On 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).
On 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.
On December 15, 2017, the Canada Revenue Agency (the “CRA”) released new guidelines on the rules applicable to voluntary disclosures that are made (or for which the name of the taxpayer is disclosed) on or after March 1, 2018. Like the earlier draft guidelines, which were released on July 9, 2017, the new guidelines include a separation of the rules applicable to income tax voluntary disclosures and the rules applicable to disclosures of errors relating to GST/HST and other non-income taxes. Below is a summary of the new voluntary disclosures program for GST/HST (“VDP”).
The voluntary disclosures program allows taxpayers to make disclosures to the Canada Revenue Agency to correct inaccurate or incomplete information, or to disclose information not previously reported. We understand there were concerns within the CRA that the existing program was overly generous to participants in the program (as compared to taxpayers who had been fully compliant), and proposals to revise the program have been in the works for some time now. In this regard, the CRA issued an earlier version of the VDP guidelines for comments on June 9, 2017, with an initial proposed implementation date of January 1, 2018.
There was much speculation that this implementation date would be postponed, as well as hope that the final guidelines would address concerns expressed by many tax practitioners that certain proposed measures in the June 9, 2017 version were too harsh and would lead to few taxpayers choosing to avail themselves of the program. In the result, the new VDP guidelines includes significant improvements from the July 9, 2017 version. As compared to the program that is currently in place, the new VDP is more beneficial for taxpayers in some cases, and worse for taxpayers in others.
The new VDP includes three categories for disclosures, depending on the taxpayer’s circumstances.
Category 1 (GST/HST Wash Transactions Disclosures)
Category 1 disclosures include disclosures of errors relating to qualifying GST/HST “wash transactions”. This generally covers situations where a taxpayer who supplied goods or services fails to collect and remit tax as required, and the recipient would have been entitled to full input tax credits. Wash transactions will continue to be eligible for full relief from interest and penalties under the new VDP. As for the relevant period, these disclosures will require disclosure of previously inaccurate, incomplete or unreported information for the four calendar years before the date the VDP application is filed.
This posts was originally published on White Collar Post under “Panama Papers: CRA getting tougher on tax evasion” – a Fasken Martineau blog.
We are beginning to see the legal enforcement fallout from the now infamous Panama Papers. Canada Revenue Agency’s (CRA) concerted efforts to find undeclared offshore money and assets is moving into full gear. In addition to pursuing typical civil audits, the CRA is now executing search warrants and launching criminal investigations for tax evasion.
The CRA is actively gathering information from domestic and international sources to identify and charge offenders criminally. Since 2015, the Canadian government has required domestic financial institutions to report to the CRA all international electronic fund transfers of $10,000 or more. In addition, as of March 2016 the CRA has analyzed over 41,000 transactions worth over $12 billion dollars, involving four jurisdictions and particular financial institutions of concern, and has initiated risk assessments on 1,300 individuals named in the Panama Papers. This has resulted in approximately 122 CRA audits to date and counting. However, it is not just taxpayers who are subject to the CRA’s scrutiny and who may be criminally charged. The CRA is also investigating the enablers and advisors, including the lawyers and accountants, who facilitated the hiding of taxpayer money and assets offshore.
What is the “automatic exchange of financial information”
In order to increase tax transparency across the globe, the Organisation for Economic Co-operation and Development (OECD) adopted the Common Reporting Standard (CRS) on July 15, 2014. The CRS initiative calls on each participating jurisdiction to obtain information from financial institutions within their country and automatically exchange that information with other jurisdictions on an annual basis. The objective is to increase tax compliance by providing key information to the participating jurisdictions allowing them to identify whether their citizens accurately report their foreign assets and income. However, since the CRS is not constraining, 90 jurisdictions have also signed the Multilateral Competent Authority Agreement (MCAA) on automatic exchange of financial account information. The MCAA provides a mechanism to facilitate the exchange of information in accordance with the CRS. Such information to be disclosed includes the following :
- The name, address, taxpayer identification number, date and place of birth of each account holder;
- The account number;
- The name and identifying number of the financial institution;
- The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) as of the end of the relevant calendar year or the closure of the account;
- The total gross amount of interest, dividends and other income generated with respect to the assets held in the account.