If your business purchases goods or services from other businesses, and you think some of them may not be complying with their tax obligations, there is a serious risk that you need to address. The risk is primarily in the GST/HST area.
This comes up in everything from construction services, to agencies that supply temporary personnel, to garment work, scrap metal sales, and many other areas.
Surprisingly, the risk is primarily where the supplier charges you GST/HST. If it does not charge you GST or HST that you should be paying, your risk is far lower, because the worst that can normally happen is that you have to pay the GST or HST down the road, and will be able to claim an offsetting input tax credit at that time.
Assuming your business makes “taxable supplies” for GST/HST purposes, you are normally entitled to input tax credits (ITCs) to recover all GST or HST you pay on purchases.
However, as you probably know, these ITCs are available only if the supplier provides you with an invoice or receipt that meets detailed documentation requirements. Those requirements normally include the supplier’s name and GST/HST registration number, the price paid, a “description of the supply sufficient to identify it”, the amount of GST or HST, the date, the purchaser’s name, the terms of payment and certain other details. (See GST/HST Memorandum 8.4 on www.cra.gc.ca.)
These documentation requirements are mandatory; if they are not met, you cannot claim the ITCs to recover the tax you have paid to your supplier.
The Canada Revenue Agency has been dealing for many years with the problem of companies that bill GST or HST for goods or services, collect the money and then disappear. Quite apart from not paying corporate income tax on their profits, these companies are literally stealing the sales taxes, which they collect on behalf of the government and are supposed to hold in trust for the government.
This problem has also shown up in Quebec, where Revenu Québec (RQ) administers the GST together with the Quebec Sales Tax.
Innocent businesses are being denied ITCs
In recent years, RQ has been very aggressively pursuing businesses that have dealt with these unscrupulous companies. Not being able to find the thieves, RQ has instead gone after the businesses that have purchased these suppliers’ goods and services, and has denied the ITCs that those innocent businesses have claimed.
In recent months, RQ has had a lot of success in the Courts when the innocent businesses have appealed.
Despite the fact that a business has no legal obligation to “police” its suppliers to ensure that they remit GST/HST they have collected, the Courts have been finding ways to make innocent businesses responsible.
The way that Revenu Québec and the Courts have nailed the innocent businesses is by ruling that the invoice was not from the “real” supplier. Even though the invoice was from a numbered company that was properly GST-registered, and otherwise met the documentation requirements, the Courts have ruled in some of these cases that the supplier named on the invoice was not the “real” supplier, and thus the documentation requirements were not met.
The CRA has not to date been as aggressive as Revenu Québec in assessing innocent businesses in these situations (at least from the reported cases from the Courts), but it may be headed there. In answers to questions at a conference in October 2014, senior CRA officials indicated they support the approach being taken by Revenu Québec and would deny ITCs for the same reasons. So the CRA may be just as aggressive when they next come to audit your business’s GST/HST claims.
How can a business protect itself from this risk?
It is of course preferable to deal only with reputable and established suppliers, so this problem will not come up. However, you might not know whether or not a particular supplier is going to disappear without complying with its tax obligations, and for practical reasons you may not always be able to choose your suppliers.
A way to address this problem is to take steps to document that the business named on the invoice you pay is the same legal entity that you are dealing with, and is properly registered with the CRA (or RQ) for GST/HST (and, in Quebec, for QST).
- To check that a supplier is GST/HST-registered: For any new supplier, go to www.cra.gc.ca/gsthstregistry, before you pay them any HST, and enter their name and the GST/HST registration number they give you. The online registry will tell you if the person is indeed registered under that name as of the current date. (Caution: the system gives a false positive once the first 10 characters match, so if it’s a long name and there’s a large amount of tax at stake, call the CRA Business line at 1-800-959-5525 to ask the CRA to confirm the full name.)
- For identity:
- If the invoice is in a personal name, get a copy of the person’s driver’s licence or other government-issued photo ID, and check that it’s the same name as the GST/HST registration on the registry you checked in (1) above, and that is the name that appears on the invoice you are paying.
- If it’s a company name, especially if it’s a numbered company, the only way you can ensure that the entity identified on the invoice is the one you’re actually contracting with is to ask the supplier for documentation that shows who the directors of the company are (this information is also available online from the provincial government, at a cost); and check the identity of the person you’re dealing with as being a director of the company, by getting a copy of their driver’s licence or other photo ID. Ideally, you also want a contract or bill of sale showing that you’re contracting with the company because a director is signing on its behalf. This will provide a paper trail that shows you really are contracting with this particular company, and even if they disappear without remitting the HST, the CRA or RQ wouldn’t be able to say this person wasn’t the real supplier but was using a false invoice name provided by the real supplier.
Of course, every business will have to determine whether it’s worth going through these procedures, or whether the risk of suppliers being tax-thieves is low enough that these steps are not worth the cost and effort. But for those seriously at risk of being reassessed to have substantial ITCs denied, these steps may prove to be a lifesaver.