Canada: CRA evidence “not relevant” to ITC denial
17 March 2015
Posted by: Authors: John G. Bassindal & Robert G. Kreklewet
Authors: John G. Bassindale and Robert G. Kreklewetz (Millar Kreklewetz LLP, Toronto)
The GST case of Salaison Lévesque Inc. (2014 CAF 296) has captivated indirect tax practitioners because it is a good example of a blameless party being caught between the tax authorities and unscrupulous suppliers. Most recently, the FCA made some important comments in favour of Salaison and any other taxpayer that finds itself in a similar situation. The response of the tax authorities is awaited with great interest.
Salaison was a successful, nearly 50-year-old family business that produced specialty ham products. In addition to its approximately 75 full-time employees, Salaison used the services of four different employment agencies in order to supply extra staff to ramp up production for Christmas and Easter. The workers (largely recent immigrants) supplied by the employment agencies showed up at Salaison’s workplace when needed and received mandatory health and safety training. The workers punched timecards to keep track of their hours, and Salaison reconciled the timecards with the employment agencies’ records for billing and payment purposes.
Revenu Québec conducted audits of the employment agencies and concluded that most had failed to report income and did not make payroll deductions, and that many had gone bankrupt or disappeared. On the basis of those conclusions, Revenu Québec further concluded that the employment agencies in question had no employees and did not make any supplies to Salaison. Accordingly, it denied Salaison’s ITC claims, saying that the supplies either were not provided or were provided by other parties.
At the TCC (2014 TCC 36), the Crown conceded that work that matched the description on the invoices had actually been performed. Thus, the case was not one of "false” invoices having been submitted; rather, the suppliers had simply disappeared with the GST (and other remittances). The TCC concluded that the employment agencies were the real perpetrators of fraud, and that Revenu Québec had drawn unreasonable conclusions from what the court described as superficial audits of the employment agencies. For example, the lack of payroll records probably indicated the employment agencies’ deliberate failure to comply with payroll and recordkeeping requirements rather than their having no employees—especially given the Crown’s concession that the work had actually been performed.
Ultimately, the TCC concluded that the Crown’s inconsistent arguments and Revenu Québec’s multiple assessments (including at one point assessing the employment agencies for unremitted source deductions and unremitted sales tax on the supplies made to Salaison) weakened its own case to the point that Salaison had met the burden of proof. Thus, Salaison was entitled to the ITCs that it had claimed. The TCC also chided Revenu Québec for its implicit demand and expectation that a taxpayer act as a "police officer or investigator” to scrutinize the tax compliance of other businesses: the court said that the ETA and regulations contained no such requirement.
The Crown appealed to the FCA on the grounds that the judge had reversed the burden of proof and had made palpable and overriding errors. Salaison cross-appealed for an award of more costs. The FCA clarified that there was no suggestion that Salaison was involved in the fraud and that the only ITC documentary requirement that was mandated under the regulations and raised by the Crown was whether the invoices contained the name of the supplier or intermediary. Significantly, the FCA noted that some arguments raised by the Crown—for example, that Salaison should have confirmed that the employment agencies were registered with the CSST (Québec Workplace Safety)—created confusion and that the TCC’s discussion of those matters was obiter in any event.
After considering the TCC’s judgment in some detail, the FCA concluded that the TCC had made no error of law and that it was open to the TCC to find on the facts that Salaison had met its burden of proof and refuted the minister’s assumptions. The FCA disagreed with the minister’s argument that the TCC had no evidence before it to show that the employment agencies actually performed the services provided to Salaison. The information obtained by the auditors, and the documentary and oral evidence provided by Salaison, demonstrated that the employment agencies were duly incorporated, had places of business, had representatives who could be contacted when workers were needed, and responded to Salaison’s inquiries by sending the number of workers requested. The workers also confirmed that they were recruited and paid by the agencies, and at least one worker found an old pay stub from his employment agency that matched the hours worked as recorded in Salaison’s timecard system.
Salaison is a positive decision for a recipient that seeks to claim ITCs on its business inputs. The FCA seems to have confirmed that an honest recipient must only fulfill the requirements in subsection 169(4) of the ETA and the related regulations. In this particular case, it was crucial that the Crown had conceded that supplies were actually provided: that concession supported Salaison’s evidence that it was the employment agencies that provided those supplies. In contrast, in Kosma-Kare Canada Inc. (2014 CAF 225), the FCA said that there were insufficient facts to establish that the employment agencies were the suppliers.
Whether or not the minister appeals the FCA decision in Salaison to the SCC, practitioners should be vigilant in ensuring that neither the CRA nor Revenu Québec attempts to deny the ITCs of innocent recipients like Salaison in order to recoup the GST/HST/QST that the tax administrations lose to rogue suppliers.
This article first appeared on www.ctf.ca.