VOLUME 13, NUMBER 6 >>> JUNE 2015

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1 VOLUME 13, NUMBER 6 >>> JUNE 2015 Reproduced with permission from Tax Planning International Indirect Taxes, 13 IDTX, 6/30/15. Copyright 2015 by The Bureau of National Affairs, Inc. ( )

2 Invoices of Accommodation: The Salaison Lévesque Inc. Case Louis Tassé Couzin Taylor LLP, Canada The Quebec Revenue Agency has expended considerable effort in tackling GST fraud, particularly in certain industries. In pursuance of this, the QRA has issued notices of assessment with regard to invoices of accommodation schemes, based on the central argument of the lack of resources of a supplier. This concept was examined by the Tax Court of Canada for the first time in the Salaison Lévesque case: the judgment and the potential impact of the decision of the Court are analyzed in this article. Louis Tassé is Partner at Couzin Taylor LLP in Canada I. Introduction In administering the Goods and Services Tax ( GST ) in Quebec on behalf of the Canada Revenue Agency (the CRA ), the Quebec Revenue Agency (the QRA ) has expended considerable effort to put an end to tax fraud, particularly in certain industries. Those efforts have led the QRA to issue notices of assessment regarding what they have identified as invoices of convenience or invoices of accommodation schemes. The QRA has been refusing input tax credits ( ITCs ) and input tax refunds ( ITRs ) to registrants in situations where their suppliers did not remit the required GST or Quebec Sales Tax ( QST ) to the Minister, although the services had actually been rendered. The principal argument of the QRA is based on the concept of lack of resources. In taking this position, the QRA sought to impose an additional burden on taxpayers by requiring them to ensure that their suppliers of goods or services were not tax delinquents. Even though the Tax Court of Canada (the TCC ) confirmed in that a purchaser in good faith does not have to bear the fraud of a supplier who is an agent of the Crown, the QRA maintained the same position and had success on the basis that the suppliers did not have the capacity to render the services and that the taxpayer should have known that it was dealing with tax delinquents. The concept of lack of resources was analyzed by the Court for the first time in Salaison Lévesque Inc. v. The Queen 2, where the taxpayer was successful. II. The Concept of Accommodation Invoicing As defined by the QRA, three scenarios are included in the concept of accommodation invoicing: (i) the issuance of invoices while no service is rendered or goods delivered; (ii) the issuance of invoices for a larger amount than what is actually provided or delivered; and (iii) the issuance of invoices describing actual services rendered or goods delivered by suppliers. The first two scenarios clearly constitute a case of false invoicing, since the supplier and/or the recipient are in- 2 06/15 Copyright 2015 by The Bureau of National Affairs, Inc. IDTX ISSN

3 volved in a fraud. The third scenario is the most problematic, since the recipient of the supplies is being assessed for the fraud committed by their suppliers despite the fact that the services for which the taxes were paid have been rendered or the goods have been delivered. In this context, the validity of the assessments issued by the QRA is brought in question. A. The Concept of Lack of Resources The principal argument of the QRA, based on the concept of lack of resources, usually emanates from information discovered while auditing fraudulent suppliers. The QRA found in most cases with regard to invoices of accommodation that the suppliers did not: (i) file income tax returns; (ii) remit sales taxes; (iii) declare employees (or had a very low payroll); (iv) make any employer contributions/withholding, etc. Considering these facts, the QRA argues that the suppliers did not have the capacities, expertise or material, financial and human resources to provide the workforce relating to the payments that were made to them, or to deliver the goods. Hence, the services were not rendered or the goods were not supplied by the suppliers but by other subcontractors, such that the invoices are false, as the name of the supplier indicated on the invoices is not the one that in fact made the supply. 1. The Legitimacy of the Concept of Lack of Resources As maintained by Salaison Lévesque Inc ( SLI ) in its pleadings before the TCC and the Federal Court of Appeal ( FCA ), the concept of lack of resources is illfounded. Since 1927, 3 the courts have consistently ruled that a declared or undeclared business, whether or not illegal, remains subject to all tax legislation, including income tax or sales taxes. In fact, the lack of declared resources has never stopped the QRA or the CRA from assessing delinquent taxpayers on the basis that they carried on a business. In this regard, the existence of a business is not contingent in any way on its declaration to the tax authorities. The fact that a supplier did not declare its business by filing properly completed income tax returns and sales tax declarations is not relevant for the determination of whether or not it has provided the services to the recipient. Once the services have been provided and taxes paid on such services, the recipient is only required to comply with the applicable legislation in order to claim the ITCs or ITRs, providing that it had no involvement in the fraudulent scheme undertaken by its supplier. 