The general trend is that Canada Revenue Agency is disallowing more input tax credits (“ITCs”) for businesses. In addition, the CRA has launched a project to uncover and disallow ITCs they believe relate to an accommodation invoice tax scheme.
The CRA is getting it wrong in some cases. We see some businesses are getting “caught up” in these schemes. And we see CRA disallowing valid ITCs.
After reading this article, you will know:
An accommodation invoice tax scheme occurs when a supplier issues an “accommodation invoice” to a purchasing business. Usually, the purchaser isn’t aware.
In most cases, the supplier will issue the invoice under a different name. It will not use the name of the supplier or sub-contractor providing the goods or services. Instead, the supplier will give the purchasing business an excuse about why the name on the invoice is different. In other cases, the supplier will issue an invoice containing false information (e.g., false GST/HST number).
In both cases, the purchaser pays the invoice and claims ITCs. Then, the supplier shuts down without remitting GST/HST.
CRA’s Approach
The CRA is taking an aggressive approach to this project. At times, this approach is leading to carelessness and improper audit results in some cases.
This CRA project started in Quebec. Revenue Quebec has been aggressively auditing and disallowing ITCs over the past 10 years. We are starting to see this trend move to the rest of Canada, with the CRA following Revenue Quebec’s footsteps.
The CRA will audit a supplier if it believes the supplier is running an accommodation invoice tax scheme. The CRA will audit the purchasers based on its assumption that the purchaser was part of the scheme.
The CRA often relies on assumptions that are difficult to disprove. Then, the CRA relies on those assumptions to support its conclusions.
For example, auditors often conclude that “the supplier lacks the capacity and resources to provide the goods or services described in the invoices”. Therefore, the auditor assumes the supplier did not provide the goods or services to the purchaser, and the invoices are illegitimate. It is difficult to convince the CRA the purchaser received the goods or services. Usually, the CRA will take the position that invoices and payment receipts are not sufficient proof.
The Tax Court has issued a few decisions related to this issue. It is not possible to know – reading the caselaw – the quality of the case build or advocacy. And it is hard to know what really happened during the hearing.
We do know the Tax Court has rejected the taxpayers’ primary argument in some cases and upheld the CRA’s decision to disallow the ITCs. But the Tax Court has vacated the high gross-negligence penalties the CRA is imposing in these cases.1
The reported decisions give us some data. But reported decisions are not the whole picture. They do not include all the audits, objections, and appeals resolved before a hearing. We guess parties resolve (roughly) 90 per cent of tax disputes before a hearing. So, when taxpayers and accountants make decisions using only the reported decisions, it is more likely they’re making a mistake.
These schemes occur across all industries and business structures. But the CRA is targeting the following industries and businesses:
If you operate in one of these industries or businesses, take extra care when choosing suppliers.
Businesses that participate in accommodation invoice tax schemes often disappear quickly. Therefore, businesses which have operated under the same name for a longer period are less likely to be engaging in accommodation invoice tax schemes.
To reduce your risk of selecting a supplier engaging in an accommodation invoice tax scheme, you can
To reduce your risk of selecting a supplier engaging in an accommodation invoice tax scheme, you can
- ask for supplier recommendations; and
- work with suppliers that have been in business for at least several years.
We recommend you confirm the identity of the supplier you plan to work with using at least one of the following ways:
The CRA may disallow your ITCs if the invoices do not have the information required by:
In particular, invoices used to support ITC claims must include the following information:
It is crucial the invoices have this information to minimize the risk of the CRA disallowing your ITCs.
We think using the following risk factors to assess suppliers may help you avoid an accommodation invoice tax scheme:
No vetting process is perfect, and you may still get caught up in an accommodation invoice scheme. If this happens, we suggest you engage a tax litigator and work with them to build the right due diligence defence.
We imagine you will think this advice sounds self-serving. It is. But it is still good advice. It is easy to draft and submit a due diligence defence, but it isn’t easy to build and craft a winning due diligence defence. There is a fine line that separates winning and losing these cases.
When you are engaging counsel, you can start to gather basic documents. Here are a few of the basic documents you will need to gather.
We hope that this article helps you avoid getting involved in an accommodation invoice scheme or audit.
Citations:
1 Kosma-Care Canada Inc. c. R, 2014 FCA 225; Pépinière A. Massé c. R, 2014 TCC 271; Constructions Marabella Inc. c. R, 2012 TCC 397; 9088-2945 Québec Inc. c. R, 2013 TCC 58.
Note: In some cases, the Courts will support a due diligence defence and allow the ITCs (see Salaison Levesque Inc. c. R, 2014 TCC 36, upheld on appeal, 2014 FCA 296)