Introduction – Tax Court of Canada Clarifies CRA Authority to Deny GST/HST Input Tax Credits During a CRA Tax Audit
The decision in Fiera Foods Company v The King provides important guidance on how the Tax Court of Canada evaluates disputes involving GST/HST input tax credits (ITCs) following a Canada Revenue Agency (CRA) tax audit.
In this case, the CRA denied significant GST/HST input tax credits claimed by Fiera Foods Company, a Canadian manufacturer of frozen bakery products. The CRA argued that several labour agencies supplying temporary workers were not legitimate suppliers capable of providing the services billed to the taxpayer.
After examining the evidence, the Tax Court of Canada largely rejected the CRA reassessment and confirmed that a taxpayer does not automatically lose entitlement to GST/HST input tax credits simply because a supplier fails to comply with its own GST/HST reporting or remittance obligations.
The decision is particularly relevant for Canadian businesses that rely on staffing agencies, subcontractors, or labour intermediaries and that may face GST/HST tax reassessments following a CRA tax audit.
Background – CRA GST/HST Tax Audit of Labour Agencies Supplying Temporary Workers
Fiera Foods produces frozen bakery products for retailers located throughout Canada and the United States. To support its manufacturing operations, the company relied on temporary workers supplied by multiple employment agencies.
Between January 2011 and January 2014, the company claimed GST/HST input tax credits for 37 monthly reporting periods based on HST paid to 13 labour agencies supplying temporary workers.
Section 169(1) of the Excise Tax Act allows a GST/HST registrant to claim input tax credits for GST/HST paid on taxable supplies acquired for use in commercial activities.
Following a CRA GST/HST tax audit, however, the CRA denied the ITCs. The CRA asserted that the labour agencies were not bona fide suppliers capable of providing the workers allegedly supplied to the taxpayer.
The CRA audit findings indicated that the agencies did not maintain adequate business records, did not keep documentation relating to their dealings with the taxpayer, and failed to remit the GST/HST they collected.
Based on those findings, the CRA argued that the agencies were not genuine suppliers of labour services and therefore no taxable supplies had occurred.
In the alternative, the CRA argued that even if taxable supplies existed, the taxpayer had failed to meet the documentary requirements necessary to claim GST/HST input tax credits.
Key Legal Issues – GST/HST Input Tax Credits and CRA Tax Reassessments
The Tax Court of Canada considered three primary legal issues.
The first issue was whether the labour agencies actually made taxable supplies of labour services to the taxpayer for the purposes of section 169(1) of the Excise Tax Act. If the agencies did not supply the workers, the taxpayer would not be entitled to claim the GST/HST input tax credits.
The second issue concerned whether the taxpayer satisfied the documentary requirements for claiming input tax credits under section 169(4)(a) of the Excise Tax Act and the Input Tax Credit Information Regulations.
The third issue was whether the taxpayer was liable for penalties assessed under section 285 of the Excise Tax Act, which may apply where a taxpayer demonstrates gross negligence or indifference to GST/HST compliance obligations.
Tax Court of Canada Decision – Taxable Supplies Established and GST/HST Input Tax Credits Allowed
After reviewing the evidence, the Tax Court concluded that the labour agencies did in fact supply temporary workers to the taxpayer.
The Court determined that the agencies recruited workers and directed them to perform services at the taxpayer's facilities. The agencies invoiced the taxpayer for the labour performed by those workers, and the taxpayer paid the invoiced amounts together with HST. The agencies subsequently paid wages to the workers performing services.
These findings demonstrated that the agencies supplied labour services to the taxpayer and that the taxpayer was the recipient of taxable supplies.
As a result, the requirements of section 169(1) of the Excise Tax Act were satisfied, and the taxpayer was entitled to claim the GST/HST input tax credits.
GST/HST Documentation Requirements for Input Tax Credits Under the Excise Tax Act
The CRA also argued that the taxpayer failed to maintain the prescribed documentation required to support its ITC claims.
Section 169(4) of the Excise Tax Act requires taxpayers to retain documentation containing specific information, including the supplier's identity, the amount of tax charged, and details describing the transaction.
