News of Note
Valero – Federal Court of Appeal finds that requested judicial review of CRA’s requiring audit information collaterally attacked CRA’s assessing responsibility
Valero did not withhold under Reg. 105 on fees paid to non-resident carriers for international shipping services on the basis that such carriers’ income therefrom was exempt from Canadian tax. During an audit, Valero offered to make available all the requested international shipping information, provided CRA undertook not to assess any Reg. 105 withholding tax.
CRA thereafter issued a requirement under s. 231.2(1) for such information, and Valero requested an order setting aside the requirement. In finding that such a request could not succeed, Rivoalen JA stated:
… If an order setting aside the requirement for information is granted, the Minister will be prevented from properly exercising her powers under the Act. …
The Minister has not yet assessed. Once she has received the complete information and documents, she may well find that Valero has no liability. In my view, Valero cannot stop the Minister from carrying out her statutory duty under the Act to assess income tax payable by way of an application for judicial review.
On March 15, 2020, those CRA employees performing critical functions (Category 1 employees) were directed to continue such work, but from home, if possible, until April 5, 2020. This date has now been extended to May 1, 2020. Other employees (whose work has been identified as important but not as a critical service) are directed to work from home (and not to come into the office except, perhaps, to pick up their audit laptop or other equipment) where they are equipped to do so and where their child or parent care responsibilities do not preclude this.
The list of (Category 1) critical services has been expanded to include clearance certificates, “time-sensitive income tax ruling requests and technical interpretations” and “operat[ing] call centres in the areas of GST/HST rulings, registered plans, and registered charities.” See the National COVID-19 Business Continuity Plan.
Neal Armstrong. Summary of COVID-19: Information for Canada Revenue Agency employees: 30 March 2020: Work restrictions for critical and non-critical services under s. 152(1).
CRA has revised its Webpage on the “Temporary Wage Subsidy for Employers.” The biggest change is to expand the list of eligible employers to include individuals other than trusts. In particular, CRA states:
You are an eligible employer if you are a(n):
- individual (excluding trusts),
- partnership (see note below),
- non-profit organization,
- registered charity, or
- Canadian-controlled private corporation (including a cooperative corporation) eligible for the small business deduction;
- have an existing business number and payroll program account with the CRA on March 18, 2020; and
- pay salary, wages, bonuses, or other remuneration to an eligible employee.:
… Partnerships are only eligible for the subsidy if their members consist exclusively of individuals (excluding trusts), registered charities, or Canadian-controlled private corporations eligible for the small business deduction.
There is no stated exclusion for employees who are related to the employer.
The temporary wage subsidy is not to be confused with the more expansive wage subsidy - that was announced last week and fleshed out further today in a Finance Backgrounder - under which all businesses (including those not structured as a CCPC, such as public corporations and partnerships), charities and non-profit organizations that sustain a 30% decrease in revenue (based on a month-by-month comparison to the corresponding 2019 month) due to COVID-19 can receive a subsidy retroactive to March 15, 2020 that covers up to 75% of wages (subject to a numerical limitation) for up to 3 months. Employers that do not qualify for this emergency wage subsidy may qualify for the above temporary wage subsidy.
Neal Armstrong. Summary of Frequently Asked Questions – Temporary Wage Subsidy for Employers, 30 March 2020 CRA Webpage under s. 227(4).
CRA has announced that although “The deadline for businesses to file their [GST/HST] returns is unchanged … the CRA won’t impose penalties where a return is filed late provided that it is filed by June 30th.”
The already-announced deferral of remittance obligations until June 30 also applies to quarterly instalments (i.e., no late interest charges). However, “Excise taxes and duties are still required to be remitted by their prescribed due dates,” although of course CRA retains the discretion to waive interest charges “on a case by case basis.”
“GST/HST returns that are filed electronically will be processed unless they require client contact or additional review,” whereas “Paper copies of GST/HST returns will not be processed until normal operations resume.” This electronic processing means that refund claims can be paid automatically through My Business Account. However, although point-of-sale and public service body rebates can be processed automatically, electronically filed housing and general rebate applications “are manually assessed and won’t be processed until operations resume.”
Neal Armstrong. Summary of Deferral of GST/HST Tax Remittances (COVID-19 Measures) 31 March 2020 CRA Webpage under ETA s. 281.1(1).
BT Céramiques – Quebec Court of Appeal finds that CRA violated the Jarvis principle in auditing following reasonable grounds for considering that there was taxpayer/CRA criminal conduct
Jarvis found that where the predominant purpose of a particular inquiry is the determination of a penal liability (e.g., under s. 239 of the ITA), CRA officials may not have recourse to the inspection and requirement tools in the ITA. Contrary to the Superior Court (one level below), the Quebec Court of Appeal found that the Court of Quebec (two levels below) had not made any reversible errors in invalidating evidence obtained in a search and seizure of a Quebec registrant (BT Céramiques), which was believed to have fraudulently claimed input tax credits and corrupted CRA officials. CRA had reasonable grounds, at its commencement of the audit in question, to proceed with a criminal investigation rather than merely initiating a tax audit, and while the evidence sought during the audit could be used to establish tax payable, the totality of the evidence demonstrated an interest in acquiring information on the criminal liability of the taxpayers and CRA employees. It was also relevant that the same Director headed up both the Montreal Special Enforcement Program (whose mandate was to determine the civil liability of those engaged in criminal activities) which performed the audit, and the Criminal Investigations Program, which investigated tax evasion with a view to bringing charges and which took over after completion of the audit, including preparing a search warrant.
