Mediclean – Tax Court of Canada denies ITCs to a registrant who paid HST to unregistered suppliers - but grants an equivalent s. 261(1) rebate under s. 296(2.1)

After the Tax Court had ruled that the cleaning staff utilized by the taxpayer in its cleaning business were independent contractors rather than employees, the taxpayer commenced paying GST/HST to them and did not obtain GST/HST registration numbers from them in the mistaken belief that it was sufficient to obtain their business numbers - but, in fact, most of them were small suppliers who were not registrants.

After applying Systematix to find that this failure to obtain prescribed information (the registration numbers) meant that the taxpayer was not entitled to claim input tax credits (ITCs) for the GST/HST paid by it to the workers, Owen J went on to find that the taxpayer was entitled to rebates for such tax.

In rejecting the Crown’s position “that subsection 261(1) does not apply to a mistake resulting from the Appellant’s negligence, or inattention and carelessness,” Owen J stated:

The applicable conditions [in s. 261] include the requirement that the amount be paid by mistake or otherwise. The reason for the mistake is simply not a consideration in the application of the section.

Furthermore, although s. 261(3) denied payment of a rebate under s. 261(1) if the application for the rebate was not filed within two years after the day the amount was paid or remitted, s. 296(2.1) (as found in UPS) required the Minister to assess a person to deduct a rebate under s. 261(1) in computing the net tax of that person if the specified conditions were met (as was the case here).

Neal Armstrong. Summaries of Mediclean Incorporated v. The Queen, 2022 TCC 37 under s. 261(1), s. 298(4)(a), s. 285(1) and s. 169(5).