Recent court cases have highlighted the taxing authorities’ focus on the scrap industry, with many businesses that deal in scrap paper and various scrap metals being reassessed in the past several years. These cases have seen the CRA and Revenu QuĂ©bec attempt to deny input tax credits (ITCs) claimed by the businesses, primarily on the basis that the invoices provided in support of the ITCs are false invoices or “invoices of convenience.” A discussion of these cases follows, along with a brief overview of the new mandatory disclosure requirements that were introduced in Quebec partly to address this issue.
There are two main types of allegations being made by the government in respect of the false invoicing issue. The first is that the invoices issued to the taxpayer were entirely fraudulent—that is, there were no goods being supplied to the taxpayer. The invoices were merely part of a scheme by the taxpayer and the suppliers to generate tax refunds.
The second type of allegation is that, even where there were actual goods being supplied to the taxpayer, the invoices were issued under false supplier names. In this situation, the suppliers charge the GST/HST but fail to remit it to the taxing authorities, and then disappear when the authorities attempt to collect the tax owing. Where the taxing authorities are unable to locate the suppliers, their solution is often to turn to the purchasers and deny their ITCs. This is understandable where the purchaser was a party to the false invoicing scheme; however, it can also lead to harsh consequences where an innocent purchaser may simply have been duped by its suppliers.
As an example of the former scenario, TricomCanada (2016 TCC 8) dealt with a situation where the taxpayer was found to be involved in a scheme to mask the identity of its true suppliers, and its ITCs were consequently denied.
In cases that fall under the latter scenario, the courts have generally taken the position that the ITCs should be allowed where the GST/HST registrant has made reasonable efforts to verify the identity and legitimacy of its suppliers—although we have seen different standards applied to this duty of verification.
To illustrate, SNF L.P. (2016 TCC 12) involved SNF, a scrap metal recycling business that acquired metals from various suppliers. SNF paid GST on its purchases, but its suppliers did not remit this GST to the government; Revenu QuĂ©bec reassessed to deny ITCs claimed in respect of these transactions. At trial, the Crown conceded that SNF did in fact purchase the supplies of metal for the prices indicated on the invoices. However, the Crown’s position was that the names on the invoices were not the names of the real suppliers and were merely “prĂȘte-noms” (that is, nominees or agents) of the real suppliers. Therefore, the invoices did not meet the documentary requirements to claim an ITC under subparagraph 3(a)(i) of the Input Tax Credit Information (GST/HST) Regulations, SOR/91-45. The Tax Court of Canada accepted that the names on the invoices were prĂȘte-noms for the real suppliers; however, this was not sufficient to disentitle SNF from claiming the ITCs. Subparagraph 3(a)(i) of the regulations allows for the ITC documentation to contain the name of the supplier or the intermediary—and although it is not entirely clear from the TCC’s decision, the court presumably found that the prĂȘte-noms were intermediaries for the real suppliers.
The TCC further noted that in order to claim ITCs, it was sufficient for SNF to have made inquiries as to whether its purported suppliers had valid GST registration numbers. As SNF had verified the GST registration numbers of 11 of the 12 suppliers at issue, and there was no evidence that SNF was involved in or wilfully blind to the fraudulent scheme of these suppliers, SNF was allowed to claim its ITCs on these transactions. With respect to the last supplier, the TCC found that SNF was not entitled to its ITCs because SNF had not taken reasonable precautions to verify that supplier’s GST registration number and had reason to suspect that person’s legitimacy as a supplier.
In the subsequent case of Papier Reiss (2016 TCC 289), the TCC appeared to expand the scope of the duty of verification. Here, the names on the invoices were found not to be intermediaries, since there was no evidence adduced as to the nature of the relationship between the true supplier and the names on the invoices. Further, it was not held to be sufficient for the taxpayer to verify only the GST registration numbers of its purported suppliers. According to the TCC, additional steps were required to verify the suppliers’ identities, such as verifying the officers and directors of the corporate suppliers. However, the court did not provide much guidance in this respect, making it difficult to determine the requirements of this duty of verification.
There is a further case (C C Gold Inc., 2018 TCC 155) currently under appeal before the TCC that could shed some more light on this.
(While not a factor in these cases, another point to note is that it is not uncommon in the scrap industries for the purchaser to issue its own invoices for the goods that it acquires, rather than to receive these invoices from its suppliers. At the 2005 Canadian Bar Association GST round table, the CRA indicated that these “reverse invoices” are acceptable where both parties agree to them, and where the ITC documentary requirements are otherwise met.)
To address the taxing authorities’ concerns around the use of prĂȘte-noms or nominees in transactions (in both false invoicing and other commercial contexts), the Quebec government has introduced new measures around the mandatory disclosure of nominee agreements—that is, agreements whereby a principal allows a nominee to transact under the principal’s name and to bind the principal as a party to the agreement.
Under these new measures, there is a prescribed form that must be filed whenever a nominee agreement is used as part of a transaction that has tax consequences (TP-1079, PN-V, Disclosure of a Nominee Agreement). The required disclosure includes the identities of the parties to the nominee agreement and a full description of the facts of the transaction or series of transactions to which the nominee agreement relates and the identity of any person or entity for which such transaction or series of transactions has tax consequences.
By way of commentary, this case has somewhat wider application to all GST/HST registrants seeking ITCs on business inputs. It is another indication that the CRA will be looking very strictly at ITC documentation requirements and looking to ensure that the information and documentation is being obtained by GST/HST registrants prior to the claiming of any ITCs. The CRA has not yet gone the same direction as Quebec, but best practice for all GST/HST registrants prior to claiming ITCs is to know their suppliers and obtain the required information to support their ITCs. This likely remains the number one audit issue for the CRA.
Businesses in the scrap industry should be extra careful in documenting and verifying the identities of the parties from whom they are purchasing supplies. The taxing authorities will be eager to deny ITC claims with respect to transactions where GST/HST was collected but not remitted, and businesses must take steps to ensure that they are not left paying the price.
Robert G. Kreklewetz is a Partner and Rebecca Loo is an Associate at Millar Kreklewetz LLP.