2. Legislative Basis and Relevant Provisions 4 The requirements are set out in the Excise Tax Act ( ETA ) and its Regulations (or in the Quebec Sales Tax Act for QST purposes). Specifically, a recipient has the obligation to pay the taxes indicated on the invoices issued by its suppliers, and when it claims ITCs the invoices must contain sufficient information and the registration numbers of the suppliers must be valid. Despite the fact that the legislation is clear with regard to the obligations that must be satisfied by the recipient in order that the credits or refunds be granted, the QRA has been arguing that the ITCs and ITRs be denied on the basis that the invoices issued do not contain the required information, i.e. the appropriate name of the supplier that rendered the services. The QRA s position failed to reflect the fact that the Regulations provide that an invoice must indicate only the name of the supplier or the intermediary in respect of the supply, or the name under which the supplier or the intermediary does business. Thus, a person who issues invoices for services rendered has no obligation to indicate if the supplier acted as an intermediary or whether the supplier subcontracted all or part of the contract. In the context of supplying services or goods, an intermediary of a person means a registrant who, acting as agent of the person or under an agreement with the person, causes or facilitates the making of the supply by the person. 5 The QRA s position is also brought into question by the fact that the QRA issues the registration numbers to suppliers. On that basis, suppliers act as agents of the QRA and a recipient who retains their services has the obligation to pay the GST indicated on the invoices. Despite the fact that the agents are duly registered, the QRA considers that this is not sufficient proof that they carry on a commercial activity, nor that the recipient should pay the taxes as required by the legislation once the service is rendered. III. The Salaison Lévesque Inc. Case A. Background SLI is a family-owned business founded in 1967 that specializes in the commercialization of a wide range of ham products distributed both nationally and internationally. Given that its business entails intense peak periods followed by significant slowdowns, SLI had to retain the services of employment agencies to meet its immediate labor needs. Prior to retaining the services of an employment agency, SLI always verified the GST number. The employment agencies (the Agencies ) in contention had valid GST numbers throughout the time SLI used their services. Hence, in accordance with the ETA, SLI had the obligation to pay the GST indicated on the invoices issued by the Agencies for the services rendered and the Agencies had the obligation to remit the taxes to the tax authorities. SLI claimed ITCs with respect to the GST paid on the invoices for the services it received from the Agencies, but the Agencies never complied with their obligations. The QRA refused SLI s claim for ITCs on the basis that the Agencies did not have the capacity to render the services and therefore that the invoices for which the expenses were claimed were false. B. The QRA s Position As mentioned above, the QRA s position is based on the concept of lack of resources. The QRA argued that, despite the fact that the services had been rendered to SLI, such services could not have been provided by the Agencies as they did not have the capacities, expertise or material, financial and human resources to provide the workforce. 6 Thus, the QRA contended 06/15 Tax Planning International: Indirect Taxes Bloomberg BNA ISSN

4 that the invoices were invoices of accommodation since the names of the subcontractors should have been indicated on the invoices instead of the Agencies names, or the invoices should have specified that the supplier acted as an intermediary. As such, the QRA submitted that the invoices issued did not meet the requirements of the ETA and its Regulations. The QRA also indicated that SLI was not diligent in its dealings with the Agencies and should have known that these suppliers were tax delinquents and were not the true suppliers of the services. C. SLI s Position The essential basis of SLI s position was that the concept of lack of resources does not exist for Canadian tax purposes; and that even if this concept did exist, its application is based on an incorrect premise since it only concerns the absence of declared resources. In fact, the evidence showed