have contained the required information as set out above.”

By way of commentary, the decision was likely correct both technically and from a policy perspective. Registrants making taxable supplies are not supposed to be the “taxpayers” in a value-added taxing system, and every time the CRA decides to “deny ITCs”, there is the potential for the laudable goals of the 1989 White Paper that led to the GST being defeated. That is, GST was to be borne by the final consumer, not the manufacturers, wholesalers and retailers of the world. So every time one of these people is disallowed a legitimate ITC for GST paid on an input, there is a cascading of tax, which artificially increases the costs of that person’s goods and services to Canadian consumers, and leads to competitive disadvantages for those Canadian goods and services in international marketplaces. The CRA’s practice of rejecting ITC claims for highly technical reasons (such as a missing date on an invoice, or the lack of the purchaser’s address, in the face of other evidence providing that information) is equivalent to imposing an additional unnecessary tax burden on the taxpayer and the economy.

Perhaps one of the more interesting parts of the case was left unconsidered by the TCC, and that was whether the CRA’s proposition that a physical invoice is required to maintain an ITC claim is correct in the first place. A close reading of subsection 169(4) indicates that what is legislatively required before making an ITC claim is the obtaining of “sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined including any such information as may be prescribed”. Note that the base requirement is to obtain “sufficient evidence”. Also note that there is no particular restriction as to the form of that evidence (e.g., physical invoice provided by the supplier, electronic computer record coded by the recipient, etc.). While the Minister has been given the power to prescribe “information” that may be required (and has done so in the ITC Regulations), there is no power to dictate the “form” of the information or evidence. Thus the current attempts by the CRA to impose a “physical invoice” requirement are effectively ultra vires this legislative wording, and in our view it will only be a matter of time before the TCC gets the right case to make that determination.

That “physical invoices” are not required in the first place makes good policy sense, even as far back as 1991, many large companies were relying on electronic data transmissions (EDT), and may not have actually received or retained physical invoices. And today, in the “paperless” environment, physical invoices have gone the way of the teletype (TTY). And of course, there is always the fact pattern in Forestech Industries, where the physical invoices were simply just not available at the time of audit.

It will be interesting to see how future TCC cases deal with this issue, as the CRA appears to be as willing as ever to disallow en masse claims for otherwise legitimate ITCs, on the basis of what may well be incorrect interpretations of these provisions. There is no requirement that physical invoices exist; the only requirement is that sufficient information be available (before filing the return in which the ITCs are claimed) to allow the ITC being claimed to be determined. While record-keeping issues may exist when physical or electronic records are lost prior to the required retention periods, that does not affect ITC eligibility – and sooner or later, the TCC will likely clarify that.

Authors:  John Bassindale & Robert G. Kreklewetz

Millar Kreklewetz LLP