How To File A "Service Complaint" Against The Canada Revenue Agency

In writing this blog post, we are not advocating filing baseless, frivolous, vexatious and retaliatory "service complaints" against Canada Revenue Agency ("CRA") auditors, collections officers and other employees of the CRA. However, we have learned from the experience of our clients that some legitimate complaints arise from time-to-time.  It is in the spirit of transparency and openness that we have decided to write about the CRA service complaints process.  Before we give this information to you, we ask one thing - when you write a service complaint, do not do so in anger.  Take your time to be fair.  After you write the service complaint, do not press "send" right away.  Print what you have written and put it in a drawer for 24 hours.  Then read the service complaint again and make any changes that you feel are warranted and appropriate.  If you send a fair service complaint that is factual, rather than emotional, you increase the chances that the reader will address your concerns.  I have been informed that all service complaints are reviewed and taken seriously.

There is a form for "Service Complaints" about CRA employees. You must complete an RC193 "Service Related Complaint" form.  The form asks for your information - service complaints cannot be made anonymously.  The reason why service complaints cannot be anonymous is that the CRA has to review the alleged treatment of a particular taxpayer and conduct an internal review of the contents of the complaint.  However, service complaints may be filed on your behalf by a representative, such as a lawyer, accountant, bookkeeper, consultant, etc.

The form requires the taxpayer filing the service complaint to describe the actions of the CRA employee giving rise to the service complaint and state the action the taxpayer wishes the CRA to take.

There are many legitimate reasons why a taxpayer may file a service complaint against an employee of the CRA.  The first place to start is the "Taxpayer Bill of Rights" and RC17 "Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer".  The next document to consider when completing a service complaint is the CRA's "Service Standards 2016-2017". The CRA has also prepared a publication on "Complaints and Disputes".  You may also wish to consult your accountant, lawyer or bookkeeper to assist you with the drafting of the service complaint.

For example, if an auditor is acting in a biased manner towards the taxpayer, the taxpayer should make a statement that they are being treated in a biased manner, present the facts in support of the claim and make a requested action, such as the replacement of the auditor with another auditor.  It is not possible to ask that the taxpayer never be audited.  But it is reasonable to request another auditor.

For example, if the auditor does not seem to understand the legal issues involved in the file and fails to consider the issues, you should ask for a meeting with a Team Leader.  If the auditor refuses to arrange a meeting with his/her Team Leader, you should file a service complaint.  The basis for the complaint would be the lack of knowledge and the refusal to arrange a meeting with a Team Leader.  The concern would be that the auditor is not communicating with others within the CRA and using appropriate resources.  It is not uncommon for new auditors to be "in over their heads" when dealing with new and complex issues.  It can be beneficial to raise these issues in order to keep the audit on track and to minimize the risk of the auditor making incorrect assessments.

After the complaint is written, put it away for a day and make appropriate revisions.  The service complaint may be submitted to the CRA electronically (through My Business Account), by fax or by mail. See the Submissions options.

We have filed service complaints on behalf of our clients.  Normally, we receive a letter within a few weeks acknowledging receipt by the CRA of the complaint.  The complaint is forwarded to the Tax Services Office most closely connected to the service complaint.  In every file in which we filed the service complaint, we have received a telephone call about the service complaint.  In every case, there was a requirement that the CRA employee respond to a supervisor who was looking into the service complaint.  In every file, we received a response from the CRA about the steps to be taken.  In every case, the service complaints were taken seriously. In most cases, the matter was resolved satisfactorily.  This is because we were reasonable in how we discussed the issues and were reasonable in what actions were requested.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or email cyndee@lexsage.com.

Canadian Sales Tax Rates (as at October 1, 2016)

Canadian Sales Tax Rates Chart
As at October 1, 2016

 

Province/Territory Provincial Sales Tax GST/HST Rate GST Included in PST Tax Base Combined Rate
British Columbia 7% 5% N/A 12%
Alberta Nil 5% N/A 5%
Saskatchewan 5% 5% No 10%
Manitoba 8% 5% No 13%
Ontario N/A 13% N/A 13%
Quebec 9.975% 5% N/A 14.975%
New Brunswick N/A 15% N/A 15%
Nova Scotia N/A 15% N/A 15%
Newfoundland/Labrador N/A 15% N/A 15%
Prince Edward Island N/A 15% Yes 15%
Northwest Territories Nil 5% N/A 5%
Yukon Nil 5% N/A 5%
Nunavut Nil 5% N/A 5%

The HST rate for Newfoundland/Labrador increased to 15% from 13% effective July 1, 2016.

The HST rate for New Brunswick increased to 15% from 13% effective July 1, 2016.

The HST rate for Prince Edward Island increased to 15% effective October 1, 2016.