that the Agencies had the resources to render the services indicated on the invoices. Furthermore, SLI submitted that it was diligent in its dealings with the Agencies and took reasonable precautions to ensure that the Agencies were registered. D. The TCC Decision On February 4, 2014, Justice Tardif allowed the appeal brought by SLI and concluded that the arguments raised by the QRA were inconsistent and were not based on actual facts, but rather on the objective of recovering the GST not remitted by the Agencies. The TCC agreed with SLI s contention that the QRA had confused the concepts of lack of resources and unreported resources. The evidence showed that the Agencies had the capacity to carry on a commercial activity and that they had rendered the services to SLI. The TCC pointed out that the Regulations permit that the name indicated on the invoices be that of the supplier of the services or of its intermediary. Since SLI complied with the ETA and its Regulations, it could claim the ITCs related to the GST paid to the Agencies for the services rendered. The TCC reiterated that the QRA cannot impose more stringent obligations upon taxpayers than those provided by the legislation. The TCC added that no provision of the ETA allowed the tax authorities to hold a company liable for the tax delinquencies of its suppliers. Finally, the TCC pointed out that the QRA was the only one that had access to the information regarding the Agencies delinquent background. Therefore, SLI could not have known that it was dealing with fraudulent suppliers, since the suppliers had valid registration numbers and the supplies had actually taken place. E. The FCA Decision The Crown appealed the TCC decision before the FCA on the basis that the TCC judge erred in law in reversing the burden of proof as well as making palpable and overriding errors in reviewing the evidence before him by taking into account elements extrinsic to the assessment. Therefore, the only issue for the FCA was to determine whether the TCC judge could have properly concluded that the Agencies indicated on the invoices had rendered the services to SLI. The FCA concluded that the TCC judge made no error of law or any error of fact sufficient to overturn the TCC s decision to allow SLI the ITCs. The QRA argued foremost that the TCC judge had erred in requiring that it first establish that the Agencies had not rendered the services, which in the QRA s opinion constituted an error of law as the initial burden of proof should have fallen on SLI. The FCA rejected this argument and pointed out that the TCC judge: [Translation] fully understood that SLI was required to demolish the presumptions formulated by the Minister by making a prima facie evidence and nothing more. 7 Hence, it was only once that had been done that the QRA was required to prove the merits of its position, namely that the services had been rendered by unidentified third parties rather than by the Agencies, which it was unable to do. The FCA also rejected the QRA s second contention that the TCC judge erred in his assessment of the evidence. On that matter, the QRA argued, inter alia, that the TCC judge had to draw a negative inference from the absence of certain witnesses (i.e. the Agencies representatives). The FCA recalled that the TCC judge found SLI s witnesses credible and that it had evidence to conclude that the Agencies carried on commercial activities (the Agencies were duly incorporated, the Agencies had valid GST number registration, the Agencies representatives were contacted from time to time and responded to SLI s requests by sending the number of persons required at the necessary times, etc. 8 ) as well as that they had rendered the services indicated on the invoices. Finally, the FCA pointed out that it is not relevant to consider the manner in which the subcontractors paid, recruited or declared their employees for the purpose of determining whether a supplier had rendered the services to a recipient. In order to claim ITCs, a registrant needs only to obtain and verify the information prescribed under the ETA and its Regulations. The registrant has no obligation to ensure that the supplier actually reports and remits the taxes paid to them. The FCA was thus satisfied that the TCC judge did not err in concluding that the Agencies had rendered the services to SLI. As the FCA found that it was not relevant to consider how the Agencies recruited or paid their employees, it could be argued that the FCA is disregarding those elements on the basis that they relate to the declaration of the resources, not their existence. If that argument is correct, it could also trump all the others arguments raised by the QRA with respect to the capacities, the material and the financial resources of the Agencies, as they are also based on the lack of declaration. It is also interesting to note that the FCA judge made a distinction between the expressions false invoices and invoices of accommodation. Without listing all the possible scenarios, the FCA judge made it clear that the expression [Translation] false invoices had to be interpreted more broadly to include, inter alia, cases in which the purchaser of a supply is not involved in a scheme with the issuer or the invoice, but in which the information appearing on said invoice is said to be inaccurate. The FCA also con- 4 06/15 Copyright 2015 by The Bureau of National Affairs, Inc. IDTX ISSN

