Canada: Claiming Input Tax Credits On GST Paid To Delinquent Suppliers: A Review Of The Federal Court Of Appeal’s Decision In Salaison


On December 17, 2014, the Federal Court of Appeal upheld a decision by the Tax Court of Canada which allowed a taxpayer's appeal for input tax credits ("ITCs") that had been previously denied by the Agence du revenu du Québec ("Revenu Québec"). The FCA's decision in Salaison Lévesque Inc. c. R.,1reaffirms that revenue authorities cannot impose more responsibilities on taxpayers than those required by the applicable legislation and regulations. The decision also has significant implications for taxpayers claiming ITCs for GST paid to placement agencies providing temporary labour services.


The taxpayer, Salaison Lévesque Inc. ("SLI"), is a family-owned business founded in 1967 specializing in the production of various ham products for sale in supermarkets across Canada. The business employed approximately 75 full-time employees, had annual sales between $15-$20 million, had never been the subject of a food recall, and was considered to be a credible organization whose reputation was beyond reproach.

Because the nature of SLI's business involved intense peak periods followed by significant slowdowns, SLI hired four placement agencies (the "Agencies") between 2005 and 2009 to provide temporary labour services during busy periods. As a GST registrant under Part IX of the Excise Tax Act2(the "ETA"), SLI was required to pay the GST for services rendered by the Agencies and the Agencies were required to remit the tax collected to Revenu Québec. SLI would subsequently claim an ITC on the GST paid to the Agencies pursuant to subsection 169(4) of the ETA. Prior to retaining the Agencies' services, SLI verified the accuracy of the Agencies' GST registration numbers with the REQ [Québec enterprise register].

Following a routine audit by Revenu Québec, it became apparent that the Agencies were involved in a fraudulent scheme whereby they pocketed the QST and GST paid to them by SLI instead of complying with their remittance obligations. Because the nature of the fraud prevented Revenu Québec from locating Agency employees or recovering unpaid remittances, SLI was audited by Revenu Québec and denied $12,443.34 of ITCs for GST paid to the Agencies.

Although the Agencies had provided personnel to SLI, Revenu Québec argued that SLI was not entitled to the ITCs because it did not ensure that the Agencies had the necessary facilities and resources to deliver the personnel they were providing. In other words, Revenu Québec took the position that no real service had been provided to SLI on the basis that the Agencies lacked the necessary "capacities, expertise or material, financial, and human resources" and were not paying their workers the legal minimum wage.3The Agencies' invoices were deemed to be "accommodation invoices", whereby an ITC would be claimed on services that had been billed but never actually performed. SLI appealed its assessment to the Tax Court of Canada and argued that it was diligent in its dealings with the Agencies and that Revenu Québec's absence of resources argument was unfounded.


On February 4, 2014, the Tax Court of Canada (TCC) released a noteworthy decision and allowed SLI's appeal. According to Justice Alain Tardif, there was no evidence that SLI had participated in the Agencies' fraud. Justice Tardif was highly critical of Revenu Québec for erroneously equating unreported resources to a lack of resources and conducting "a minimal, superficial audit"4simply because "[Revenu Québec] could not recover the amounts owed by the Agencies".5This resultsdriven approach of attempting to hold SLI liable for their Agencies' remittances was fundamentally flawed and involved an incorrect interpretation of the ETA. Based on the Court's finding that the Agencies had provided SLI with supplies, Revenu Québec's conclusion that the Agencies lacked the capacity to carry on commercial activity was ill-founded.

Although the Agencies were nothing more than "...highlevel tax delinquents",6Justice Tardif found that SLI was not responsible for policing its suppliers to ensure that they complied with their GST remittance requirements. Because SLI had complied with the ETA and the Regulations, Justice Tardif concluded that it was entitled to claim the ITCs:

[121] For all these reasons, I conclude that the Appellant has shown that it provided ArQ [Revenu Québec] with all the information required by the ETA and the Regulation to become entitled to the litigious ITCs; it cannot lose those ITCs solely because it dealt with staffing Agencies that turned out to be tax delinquents. The appeal is therefore allowed and the assessment cancelled.7


Revenu Québec appealed to the Federal Court of Appeal (FCA) on the following grounds: (i) that the TCC erred in reversing the burden of proof; (ii) that the TCC incorrectly concluded that SLI had demolished, on a prima facie basis, Revenu Québec's assumptions underlying the assessment; and (iii) that the TCC made palpable and overriding errors in interpreting the evidence. There was also a cross-appeal by SLI on the basis that Justice Tardif erred in not granting costs beyond the Tariff amount.

The FCA rejected Revenu Québec's appeal with costs, with the exception of two amounts that had been discussed but not been claimed before the TCC. In considering Revenu Québec's first and second arguments, the Court pointed out that Revenu Québec did not dispute the fact that SLI had paid for services that were rendered. Therefore, the real issue to be determined was whether the TCC was correct in allowing the ITCs for the services provided by the Agencies. The FCA rejected Revenu Québec's position that the initial burden of proof should have fallen on SLI and instead pointed out that the TCC "fully understood that Salaison was required to demolish the presumptions or assumptions formulated by the Minister by making a prima facie case and nothing more" [translation].8Only after this had been done was Revenu Québec required to prove the merits of its claim, which it was unable to do.

The FCA also rejected Revenu Québec's third argument that the TCC erred in interpreting the evidence. Justice Tardif was entitled to consider all of the evidence in deciding whether to draw a negative inference from the fact that there were no representative witnesses from the Agencies as a result of the fraud. By considering all of the available evidence, the TCC was justified in concluding that the Agencies were carrying on commercial activities and that they had rendered the services to SLI. It was also within Justice Tardif's discretion to determine that the manner in which the Agencies paid, recruited, and declared their employees was irrelevant in determining whether they had actually provided services to SLI. According to the FCA, "the weight to be given to the absence of payroll records or incomplete records depends on the context and on the other evidence adduced at trial" [translation].9

The FCA also commented on how Revenu Québec had amended its position on appeal to argue that the "accommodation invoices" were in fact "false invoices". Here, Justice Gauthier distinguished "false invoices" from "accommodation invoices" and held that "'false invoices' had to be interpreted more broadly to include inter alia cases in which the purchaser of a supply is not involved in a scheme with the issuer of the invoices, but in which the information appearing on the invoice in question is said to be inaccurate" [translation].10

As a result, the FCA concluded that the TCC did not err in concluding that Revenu Québec's position was unfounded and that SLI had discharged its burden of proof. On the issue of the cross-appeal, the FCA ordered the case back to Justice Tardif for a determination of the quantum of costs issue.


The FCA's decision in Salaison sends a strong message to the legal community that revenue authorities, such as Revenu Québec, cannot hold a taxpayer liable for the tax collected but not remitted by suppliers. The future impact of Salaison remains to be seen, however, since the Crown has until February 16, 2015 to seek leave to appeal to the Supreme Court of Canada.

Jamie G. Walker is a Student-at-law at Miller Thomson LLP (2015).


1 Salaison Lévesque Inc. c. R., 2014 CAF 296.

2 Excise Tax Act, R.S.C. 1985, c. E-15.

3 Salaison Lévesque Inc. c. R., 2014 TCC 36, at para. 7.

4 Ibid., at para. 34.

5 Ibid., at para. 37.

6 Ibid., at para. 60.

7 Ibid., at para. 121.

8 Supra note 1, at para. 25.

9 Ibid., at para. 37.

10 Ibid., at para. 14.

Originally published by Taxes & Wealth Management, March 2015 | Issue 8-1.

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.

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