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Budget 2025 proposes a "reverse charge mechanism" (the "RCM") to (i) relieve a registered supplier from charging and collecting GST/HST on taxable supplies of specified telecommunication services to registered re-sellers of the services, and (ii) places the onus on the registered re-sellers to self-assess and report this GST/HST payable on their GST/HST returns.1 If entitled to claim an input tax credit (an "ITC") to recover the GST/HST self-assessed, the registered purchaser could claim the ITC on the same GST/HST return as the GST/HST self-assessment. The ITC entitlement could thus relieve the registered re-seller from any actual payment of the GST/HST.2
As currently proposed, the RCM would only apply to taxable supplies of specified telecommunication services to registered resellers. Specified telecommunication services encompass:
- speech communication that is instant or with only a negligible delay between the transmission and receipt of signals; and
- the transmission of writing, images and sounds or information of any nature when provided in connection with services that enable such speech communication.3
An example would include supplies of voice-over-internet protocol (VoIP) minutes.4 The RCM applies where all or substantially all of the specified telecommunication services acquired by the registered reseller are for the purpose of resupplying them.
Fraudulent Carousel/Missing Trader GST/HST Scheme Targeted
The proposed RCM is intended to counteract fraudulent GST/HST carousel/missing trader schemes put into place by bad actors. A common form of GST/HST fraud is the carousel scheme, which involves property or services sold through a series of registered entities, each obligated to pay the GST/HST to its supplier and each of which claims an ITC. Often, the final transaction involves a zero-rated exported supply of property or service from Canada without tax. At least one supplier, known as the "missing trader", in the distribution chain disappears without remitting the GST/HST that it has collected.5
Not only have the fraudsters absconded with the Government's money, but the Canada Revenue Agency (the "CRA") has often targeted innocent parties to pay for the fraudsters' appropriation of the monies by disallowing the ITCs of their registered customers who neither participated in, nor benefitted from, the fraudulent activity. The CRA might erroneously justify denying the ITCs on the basis that (a) no taxable supplies were made to the customers ("phantom transactions"), or (b) the claimant had knowledge of the fraudulent scheme with the registered customers (i.e., alleging collusion with the fraudsters).
In a Tax Court of Canada decision last year, the CRA denied the taxpayer's ITCs, and the Crown argued that the taxpayer was complicit in or should have known about the fraud committed by some of its suppliers. In vacating the assessment, the Tax Court of Canada found the CRA at fault in not alerting the ITC claimant that their fraudulent suppliers were not collecting the GST/HST. The CRA could have taken steps to cancel the fraudster entities' GST/HST registration numbers. They remained valid years after the initial assessment, allowing the fraudster to continue to perpetrate the fraud with other customers.6 In other words, the CRA targeted an innocent party to disallow its ITCs and allowed the same fraud to continue.
Other Features of the RCM
Registered suppliers would be required to indicate on their invoices that the specified telecommunication services would be subject to the RCM, requiring the registered re-sellers to self-assess the GST/HST under the RCM.7 Presumably, registered suppliers would need to verify the GST/HST registration status of these customers on the CRA's GST/HST Registry search site at Search now and that all or substantially all of the specified telecommunication services are acquired by these customers for the purpose of resupplying the services.
Under the existing GST/HST rules, a person paying GST/HST in error to a supplier may either (a) apply for a rebate from the CRA within two years, or, alternatively, (b) receive a refund directly from its supplier of the GST/HST paid in error within two years. A person paying GST/HST in error directly to the Receiver General for Canada under the RCM could apply to the CRA for the GST/HST rebate within the two-year period. 8
Where registered re-sellers are required to self-assess GST/HST under the RCM and pay the GST/HST in error to their suppliers, they may only request a GST/HST refund directly from their suppliers.9 Quaere the registered re-seller would be precluded from applying for GST/HST rebates directly from the CRA. Queare what recourse the registered re-seller would have if their suppliers refused to refund the GST/HST paid in error to the supplier?
The GST/HST rebate application is normally the safety valve that allows the erroneous GST/HST payer to obtain reimbursement from the CRA where the supplier refuses to cooperate. That is only fair since the supplier would have been required to report and account for the GST/HST collected in error with its net tax on its GST/HST return.
Positive Step Forward by the Government to Combat GST/HST Fraud with Hopefully More to Come
In a submission made on September 20, 2024 to the CRA, the Canadian Bar Association Commodity Tax, Customs and Trade Law Section (the "CBA Section") raised the profile of the concerns about these fraudulent GST/HST schemes and proposed various solutions to prevent this fraudulent activity and misappropriation of the Government's taxes (generally deemed trust monies).10 One of the proposed solutions was the RCM.
With respect to other high-risk industries and activities (aside from the multi-layer distribution chains of specified telecommunication services, such as for placement agencies and precious metal sales), the RCM could be expanded. The Budget 2025 proposal contemplates including "a new legal authority that would allow the government to make other supplies subject to an RCM by means of regulations."11
The Government has now followed other governments in combatting GST/VAT fraud through an RCM. The United Kingdom implemented an RCM in 2007 for mobile phones and computer chips and then in 2014 for gas and electricity.12 Australia implemented an RCM for precious metal sales between GST-registered parties effective from April 1, 2017.13
To supplement the RCM, other enforcement tools for combatting GST/HST fraud proposed by the CBA Section could be implemented. They could include deregistration of registered suppliers who have fraudulently misappropriated GST/HST collected and notification to taxpayers to avoid transacting with such fraudsters. There could be mandatory electronic invoicing and reporting requirements for transacting in high-risk industries for timely monitoring and verification of GST/HST compliance.
Where taxpayers/registrants enter into specified transactions or supply contracts with counterparties, the CRA could issue attestations or certifications of GST/HST compliance to satisfy a pre-condition for proceeding with the transactions. As an additional safeguard, certain "high-risk" registrants could be required to maintain security for unpaid or unremitted GST/HST liabilities. The implementation of these additional measures would bolster and enhance the efforts to prevent GST/HST fraud.
While the Government has left open the possibility of taking further measures to prevent GST/HST fraud (specifically contemplating expanding the RCM beyond specified telecommunication services as prescribed under regulations), the Government has taken an important initial step forward in combatting such fraud.
Moreover, under the RCM, legitimate commercial parties would no longer be targeted by the CRA to pay for the fraudulent misappropriation of GST/HST deemed trust monies by criminal elements. Without the RCM, fraudsters and their misappropriated gains (i.e., withheld GST/HST collected) could move abroad beyond the reach of the CRA, whereas legitimate commercial enterprises contributing to the Canadian economy could remain conveniently in the CRA's enforcement sight lines.
Consultations on the Proposal
Stakeholders and other interested parties will have the opportunity to contribute to the final "design of the new rules and the tabling of enacting legislation" by emailing submissions to the Department of Finance at ConsultationLegislation@fin.gc.ca during a consultation period scheduled to conclude on January 12, 2026.
Footnotes
1 Government of Canada, "Budget 2025: Canada Strong", (November 4, 2025), online, at 357 [Budget 2025].
2 Budget 2025, p 357.
3 Ibid.
4 Ibid.
5 Ibid.
6 Entrepôt Frigorifique International Inc. c. Le Roi, 2024 TCC 78.
7 Budget 2025, p 358.
8 Ibid.
9 Ibid.
10 CBA, "Carousel/Missing Trader Fraud" (September 20, 2024), online.
11 Budget 2025, p 358.
12 Government of UK, "Domestic Reverse Charge Procedure".
13 Reverse charge in the valuable metals industry | Australian Taxation Office.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
