Tax Audit and the SRM

The administrators of a food service establishment consulted us after they received their GST- QST draft assessments relating to the sales of their restaurant. The tax authorities argued that not all of the restaurant's sales were recorded during the four-year audit period. The sale amount was established by the tax authorities using extrapolation. The GST-QST payment estimated by the project of assessment was substantial and included penalties and interest. The tax authorities also indicated in writing that a corporate income tax assessment would follow relating to those sales presumed unrecorded. In addition, an individual income tax assessment would be carried out on the administrators in relation to the appropriation of funds.

After a thorough and detailed examination of the facts at hand, and subsequent to lengthy representations to the tax authorities, we were able to convince them to drop all proposed assessments.

Natural gas broker – GST and QST on documentation provided to clients – any obligation to remit?

During the course of a tax audit of a natural gas broker, tax authorities began to move forward to assess for more than a million dollars. This assessment was initiated on the grounds that the natural gas broker appeared to be obliged to remit the GST and the QST included in the documentation provided to its clients.

Subsequent to our involvement in this file, tax authorities did not assess the natural gas broker.

Place of supply for GST/HST and QST

Specific rules are applied to determine whether a supply has been made in Quebec or elsewhere in Canada, in a participating province or not. It is important to know these rules to determine which taxes are applicable for the GST, HST and QST, and at what rate. Many of the place of supply rules have only been recently introduced. Some of our clients have places of business in several provinces in Canada, and we often see that it can be difficult to determine the tax rate by province.

In one case, our clients were offering maintenance services for properties situated in several locations in Canada. We reviewed all of the billing to properly identify the various taxes applicable on services provided.

In a second case, our client had made a transaction involving a trust. At issue was whether the address of the trustee was considered to be the place where the service had been provided.

In one last case, our client in Quebec had provided a service in relation to a property that was located in Ontario, on behalf of a QST non-registrant.

Out-of-court settlement – health sector

A client operating in the health sector was claiming input tax credits (ITCs) and input tax refunds (ITRs) for specific expenses it had incurred. Revenu Québec refused the claimed ITCs/ITRs. It argued that our client had not established conclusively that the ratio of its commercial activities was over 90%. We filed and objection, and appealed to the Tax Court of Canada and the Court of Québec. We argued that the practice of the registrant was consistent with the GST/HST Policy Statement P-238, "Application of the GST/HST to Payments Made Between Parties Within a Medical Practice Organization".

Following negotiations with the Crown counsel, our client received an out-of-court settlement.

Who may claim ITC/ITR in a partnership?

The partners in a partnership often make transactions on behalf of the partnership. For the purposes of the Excise Tax Act and the Act Respecting Québec Sales Tax, the actions of a member of a partnership made in this respect are deemed to have been made by the partnership. Partners, however, often perform other transactions of their own. The respective roles of the partners and the partnership can sometimes be difficult to identify amongst all the ongoing transactions. It is important, in this context, to correctly establish how invoices are issued, who is paying for the purchases and to ensure that tax returns are filed by the correct person.

We are frequently called upon to advise our clients in partnerships on how to prevent potential problems or to try to find solutions when there is an audit. Problems occur frequently in these situations and the tax authorities pay special attention to these issues.

Foreign Corporation distributing its products in Canada

To export its products to Canada, a foreign corporation signed a product distribution agreement with a Canadian distributor. The issue was whether the foreign corporation was required to register for the GST and obtain an importer account.

We examined the import conditions, sales conditions and factors relating to the marketing of these products in Canada to determine the applicable criteria for registration to GST and obtaining an importer account.

Voluntary disclosure

A corporation made exempt financial services. Exceptionally, some of its services were taxable. The corporation had collected the taxes on these services. However, the corporation was not registered and neglected to do so. The amounts collected were relatively small but they were accumulating.

We reviewed the situation and suggested that the corporation should make a voluntary disclosure proposal. A settlement was finally reached with the tax authorities, with the corporation avoiding the heavy penalties it could have otherwise been liable for.

Pension plans and Selected Listed Financial Institutions (SLFIs)

Some of our clients, as employers, have set up pension plans for their employees. Among these plans, those that have beneficiaries in more than one province are Selected Listed Financial Institutions (SLFIs). Therefore, these plans are subject to very specific, complex rules that require the filing of detailed statements for the purposes of the GST/HST and QST.

We manage the filing of all required returns for pension plans, regardless of SLFIs status, in order to access relevant tax refunds. These refunds are eligible to be claimed according to the legislation with respect to the incurred expenditure for these plans.

