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 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.