Background
On May 27, 2024, the Tax Court of Canada (the "Tax Court") issued its decision in Entrepôt Frigorifique International Inc. v. His Majesty the King1. The Tax Court's decision is a helpful reminder that, save from participating in a fraud or sham, a GST/HST registrant's entitlement to claim input tax credits ("ITCs") is not dependent on the supplier remitting such tax, but rather, is entrenched so long as the registrant meets the conditions set out in subsection 169(1) and satisfies the documentary requirements set out in subsection 169(4) and the Input Tax Credit Information (GST/HST) Regulations (the "Regulations").
Case Summary
Entrepôt Frigorifique International Inc. (the "Appellant") operates a refrigerated transport and storage company. During the period from October 1, 2010 to December 31, 2014, the Appellant paid certain employment staffing agencies (the "Suppliers") for the supply of temporary workers. The Suppliers issued invoices to the Appellant, which contained all of the information prescribed by the Regulations and collected GST on the supply of their services. However, the Suppliers did not remit the tax collected. The Appellant paid the tax and claimed ITCs.
Instead of seeking out the Suppliers and assessing them for the unremitted GST, the Ministère du Revenu du Québec ("MRQ") reassessed the Appellant by disallowing all of the ITCs claimed by the Appellant in respect of the GST paid to the Suppliers on the basis that (i) the invoices issued by the Suppliers were false invoices or "invoices of accommodation"; (ii) the Suppliers did not have the resources necessary to supply the services for which they were retained by the Appellant; and (iii) the whole arrangement was a sham in which the Appellant was a participant. The MRQ also assessed gross negligence penalties under section 285. In addition, the MRQ issued the reassessment to the Appellant beyond the normal four year reassessment period on the basis that the Appellant had made a misrepresentation that is attributable to neglect, carelessness or willful default, or that the Appellant committed fraud in filing its GST return. In order for the reassessment to have been validly issued by MRQ beyond the 4 year period, MRQ had the burden of proving on the balance of probability that the Appellant had made a misrepresentation that is attributable to neglect, carelessness or willful default, or that the Appellant committed fraud in filing its GST return.
In a case that turned on oral testimonies (there were testimonies by 14 witnesses) and the other factual evidence submitted by the parties, the Tax Court allowed the Appellant's appeal. The Tax Court found that based on the evidence submitted it was impossible to conclude that on the balance of probabilities, the Appellant had been a participant in the sham or that it had made a misrepresentation attributable to neglect, carelessness or willful default in filing its returns. In rendering its decision, the Court strongly rejected the MRQ's argument that the Excise Tax Act (the "ETA") imposes a requirement on a registrant to exercise additional due diligence when acquiring a supply from a supplier, including ensuring that the supplier has a proper physical establishment, and has remitted all GST collectible by it as well as all source deductions and other taxes. Notably, the Tax Court stated that if Parliament had intended to impose such obligations on Canadian businesses along with the associated financial risks and penalties, it would have been clearly set out in the legislation. The Tax Court noted that Parliament had not done so.
Based on the fact that the evidence presented to the Court supported the Appellant's position that it had acquired services from the Suppliers, was not a participant in the alleged sham, and had put in place a process for ensuring that the documentary requirements set out in the Regulations were satisfied, the Tax Court had no other choice but to allow all ITCs and allow the Appeal.
Key Takeaways
- There is no requirement for registrants to go beyond the requirements set out in the ETA and the Regulations to claim ITCs.
- Registrants should maintain documentary evidence of their relationship with their suppliers to ensure that they are not found to be a participant in a sham.
- All that is required for registrants to be entitled to claim ITCs (other than the conditions set out in subsection 169(1), such as the commercial activity requirement) is to maintain documentation which meets the information requirements in the Regulations. It is also important for registrants to ensure that the GST account number they obtain from suppliers is valid. Registrants who are assessed for denied ITCs on the basis that the invoices were issued by sham suppliers should respond with evidence that they were unaware of such a scheme and had documentation that met the information requirements in the Regulations at the time they claimed the ITCs.
Footnote
1. 2024 TCC 78.
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