The sum of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) that a registrant paid on legitimate and reasonable business expenses is known as Input Tax Credits (ITCs).

The use of ITCs enables registrants to recoup GST/HST they have already paid on legitimate purchases connected to their business activities. Only the “end-user” of an item or service actually pays under this GST system, and the CRA does not collect GST/HST more than once along the supply chain. This effectively means that businesses in the supply chain collect and remit the tax but are spared from paying it themselves. Instead, the business or individual end consumer is left to pay the tax.

The claiming of ITCs is subject to a few general guidelines. A registrant must first register with the Canada Revenue Agency (CRA) for GST/HST purposes. Second, only purchases and expenses that are made for consumption, use, or supply during the course of a commercial activity may be claimed by a registrant. Third, the expenses and nature of the expenditures or acquisitions must be appropriate given the nature of the business.

The eligibility of ITCs is subject to strict documentary regulations as well. When a registrant claims ITCs, certain documentation requirements are imposed by Section 169(4) of the Excise Tax Act (“ETA”) and Section 3 of the Input Tax Credit Information (GST/HST) Regulations (“ITC Regulations”). According to the ETA, a registrant must present “sufficient evidence” in addition to other required information. The ITC Regulations contain the required information. ITC claims above $150 must be accompanied by the following supporting records, such as an invoice:

1. a description of the supply, particularly the name of the vendor or the intermediary (a supply is a sale for GST purposes);
2. the invoice’s date;
3. the entire sum of all supplies purchased or otherwise due;
4. GST/HST registration number of the vendor;
5. either the amount of GST/HST applied to non-taxable purchases or the rate of GST/HST applied to taxable purchases;
6. the name of the service recipient;
7. the payment terms; and
8. a sufficiently identifiable description of each supply.

Thus, it is essential to carefully evaluate, record, and keep track of the receipts, invoices, and contracts in line with the prescribed guidelines. The CRA may deny ITCs if there is insufficient information.

Involvement in the “invoices of accommodation/convenience” scheme where a registrant participated has previously caused the denial of ITC claims by the Canada Revenue Agency (CRA) and Revenu Quebec (RQ). A taxpayer, the so-called “accommodated” individual, conspires with a provider of “invoices of accommodation/convenience” in order to implement the scheme. False invoices for services that the supplier did not provide and that the person receiving accommodations did not pay for are issued to them by the provider of invoices of accommodation. The “accommodated” individual submits ITC applications and fraudulently obtains reimbursements under this fraudulent arrangement.

The CRA will conduct tax audits of the supplier and its clients if it has reason to believe that a supplier is issuing false invoices to clients. The CRA will reassess to deny the ITCs claimed on the fees of the fictitious suppliers if it believes that the taxpayers are involved in invoices of accommodation schemes with a supplier. A taxpayer that has been assessed by the CRA alleging invoices of accommodation should be represented by a top Canadian tax lawyer to challenge such an assessment in the tax courts.

Unfortunately, innocent businesses may not be allowed ITCs by the tax courts. Revenu Quebec has aggressively reviewed and denied ITCs from innocent businesses that have contracted services from fraudulent suppliers in recent years. When innocent businesses appealed their tax assessments, Revenu Quebec was generally successful. Tax courts frequently reject innocent businesses’ appeals when they fall short of meeting the stringent and necessary conditions for ITCs, even though they may not have been parties to an accommodation invoices scheme. As an example, one of the requirements for submitting an ITC claim is that the invoice must include the name of the real supplier or intermediary. Services may not genuinely come from the supplier that was hired if innocent businesses use a fraudulent supplier. Courts have in certain situations rejected ITC claims for services from fraudulent suppliers, despite the fact that the innocent businesses were not complicit in the scheme.

Tax Appeal Against Allegations of “Invoices of Accommodation” Scheme

The registrant must pass the relevant tests in order to recover the ITCs in a tax appeal against a claim of an invoices of accommodation scheme. The Tax Court of Canada ruled in Pro-Poseurs Inc. c R that the registrant is responsible for disproving any assumptions used by CRA and Revenu Quebec in tax assessments. The Tax Court further stated that this burden is satisfied when the taxpayer establishes at least a prima facie case that refutes the presumptions. The onus then falls to the Canadian tax litigation lawyer representing the CRA to refute the prima facie case if the taxpayer is able to meet the burden. Unless it is refuted, a prima facie case has enough supporting evidence to warrant a favourable ruling.

Depending on the factual situation, there may be several assumptions that taxpayers must disprove when dealing with an invoice of accommodation scheme claim. The following are some examples of the frequent prima facie evidence that a taxpayer is required to establish:

1. The taxpayer must prove that the suppliers ran a business during the pertinent time;
2. The taxpayer must prove that it purchased the goods or services from the vendor shown on the invoices;
3. The taxpayer must prove as a non-party in the scheme of invoice of accommodation;
4. The taxpayer must show that the responsibility of verification has been satisfied and did so; and
5. The taxpayer is required to prove that all supporting documents, including the invoices, adhere to the ETA‘s rules.

ITC eligibility criteria have become more strict and obligatory as a result of recent case law, particularly in Quebec. In Ventes et Faconnage de Papier Reiss Inc. c. R., the Tax Court of Canada enlarged and defined the duty of verification’s parameters. The Court ruled that, at the very least, the claimant must check the supplier’s tax registration on the government website, check with the Registraire des Entreprises du Quebec to see if the supplier is a corporation or a business, and confirm the supplier’s identification. The Tax Court utilizes this standard to decide whether a registrant has taken the necessary measures because it is a common law requirement.

Complex Litigation Requires the Help of Canadian Tax Litigation Lawyers

The process of contesting such a tax reassessment is frequently stressful and complex. Please do not hesitate to contact our top Canadian tax law firm for legal assistance if the CRA has reassessed you as a result of your alleged participation in an invoices of accommodation scheme. In order to protect your ITCs in the event of a future tax audit, we can also offer tax planning guidance.

Frequently Asked Questions (FAQs)

In Canada, how are input tax credits calculated?

The usual way to determine ITCs is to total up the GST/HST that has been paid or that still has to be paid for all purchases and expenses related to property or services acquired, imported, or carried into a participating province. The sum should then be multiplied by the ITC eligibility that can be used.

What can be covered by an input tax credit?

When compared to the nature of the claimant’s business, expenses and purchases must be fair in terms of their quality, type, and cost in order to qualify for ITCs. The following common purchases and expenses are examples of those for which you may be able to claim ITCs: business start-up costs, home-based business expenses, delivery and freight fees, fuel costs, legal, accounting, and other professional fees, maintenance and repairs, meals and entertainment, office expenses, rent, phone, and utility costs, and travel.

What purpose do input tax credits serve?

By submitting an input tax credit (ITC) claim, GST/HST registrants may recover the GST/HST they have already paid or will have to pay on purchases and expenses relevant to their business. If purchases and expenses are for consumption, use, or supply in the claimant’s commercial activity, ITCs may be claimed.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”