|
Subject:
|
ITC Entitlement - Documentary Requirements - GAF - Interest and Penalties
|
The purpose of this memorandum is to respond to issues referred to General Tax Policy by XXXXX of your staff with a request for general policy guidelines in the areas of concern. The issues relate to ITC entitlement, the use of the General Adjustment Form (GAF) and the application of penalties and interest.
Statement of Facts
Our understanding of the relevant facts as taken from the documentation provided to us by XXXXX is as follows:
1. an individual who is registered is the sole owner of a registered corporation;
2. the corporation operates a kitchen fabrication business;
3. the individual also owns the building in which the corporation operates the kitchen fabrication business;
4. the individual leases the building he owns to the corporation;
5. the building was expanded;
6. the contract for the expansion of the building designates the corporation and the contractor as the parties of the contract;
7. the corporation was identified on all invoices as the recipient of the contractor's services;
8. the amounts invoiced to the corporation were, in fact, paid by the individual;
9. the individual claimed the ITC for the tax payable on the contractor's fees;
10. in the course of an audit of the individual, Audit assessed the individual on the basis that the corporation was the recipient of the contractor's services;
11. the individual appealed the assessment and the appeal was allowed by Appeals;
12. Appeals based its decision on the following points:
• the contractor intended to contract with the individual and that intention was proven to the satisfaction of Appeals by an affidavit from the contractor; and
• the contractor's fees for the expansion of the building were deducted, for income tax purposes, from the income of the individual - for consistency between income tax and GST legislation, the ITC should also be claimable by the individual.
Issues
As a result of the appeal being upheld, the XXXXX is seeking clarification on who is entitled to the ITC in this type of case. More specifically,:
1. whether it is necessary to be the recipient of a supply to claim an ITC.
2. what evidence is required to satisfy the Department that an ITC claimant is the recipient of the supply in respect of which he claims an ITC.
3. where an ITC has been claimed by a person not entitled to the ITC, and has not been claimed by the person entitled to the ITC:
• whether the relevant returns can be corrected by the filing of GAF forms; and
• whether interest and penalties should be applicable to the original claimant of the ITC.
Legislative Principles Applicable to the Case
The Excise Tax Act states that four conditions must be met in order for a claimant to claim an ITC in respect of the tax payable on supplies:
1. the claimant must be the recipient of the supply in respect of which an ITC is claimed;
2. tax becomes payable or is paid without having become payable by the claimant;
3. the supply is for use, consumption or supply in the course of the claimant's commercial activities; and
4. the claimant has obtained sufficient evidence, including prescribed information, satisfactory to the Department to support the claimant's ITC claim.
1. Being the Recipient of the Supply
Subsection 169(1) of the Act applies where a "property or a service is supplied to, or imported by a person". Subsection 123(1) of the Act provides in the definition of "recipient" that "any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply ...". Therefore, the reference in subsection 169(1) to the person to whom a supply is made is considered to be a reference to the recipient of the supply. Consequently, a condition for claiming an ITC for tax payable on a supply is that the claimant of the ITC be the recipient of the supply.
The definition of "recipient" also provides that the person liable to pay the consideration for the supply, either by agreement or otherwise, is the recipient of the supply (reference: paragraphs (a) and (b) of the definition). Thus it is the person liable to pay the consideration for the supply who meets the condition of being the recipient of the supply and therefore, entitled to claim an ITC for tax payable on that supply (subject to the other conditions for claiming ITCs).
In this case, although the parties named on the agreement were the contractor and the corporation, an affidavit from the contractor filed at the hearing of the objection stated that the intention of the contractor was to contract with the individual. A written contract is the evidence of the intention of the parties, but where the parties both acknowledge that their intention was not the one mentioned in the contract, it may be difficult to deny such intent. However, it does not appear that there was evidence before the filing of the affidavit at the objection's hearing that the intent of the parties was different than the one stated in the contract.