The ITC recapture rate in Ontario decreased to 50% as of July 1, 2016.

Steps To Take

  1. Are you charging the correct amount of sales tax?
    • Sales departments/accounts receivable departments that have programmed HST-included pricing will need to update the sales tax rates in their systems.
    • Even companies that calculate sales tax separately will need to make sure that computer programs have been updated.
  2. Are you paying the correct amount of sales tax?
    • Payroll departments will need to review invoices in the months following the sales tax increases to ensure that they are being charged the correct amount of sales tax.
    • This means not paying the higher rate for property and services provided before July 1, 2016 and paying the higher rate, if applicable, after July 1, 2016.
  3. Are you claiming the correct amount of ITCs?
    • The finance department will need to make sure that computerized programs that break out the amount of HST payable on invoices have been updated to reflect the higher HST rates.
  4. Are Ontario businesses not giving too much back?
    • The ITC recapture rate in Ontario has decreased to 50% from 75%.  This means the amount of ITCs that companies can claim may have increased for some large businesses.
    • Have you updated your computerized records to reduce the recapture rate?

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com. Alternatively, visit www.lexsage.com.

Taxpayer Interest And Penalty Relief: How Can A Taxpayer Get Some Relief?

Canadian taxpayers are entitled to apply to the Canada Revenue Agency for taxpayer relief of penalties and interest.  All that is required is for a taxpayer who has been assessed to complete and submit an RC4288 form "Request for Taxpayer Relief - Cancel or Waive Penalties and Interest".  This form can be used for goods and services tax ("GST") and harmonized sales tax ("HST") relief in addition to income tax.

The form is relatively simple - however, the devil is in the details.  Section 2 is very important and any taxpayer seeking a significant amount of relief should take care in writing the reasons for the request for relief.  We often prepare a separate document providing the facts and reasons why relief should be granted - we do not limit the written communication to the form.  We also attach relevant documents to show transparency and openness.

It is important to understand that relief is not guaranteed.  While the CRA has broad discretion to grant relief, they also have broad discretion to deny relief. The CRA provides limited information about when they will grant penalty and interest relief.  The CRA indicates that the Minister of National Revenue may grant relief from penalty or interest when the following types of situations prevent a taxpayer from meeting their tax obligations:

  • extraordinary circumstances:  Penalties or interest may be cancelled or waived in whole or in part when they result from circumstances beyond a taxpayer's control. Extraordinary circumstances that may have prevented a taxpayer from making a payment when due, filing a return on time, or otherwise complying with a tax obligation include, but are not limited to, the following examples:
    • natural or human-made disasters, such as a flood or fire;
    • civil disturbances or disruptions in services, such as a postal strike;
    • serious illness or accident; and
    • serious emotional or mental distress, such as death in the immediate family;
  • actions of the Canada Revenue Agency (CRA): The CRA may also cancel or waive penalties or interest when they result primarily from CRA actions, including:
    • processing delays that result in taxpayers not being informed, within a reasonable time, that an amount was owing;
    • errors in CRA material which led a taxpayer to file a return or make a payment based on incorrect information;
    • incorrect information provided to a taxpayer by the CRA;
    • errors in processing;
    • delays in providing information, resulting in taxpayers not being able to meet their tax obligations in a timely manner; and
    • undue delays in resolving an objection or an appeal, or in completing an audit;
  • inability to pay or financial hardship:  The CRA may, in circumstances where there is a confirmed inability to pay amounts owing, consider waiving or cancelling interest in whole or in part to enable taxpayers to pay their account. For example, this could occur when:
    • a collection has been suspended because of an inability to pay caused by the loss of employment and the taxpayer is experiencing financial hardship;
    • a taxpayer is unable to conclude a payment arrangement because the interest charges represent a significant portion of the payments; or
    • payment of the accumulated interest would cause a prolonged inability to provide basic necessities (financial hardship) such as food, medical help, transportation, or shelter; consideration may be given to cancelling all or part of the total accumulated interest; and
  • other circumstances: The CRA may also grant relief if a taxpayer's circumstances do not fall within the situations described above.

The CRA is working to improve its procedures for dealing with Requests for Taxpayer Relief. When a completed form is filed with the supporting documentation, the CRA should send a letter to the requester acknowledging receipt of the Request for Taxpayer Relief.  The file should be assigned to a CRA officer and the taxpayer should receive requests for relevant documentation (unless a full set of relevant documents is provided with the Request for Taxpayer Relief).

If the taxpayer gets a decision that is not favourable - it happens often - then there is the ability to request an impartial review of the CRA officer's decision by the CRA (not the same CRA officer who rejected the request).