Update of commercial activity ratios

Much of the activities of many public service bodies, such as universities, colleges, and municipalities, are to provide exempt services that are eligible for partial tax rebates at reduced rates. In many cases, these organizations can also claim the full amount of taxes under tax input credits and tax rebates on inputs for expenses that are incurred in the course of commercial activities. These public service bodies will usually establish their commercial activity ratios to determine the recovery rate of mixed expenditures, such as capital expenditures on property. It then becomes necessary to re-calculate the distribution of inputs to determine the ratios of their taxable activities. The calculation of the distribution of inputs requires the choice of an appropriate methodology and the collection of all relevant data. This work requires the selection of an appropriate methodology. In this area, the recent decisions of the Tax Court of Canada, University of Calgary and University of Alberta have shown that some methods proposed by the tax authorities in the past to calculate the distribution of inputs did not meet the requirements of the law. Such work demands careful consideration of the facts and must be based on very detailed and reliable documentation. These data must also be updated periodically as the proportion of an organization's business operations may change.

We have significant experience in this area, and we recently completed a full update of the data and the calculations for a large-scale institution in the light of the most recent jurisprudence.

Promise to purchase a residential building

An individual made a promise to purchase a building. The standard form used by real estate brokers for promises to purchase requires that the offeror seller must inform the promisor buyer whether the immovable is subject to taxes on the purchase. The offeror seller had indicated that the transaction would not be taxable. When the time came to sign the deed of sale before a notary, it was realized that the transaction was taxable.

Following our intervention, the offeror seller agreed to settle the issue to the buyer's benefit.

Carrying on a business in Canada and in Quebec

It is not always easy to know if a foreign company or a company doing business primarily in another province must register for GST or QST purposes. In some cases, even where this is not mandatory, a company may choose to register to claim input tax credits or input tax refunds. To determine whether a company or other entity must or may register, it is often necessary to determine if it carries on business in Canada or in Quebec, which is then a question of fact.

We advise foreign companies to determine whether they should register for the GST and QST, as well as Canadian companies regarding the QST registration.

Consent judgment – was there a resale?

An organization claimed input tax credits on services acquired under a contract. However, the acquired services were not paid by that organization. The payment had been made by another entity. The tax authorities assessed the organization for the GST considering that if the other entity made the payment this meant that the organization sold to that person the services it had acquired.

We examined the particular facts of these transactions, and an objection was filed with the tax authorities. We eventually appealed to Tax Court of Canada. Shortly before the hearing of the case, the tax authorities offered a favorable settlement with the organization and a consent judgment was rendered on that basis.

Exception to the self-assessment rules in GST and QST on the construction of a building

The indirect tax rules regarding real estate properties can be complex. In the residential area, for example, it is provided that the builder of a building that transfers possession or use of a residential building by lease or license, once it is completed, or if he is an individual, occupies himself this building for residential purposes, is deemed to have made a taxable supply of the property by selling. In this scenario, the builder or individual must pay the taxes calculated on its fair market value. However, there are exceptions to this rule.

In one case, the contractor was an individual. One of our clients had built a duplex which he occupied one of the housing and rented the other. We concluded, after analyzing the facts of the case that there was no need for him to self-assess GST or QST.

In a second case, we examined a similar situation, but this time, the exceptions to the self-assessment rules targeted religious congregations.

Construction of residential real properties – claiming the 36% rebate outside the general two-year statutory limit

We tabled a voluntary disclosure for a real property contractor who neither self-assessed for the GST and the QST at the time the building was completed, nor claimed the 36% rebate on the construction cost of the residential real property for rental. Initially, the tax authorities refused to grant the 36% rebate on the construction cost as the voluntary disclosure was tabled more than two years after the general statutory limit provision.

We argued that the general two-year statutory limit has some exceptions and that our client’s tax profile was within the scope of one of those exceptions. As a result, the 36% GST and QST rebate was granted.

Travel agency: large business or not?

During a tax audit, the tax authorities issued a project of assessment to a travel agency. This addressed QST claimed on expenses covered by the restricted input tax refunds such as meals, km allowances, energy and telecommunication expenses on the grounds that the organization was a large organization.

Based on the facts, and the definition of “large business” for QST purposes, we argued to the tax authorities that the travel agency was not a large business. The “large business item” of the draft assessment was dropped.

Unexpected refund while reviewing GST/HST and QST returns

While reviewing the GST/HST and the QST returns of a client for filing, we identified an error in the foreign currency conversion formula of the GST/HST and QST amounts in Canadian dollars. This resulted in substantial savings for our client.

Employee or autonomous worker

The distinction between an employee and an autonomous worker is often blurred. In this context, the tax authorities will frequently decide on a position that is completely at odds with that of the taxpayer. This can result in unexpected GST/HST and QST assessments.

In such situations, we have examined the proposed reassessments and, in many cases, have been able to respond in such a way that our clients did not have to pay more.