2. Tax is payable by the person
Subsection 169(1) of the Act provides for an entitlement to an ITC where tax is paid or payable in respect of the supply. Subsection 165(1) of the Act imposes a requirement on every recipient of a taxable supply made in Canada to pay the GST on that supply.
Since the tax is payable by the recipient of the supply, it is the recipient who meets the condition that tax be payable by him, even if the tax is paid by another person. If tax is paid before it is payable, it would still be the recipient of the supply who would be entitled to claim an ITC in the reporting period when the tax was payable. In this particular case, it was the individual who paid the amounts payable for the contractor's services.
3. Use, consumption or supply
The next requirement from subsection 169(1) of the Act is that a supply in respect of which an ITC is claimed be for use, consumption or supply in the course of the commercial activities of the claimant. To determine an ITC entitlement, the total tax payable in respect of the supplies is multiplied by, for this particular case, the extent (expressed as a percentage) to which the person acquired or imported the property or service for consumption, use or supply in the course of commercial activities of the person." (Reference: paragraph (c) of element B of subsection 169(1)).
The question in this case is whether the inputs are considered to be used in the commercial activity of the individual or the corporation. The individual is leasing the property he owns ("the building") to the corporation. The inputs for renovating or rebuilding part of the building could be considered for use in the individual's commercial activity of leasing the property to the corporation. However, the inputs could also be considered for use in the corporation's commercial activity of operating the kitchen fabrication business.
4. Sufficient evidence
The final condition to determine entitlement to claim ITCs is from subsection 169(4) of the Act: the "registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed;"
In this case, the invoices from the contractor identify the corporation as the recipient of the supply. In order for the individual to claim the ITCs, the individual would have to obtain evidence substantiating that he is the recipient of the supply before claiming the ITC. Such evidence may include, in addition to the invoices issued by the contractor, other documentation, for example, an amendment to the contract specifying that the parties of the contract were the contractor and the individual, which indicates that the individual is the recipient of the supply.
Also, the Input Tax Credit Information Regulations prescribe information requirements for invoices. Where the total amount paid or payable for the supply is $150 or more, the claimant's supporting documentation must show the recipient's name, or the recipient's duly authorized agent or representative (reference: paragraph 3(c)(ii) of the Regulations).
Where the individual can substantiate that the invoices issued on behalf of the individual are issued pursuant to the amended contract (which is an agreement between the individual and the contractor), the individual would be considered to have obtained evidence demonstrating that he is the recipient of the supply.
General Adjustment Form (GAF), Interest and Penalties
We will assume, to address in an illustrative way your concerns on interest, penalties and the GAF form that the sufficient evidence for claiming an ITC has been obtained by the individual in a reporting period subsequent to the reporting period where the ITC has been non-validly claimed by the individual.
Currently, as applied to the examined case, once the individual would have obtained the sufficient evidence for a valid claim, he could claim the ITC in a subsequent return. Where the individual wishes to amend a previously filed return to disclose an unreported amount of GST, the individual could also request, in writing, that an adjustment be made to claim the ITC in the same reporting period provided the ITC claim was valid at that time. In other words, an adjustment to account for the ITC would only be made where the ITC claim was valid and the amount offsets a previously unreported amount of GST.
The non-valid original claim would be subject to interest and penalty from the due date of the return in which the invalid claim was made to the date that the amount is paid or offset by any available net tax refund.
In the case where an ITC has been claimed by the wrong person, for example if an ITC is claimable by the corporation but has been claimed by the individual, the individual would submit a written request to amend the previously filed return and remit additional net tax. Penalty and interest would apply to this amount from the due date of the return to which it relates until the next tax, penalty and interest are paid. The corporation would claim the ITC in their next return, assuming the corporation makes the claim within the four-year limitation provided for by subsection 225(4) of the Act based on the reporting period during which the original entitlement arose.