If the review procedure ends in a rejection of the requested relief, it is possible to seek a review by the Federal Court of Appeal by way of a judicial review.  However, judicial reviews often are an expensive legal procedure and can cost tens of thousands of dollars (even hundreds of thousands of dollars in some cases depending on the complexity of the issues). There have been judicial review applications filed and the Federal Court of Appeal has in some cases sided with the taxpayer.

I will be honest with you - the Request for Taxpayer Relief Program can be frustrating for persons seeking relief. That does not mean it is not worth the effort and one should not try. Just know that you may feel like you are still stuck in the mud while pursuing a process that may take time.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

15 Stages Of A Canada Revenue Agency GST/HST Audit

If you have never been audited before, you probably have no idea what to expect.  Most audits follow the same 15 stages (more or less).  On the taxpayer's side of things, each stage is stressful.

  1. CRA Selection Process:  The taxpayer usually has no involvement in this process.  It all happens behind the scenes and the taxpayer can only guess why their name was selected. Sometimes the taxpayer is randomly selected.  Sometimes the taxpayer is selected as a result of the industry segment in which they operate.  Sometimes the taxpayer is selected because of something in a filing with the CRA.  Sometimes the taxpayer is selected because of a tip made to the CRA.
  2. The Audit Letter: The taxpayer receives a letter from the CRA notifying them that they are to be audited. Normally, the taxpayer is asked to contact the CRA auditor.  However, sometimes the auditor just shows up at the business premises.
  3. The CRA letter requesting certain documents:  Usually the CRA auditor will send to the taxpayer a letter indicating what documents need to be provided before the initial meeting at the taxpayer's premises or what documents must be available for the first day of the audit.
  4. Initial Meeting:  If the audit occurs at the taxpayer's premises, the auditor will have a meeting at the start of the audit.  The auditor explains what is expected during the audit.  The taxpayer should also communicate to the auditor what is expected.  The taxpayer may indicate that the auditor must deal with a specific person so that the entire organization does not end up working for the auditor.
  5. Fieldwork:  The on-site audit is the fieldwork stage.  The fieldwork can take place over a few days or over a lengthy period of time.
  6. Office work: Usually the auditor will take information back to the CRA offices and work on the audit from the CRA premises.
  7. Follow-up questions: It is common for the CRA auditor to contact the taxpayer after the fieldwork stage of the audit. Sometimes additional documents are requested.  Sometimes additional questions are asked.
  8. Preliminary Report: The CRA auditor will prepare a proposal and send it to the taxpayer for comment.  Usually a proposed assessment number is provided to the taxpayer.
  9. Response Letter: The taxpayer has an opportunity to change the minds of the CRA.  This is the best opportunity to stop an incorrect assessment from being issued.
  10. Notice of Re-assessment: The CRA auditor sends to the taxpayer the Notice of Reassessment setting out how much is being assessed.
  11. CRA Collections: As of the date of the Notice of Re-assessment, a debt is due to Her Majesty.  CRA Collections may start collection activities immediately after the Notice of Re-Assessment is issued.
  12. Notice of Objection: If a taxpayer disagrees with a Notice of Re-Assessment, the taxpayer can file a Notice of Objection.
  13. Objection: The taxpayer will communicate with a CRA Appeals Officer and the re-assessment will either be confirmed, amended to reversed.
  14. Notice of Appeal: Assuming that not all the issues are addressed in the objection stage, a taxpayer may file an appeal with the Tax Court of Canada.
  15. Day in Tax Court: A taxpayer will have their day(s) in the Tax Court of Canada if the appeal is not settled.  A Tax Court judge will listen to the parties and render a judgement.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

Make A List And Check It Twice: Record All Information Provided To A CRA Auditor

One of the most common mistakes we see taxpayers make during a Canada Revenue Agency ("CRA") audit is that they do not record what documents were requested by the auditor, what documents were provided to the auditor, and when those documents were provided to the auditor.  What is common is that documents are requested by the CRA auditor and the taxpayer is so nervous and anxious about the audit that they run around providing everything that is asked without making a list.  The taxpayer wants the audit to happen so quickly (so the auditor will leave) that they do not take time to think about how best to protect themselves.  What could go wrong during an audit?

We have seen cases where the CRA auditor forgets that they did not ask for something, but says it was never provided.  Accusations are easily made against a taxpayer and are sometimes used to justify an arbitrary assessment.  When you have a list, you have evidence that the CRA auditor did not ask for the document or was provided the document.  If you diligently make the list, the CRA auditor may have to think twice about how you should be treated - you are acting professionally and diligently.

