Via email: Consultation-Legislation@fin.gc.ca
Department of Finance Canada
90 Elgin Street
Ottawa, ON K1A 0G5
Dear Sirs/Mesdames:
Re: Feedback on Carousel Fraud Proposals in 2025 Federal Budget
In the 2025 Federal Budget (the “2025 Budget”), the Federal Government proposed new rules to address “carousel fraud,” including, in particular, the introduction of a “reverse charge” mechanism that applies to certain supplies in the telecommunications sector (the “RCM Proposal”). Further to the invitation in the 2025 Budget, the Commodity Tax, Customs and Trade Section of the Canadian Bar Association (the “CBA Section”) appreciates the opportunity to provide feedback on the proposal by January 12, 2026.
The Canadian Bar Association is a national association representing over 40,000 legal professionals, including lawyers, notaries, law professors, and students across Canada. Our mandate includes promoting the rule of law, improving access to justice, advocating for effective law reform, and providing expertise on how legislation impacts Canadians’ daily lives. The CBA Section comprises approximately 40 members and works to enhance awareness and understanding of legal and policy issues related to commodity tax, customs, and trade.
The CBA Section believes that the RCM Proposal is an improvement on the existing law and is consistent with the Section’s recommendations set out in a submission to the Canada Revenue Agency (CRA) and the Department of Finance last year. However, the CBA Section has specific suggestions for improving the RCM Proposal to better combat fraud without imposing unnecessary costs on businesses operating in Canada.
Background
A common form of alleged GST fraud is referred to as a “carousel scheme,” which involves legitimate goods or services circulating through a series of entities, each obligated to pay the GST and each of which claims an input tax credit (ITC), until a participant in the chain collects GST and disappears without remitting it.
In recent years, in some cases, instead of pursuing rogue suppliers who commit fraud (and who are themselves the legal collection agents of the Minister), the CRA has relied on enforcement approaches that deny ITCs to recipients who paid the tax and were often completely innocent and unaware of the GST fraud. In these cases, the CRA has alleged that no supplies were actually made or that the supplier was not the actual supplier. This approach has been rejected by the courts where there was no evidence that the recipients participated in the fraud: Entrepôt Frigorifique International Inc. v. His Majesty the King, 2024 TCC 78, and Fiera Foods Company v. The King, 2023 TCC 140.
At the 2024 CBA Section–CRA GST/HST Roundtable, the CRA requested submissions from the CBA Section on how to better address GST fraud. The CBA Section responded to the CRA and the Department of Finance with a submission dated September 20, 2024, recommending several ways the CRA could prevent fraud without assessing innocent parties. One recommendation was for the Department of Finance to propose a reverse charge mechanism for industries at the highest risk of GST fraud.
It appears that the Department of Finance has followed the CBA Section’s recommendation. However, the RCM Proposal, as set out in the 2025 Budget, applies only to “specified telecommunications services” and only if the recipient is registered and acquires all or substantially all of those services for the purpose of resupplying them. The RCM Proposal does not explain the policy rationale for these limitations.
Submission
The CBA Section recommends the following revisions to the RCM Proposal:
- The RCM Proposal should be extended to other industries that historically present elevated risks of GST fraud, including precious metals and employment agencies.
- Rather than allowing the RCM Proposal to expand by regulation, extensions should involve statutory amendments to allow sufficient consultation. Any extension to new industries or supplies should include a consultation period to ensure adequate notice to affected taxpayers.
- The consequences for innocent non-compliance by recipients should be mitigated by extending the time within which a credit note may be issued under subsection 232(1).
- The consequences for innocent non-compliance by suppliers should be mitigated by introducing an express due diligence defence where suppliers reasonably rely on information provided by recipients and do not collect tax as a result.
Discussion
The CBA Section is pleased to see that the 2025 Budget follows its recommendation to implement a reverse charge mechanism. The RCM Proposal will prevent fraud because when the recipient pays GST/HST directly to the government, the supplier will be unable to abscond with the funds. It will also allow recipients to claim ITCs with confidence, as they will not have to worry about suppliers failing to remit tax.
That said, the current application of the RCM Proposal is extremely limited. It applies only to specified telecommunications services and only where the recipient is registered and intends to resupply the services. To effectively reduce fraud, the RCM Proposal should be expanded to cover supplies in other high-risk industries, particularly precious metals and employment agencies.
While the 2025 Budget notes that new rules could allow additional supplies to be made subject to the RCM by regulation, we are concerned that regulatory amendments receive less scrutiny than legislative changes. Taxpayers may be unaware when the reverse charge mechanism is expanded to their industry.
If the government proceeds with expansion by regulation, it should ensure that affected industries receive ample notice and an opportunity to provide input. Adequate lead time is critical for industry participants to update systems and implement the reverse charge mechanism correctly.
The potential consequences of incorrect application are severe. If tax is charged in error on a supply subject to the RCM, recovery is limited and may not be available through ITCs. Conversely, suppliers may be liable for tax, interest, and penalties if they fail to collect tax when required. Clear guidance and sufficient notice are therefore essential.
Legislation should also be introduced to mitigate consequences for innocent parties. Where ITCs have been disallowed due to incorrect application of the RCM, parties should have additional time to correct errors through credit notes under subsection 232(1). The current two-year limit should be aligned with the ITC claim period under subsection 225(4).
Finally, because the mechanism applies only where the recipient is registered and acquiring services for resupply, we recommend introducing a due diligence defence for suppliers who reasonably rely on recipient information. Without such a defence, the reverse charge mechanism risks being unworkable in practice.
Concluding Comments
The RCM Proposal is a welcome measure that is likely to help combat GST fraud while protecting innocent recipients. With targeted refinements regarding scope, implementation, and relief for good-faith errors, the mechanism can more effectively balance fraud prevention and fairness. The CBA Section encourages the Department of Finance to consider these comments when drafting the legislation.
Thank you for the opportunity to provide our comments. We would be pleased to discuss any aspect of this submission further.
Yours very truly,
(original letter signed by Noel Corriveau for Jesse Waslowski)
Jesse Waslowski
Chair, Commodity Tax, Customs and Trade Section