In a January 29, 2016 Tax Court of Canada case (SNF S.E.C. vs. H.M.Q., 2013-1207(GST)G), CRA had denied over $500,000 of ITCs, and assessed penalties and interest, in respect of GST and QST paid to welve suppliers. Unknown to the taxpayer, the suppliers did not remit the tax.
The taxpayer, a scrap metal dealer, obtained evidence of prospective suppliers’ GST and QST registration prior to accepting them as suppliers.
Taxpayer wins – mostly :The taxpayer must use reasonable procedures to verify that suppliers are valid registrants, their registration numbers actually exist and are in the name of that person. The Court held that the taxpayer’s procedures (reviewing the suppliers’ registrations, stamped by Revenue Quebec) were generally sufficient to meet the documentation requirements (Excise Tax Act Subsection 169(4)). It was not relevant that some suppliers did not have scrapyards and/or vehicles to carry on scrap businesses, nor that payment was often made in cash, making it difficult to verify the suppliers’ revenues. The taxpayer could not be expected to query government officialsto ensure that GST registrations were properly issued.However, in respect of one supplier, the facts showed that the taxpayer had been sloppy to the point of gross negligence in accepting evidence of registration where it was clear that the registered supplier was not acting on their own account. Those ITCs were properly denied, and the related gross negligence penalty upheld.As well, one purchase was made on the date the supplier’s registration was cancelled, so the supplier was not a registrant on that date, and the ITC was properly denied. However, the related gross negligence penalty was reversed, based on the due diligence undertaken in respect of the supplier previously.
Finally, the Court held that a rebate for GST/HST paid in error (Excise Tax Act Subsection 261(19)) does not apply where the error arises due to the taxpayer’s negligence, or because the payment is made to a nonregistrant, including a supplier whose registration has been cancelled.The purpose of the rebate is not to allow the taxpayer to recover GST/HST from the Crown when the erroneous payment to the supplier results from taxpayer’s failure to exercise proper care and attention.
SINGLE SUPPLY – SERVICES PROVIDED INSIDE AND OUTSIDE OF CANADA
In a July 11, 2017 Federal Court of Appeal case (Club Intrawest vs. H.M.Q., A-249-16), at issue was what portion of resort fees paid by members of the Intrawest program would be subject to GST. Fees paid provided access to resorts in Canada, the U.S., and Mexico. The fees were used primarily to administer the program, maintain the properties, and build a reserve fund. The taxpayer had argued that the portion of the fee related to the properties outside of Canada should not be subject to GST/HST according to the place of supply rules in Section 142 of the Excise Tax Act.
In the original Tax Court of Canada case (Intrawest vs. H.M.Q., 2012-3401(GST)G), the Court found that the fees were for a single supply of service, and that part of the service was provided in Canada, therefore GST/HST was applicable to the entire fee.
Taxpayer wins-Generally, once it has been determined that there is a single supply, the entire charge is either subject to GST/HST or not. The Federal Court of Appeal determined, that even though the service was paid in a single payment, an alternative approach was required to recognize that ultimately the services were distinct: services provided inside Canada and those provided outside. These were two separate supplies, so the single supply provisions did not apply.
The Federal Court of Appeal agreed that the taxpayer’s original proposal to charge GST/HST based on the proportion of costs in Canada to the total membership costs would more fairly and reasonably reflect the nature of the supply.
AGENCY AGREEMENT In a June 9, 2017 Tax Court of Canada case (572256 Ontario Ltd. vs. H.M.Q., 2015-4326(GST)I), the Court reviewed whether an entity’s management contract to maintain real property of the taxpayer constituted an agency agreement. If it did, the taxpayer was eligible to claim input tax credits for purchases made by the management entity.
Taxpayer wins The management agreement identified the property manager as an agent of the property owners. This status was questioned because the manager had acquired the parking area related to the other real estate. Although no written documentation existed to support the relationship, the Court concluded that the parking area was held as a bare trustee, and the manager acted as agent in respect of that property as well. The taxpayer was, therefore, entitled to input tax credits.