We have seen many things happen during CRA audits over the years.  We have seen cases where the CRA auditor asks for documents and loses the documents.  This has happened in too many files. The worst case I remember happened many years ago during an Ontario provincial sales tax audit.  A Ministry of Finance auditor asked a taxpayer for a USB key with all the companies bookkeeping records and was provided with all of the taxpayer's books and records.  After a few months had passed, the auditor admitted to the taxpayer that he had lost the USB key and had no idea where it could be.  The auditor had to ask for the information again and the taxpayer was uncomfortable providing another USB key for obvious reasons.  The auditor had to admit his error because the taxpayer had a list and he had initialed that he had received the USB key.

Recently, a CRA GST/HST appeals officer informed us that no documents provided during the audit had been uploaded in the system and he could not get the auditor's files.  He took the position that our client had not provided the documents. We were asked to provided all the documents again (which amounted to a number of boxes). Luckily, we had the list and we kept copies of all documents that had been provided in audit binders.  When each document was provided, three copies were made.  One copy was made for the CRA auditor, one copy was made for the audit binder and one copy was made for the scanned electronic record.  All documents were stamped confidential before being copied. We were able to provide the list and all the documents within 48 hours.

In another file, the CRA GST/HST auditor started an input tax credit audit and spend months looking through invoices and purchase documents.  The audit changed courses after many months and many requests for documents. An arbitrary assessment was issued because a limitation period was about to expire. We had been preparing the list and keeping copies of the documents.  When we performed the same audit on the same documents, the assessment was almost zero.  We filed a notice of objection and eventually the appeals officer received our analysis.  The objection was successful because we were able to show that we had a list of documents provided and what the correct analysis of those documents showed.

We have developed a template Audit List for taxpayers to use during audits.  This is the same template that we give our clients who ask us to help them during the audit process.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many useful articles about tax audits under Free Information - Sales Tax, Harmonized Sales Tax (HST) and Goods and Services Tax (GST) Articles.

11 Tips For Small Business Owners For Keeping Canada Revenue Agency Collections Officers Happy

Recently, I was contacted by a small business owner who had an unpleasant conversation with a Canada Revenue Agency ("CRA") collections officer about an outstanding goods and services tax/harmonized sales tax ("GST/HST") assessment against his small company (of which he was a director).  The CRA collections officer had threatened to send the sheriff to his house that very day to seize personal assets.  When I called the CRA collections officer, she suggested to me that she merely discussed the director's liability process to the small business owner.  What because clear to me is that the CRA was not clear in what was said because the lack of clarity could result in payments against the outstanding debt.  The CRA collections officer was deliberately attempting to make the small business owner fearful.

However, what was actually happening is that the CRA collection officer had completed a direction to the sheriff to determine the assets of the reassessed corporation.  If the sheriff prepares a "No Assets" report, then the CRA could issue a director's liability assessment under section 323 of the Excise Tax Act. Only after the CRA issues a director's liability assessment against the small business owner could the CRA ask the sheriff to seize personal assets.  The problem in this case was that the address provided by the small business owner for the business was his home address.  It was for that reason that the sheriff would come to the home to determine if the corporation has assets that could be seized.

What needed to be done was satisfactorily resolve the corporation's GST/HST reassessment issues.  The following are tips to keep the CRA collections officer happy and away from personal assets from the small business owner.

1. Do not use your home address as your business address.  If you have an operating business and a business location that is not your home, use that address for communications with the CRA.  If the CRA collections officer issues a direction to the sheriff to prepare an assets report, the sheriff would go to the business address.

2. See if you can enter into a payment arrangement with the CRA to satisfy the corporation's debt.  The best way to avoid a director's liability claim is to make sure there are sufficient assets in the corporation.  The payment arrangement usually will be acceptable is it covers 6-24 months (that is you give post-dated cheques to pay the debt over time).

3. If you have a payment arrangement and have provided cheques to the CRA collections officer, you may provide proof of such arrangement to the sheriff.  The sheriff usually takes this into consideration when preparing an assets report.  If the assets report does not state that there are no assets, the CRA may not be able to issue a director's liability claim (depends on the facts).

4. If you enter into a payment arrangement, ensure there are sufficient funds in the account to pay the cheques.  If a cheque is returned NSF (not sufficient funds), then the CRA collections officer will look at other options to get the money.

5. During the period of the payment arrangement, make sure you are up-to-date on all CRA filings and payments (including GST/HST, income tax, payroll taxes, etc).  CRA collections officers are nervous fellows and gals and they will get concerned if the debts of the corporation start increasing.  This means that the cheques they have no longer cover the outstanding liability and that the outstanding liability will not get paid.

6. While the company is paying off the debt, apply for interest relief.  If the CRA accepts your interest relief request, your outstanding debt will decrease. Every little bit helps.

7. While the company is paying off the debt, if you are able to make a significant payment, do so.  This stops the interest clock on the amount you paid.

