Companies that anticipate receiving GST/HST net tax refunds may be wondering whether there is a limit to the length of time that the CRA can withhold the payment of the refund. This question is particularly important for companies that are typically in a net refund position (such as companies making zero-rated supplies that would not charge GST/HST on those supplies but would be entitled to related input tax credits). The COVID-19 pandemic also puts significant financial pressures on any company relying on GST/HST refunds to maintain its business cash flow.
The answer is found in the statutory provisions that set out the timing of refund payments. Excise Tax Act (“ETA”) subsection 229(1) provides that “[w]here a net tax refund payable to a person is claimed in a return filed under this Division by the person, the Minister shall pay the refund to the person with all due dispatch after the return is filed.” Unfortunately, what constitutes “all due dispatch” is not certain.
Two recent cases, Express Gold Refining Ltd. v. Canada (National Revenue) (2020 FC 614) and Iris Technologies Inc. v. Canada (National Revenue) (2020 FCA 117), addressed this issue. Both cases arose out of an application for judicial review seeking an order of mandamus to compel the CRA to release the refunds.
In Express Gold, the taxpayer was a purchaser of scrap gold and precious metals, which it processed and sold in a purified form. The taxpayer was constantly in a credit position because its purchases of scrap metal were subject to GST/HST, but its sales of refined precious metals were zero-rated. In prior audits, the CRA had withheld the taxpayer’s GST/HST refunds for a substantial period of time; notices of reassessment were not issued until several years after the commencement of each audit. The CRA conducted a subsequent audit covering the period from June 1, 2016 to October 31, 2018 and again indicated that it would be withholding the refunds until the completion of the audit.
In Iris Technologies, the taxpayer was a provider of telecommunication services and was the sole provider of certain services to many remote northern Canadian communities. The CRA audited the taxpayer for the period from January 1, 2019 to February 29, 2020 and withheld GST/HST refunds for that period. The taxpayer requested that the CRA release refunds for the period under audit, indicating that withholding the refunds had a severe impact on its ability to continue operations. The request had been granted in relation to a prior audit; this time, however, the CRA refused to grant the request.
The courts in the two cases found that it was reasonable for the CRA to withhold payment of refunds until the audits were completed. Subsection 229(1) refers to a “net tax refund payable,” meaning that only refunds “payable” under the ETA must be paid. This wording unfortunately means that the minister may choose to conduct an audit to verify that the refund amounts claimed are in fact owing to the taxpayer, putting the taxpayer at risk for those funds until the entire audit is completed.
Both courts also specifically noted that the CRA had valid concerns that led to the commencement of the audits in the first place. In Express Gold, the CRA had found that the taxpayer’s net tax refund claims had substantially increased over a few years, which was of concern to the CRA because of its pre-existing view that the scrap gold business was at high risk for tax non-compliance. In Iris Technologies, the CRA was concerned about the taxpayer’s possible involvement in a carousel scheme (that is, a scheme whereby the business collects net tax refunds but no GST/HST is ever remitted later in the supply chain).
Thus, for the time being, it appears that taxpayers awaiting refunds are at the mercy of the CRA. In the words of the FCA in Iris Technologies, “What constitutes ‘all due dispatch’ is a fact and context dependent determination that takes into account the complexity of the audit, the amounts involved, the diligence of the CRA in its execution, and the degree of cooperation of the taxpayer.”
When an audit is taking an unreasonably long time, the taxpayer can try to obtain judicial review in order to force a completion of the audit or assessment (see Nautica Motors Inc. v. Canada (Minister of National Revenue), (2002 FCT 422); however, courts faced with that kind of request are likely to side with the CRA in all but the truly exceptional case. The courts, perhaps understandably, recognize the CRA’s interest in verifying refunds before paying them out, particularly if the CRA has valid concerns about the legitimacy of the claims. Unfortunately for taxpayers, this approach can have significant cash flow implications for companies with genuine refund claims, which may find themselves without a remedy in the event of a lengthy audit.
Rebecca D. Loo and Robert G. Kreklewetz, Millar Kreklewetz LLP, Toronto