Multinationals with Canadian activities should take note of the following recent developments:
CRA Denies Tax Refund Request of a Non-Resident Carrying on Business in Canada
The Canadian Income Tax Act mandates the Canada Revenue Agency (“CRA”) to refund any overpaid tax, interest, and penalties if the taxpayer has filed its tax return within three years of the end of the taxation year in question, and the taxpayer requests its refund during the period in which the CRA can reassess the taxpayer for that year.
The Canadian Income Tax Act also provides that a non-resident corporation carrying on business in Canada at any time in a taxation year is required to file, subject to narrow exceptions, a Canadian income tax return in respect of the taxation year. This obligation exists even if the non-resident corporation does not carry on business in Canada through a permanent establishment situated in Canada, such that its business profits are not subject to income tax in Canada by virtue of a tax treaty.
The interaction of these rules was addressed by the CRA in a recently released letter (doc 2014-0538901E5). At issue was a situation in which a non-resident corporation (“NRCo”) carried on business in Canada, but did not file a Canadian income tax return. The CRA assessed NRCo on the basis that it carried on business in Canada and owed Canadian income tax. To mitigate against the interest that would accrue in the event that the CRA was correct about NRCo’s tax liability, NRCo paid the full amount of the tax that was assessed against it by the CRA. NRCo objected to the assessment and was ultimately successful in convincing the CRA that it was not carrying on business in Canada through a permanent establishment situated in Canada and therefore, was not subject to Canadian income tax. Notwithstanding NRCo’s success, the CRA refused to refund the amount paid by NRCo because NRCo had filed its tax returns more than three years after the end of the applicable taxation year.
Baker & McKenzie
29 Tax News and Developments February 2015
It appears from the letter that NRCo made the tax payment voluntarily. Notably, however, if NRCo had been a “large corporation” (generally, where taxable capital in Canada of the corporate group exceeds $10 million), the CRA would have been entitled to take collection action against NRCo for 50% of the amount in dispute. It seems especially egregious that the CRA could enforce collection against a taxpayer for 50% of the amount in dispute and then, once the taxpayer is ultimately found not to owe the tax, refuse to refund the overpayment to the taxpayer.
As for remedies, the letter does not address NRCo’s available options. Presumably, these would include bringing a lawsuit against the CRA for unjust enrichment, making an application to court for judicial review of the CRA’s refusal, or making an application to the government for a tax remission order. In our view, anything short of a full refund would appear to be unjust.
Canadian Customs Announces New Policy Regarding Retroactive Transfer Price Adjustments
The Canada Border Services Agency (the “CBSA”) has changed its long-standing policy and announced that a retroactive transfer price adjustment resulting in a reduction of the price paid or payable for imported goods may entitle an importer to a refund of duties paid (provided the adjustment is made in accordance with a written agreement in effect at the time of importation). This announcement was made in Customs Notice 15-001, Treatment of Downward Price Adjustments in Value for Duty Calculations. Before this change in policy, the CBSA’s position was that retroactive transfer price increases resulted in an obligation to correct the value for duty originally declared, but retroactive transfer price reductions could not be taken into account (and therefore importers were precluded from obtaining refunds). This change of policy presents a potential for significant duty recovery, given that an importer may file a refund claim within four years of the importation subject to the claim. For additional details regarding this change of policy, see the Client Alert, Canada Customs Announces New Policy Regarding Retroactive Transfer Price Adjustments, prepared by our Global International Trade Compliance and Customs Practice.
New Form for The Excise Tax Act Section 156 Election Now Available
In the December 2014 Canadian Tax Update, we noted the new filing requirement for closely related corporations and partnerships that make the election under section 156 of the Excise Tax Act (the “ETA”). The section 156 election generally deems supplies of property and services between eligible closely related corporations and partnerships to be made for nil consideration so that intercompany supplies generally will not be subject to goods and services tax/harmonized sales tax (“GST/HST”). The filing requirement applies to closely related corporations and partnerships entering into new section 156 elections on or after January 1, 2015 and closely related corporations and partnerships that wish to have section 156 elections made prior to 2015 remain in effect after January 1, 2015. The election forms have now been released and are available at the following link on the CRA web site: http://www.cra-arc.gc.ca/E/pbg/gf/rc4616/rc4616-fill-14e.pdf.
Baker & McKenzie
30 Tax News and Developments February 2015
The Right to Claim Input Tax Credits Not Subject to Enhanced Burden of Proof
Revenu Québec, which administers the GST in Québec, has encountered widespread fraud involving false invoices and “invoices of convenience” in the construction, scrap metal, and employment agency (“EA”) industries. For example, we understand that in the EA industry, there have been cases where an EA registered for, and charged its customers, GST on the supply of temporary workers; the EA’s customer paid the GST to the EA and claimed input tax credits (“ITCs”) to recover the tax paid; and then the EA absconded with the GST collected. Ultimately, cases of this sort left Revenu Québec out of pocket. The same problem applies for Québec Sales Tax (“QST”) purposes, a provincial value-added tax that applies in Québec in the same general manner as the GST.
In an effort to combat this fraud, Revenu Québec began imposing stringent supplier-verification obligations on customers of EAs who sought to claim ITCs to recover the tax paid to the EAs. Specifically, in addition to the documentary requirements imposed under subsection 169(4) of the ETA, Revenu Québec has required that customers of an EA confirm the EA’s legitimacy through different measures, including: verifying the supplier’s legal existence with the corporate registrar, visiting the supplier’s head office for proof that actual commercial activities were taking place, asking all the EA’s temporary employees to provide identification and their Social Insurance Numbers and obtaining compliance letters from the provincial occupational health and safety agency confirming that the hours worked by the EA’s employees were reported.
The validity of these Revenu Quebec requirements was recently considered by the Federal Court of Appeal (“FCA”) in The Queen v. Salaison Lévesque Inc., 2014 FCA 296. The FCA upheld the judgment of the Tax Court of Canada (“TCC”) allowing Salaison Lévesque Inc.’s (“Salaison”) appeal of Revenu Quebec’s disallowance of ITCs claimed in respect of GST paid to EAs notwithstanding Salaison’s failure to comply with Revenu Quebec’s enhanced supplier-verification obligations. To the relief of taxpayers, the FCA effectively agreed with the TCC’s holding that ITC claims will be considered valid where there is a legitimate supply made, the customer has paid the tax, and the customer satisfies the documentary requirements under subsection 169(4) of the ETA. That is, it is not within the power of Revenu Québec to impose on taxpayers enhanced supplier-verification obligations that fall outside the ETA.
While Salaison addressed Revenu Québec’s audit practices, it is important to note that the CRA has been grappling with similar fraud issues and considering the level of due diligence that it will impose on persons claiming ITCs under its jurisdiction. However, given the decision in Salaison, it would appear that where the underlying transaction is legitimate and there is no obvious basis for the customer to question the supplier’s legitimacy, the customer should be entitled to claim ITCs provided it satisfies the ETA’s documentary requirements. Revenu Québec has not appealed the FCA decision as of the date of writing.
By Alex Pankratz, Toronto and Randy Schwartz, Toronto