Category Archives: Canada

Quebec to tax the digital economy… and more

ecommerce-2607114_1920In March of 2018, the province of Quebec introduced a proposal to vastly expand the requirements for non–residents of Quebec to collect and remit the Quebec Sales Tax (“QST”) on sales of services and intangible property.  Although no draft legislation has yet been released, these proposals would require both Canadian and non–Canadian suppliers of intangible property or services, whether delivered through a digital platform or not, to register as a collector of the Quebec Sales Tax, and to collect, report and remit such tax on all such sales to unregistered Quebec residents.

These proposals follow the OECD recommendations designed to address the tax challenges associated with the digital economy globally, and appear to be directed primarily at B2C transactions, such that only non–residents of Quebec that make sales to unregistered Quebec resident consumers will be subjected to these new rules.  Further, Quebec has indicated that there will be a $30,000 threshold (calculated on a rolling basis over the previous 12–month period), below which registration will not be required.

Although there are many layers of complexity that will need to be dealt with as the legislation is drafted, Quebec has already made it clear that the tax collected under this new system, as well as those collecting such tax, will not be treated the same as the traditional amounts of QST or the traditional QST collectors.  For example, collectors under this new regime will not be entitled to recover any of their own QST costs by way of input tax refund.

Further, it appears that Quebec will also require certain digital intermediaries (e.g. a third party that provides the digital platform to enable supplies of intangibles) to register and collect the QST on such taxable supplies.  This imposition of a compliance burden on such third party intermediaries, appears similar to similar compliance burdens placed on intermediaries in other value added tax jurisdictions (e.g. in Brazil, credit card companies are obligated to collect, report and remit certain sales taxes on payments made by resident Brazilians to non–resident suppliers of intangibles and services).  Although we note that the Quebec proposals appear to exempt payment processors from such compliance obligations, we questions whether Quebec (and possibly Canada) will continue to move in this direction in order to more fully tax the digital economy.

As can be imagined, there will be many difficulties faced by Quebec in the implementation of this new form of QST, not the least will be ensuring compliance by non–residents.  Although it is likely that Quebec will effectively be able to force compliance by Canadian suppliers that do not otherwise carry on business in Quebec, there will likely be significant challenges in enforcing such registration requirements of non–Canadian suppliers.  Similarly, there will likely be significant challenges faced by such non–resident suppliers in determining whether they are making sales to consumers that are actually subject to this tax.

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Search warrant’s validity does not need to be confirmed for CRA to examine items seized as part of criminal investigation

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Originally published on Fasken’s White Collar Post blog, under the title “CRA Can Examine Items Seized During Criminal Investigation Before Validity of Search Warrant Confirmed“.

By Jenny P. Mboutsiadis and Anastasia Reklitis

The Canada Revenue Agency (“CRA”) can examine and make copies of items seized by the Royal Canadian Mounted Police (“RCMP”) pursuant to search warrants issued during a criminal investigation without having to wait for a determination of whether the warrants were valid.  This was confirmed by the British Columbia Supreme Court in Canada Revenue Agency v. Royal Canadian Mounted Police, 2016 BCSC 2275.  The CRA has not appealed the decision.

In this case, the CRA applied to the court under subsection 490(15) of the Criminal Code, RSC, 1985, c. C-46, for access to items obtained by search warrants.  The search warrants had been issued based on the belief that those named in the warrants (“Named Persons”) had committed criminal offences, such as laundering proceeds of crime, possession of property obtained by crime, and importing and trafficking in a controlled substance.  The items seized included large amounts of cash, numerous documents and computers, and other electronic devices and media containing business, accounting, and tax records.

The CRA argued that it was permitted access because it is a person “who has an interest in what is detained”, thereby satisfying the applicable Criminal Code provision.  The Named Persons opposed the CRA’s application on numerous grounds.  The RCMP took no position.

The Named Persons’ first argument was that a determination that the seizure is lawful is a pre-condition to the CRA’s entitlement to access any materials.  The Named Persons had already commenced the process in the Provincial Court that could possibly lead to the quashing of some or all of the search warrants and argued that, therefore, the CRA’s application should be adjourned until the validity of the warrants is determined from that process.  The court rejected this argument and explained that the warrants were presumptively valid and the Named Persons have the burden to establish otherwise.  A mere challenge with vague possibilities was not enough to satisfy the court that the warrants were invalid.

The Named Persons’ second argument was that the CRA’s application should fail because it did not have an interest in the seized items.  The court found to the contrary:  the CRA did have an interest because the items could be relevant to various tax investigations in which it was involved, which were independent of the RCMP investigations.  In particular, the items were relevant to determining potential tax offences involving some or all of the Named Persons, including tax evasion and the filing of false tax returns.

The Named Persons’ third argument was that any order allowing the CRA access should contain specific restrictions relating to privacy, privileged material, and relevance.  The court refused to place any restrictions as it did not find it appropriate to limit the examination of the evidence.

The CRA’s application was allowed and access to the seized items was granted.  In doing so, the court stated that there is nothing inherently wrong with law enforcement officials cooperating and sharing legally-obtained information.  Preventing the CRA from accessing the RCMP gathered information would delay the CRA’s investigation, thereby prejudicing its effectiveness and the likelihood of charges arising from it.  The court’s view was that it is in the public interest that the RCMP and CRA investigations proceed concurrently as they concern offences arising from the same search warrants.