5 firmed that in order for an invoice to be considered an invoice of accommodation, the recipient of the invoice had to be involved in the scheme. Since that statement by the FCA judge, the QRA is no longer referring to invoices of accommodation but to false invoices, presumably to avoid having to prove the existence of collusion between the parties. III. Conclusion In the past few years, the province of Quebec has had to deal with invoices of accommodation, particularly in the construction and manufacturing industries. In its attempts to counteract this phenomenon, the QRA has issued assessments where the legislative basis has been brought into question by the legal community. The Quebec Ombudsman acknowledged the issue in its annual report stating that: [...] the Québec Ombudsman deplores the actions by certain Revenu Québec tax audit and its refusal to approve their claim for input tax credits or input tax refunds. [...] the Québec Ombudsman is aware of the importance of countering fake invoice schemes and under-the-table employment. However, this objective must never result in abusive assessments that make enterprises that have done business with tax delinquents guilty by association. 9 The full impact of the Salaison Lévesque case is unclear at this time and other than the change of terminology mentioned above, the QRA has not changed its position for the cases at the objection level or before the courts. Louis Tassé is Partner at Couzin Taylor LLP in Canada and can be contacted by at louis.tasse@ca.ey.com. NOTES 1 Joseph Ribkoff v. The Queen, 2003 TCC TCC 36 and 2014 FCA 296 [«SLI»] 3 Minister of Finance v. Smith, 1 DTC 92 (JCPC) 4 Excise Tax Act, R.S.C. 1985, c. E-15 [«ETA»] 165. (1) Imposition of goods and services tax Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply (4) Required documentation A registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed, (a) the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed (1) Collection of tax Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply (1) Registration The Minister may register any person that applies for registration and, upon doing so, must assign a registration number to the person and notify the person in writing of the registration number and the effective date of the registration False statements or omissions Every person who knowingly, or under circumstances amounting to gross negligence, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (each of which is in this section referred to as a return ) made in respect of a reporting period or transaction is liable to a penalty of the greater of $250 and 25% of the total of (a) if the false statement or omission is relevant to the determination of the net tax of the person for a reporting period, the amount determined by the formula A B where A is the net tax of the person for the period, and B is the amount that would be the net tax of the person for the period if the net tax were determined on the basis of the information provided in the return, (b) if the false statement or omission is relevant to the determination of an amount of tax payable by the person, the amount, if any, by which (i) that tax payable exceeds (ii) the amount that would be the tax payable by the person if the tax were determined on the basis of the information provided in the return, and (c) if the false statement or omission is relevant to the determination of a rebate under this Part, the amount, if any, by which (i) the amount that would be the rebate payable to the person if the rebate were determined on the basis of the information provided in the return exceeds (ii) the amount of the rebate payable to the person. Input Tax Credit Information (GST/HST) Regulations, S.O.R./91-45 [«Regulations»] 3. For the purposes of paragraph 169(4)(a) of the Act, the following information is prescribed information: [...] (c) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is $150 or more, (i) the information set out in paragraphs (a) and (b), (ii) the recipient s name, the name under which the recipient does business or the name of the recipient s duly authorized agent or representative, (iii) the terms of payment, and (iv) a description of each supply sufficient to identify it. 5 Regulations, section 2 «intermediary» 6 Salaison Lévesque Inc. v. The Queen, 2014 TCC 36, para. 7 7 The Queen v. Salaison Lévesque Inc., 2014 FCA 296, para Ibid. para Québec, Québec Ombudsman, Annual report, Québec, Publications du Québec, 2014, pp (Ombudsperson : Raymonde St-Germain) 06/15 Tax Planning International: Indirect Taxes Bloomberg BNA ISSN