8. If you have nothing to hide (and even if you do have something to hide), be honest with the CRA collections officer.  Things you say may cause the CRA collections officer to become concerned.

9. Along the same lines, provide the information that is requested by the CRA collections officer.  If the CRA collections officer trusts you, he/she will be more likely to exercise discretion.

10. Always remember to be civil.  The CRA collectinos officer has a job to do.  It does not become personal unless you make it personal.  Know that they have a supervisor that wants to see results. Help them to their job.

Bonus tip: If you cannot make it work with a CRA collections officer because of a personality conflict between you and her/him, ask to meet with the CRA collections officer and his/her supervisor.  Do not use this opportunity to rant at the supervisor because you will only show the supervisor that the CRA collections officer is right about you.  Take the opportunity to press the reset button of the relationship. You need a positive resolution to your GST/HST problems.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com. Alternatively, visit www.lexsage.com.

GST/HST Measures in March 22, 2016 Federal Budget

There are a few GST/HST measures in the Canadian Federal Budget tabled today.  The following is an excerpt from the 2016 Budget Describing the GST/HST Measures:

Medical and Assistive Devices

Medical and assistive devices that are specially designed to assist an individual in treating or coping with a chronic disease or illness or a physical disability are generally zero-rated under the Goods and Services Tax/Harmonized Sales Tax (GST/HST). Zero-rating means that suppliers do not charge purchasers GST/HST on these medical devices and are entitled to claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies. The medical devices eligible for zero-rating are listed in the GST/HST legislation.

Budget 2016 proposes to add insulin pens, insulin pen needles and intermittent urinary catheters to the list of zero-rated medical devices to reflect the evolving nature of the health care sector.

Insulin Pens and Insulin Pen Needles

Insulin infusion pumps and insulin syringes are currently included in the list of zero-rated medical devices. These devices are used to inject insulin for the treatment of diabetes. Insulin itself is currently zero-rated as a drug.

Insulin pens are also used to inject insulin for the treatment of diabetes, and are an alternative to infusion pumps or syringes. Budget 2016 proposes to add insulin pens and insulin pen needles to the list of zero-rated medical devices.

This measure will apply to supplies made after Budget Day and to supplies made on or before Budget Day unless the supplier charged, collected or remitted GST/HST in respect of the supply.

Intermittent Urinary Catheters

Urinary appliances that are designed to be worn by an individual are currently included in the list of zero-rated medical devices.  Intermittent urinary catheters are an alternative to catheters that are left in place.

Budget 2016 proposes to add intermittent urinary catheters, if supplied on the written order of a medical doctor, registered nurse, occupational therapist or physiotherapist for use by a consumer named in the order, to the list of GST/HST zero-rated medical and assistive devices.

This measure will apply to supplies made after Budget Day.

Purely Cosmetic Procedures

Supplies of purely cosmetic procedures are not considered to be supplies of basic health care and are intended to be subject to the GST/HST, regardless of the status of the supplier.

Budget 2016 proposes to clarify that the GST/HST generally applies to supplies of purely cosmetic procedures provided by all suppliers, including registered charities. Taxable procedures will generally include surgical and non-surgical procedures aimed at enhancing or altering an individual’s appearance, such as liposuction, hair replacement procedures, hair removal, botulinum toxin injections and teeth whitening.

A cosmetic procedure will continue to be exempt if it is required for medical or reconstructive purposes, such as surgery to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. As well, cosmetic procedures paid for by a provincial health insurance plan will continue to be exempt.

This measure will apply to supplies made after Budget Day.

Exported Call Centre Services

Under the GST/HST rules, exported supplies are generally relieved (i.e., zero-rated) from the GST/HST. This means that suppliers do not charge purchasers GST/HST on these supplies and are entitled to claim input tax credits to recover the GST/HST paid on inputs used in relation to these supplies.

Budget 2016 proposes to modify the zero-rating rules for certain exported supplies of call centre services. Specifically, the supply of a service of rendering technical or customer support to individuals by means of telecommunications (e.g., by telephone, email or web chat) will generally be zero-rated for GST/HST purposes if:

  • the service is supplied to a non-resident person that is not registered for GST/HST purposes; and
  • it can reasonably be expected at the time the supply is made that the technical or customer support is to be rendered primarily to individuals who are outside Canada at the time the support is rendered to those individuals.

This measure will apply to supplies made after Budget Day. It will also apply to supplies made on or before Budget Day in cases where the supplier did not, on or before that day, charge, collect or remit an amount as or on account of tax under Part IX of the Excise Tax Act in respect of the supply.