 

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GST/HST burden, insolvent suppliers, and the pros & cons of credit notes

lab-316553On January 12, 2018, the Canadian Federal Court of Appeal (the “FCA”) released its decision in North Shore Power Group Inc. v. Canada, 2018 FCA 9 (“North Shore Decision”), which addressed the tax implications to a purchaser of receiving credit notes from an insolvent supplier.  The FCA’s unanimous decision also sheds light on the scope of a purchaser’s obligation for unremitted goods and services tax/harmonized sales tax (“HST”) and illustrates how the textual, contextual and purposive approach to statutory interpretation is applied by Canadian courts.  The decision also serves as a useful reminder of the practical considerations for purchasers, as well as suppliers, in using credit notes when dealing with refunds.

HST overpayments generally

By way of background, HST overpayments made by a purchaser to a supplier are generally addressed in one of two ways: (1) the purchaser files a rebate with the Canada Revenue Agency (the “CRA”) for the tax (an option that many suppliers favour), or (2) the supplier can refund the tax to the purchaser and claim the refunded tax back in its HST return (an option that many purchasers favour).  The rules relating to option (2) are set out in section 232 of Part IX of the Excise Tax Act (Canada) (the “HST legislation”), and were the subject of the North Shore Decision.

Section 232 of the HST legislation

Subsection 232(3) is triggered when a supplier “adjusts, refunds or credits” HST under section 232 (e.g. because the HST was incorrectly charged or the price was later reduced) to a purchaser and generally requires, among other things, that the supplier “within a reasonable time, issue to the other person a credit note, containing prescribed information…” If the purchaser has already claimed back the HST paid to the supplier as an input tax credit (“ITC”), section 232 requires the purchaser to repay the credited HST to the CRA when it files its HST return, so that it is prevented from recovering the single HST payment twice (i.e. once as an input tax credit and once as a credit from the supplier).

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Transfer of Immovables Involving Partnerships: Introduction of Exemptions

Bank security box  in old-fashioned interior clear room.

This Tax Bulletin was initially published on December 22nd, 2017, on Fasken.com, under the title “Introduction of Exemptions From the Payment of Transfer Duties on the Transfer of an Immovable Involving a Partnership“.

On December 20, 2017, the Minister of Finance published an Information Bulletin (2017-14, dated December 20, 2017) indicating that amendments would be made to the Act respecting duties on transfers of immovables (the “Act”) to provide an exemption from duties (“Duties”) for transfers involving partnerships made after December 20th, 2017.

Duties are imposed on the transfers of immovables in Québec, unless an exemption applies.

The Act provides exemptions from the payment of Duties in certain cases, such as, for example, where the transfer of an immovable involves a transferor or a transferee that is a legal person.

However, currently no exemption from the payment of Duties applies if a transfer is made to or from a partnership.

Québec has decided to provide an exemption from the payment of Duties on the transfer of an immovable involving a partnership, in circumstances similar to those for legal persons (i.e. for transfers between closely related legal persons).

The proposed amendment will provide for an exemption from the payment of Duties on the transfer of an immovable involving a partnership, where the percentage of a partner, that is the transferor or the transferee of the transfer, of the income or losses of the partnership is at least 90%. This, presumably, includes transfers by or to corporations and partnerships.

Continue over to Fasken.com for the full article.

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Paradise Papers and the new voluntary disclosures program

sweet-ice-cream-photography-122596On November 5, 2017, a massive leak of financial documents referred to as the Paradise Papers was released to the public. The leak involves multiple jurisdictions and contains nearly 13.4 million confidential electronic documents relating to offshore investment. The Paradise Papers comes largely from Appleby, a law firm based in Bermuda, and from the corporate registries of 19 tax havens.

The Paradise Papers cover the period from 1950 to 2016 and involve over 120,000 people and companies across the world, including government officials, entertainment personalities and corporate giants. It also involves more than 3,000 Canadian individuals and corporations, which is five times more than the ones from the Panama Papers.

On November 3, 2017, just a few days prior to this new leak, the Canada Revenue Agency (the “CRA”) delivered a statement (document) to highlight its work to combat tax evasion and tax avoidance. The CRA stated having “currently more than 990 audits and more than 42 criminal investigations related to offshore underway”, 123 of which involve participants and facilitators named in the Panama Papers. In light of the recent Paradise Papers leak, the CRA already announced that it is reviewing the data and promised to take “appropriate action”.

Furthermore, as part of the CRA’s strategy to combat offshore tax evasion and aggressive tax planning, the CRA announced earlier this year that a revised voluntary disclosures program policy would be introduced in 2018. The proposed changes were initially supposed to be implemented on January 1, 2018, but the CRA is delaying the implementation until March 1, 2018. The formal keys changes confirmed by the CRA will :

  • eliminate the « no-names » disclosure process;
  • require payment of the estimated tax at the time of the application;
  • cancel relief if it is subsequently discovered that the application was not complete due to a misrepresentation; and
  • create a two tracks system by introducing a « General Program » for minor non-compliance and a « Limited Program » for major non-compliance with limited relief in certain circumstances;

Such circumstances could include, for example :

  • Situations where large amounts of tax were avoided;
  • Active efforts to avoid detection and the use of complex offshore structures;
  • Multiple years of non-compliance;
  • Disclosures motivated by CRA statements regarding its intended focus of compliance, by broad-based tax compliance programs or by the reception of leaked confidential information by the CRA such as the Paradise Papers data leak; and
  • Other circumstances in which the CRA considers that there was a high degree of guilt in the taxpayer’s conduct contributing to his failure to comply.

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