The Court determined that the taxpayer possessed sufficient documentation to satisfy those requirements. The records included invoices issued by the labour agencies, payment records confirming the amounts paid, and supporting documentation relating to the workers who performed services.
Taken together, these materials satisfied the documentation requirements contained in the Input Tax Credit Information Regulations and demonstrated that the taxpayer maintained reasonable records supporting its GST/HST input tax credit claims.
CRA Gross Negligence Penalties Under the Excise Tax Act Rejected
The CRA also assessed penalties under section 285 of the Excise Tax Act.
The Tax Court rejected these penalties and concluded that the taxpayer exercised reasonable diligence when claiming the GST/HST input tax credits.
The Court emphasized that the taxpayer paid the agencies the invoiced amounts together with HST and maintained documentation supporting the transactions. There was no evidence that the taxpayer knew or should have known that the agencies would fail to remit the GST/HST they collected.
The Court stated that the taxpayer simply claimed input tax credits that a reasonable person would have believed were available under the Excise Tax Act. The agencies' failure to comply with their GST/HST obligations could not be attributed to the taxpayer.
CRA GST/HST Tax Audit Risk – Supplier Non-Compliance and Input Tax Credit Denials
The decision in Fiera Foods Company v The King highlights a common issue arising during CRA GST/HST tax audits involving subcontractors, labour intermediaries, and staffing agencies.
The CRA frequently denies ITCs where suppliers fail to remit GST/HST or maintain proper records. However, this decision confirms that supplier non-compliance alone does not eliminate a taxpayer's entitlement to GST/HST input tax credits.
The critical question is whether a taxable supply actually occurred and whether the taxpayer maintained sufficient documentation demonstrating the commercial transaction.
Where businesses can demonstrate that services were performed, payments were made, and GST/HST was charged, the Tax Court of Canada may overturn CRA tax reassessments that rely primarily on supplier compliance failures.
Pro Tax Tips – Protecting GST/HST Input Tax Credits During CRA Tax Audits
Businesses that rely on labour agencies, subcontractors, or staffing intermediaries should implement strong compliance practices to protect their GST/HST input tax credit claims in the event of a CRA tax audit.
Companies should verify that suppliers have valid GST/HST registration numbers before making significant payments and should retain invoices containing all prescribed information required under the Excise Tax Act.
Businesses should also maintain detailed payment records linking invoices to commercial activities and ensure that accounting systems clearly document the services received. When large or recurring payments are made to labour agencies or contractors, periodic verification of supplier compliance can reduce the risk of GST/HST tax reassessments.
If the CRA denies ITCs during a tax audit or issues a GST/HST reassessment alleging supplier non-compliance, obtaining advice from an experienced Canadian tax lawyer or Canadian tax litigation lawyer can significantly improve the likelihood of successfully challenging the CRA decision.
Key Takeaways from the Tax Court of Canada Decision
The decision in Fiera Foods Company v The King confirms that entitlement to GST/HST input tax credits depends primarily on the underlying commercial transaction rather than on a supplier's later tax compliance failures.
Where a taxpayer can demonstrate that a taxable supply occurred, that GST/HST was paid, and that adequate documentation exists, the Tax Court of Canada may overturn CRA tax reassessments denying input tax credits.
The decision also confirms that penalties for gross negligence should not apply where a taxpayer acts reasonably and maintains appropriate business records supporting its GST/HST reporting positions.
For businesses facing GST/HST tax reassessments following a CRA tax audit, maintaining strong documentation and obtaining advice from an experienced Canadian tax lawyer can be critical to successfully resolving the dispute.
FAQ
Can the CRA deny GST/HST input tax credits if a supplier fails to remit GST/HST?
Not automatically. The CRA must demonstrate that no taxable supply occurred or that the taxpayer failed to satisfy documentary requirements under the Excise Tax Act.
What documentation is required to support GST/HST input tax credit claims?
Invoices containing prescribed information, proof of payment, and business records demonstrating the commercial activity are generally required.
Can taxpayers be penalized if their suppliers violate GST/HST rules?
Penalties typically apply only where the taxpayer demonstrates gross negligence or indifference to compliance obligations.