Copies of the seized documents had, in turn, been provided by CRA to the ARQ, which brought its own tax evasion charges. In affirming the decision of the Court of Quebec to also exclude, pursuant to s. 24 of the Charter, use of such evidence by the ARQ, Dufresne JCA stated):
[It] simply could not take advantage of the proceeds of the illegally obtained warrants. If this shortcut were allowed, the risk of abuse would be great, since one state agency could, in all events, take advantage of the other's searches, regardless of the legality of the means used to obtain them.
Ahmar – Federal Court of Appeal finds that a director’s plan to turn the company around is not a due diligence defence to failure to remit
After a construction company (Strong Forming) began to run out of money, its sole shareholder, director and officer (Mr. Ahmar) decided that Strong Forming would stop making HST remittances, but that it would continue on with another construction contract using revenues that came in and money contributed by Mr. Ahmar – before Strong Forming had to cease operations. In affirming that Mr. Ahmar had not made out the due diligence defence to director liability for failure to remit, Mactavish JA stated:
… Mr. Ahmar made the conscious decision to have Strong Forming defer payment of its HST debt, and to use these revenues to satisfy other obligations in the hopes of turning the company’s financial position around. …
… Buckingham … state[ed] that the defence under section 323 “should not be used to encourage such failures by allowing a due diligence defence for directors who finance the activities of their corporation with Crown monies on the expectation that the failures to remit could eventually be cured”… .
In its COVID-19 release, Finance is now effectively letting companies defer GST/HST remittance obligations in order to help keep themselves afloat. Will doing so still give rise to director’s liability?
Neal Armstrong. Summary of Ahmar v. Canada, 2020 FCA 65 under ETA s. 323(3).
We have published a further 5 translations of CRA interpretations released in December and November, 2010. Their descriptors and links appear below.
These are additions to our set of 1136 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 9 1/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the open week for April.
CRA confirms that accelerated CDE deductions can be available for drilling on land acquired from an affiliate
S. 66.2(2) provides an increased deduction for Canadian development expense incurred after November 20, 2018 – but with an exclusion for “a cost in respect of a Canadian resource property acquired by the taxpayer … from a person or partnership with which the taxpayer does not deal at arm’s length.” When asked, CRA confirmed that this exclusion would not apply to amounts paid to an arm’s length party for “drilling or completion expenses, solely because they were incurred on lands acquired from a person with whom a taxpayer does not deal at arm’s length.”
Neal Armstrong. Summary of 6 June 2019 CPTS Roundtable, 2019-0816111C6, Q.6 under s. 66.2(5) – accelerated CDE – (a)(ii).
CRA has now provided a more general COVID-19 related extension of income tax filing deadlines, that otherwise fell after March 18, 2020, to June 1, 2020, stating:
These administrative income tax actions include the filing of returns, forms, elections, designations, and responses to information requests. Payment and remitting requirements [e.g., of source deductions] are not covered by this announcement.
However, the filing deadlines for trust, partnership and NR4 information returns are extended only to May 1, 2020, and the filing deadline for the T661 (re SR&ED claims) is not extended at all.
No mention is made of extensions for the filing deadlines for GST/HST returns, e.g., the “regular” GST34, or the GST111 (for financial institutions that are not registered for Quebec purposes and are not “SLFIs.”) However, the CRA announcement is effectively part of a Finance Release (dated 27 March 2020) which states that “the Government is deferring Goods and Services Tax/Harmonized Sales Tax (GST/HST) remittances and customs duty payments to June 30, 2020.” There is no late-filing penalty under ETA s. 280.1 where no amount was required to be remitted. Nonetheless, it is odd that there is no mention of there being an extension of the filing deadline for GST/HST returns.
The Finance release also states:
No audits should be finalized and no reassessments should be issued. ...
For any objection request [i.e., notice of objection] due March 18 or later, the deadline is effectively extended until June 30, 2020. [As per private correspondence dated, March 29, 2020, it is understood that CRA has confirmed that this refers to an automatic extension under s. 166.1, so that no legislative amendment is required.]
Neal Armstrong. Summary of COVID-19 Update: Additional measures from the Canada Revenue Agency, 26 March CRA News Release under s. 220(3). See also Additional Support for Canadian Businesses from the Economic Impact of COVID-19, 27 March 2020 Finance News Release.