Indirect Tax Alert (News from Americas Tax Center) | 17 March 2014
Tax Court of Canada issues important decision in Salaison Levesque Inc. regarding invoices of accommodation
On 4 February 2014, the Tax Court of Canada (TCC) rendered a key decision in a case in which it had to determine whether the Quebec Revenue Agency (QRA) was correct in refusing the taxpayer's claim for input tax credits (ITCs) in respect of GST paid to certain placement agencies that had not remitted the GST to the tax authorities. As a basis for such refusal, the QRA argued that the placement agencies did not render the services identified on the invoices paid by Salaison Lévesque Inc. (SLI) as they did not have the resources to do so and that SLI had not been diligent in its dealings with the placement agencies.
The TCC allowed the taxpayer's appeal and concluded that the QRA's contentions were not based on factual findings, but rather on the simple objective of recovering the taxes that had not been remitted by the fraudulent suppliers. In its judgment, the TCC emphasized that no provision of the Excise Tax Act (ETA) allowed the tax authorities to hold a company liable for the tax delinquencies of its suppliers.
SLI is a family-owned business founded in 1967 that specializes in the commercialization of diverse ham-related products distributed both nationally and internationally. During peak seasons, the small business retained the services of placement agencies in order to maintain its production. It is in this context that SLI required the services of four placement agencies (Agencies) between 2005 and 2009.
In accordance with the ETA, SLI had the obligation to pay the GST indicated on the invoices issued by the Agencies for the services rendered. While the Agencies had the obligation to remit the taxes to the tax authorities, they seemingly never did so.
The QRA's position
First and foremost, as indicated by the TCC, the position adopted by the QRA appeared quite contradictory: “[translation] On one hand, the QRA contended that the litigious invoices were false. However, the QRA admitted at the same time that the services described on the contentious invoices had actually been rendered.”1
The QRA argued that regardless of the fact that the services had been rendered to SLI, such services could not have been provided by the Agencies as they did not have “[translation] the capacities, the expertise or the material, financial and human resources to provide the workforce”2 necessary for the performance of the services. Rather, the QRA contended that the Agencies had outsourced the work and had not provided the services themselves. The QRA took the position that in the absence of a payroll registry, the Agencies did not have any employee able to provide the services and, hence, the invoices they had issued were invoices of accommodation.
Moreover, the QRA contended that the names of the subcontractors to which the Agencies had outsourced the work should have been indicated on the invoices in order for the ITCs claimed to be granted as the subcontractors were the ones that actually rendered the services.
Finally, as a basis of its refusal, the QRA indicated that SLI did not act diligently in its dealings with the Agencies and that SLI should have known that the Agencies were fraudulent and did not remit the sales taxes collected.
SLI's position was clear: it argued that it had complied with the applicable legislation and regulations, that the ETA did not render it responsible for the potential fraud committed by its suppliers, that the QRA's argument based on the absence of resources was ill founded and that it was diligent in its dealings with the Agencies.
The TCC decision
The TCC did not accept the QRA's position and allowed the taxpayer's appeal.
In fact, the TCC ruled that the QRA raised rather conflicting arguments as a basis for refusing to refund the ITCs to the taxpayer.
On one hand, the QRA was arguing that the Agencies did not meet the specific requirements to carry on a commercial activity. The TCC categorically rejected this argument and added that the QRA's contention on the subject was eccentric and far-fetched. In adopting the taxpayer's argument, the TCC submitted that there was “[translation] a clear distinction between the concept of lack of resources and one of non-declared resources.”3
In the SLI case, the Agencies had actually rendered the services requested by SLI. Therefore, according to the TCC, the fact that the Agencies had not remitted the taxes and had used undeclared resources to render the services should not be attributed, directly or indirectly, to a business that had no knowledge of the fraud and acted in good faith.
For the same reasons, the TCC concluded that the QRA's contention that it could not allow the refunds of the ITCs as the names shown on the invoices were not the names of the suppliers that actually rendered the services was ill founded. The fact that the Agencies may not have personally rendered the services to SLI, but might have hired unidentified subcontractors to provide the services made no difference.
The applicable regulations4 allow an invoice to indicate either the commercial name of the supplier or the name of its intermediary. As such, the TCC reminded the QRA that it cannot impose more stringent obligations upon taxpayers than provided by legislation. Hence, the TCC specified that in the absence of specific legislative provisions in the ETA, a taxpayer cannot be held accountable for the unfulfilled tax duties of its suppliers. Therefore, since SLI had complied with the applicable legislation, it could not be held liable for the fraud committed by the Agencies.
The TCC also pointed out that the QRA arguing that SLI should have deployed more efforts and verified the Agencies more thoroughly amounted to requesting that the taxpayer carry out the QRA's job. The TCC went further and stressed that the QRA itself was content with the information obtained from the Agencies without making sure of its reliability. In fact, it would be unreasonable to expect a small business, or even a large corporation for that matter, to perform complete background checks of all of its suppliers, especially when the QRA is the one that has large powers afforded by legislation to both investigate and request information, including information that is confidential in nature. A business's vocation is mainly to achieve profitability. Hence, it is not a business's duty to develop means of control and surveillance for the benefit of the tax authorities. Imposing such obligations would not only weaken the corporations that deal with placement agencies on a daily basis, but it would also disrupt an entire economy.