Reporting of Grandparented Housing Sales

Under the transitional rules that applied when a province either joined the harmonized value-added tax system since 2010 or increased its HST rate, certain sales of newly constructed or substantially renovated homes were grandparented for HST purposes. This meant that the housing sale was not subject to the provincial component of the HST or the increased HST rate, as applicable. A housing sale was generally grandparented if the agreement of purchase and sale was entered into in writing on or before the announcement date of the transitional rules and ownership and possession of the housing was transferred on or after the date on which the HST, or the increased HST rate, came into effect.

Under the current rules, builders are subject to special reporting requirements, which involve reporting their grandparented housing sales where the purchaser was not entitled to a GST New Housing Rebate or a GST New Residential Rental Property Rebate. The rules also include penalties for misreporting (i.e., under-reporting, over-reporting or failing to report).

Budget 2016 proposes to simplify builder reporting by:

  • limiting the reporting requirement to those grandparented housing sales for which the consideration is equal to or greater than $450,000; and
  • providing builders with an opportunity to correct past misreporting and avoid potential penalties by allowing them to elect to report all past grandparented housing sales for which the consideration was equal to or greater than $450,000.

This measure will apply in respect of any reporting period of a person that ends after Budget Day. In addition, if the above election is made, the measure will also apply to any supply of grandparented housing in respect of which the federal component of the HST became payable on or after July 1, 2010. Builders will generally have between May 1, 2016 and December 31, 2016 to make the election.

GST/HST on Donations to Charities

The GST/HST does not apply to a donation if the donor does not receive anything in return. However, if the donor receives property or services in exchange for the donation, even if the value of the donation exceeds the value of the offered property or services, the GST/HST generally applies on the full value of the donation. (A number of exceptions to this treatment apply, including where the service or property offered by the charity relates to a special fundraising event, such as a gala dinner, annual cookie sale or charity auction, or where the charity provides the donor goods that were previously gifted to the charity. Such supplies are exempt from GST/HST. In addition, a charity that qualifies as a “small supplier” (e.g., makes under $50,000 of taxable sales annually) is not required to collect GST/HST.)

Special rules are provided under the Income Tax Act to deal with transactions where property or services are supplied in exchange for or in recognition of a donation to a charity. Under the Income Tax Act “split-receipting” rules, where a charity encourages or recognizes a donation by supplying property or services in exchange, the charity generally may issue a donation receipt for the amount paid by the donor less the value of any property or service that the donor receives. Consequently, such donations are treated less favourably under the GST/HST than under the Income Tax Act

To bring the GST/HST treatment of this type of exchange into line with the treatment under the Income Tax Act split-receipting rules, Budget 2016 proposes a relieving change to provide that when a charity supplies property or services in exchange for a donation and when an income tax receipt may be issued for a portion of the donation, only the value of the property or services supplied will be subject to GST/HST. The proposal will apply to supplies that are not already exempt from GST/HST. It will ensure that the portion of the donation that exceeds the value of the property or services supplied is not subject to the GST/HST.

This measure will apply to supplies made after Budget Day.

In addition, where a charity did not collect GST/HST on the full value of donations made in exchange for an inducement, for supplies made between December 21, 2002 (when the income tax split-receipting rules came into effect) and Budget Day, the following transitional relief will be provided:

  • If GST/HST was charged on only the value of the inducement, consistent with the income tax split-receipting rules, or if the value of the inducement was less than $500, the donors’ and charities’ GST/HST obligations will effectively be satisfied, resulting in no further GST/HST owing.
  • In other cases, the charity will be required to remit GST/HST on the value of the inducement only (i.e., the relieving split-receipting rules will apply).

De Minimis Financial Institutions

Under the GST/HST, special rules apply to financial institutions, particularly in determining their entitlement to input tax credits. For GST/HST purposes, financial institutions include persons whose main business is providing financial services such as banks, insurance companies, investment dealers and investment plans. The GST/HST legislation also includes rules to ensure that other persons that provide a significant amount of financial services, such that they may be in competition with traditional financial institutions, are also treated as financial institutions for GST/HST purposes. For example, a person will generally be treated as a financial institution throughout a taxation year if the person’s income for the preceding taxation year from interest, fees or other charges with respect to the making of an advance, the lending of money, the granting of credit, or credit card operations, exceeds $1 million.

Under this rule, a person that earns more than $1 million in interest income in respect of bank deposits in a taxation year will be considered to be a financial institution for GST/HST purposes for its following taxation year even though the earning of such interest would generally not, by itself, bring that person into competition with traditional financial institutions.

To allow a person to engage in basic deposit-making activity without that activity leading it to being treated as a financial institution for GST/HST purposes, Budget 2016 proposes that interest earned in respect of demand deposits, as well as term deposits and guaranteed investment certificates with an original date to maturity not exceeding 364 days, not be included in determining whether the person exceeds the $1 million threshold.