The above is based on the revised position of the Department on the use of the GAF. The revised policy was approved by Policy and Legislation's Policy Review Committee. The Deputy Minister was informed on April 20, 1994 that the revised policy was being implemented.
The revised policy can be summarized as follows. GAFs will be used as internal documents only.
1. Registrants will no longer complete any forms. They will simply provide the necessary information in writing.
2. Requests to adjust amounts on previously filed returns will be considered provided the registrant is not attempting to increase any ITCs or other credit adjustments, without a corresponding increase in tax liability for the same reporting period.
3. In certain circumstances, administrative flexibility may be exercised. For example, in the case of an annual filer who would be required to wait over 12 months in order to obtain a missed ITC, the registrant may amend the originally submitted GST return through a request for an assessment or reassessment of the previously filed return. Resource availability and the circumstances surrounding the registrant's request will be taken into account when deciding whether to assess or reassess the previously filed return. Flexibility may also be exercised in situations of financial hardship where delaying a net tax refund by not making an adjustment for a missed ITC would have a severe negative impact on the registrant's business.
Under the previous GAF policy, an adjustment may have been made to account for the ITC in the reporting period during which the person became entitled to claim the amount. However, the filing date of the GAF would have been used to determine any interest that may be payable where a net tax refund is claimed.
Consistency With Income Tax
One of the reasons given by the Appeals Division for rejecting the assessment was that since the individual had deducted the contractor's fees for income tax purposes, the individual should be entitled to claim ITCs on the GST payable on these fees so that the income tax and GST treatment are consistent.
The principle is that in the same way that a registrant may only claim ITCs for expenses for use in his commercial activity and not someone else's, the Income Tax Act (ITA) makes the same distinction for allowable deductions for business expenses.
The source of that principle, as applied to income tax, lies in the wording of paragraph 18(1)(a) of the ITA. Paragraph 18(1)(a) of the ITA provides that:
"18(1) In computing the income of a taxpayer from a business or property in respect of
(a) an outlay or expense except to the extent that it was income from the business or property;"
Thus, the ITA requires that for making a deduction from a business or property, the deduction must be made from the income from the same business. That is, an expense for a business cannot be subtracted from the income of another business. The principle is reinforced when applied to two businesses of two different persons.
This principle is consistent with the GST principle according to which an ITC can be claimed where the related supplies are for use, consumption or supply in the course of the commercial activities of the claimant.
However, the fact that the individual deducted the contractor's fees from his income does not, in itself, demonstrate that the eduction was correctly made for income tax purposes.
Conclusion
In order for the individual to have claimed the ITCs in this case, it would be necessary for the individual to demonstrate from documentation acceptable to the Department that the individual was the recipient of the supply, that the tax was payable by the individual and that the supply received was for consumption, use or supply in the commercial activity of the individual. If these conditions are met, then the individual would be entitled to claim the ITCs in question.
The question of what documentation would be satisfactory to support a claim of being the recipient of a supply depends on the circumstances of each individual case. That is, what might be satisfactory for one case, may be insufficient in another. As a guideline, it may be helpful to consider contracts, agreements, invoices and an assessment of a reasonableness test for the circumstances of the particular case.
In the absence of documentation demonstrating that the ITC claimant is the recipient of the supply, the claimant would not be entitled to claim the ITC.
If a person has made an invalid ITC claim and obtains in a subsequent reporting period sufficient evidence to substantiate that claim, no adjustment to previously filed returns will be made unless the ITC may be offset against an unreported amount of GST and the person was entitled to claim the ITC in the return in question. The person will incur penalty and interest on the unremitted tax resulting from the invalid ITC claim. The penalty and interest would run from the due date of the return in which the invalid claim was made until the amount is paid.
If you have any question, please do not hesitate to contact Raymond Labelle at 952-8815.
H.L. Jones
Director
General Tax Policy
XXXXX
| c.c.: |
M. Matthews
D. Caron
M. Boivin
G. Preston
R. Labelle |
Email this Content