On June 17, the Tax Court of Canada issued a judgment, Entreprises DRF Inc. v. The Queen, 2013 TCC 95, a disturbing decision on several points of view.Imagine being a construction contractor specializing in seals and repairs. You are short of employees for a certain period and recruit a handyman in the newspaper. After finishing the work required, the handyman brings you a bill from a company XYZ. XYZ is validly registered at the business register, and its tax numbers are valid. You issue a cheque to XYZ, and deliver it to the handyman. You then deduct the expense from your business income and claim the input tax credits. Four years later, the tax authorities requires you to pay back all these deductions, claiming that you have participated in a scheme with XYZ to evade payment of taxes.The truth is that XYZ does not report its income. XYZ does not report having any employees, so XYZ does not pay its DAS, and probably pays workers "under the table". You ignore this fraud, and you had no way to have actual knowledge of it considering the numerous regulations about protection of personal information.
It is likely a ploy between the owner of XYZ and the handyman where the owner pays the handyman directly and keeps the balance to avoid the heavy tax and administrative burden. According to l'Association de la construction, "Le système encourage le travail au noir". (http://www.lapresse.ca/debats/chroniques/yves-boisvert/201307/05/01-4667929-letrange-strategie-de-dessau.php).
In light of the discovery of the extent of undeclared work, Revenu Québec has undertaken to recover the sums owed by developing a type of aggressive reassessment to contractors claiming their complacency with their subcontractors who do not declare their income and/or their employees. By these reassessments against contractors, Revenu Québec seeks reimbursement of input tax credits and refunds, the reimbursement of the deduction of invoices issued by fraudulent subcontractors. A shareholder benefit reassessment is also issued alleging misappropriation of the business funds. These outrageous reassessments are issued despite the fact that the contractor who received XYZ's services made all possible verifications about XYZ's compliance and ignores all of the fraud!
The jurisprudence, initially favorable to taxpayers, required a demonstration of the Taxpayer's good faith to reject the Crown's reassessments. If the Contractor, in good faith, was unaware of the fraud of its subcontractor, then Revenu Quebec could not request the reimbursement of the credits and expenses deducted.
Then, the Federal Court specified that the input tx credits and refunds could not be claimed if the tax numbers were not validly assigned to the issuer of the invoice, regardless of the good faith of the contractor. (Judgments Systematix and Comtronic)
Subsequently, several judgments were rendered in cases where the Court held that there was no real services rendered, therefore, there was ACTUALLY presence of a tax evasion strategy, and Taxpayer's appeals have been properly rejected.
Revenu Québec then attempted to use these judgments, and apply the conclusions of those judgements to situations where the existence of services was NOT in question.
The judgment DRF is the expression of those efforts by the Minister. Following the Crown's conclusions, the judge criticized the company DRF, and according to the judge, DRF should have asked more questions to its subcontractors, and should have known that something was wrong with the subcontractors. Basically the Court asks the Taxpayers to refuse to be invoiced by a corporation, if there can be a slight doubt that something might be wrong with its government compliance in general. This judgement is detrimental to business in Quebec and it must now be put back in context, to apply only to files where the existence of the services is questioned.
If not, how can a Taxpayer be assured of the tax compliance of its subcontractors, when Revenu Quebec does not allow him to verify this information?
If not, how can a Taxpayer really prove the identity of the supplier, as requested by the Court in DRF, without any government provided tools
We will argue before the Court of Quebec a similar case in late September, and we will present an innovative argument that could possibly overrule the existing jurisprudence trend. To be continued.
It is likely a ploy between the owner of XYZ and the handyman where the owner pays the handyman directly and keeps the balance to avoid the heavy tax and administrative burden. According to l'Association de la construction, "Le système encourage le travail au noir". (http://www.lapresse.ca/debats/chroniques/yves-boisvert/201307/05/01-4667929-letrange-strategie-de-dessau.php).
In light of the discovery of the extent of undeclared work, Revenu Québec has undertaken to recover the sums owed by developing a type of aggressive reassessment to contractors claiming their complacency with their subcontractors who do not declare their income and/or their employees. By these reassessments against contractors, Revenu Québec seeks reimbursement of input tax credits and refunds, the reimbursement of the deduction of invoices issued by fraudulent subcontractors. A shareholder benefit reassessment is also issued alleging misappropriation of the business funds. These outrageous reassessments are issued despite the fact that the contractor who received XYZ's services made all possible verifications about XYZ's compliance and ignores all of the fraud!
The jurisprudence, initially favorable to taxpayers, required a demonstration of the Taxpayer's good faith to reject the Crown's reassessments. If the Contractor, in good faith, was unaware of the fraud of its subcontractor, then Revenu Quebec could not request the reimbursement of the credits and expenses deducted.
Then, the Federal Court specified that the input tx credits and refunds could not be claimed if the tax numbers were not validly assigned to the issuer of the invoice, regardless of the good faith of the contractor. (Judgments Systematix and Comtronic)
Subsequently, several judgments were rendered in cases where the Court held that there was no real services rendered, therefore, there was ACTUALLY presence of a tax evasion strategy, and Taxpayer's appeals have been properly rejected.
Revenu Québec then attempted to use these judgments, and apply the conclusions of those judgements to situations where the existence of services was NOT in question.
The judgment DRF is the expression of those efforts by the Minister. Following the Crown's conclusions, the judge criticized the company DRF, and according to the judge, DRF should have asked more questions to its subcontractors, and should have known that something was wrong with the subcontractors. Basically the Court asks the Taxpayers to refuse to be invoiced by a corporation, if there can be a slight doubt that something might be wrong with its government compliance in general. This judgement is detrimental to business in Quebec and it must now be put back in context, to apply only to files where the existence of the services is questioned.
If not, how can a Taxpayer be assured of the tax compliance of its subcontractors, when Revenu Quebec does not allow him to verify this information?
If not, how can a Taxpayer really prove the identity of the supplier, as requested by the Court in DRF, without any government provided tools
We will argue before the Court of Quebec a similar case in late September, and we will present an innovative argument that could possibly overrule the existing jurisprudence trend. To be continued.
RSS Feed