The TCC distinguished the most recent jurisprudence dealing with the QRA's refusal of ITCs claimed in relation to GST paid for the supply of goods or services. The TCC indicated that the QRA could rightly disallow the ITCs in situations where the supply of the goods or services had not been made since, in such cases, there is clearly a scheme of false invoices. The TCC also admitted that in situations where the suppliers' GST number was invalid, did not exist or had been usurped,5 the refusal of ITCs could be legitimate. Similarly, refusal of ITCs might be appropriate when there has been collusion between the taxpayer and the supplier who committed the fraud. However, the TCC stressed that in the SLI case, none of those situations applied as to justify the refusal of the ITCs. In fact, SLI had been sufficiently diligent in its dealings with the Agencies and had no reason to believe that they were in fact fraudulent suppliers. According to the TCC, it was doubtful that a corporation like SLI which has throughout the years always respected its tax obligations would compromise its reputation by plotting deliberately with tax delinquents.
In sum, the TCC indicated that the tax authorities' position seemed to impose on taxpayers responsibilities that exceeded the legislative schemes of the ETA and its regulations. Taxpayers evidently have the obligation to be prudent, diligent and account for their activities to the tax authorities. However, the tax authorities must provide assistance to taxpayers in the meeting of their responsibilities. Since the tax authorities possess the necessary tools to facilitate the collection of taxes, it is their duty to develop strict audit processes and undertake rigorous follow-ups with respect to the entities that have the obligation to remit to the Minister the taxes collected, as it was the case for the Agencies.
The TCC concluded by drawing attention to the fact that the QRA had adopted its position after having assessed but unsuccessfully collected the sums owed by the Agencies. In fact, instead of investigating further, the TCC pointed out that the QRA chose what seemed to be the easiest way to recover the money owed, which was to assess the taxpayer that had dealt with the fraudulent Agencies.
In the last few years, in administering the GST in Quebec on behalf on the Canada Revenue Agency (CRA), the QRA has deployed important efforts in order to put an end to tax frauds. Those efforts have led the QRA to issue notices of assessment with respect to what they have identified as “invoices of accommodation” schemes.
As defined by the QRA, three scenarios are included in the concept of accommodation invoicing:
- • The issuance of invoices while no service is rendered or supplies traded
- • The issuance of invoices for a larger amount than what is actually provided or rendered
- • The issuance of invoices describing actual services rendered or supplies traded by suppliers
The first example clearly constitutes a case of false invoicing and, hence, relates to a fraud committed by the supplier and the recipient to which both should be held accountable. The third category, the one in which SLI falls, is certainly the most problematic. The QRA issues an assessment, based on confidential information, to a recipient that acquired supplies of goods or services contending that the supplier involved did not have the capacity to sell the goods or render the services.
In the SLI decision, the TCC examined for the first time the rationale behind the QRA's position on invoices of accommodation and its central argument based on the lack of resources of the supplier. As mentioned above, the TCC categorically rejected such argument.
Moreover, the TCC agreed with SLI and concluded that the QRA confused “absence of resources” and “absence of declared resources”. A declared or undeclared business, whether illegal or not, remains subject to all tax legislation, including income tax or sales taxes. In fact, such business will have to comply with all tax legislation and regulations, regardless of its status. In the case of the Agencies, the fact that the workers had not been declared did not change the fact that they were employees of the Agencies.
From a general standpoint, the TCC's decision reinforces the idea that corporations have as their main objective generating revenues and that their role should not be to verify the corporate history of each entity with which they do business. Small businesses do not have the adequate resources to carry out an investigation on the integrity of their suppliers. The TCC concluded that it is in fact not their role.
This decision also emphasizes the importance for taxpayers to respect the applicable provisions of the legislation. Without express and clear legislative rules, the courts of justice limit their interpretation to what they can clearly infer from them. The courts' role is not to create rules of law or to substitute legislatures in order to impose more stringent responsibilities than those provided by laws and regulations.
The Crown (QRA) has filed an appeal of this decision with the Federal Court of Appeal.
This decision has received a considerable amount of interest from the French-language media.
1. Salaison Lévesque Inc. v The Queen, 2014 TCC 36, para. 3.
2. Ibid., para. 7.
3. Ibid., para. 48.
4. Input Tax Credit Information (GST/HST) Regulations, SOR/91-45.
5. Systematix Technology Consultants Inc. v The Queen, 2007 FCA 226, and 9088-2945 Québec Inc. v The Queen, 2013 TCC 58.
For additional information with respect to this Alert, please contact the following:
Couzin Taylor LLP, Canada
- • David Robertson
+1 403 206 5474
- • Daniel Sandler
+1 416 943 4434
- • Louis Tassé
+1 514 879 8070
EYG no. CM4266