This measure will apply to taxation years of a person beginning on or after Budget Day and to the fiscal year of a person that begins before Budget Day and ends on or after that day for the purposes of determining if the person is required to file the Financial Institution GST/HST Annual Information Return.

Application of GST/HST to Cross-Border Reinsurance

The GST/HST applies to domestic purchases as well as to importations of property and services. GST/HST rules require certain recipients of imported taxable supplies of services and intangible personal property to pay tax on a self-assessment basis.  Additionally, special GST/HST imported supply rules for financial institutions require a financial institution, including an insurer, with a presence outside Canada (e.g., in the form of a branch or a subsidiary) to self-assess GST/HST on certain expenses incurred outside Canada that relate to its Canadian activities.

Budget 2016 proposes to clarify that two specific components of imported reinsurance services, ceding commissions and the margin for risk transfer, do not form part of the tax base that is subject to the self-assessment provisions contained in the GST/HST imported supply rules for financial institutions and to set out specific conditions under which the special rules for financial institutions do not impose GST/HST on reinsurance premiums charged by a reinsurer to a primary insurer.

This measure will apply as of the introduction of the special GST/HST imported supply rules for financial institutions (i.e., in respect of any specified year of a financial institution that ends after November 16, 2005). In addition, this measure will allow a financial institution to request a reassessment by the Minister of National Revenue of the amount of tax owing by the financial institution under the special GST/HST imported supply rules for a past specified year of the financial institution, as well as any related penalties or interest, but solely for the purpose of taking into account the effect of this measure. A financial institution will have until the day that is one year after the day that these amendments receive Royal Assent to request such a reassessment.

Closely Related Test

Under the GST/HST, special relieving rules allow the members of a group of closely related corporations or partnerships to neither charge nor collect GST/HST on certain intercompany supplies. To qualify for these relieving rules, each member of this group must, among other requirements, be considered to be closely related to each other member of the group, supporting the assumption that the members effectively operate as a single entity.

In the case of a subsidiary corporation owned by a parent corporation or partnership, the closely related concept is reflected in a test that requires the parent to have nearly complete ownership and voting control over the subsidiary corporation. The current test requires that the parent corporation or partnership own 90 per cent or more of the value and number of the shares of the subsidiary corporation that have full voting rights under all circumstances. However, due to the complexity of share capital structures, it has been suggested that a parent corporation or partnership could be considered to be closely related to a subsidiary corporation even if it lacks nearly complete voting control over the subsidiary corporation.

To ensure that the closely related test applies only in situations where nearly complete voting control exists, Budget 2016 proposes to require that, in addition to meeting the conditions of the current test, a corporation or partnership must also hold and control 90  per cent or more of the votes in respect of every corporate matter of the subsidiary corporation (with limited exceptions) in order to be considered closely related.

This measure will generally apply as of the day that is one year after Budget Day. The measure will apply as of the day after Budget Day for the purposes of determining whether the conditions of the closely related test are met in respect of elections under section 150 and section 156 of the Excise Tax Act that are filed after Budget Day and that are to be effective as of a day that is after Budget Day.

One Of The Common Objection Mistakes - Missing The Deadline

There have been many times that a potential client contacts me (or any tax lawyer) to discuss filing a notice of objection to challenge a notice of assessment from the Canada Revenue Agency ("CRA"). The potential client seems to have a good legal position.  Then, I ask for the notice of assessment date and --- yikes --- it is more than 3 months ago. 

The deadline to file a GST/HST notice of assessment is 90 days from the date on the notice of assessment.  Three months is a short amount of time that seems to tick by quickly.  Some of that time passes while the notice of assessment is in the mail.  Some of the time is spent looking for a tax lawyer.  Unfortunately, some of the time is spent avoiding the issue of a GST/HST assessment.

If a taxpayer misses the 90 day deadline, is there any chance to still file a notice of objection?  The answer is that it depends..  Section 303 of the Excise Tax Act gives taxpayers an opportunity to apply to the Minister for an extension of time to file a notice of objection within one year of the expiration of the 90 days deadline.  In the application for an extension of time, the taxpayer must:

1) demonstrate that within the 90 day deadline for the notice of objection the taxpayer was unable to act or give instructions to a representative to file a notice of objection OR the taxpayer had a bona fide intention to object; and

2) give good reasons why the Minister should grant the application for an extension of time.

It is not a sure thing that the Minister will grant an extension of time to file a notice of objection.  We have been successful in receiving an extension of time when a client did not receive the notice of assessment, where the client asked for information from the auditor and was waiting for the information, where the client continues to discuss the audit file with the auditor or a supervisor after the date of the notice of assessment (and the T2020 report has recorded this contact), and when the client has communicated with the CRA about a desire to object.

