We continue to see Canada Revenue Agency (CRA) auditors aggressively challenge GST/HST registrants with the documentary requirements under subsection 169(4) of the Excise Tax Act (ETA). It is a fundamental principle underlying the GST/HST that no tax should be included in the cost of property and services by a registrant in the course of its commercial activities. However, registrants must satisfy the general rules for claiming input tax credits (ITCs) found in subsection 169(1) before being eligible to claim the ITCs in their GST/HST returns.
The CRA continually emphasizes ensuring that registrants obtain sufficient documentary evidence to substantiate any ITC claimed. Subsection 169(4)(a) of the ETA establishes the information required to support the ITC claim and determine the amount, including information prescribed under the Input Tax Credit Information (GST/HST) Regulations.
In a previous Indirect Tax Alert from October 25, 2011, entitled Input Tax Credits and Documentation, Chantal A. Guilmette reviewed the documentary information required for specific dollar thresholds ( http://www.collinsbarrow.com/en/cbn/publications/input-tax-credits-and-documentation). Some of the documentary information requirements that seem to have become audit issues or areas that the CRA tends to challenge include:
- validity of GST/HST registration
- adequate supporting documents
- recipient name
Validity of GST/HST registration
Where the supplier charges GST/HST and the total amount paid or payable for the supply is $30 or more, the supplier must indicate its GST/HST registration number on the supporting documentation. The recipient acquiring the supply is not entitled to claim an ITC for the supply if a false or incorrect GST/HST registration number is provided. Where an auditor discovers an invoice without the required GST/HST registration number, a reasonable amount of time is normally granted to obtain this information from the supplier. If the supplier is no longer in business and the recipient is therefore unable to obtain the GST/HST registration number, the ITC will be denied.
Technically, the ETA establishes an obligation for a registrant claiming an ITC to verify the supplier's GST/HST registration number. Anyone may check a supplier's number at www.cra-arc.gc.ca/gsthstregistry or www.registreentreprises.gouv.qc.ca in Quebec. A person may also call the CRA's business enquiries line at 1-800-959-5525 or Revenu Québec to verify another person's number. The CRA and Revenu Québec will provide verbal or written GST/HST registration confirmation where there is a valid need to know that a person is a registrant.
It is good business practice to verify the validity of GST/HST registration numbers provided by suppliers on a regular basis.
For various reasons, the CRA may request documentation to support sales and GST/HST collected in addition to purchase invoices and general ledger (G/L) detail of ITCs claimed. When preparing the documents for submission, ensure that they are complete and meet all requirements to avoid a denial of the ITC. There is no requirement that the documentary information or evidence be contained in a single document. It is not uncommon, particularly where written agreements and contracts are concerned, for primary documentation to be supplemented by additional material. For example, a contract for services may specify the particulars concerning the supplier, the recipient and the terms of payment, but the consideration and the tax paid or payable may be determined only on a periodic basis and documented on separate invoices. Both the written agreement and the invoice are required to satisfy the documentary requirements to claim an ITC. The CRA does not make it a practice to ask for additional information that may support ITC claims, so ensure that submissions contain all of the documentary information required.
Ensuring that an invoice is issued to the correct recipient is important. Generally, the recipient of a supply is the person liable under an agreement to pay the consideration for the supply. A common audit issue arises where Company A is issued an invoice for a supply for the commercial activities of Company B, a related company. Company B pays the invoice and claims the ITC, but as the invoice is issued to Company A, which is liable to pay the consideration, the ITC may be denied to Company B upon audit. There are three ways to address this issue: 1) the supplier must correct the recipient name and reissue the invoice; 2) Company A must resupply the goods to Company B and issue an invoice; or 3) ensure that there is an agency agreement in place whereby Company A acts as an authorized agent for Company B.
Another common audit issue arises when an owner purchases goods on behalf of a corporation and the invoice is issued to the owner personally. The CRA is becoming very strict when conducting audits and is denying ITCs claimed by the corporation if the documents identify the owner as the recipient. One solution is for the owner to be reimbursed by the corporation, but this causes additional paperwork and auditors are not receptive to having these expense claims back-dated. Though ITCs may be taken in the most current reporting period if within prescribed time limits, interest may be applicable at the time ITCs are denied during the audit.
On occasion, a supplier may enter into an agreement for the making of a single taxable supply to more than one person. If there is more than one recipient for the supply, each recipient may be eligible to claim an ITC for the part of the GST/HST it is liable to pay in respect of the supply to the extent that the recipient's part of the supply is for consumption, use or supply in the course of that recipient's commercial activities, provided all the other ITC criteria are met. Generally, the allocation of the ITC between multiple recipients must be determined by reference to other documentary evidence such as letters, written agreements or other supporting documentation.
In certain circumstances, even though a person is not the recipient of a supply, this person may be eligible to claim ITCs for the tax paid by the recipient. For example, when employers, charities and public institutions pay allowances to or reimburse employees or volunteers, the employers, partners, charities or public institutions may be eligible to claim ITCs in respect of the payments.
The best way to avoid some of these common audit issues is to obtain sufficient documentary evidence to substantiate any ITC claimed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.