Section 224 of the Excise Tax Act (ETA) allows a supplier who has remitted GST/HST collectible from, but as yet unpaid by, a recipient, to sue the recipient for the tax remitted as if it were a debt owed to the supplier.  

There has been little case law or helpful interpretative materials from the CRA on this provision.

A recent case seems to clarify that where a supplier fails to charge and collect the GST/HST initially, the two-year limitation period on such a claim runs from the time that the supplier pays same to the CRA when assessed for the unremitted GST/HST.

In National Money Mart v. 24 Gold Group Ltd. (2017 ONSC 6373), the Supplier was selling unrefined gold to the Recipient over a period ending July 1, 2012.  On June 1, 2015, the CRA assessed the Supplier for its failure to charge and remit the GST/HST on the transactions. After the Supplier had paid the assessment in full, it invoiced the Recipient demanding reimbursement of same.  When the Recipient refused to pay, the Supplier sued the Recipient in the Ontario Superior Court of Justice (the “Ontario SCJ”) for the tax remitted. 

At issue in the Ontario SCJ was (1) whether section 225 of the ETA precluded the Supplier from succeeding on its claim and (2) whether the Supplier’s claim was statute-barred by the Ontario Limitations Act which would generally apply a two-year limitation period for lawsuits in Ontario.

On issue one, the Recipient argued that section 225(4) limited its ability to claim the corresponding ITC no later than two years after its 2010-2012 fiscal years and, as it believed that it had lost the ability to claim the ITC due to the Supplier’s own delay in charging the tax, the Recipient submitted that the Supplier ought to be precluded from proceeding with the action. 

The Ontario SCJ rejected the Recipient’s submissions, concluding that section 224 did not contain any time limit within which the Supplier must bring its legal proceeding, and that section 225(4)(c) permits ITC claims to be filed no matter how late a supplier charges the GST/HST as long as the GST/HST was not originally charged by the supplier and the CRA has subsequently assessed the supplier for that outstanding tax.  The Ontario SCJ found the Recipient was in this exact situation, and had failed to avail itself of this special provision, which would have afforded it the corresponding ITC. 

On issue two above, the Recipient argued that if the Supplier had exercised “reasonable business diligence”, it should have realized its failure to charge the tax at the time of the transactions and, therefore, should have brought the action no later than the summer of 2012.  The Recipient submitted that the Supplier’s claim was therefore out of time under the Limitations Act. [Not a bad argument in our view].

The Ontario SCJ again rejected the Recipient’s point, and determined that the Supplier’s cause of action for invoking section 224 only arose when it ended up paying the outstanding GST/HST itself.  Accordingly, the 2-year limitation period under the Limitations Act did not commence until, at the earliest, June 1, 2015.

As reflected in this case, even if a supplier fails to charge the GST/HST at the time of a sale due to oversight or other errors, the recipient of the taxable supply appears to remain on the hook for the outstanding tax.  Recipients in these situations need to fully understand their rights and remedies under the ETA, including the special rules in subsection 225(4)(c) – which has fairly restrictive conditions.   Recipients who are not familiar with these ETA rules should seek legal advice.

Are you in a position where you need to charge and collect GST/HST from a recipient after-the fact?  Are you a recipient receiving a “tax only” invoice well after the fact?    Please contact us here for assistance.