Introduction – Goods and Services Tax & Excise Tax Act
Introduced in 1991, the Goods and Services Tax ("GST") is governed by Part IX of Canada's Excise Tax Act ("ETA"). The GST is a "value-added" tax system in that it is imposed on the price of most goods and services at each stage from the supply of raw material, production, distribution to the sale to the consumer. Certain provinces, including Ontario, have harmonized their provincial sales tax with the GST thereby implementing the Harmonized Sales Tax ("HST"). Both the GST and HST are administered by the Canada Revenue Agency ("CRA") and governed by the ETA. This article may refer to the combined taxes as GST/HST or simply to the GST.
How Does the GST Apply & Who Pays GST?
The GST applies nationally on most goods and services made in Canada. For cross-border transactions, the GST applies on most goods and services acquired outside Canada but are imported for the use, consumption and enjoyment in Canada.
Under subsection 165(1) of the ETA, every recipient of "taxable supply made in Canada" is required to pay tax in respect of the supply purchased at a rate of 5% on the value of the consideration made for the supply (ETA Subsection 165(2)). A "taxable supply" is a supply made in the course of a commercial activity and "supply" includes sale, transfer, barter, exchange, licence, rental, gift, lease or disposition (ETA Subsection 123(1)). In normal English the recipient of a taxable supply is a purchaser.
Under subsection 165(3) of the ETA, certain goods and services are taxable at a rate of 0% and are referred to as "zero-rated" supplies. For examples, groceries, drug prescription and exported goods constitute "zero-rated" supplies. This means that zero-rated supplies are not subjected to GST/HST, however supplier may be eligible to claim input tax credits (which are discussed further below) for the GST/HST paid or is payable on the goods and services acquired to provide these zero-rated supplies. There are also certain goods and services which are exempt from GST (ETA Subsection 165(4)). To illustrate, educational services and financial institution services are exempt from GST. The means that supplies are not subjected to GST/HST and suppliers are not entitled to claim input tax credits on the goods and services acquired to provide these supplies. Generally, businesses that only provide tax exempt supplies are not permitted to become GST/HST registrants with the CRA, however certain businesses are exempt from this rule including financial institutions that are resident in Canada.
Registering for & Collecting the GST
Under the GST, vendors (as knowns as "registrants") of goods and services must collect the GST, on behalf of the CRA, on all taxable supplies that they provide to their customers. Pursuant to Part IX of the ETA, a registrant means as a person (including business) who is registered or is required to register with the CRA for GST/HST purposes.
A person is required to register with the CRA for GST/HST purposes if they (1) make taxable sales, leases or other supplies in Canada, and (2) are not a small supplier. A small supplier is a person (including business) whose revenue from taxable supplies does not exceed $30,000 in a calendar quarter or over the previous four consecutive calendar quarters. Persons who do not meet this threshold may voluntarily register with the CRA for GST/HST purposes in order to be able to claim input tax credits.
For domestic transactions, the GST is charged and collected by the vendor from their customers. In this context, vendors play a significant intermediary role between the consumer and the CRA. For cross-border transactions, either the importer, exporter or authorized representatives of the Canada Border Services Agency may collect the GST. Canada is engaged with countries all over the world in various trade agreements, such as NAFTA, which include provisions pertaining to the application of GST on cross-border transactions.
Filing the GST Return & Remitting the GST Collected to the CRA
As previously mentioned, GST registrants must charge and collect the GST from their customers. Registrants must also file GST returns to report the tax charged to and collected from their customers to the CRA. When reporting the GST charged and collected, registrants are entitled to claim an input tax credit ("ITC") for the amount paid to their suppliers on goods and services purchased, used or consumed during their commercial activities.
To claim an ITC, registrants must first meet the documentary and information requirements set out in section 169 of the ETA. Specifically, registrants must obtain sufficient documentary evidence to support their ITC claim from their suppliers. For example, registrants should obtain a receipt or an invoice outlining certain information including the supplier's name, total amount paid or payable, date of the transaction and all other relevant details.
Further, registrants must calculate the GST amount collected from their customers minus the amount paid to their suppliers and where the difference is a negative balance, they (the registrants) are entitled to a refund when filing their GST/HST tax return. However, where the difference between the GST collected and the input tax credit is positive, then the registrant is obligated to remit this amount to the CRA.
GST Misuse & Abuse
Despite the legislative framework, there are ongoing major concerns with respect to the misuse and abuse of the GST provisions under the ETA. In R. v. Scholz, the Ontario Court of Justice found the defendant guilty of defrauding Canada's income tax and GST/HST systems pursuant to subsection 380(1) of the Criminal Code. In this case, the defendant was ordered to pay a fine of $445,789 for the GST/HST he failed to remit and was sentenced to a 24 months conditional sentence. In R. v. Di Giuseppe, the Ontario Court of Appeal upheld the Appellant's fraud conviction and explained that the "public economic interest was placed at risk due to the accused's making of false GST filings, failure to file GST return and failing to file T2 Income Tax returns". In this case, the Appellant was sentenced to six months imprisonment and was ordered to pay a fine of $2 million dollars.
GST fraud may appear in other scenarios including, but not limited to:
- registrants billing their customers for GST, collecting the taxes then disappearing without remitting the tax to the CRA;
- registrants agreeing to exclude GST from the purchase price of goods and services, when it should be included;
- customers paying cash for purchased services and goods to avoid paying the taxes; and
- registrants falsely claiming a GST exemption on their purchased supplies.
These activities constitute GST/HST tax evasion and tax fraud as set out in section 327 of the ETA.
The penalties provision sets out a fine between 50% to 200% of the amount of the tax that was sought to be evaded and up to two years imprisonment (ETA Subsection 327(1)). In addition, subsection 327(2) grants the Attorney General of Canada discretionary powers to proceed by way of indictment in which case the fine is between 100% and 200% of the amount of tax that was sought to be evaded plus up to five years imprisonment.
Further, under section 487 of the Criminal Code, authorized representatives of the CRA’s Criminal Investigations Program can apply to a judge for a search warrant in certain circumstances including GST tax evasion. Moreover, a person who fails to file or make a return as required by subsection 326(1) of the ETA can be fined up to $25,000 or face up to 12 months of imprisonment.
Tax Tips – Voluntary Disclosures Program
GST/HST tax evasion and tax fraud creates detrimental consequences for taxpayers, the Canadian government and our economy. For instance, where registrants falsely claim to be exempt from paying GST on their purchases, it is likely that the Canadian government will have to bear the full tax loss. On the one hand, ITCs incentivize taxpayers to proactively report the GST charged and collected in order to secure the credit and they promote proactive compliance with the legislation. On the other hand, ITCs and their documentary requirements give rise to the misuse and abuse of the GST provisions under the ETA in cases where the information provided is insufficient or incorrect.
Like Canada's income tax system, the GST is a self-reporting system that "relies on the honesty and integrity of taxpayers", as was stated in the Supreme Court of Canada's leading decision, Knox Contracting Ltd. v. Canada. Under this self-reporting system, registrants play a significant intermediary role from charging and collecting the tax, to reporting and remitting the tax collected to the CRA. Consumers also have an obligation under the ETA to pay the GST imposed on acquired goods and services and to avoid activities that promote any misuse and or abuse of the GST system. If you are charged with tax fraud or tax evasion, or if you have questions regarding the CRA's investigation of your GST/HST tax returns, please contact our tax law office to speak with one of our experienced Certified Specialist in Taxation Canadian tax lawyers.