CRA Audits of Canadian Sales to Foreign Entities
Agent-Principal and CRA GST/HST Audit
CRA audits have targeted Canadian sales to foreign entities. As a result, Canadian entities are denied GST/HST Input Tax Credits (“ITC”) based on an assumed agency/agent relationship with the foreign “principal”.
Under the Excise Tax Act, RSC 1985, c E-15 (“ETA”), GST/HST incurred in the provision of supplies (or services) can be refunded through ITCs. Pursuant to subsection 169(1) of the ETA:
where a person acquires or imports property or service or brings it into a participating province and, during a reporting period of the person during which the person is a registrant, tax in respect of the supply, importation, or bringing in becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period…
So, for example, if a Canadian Entity (CanCo) purchases products in Canada that it then ships to a foreign entity (ForCo) for re-sale, based on certain circumstances, CanCo can claim a refund of the GST/HST it incurred in the purchase of the products during the course of its business.
Denial of GST/HST Input Tax Credits per Agent-Principal Characterization
However, CRA’s pattern has been to audit these arrangements and assume that CanCo is acting as an agent for ForCo. Because CanCo is considered an agent of ForCo it is deemed to be purchasing the products for ForCo and not for itself and CanCo cannot claim the GST/HST Input Tax Credits. For entities with significant purchases and sales this can result in considerable losses.
According to the CRA, “a person is an agent with respect to a particular transaction if that person is an agent based on a determination of fact and an application of principles of law…” Unfortunately, a detailed application of law and analysis of fact is unlikely to occur at the audit stage. Therefore, many taxpayers will be required to start the appeals process and object to the Notice(s) of Reassessment denying the ITCs by filing a Notice of Objection.
It is important to note that a taxpayer has 90-days (plus 1-year with an allowed extension application) from the date of the Notice(s) of Reassessment to file the Notice of Objection thereby preserving appeal rights.
GST/HST Policy Statement P-182R Agency contains an overview of CRA’s position on agent-principal relationships. CRA refers to this document when denying ITCs. Accordingly, it is important that the proper written agreements and procedures are in place to avoid an agent-principal characterization. Also, even though CRA has begun an audit it is not too late to put in place what it is CRA claims is missing and there are ways to continue your business in explicit compliance with CRA requirements going forward while dealing with the outcome of the audit at the Notice of Objection and Tax Court of Canada stages of the dispute.
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