It is important to note that while a telephone call does not constitute a notice of objection, telephone calls can evidence a desire to object.  That being said, if the notice of assessment was issued in 2013 and you contact a lawyer in 2016, the 90 days plus 1 year period for seeking an extension of time will have expired. In this scenario, there is no opportunity to file a notice of objection late.

If the Minister rejects an extension of time request, the taxpayer may appeal to the Tax Court of Canada to have the extension of time reconsidered (see section 304 of the Excise Tax Act). The Tax Court of Canada may dismiss the request or grant the request. The taxpayer must be able to present the Tax Cort of Canada with evidence that they intended to object to the assessment and that it would be just and equitable to grant the extension of time to file the notice of objection.  The Tax Court will not be moved by arguments that the taxpayer forgot about the deadline.

Audit Tip: Make A List Of All Documents Provided To The Auditor

When we work with clients who are undergoing a GST/HST audit, we recommend that the client document each and every request of the auditor and what is provided.  This is done is two ways:

1) The taxpayer should keep a written master list of all documents (including (a) the request of the auditor, (b) the date of the request, (c) the documents provided to the auditor, (d) the date the documents were provided to the auditor, (e) notes about information provided along with the document, and (f) the location in the binder of hard copies or the name of the electronic document; and

2) A binder with hard copies copies of all the documents provided to the auditor and a USB key with any electronic documents provided to the auditor.

The master list and the copies are helpful if there is a disagreement over what was provided (e.g., the auditor claims certain documents were never provided) or if there is a disagreement about and assessment.  If the dispute is ultimately appealed to the Tax Court of Canada under the General Procedure, a partial list of documents (and potentially the documents) would be discoverable.  It takes much less time to photocopy an binder than to recreate document production at a later point in time.

Recently we were hired to file an appeal in a Tax Court proceeding and the bookkeeper no longer worked for the company.  The new bookkeeper was not familiar with the documents and spend many hours trying to re-create the document trail.  If the original bookkeeper had kept a list of documents and a binder, the client could have saved a lot of time and money.

We also recently worked with an existing client after an audit and they have followed our advice. They sent u the list of documents provided to the auditor and we could quickly determine that the auditor had not put many of the key documents in the audit file.  We had filed an ATIP request and received a very small file.

How To Find Out What Is In The Canada Revenue Agency's Files About Your Audit

Wouldn't you like to know what is in the Canada Revenue Agency's ("CRA") files concerning your GST/HST audit? This information is very valuable in finding out where the CRA made a mistake or what is the basis for the misunderstanding about your taxes.  We recommend obtaining this information as soon as possible after an assessment is issued AND after an appeals officer makes a decision to confirm an assessment.  The information in your audit file may help you prepare a notice of objection or notice of appeal.  The information in your CRA files may also be very useful during an examination for discovery. During the examination for discovery, your lawyer may use the information to catch the auditor or appeals officer (the usual deponents for the CRA) in a misstatement.  The examination for discovery process sometimes leads to settlements. Most importantly, the information in the auditors own files may be used to contradict assumptions made in making the assessment.

You may obtain information in your CRA files by filing an Access to Information and Privacy (ATIP) request.  The ATIP requester must complete a Form RC378.  Where you may need the assistance of a tax lawyer is to ensure you are asking for the correct information.  If you have no idea for what to ask (e.g., the T2020 form completed by the CRA officer each time she/he spoke to you or a representative or someone in the CRA), you may miss requesting useful information.  This is the most common problem is not knowing what would be in the CRA's audit file.

The filing fee is only $CDN 5.00.

The CRA posts limited information on the Canada Revenue Agency web-site about making an ATIP request - see How to access information at the CRA.

The next problem that arises is that the CRA may withhold information.  There is the right of appeal should the CRA withhold certain information. This will be the subject of a subsequent blog post.

Based on our experience, the ATIP process often results in information being provided that an auditor will not often send to the taxpayer.  For example, if the auditor obtained an appraisal from the CRA, Real Property Appraisal Division, the auditor is often told not to give that document to the taxpayer.  The ATIP process usually results in the release of the appraisal.  Similar,y the auditor often will not share internal emails.  The ATIP process usually results in the release of the internal emails.  At the end of an audit, the auditor prepares a memo for the team leader/supervisor.  The ATIP process usually results in the release of the Auditor's file memo(s).

Based on our experience, it is important to file an ATIP request.  It is a small price to pay to possibly win the tax argument.  It is a small price to pay to potentially save the expense of a hearing at the Tax Court of Canada and years of fighting the tax dispute.  Finally, wouldn't you like to know what the auditor wrote in your file?

If you require assistance, please contact Cyndee Todgham Cherniak at 416-307-4168 or cyndee@lexsage.com.  We offer flat rates to file ATIP requests.

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