D'amico Family Wealth Management Group of RBC Dominion Securities Presents Étienne Gadbois and Stephen Solomon from De Grandpré Chait, Lawyers

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D'Amico Family Wealth Management Group Of RBC Dominion Securities Presents Étienne Gadbois and Stephen Solomon from De Grandpré Chait, Lawyers

"CRA and RQ in 2015 : You can run but you can’t hide! The positions taken by CRA and RQ have been subject to a great deal of media attention. This presentation will provide an overview of the major GST/QST audit issues as well as an update of the voluntary disclosures programs"

Angelo D’Amico Christiana Kavadas Dario Falso Celina Toia FCSI, CIM, CPA, CMA, CGA, CSWP B. Comm. Associate Marketing Consultant Vice President - Portfolio Manager Associate Tel: (514) 878-5049 Tel: (514) 878-5196 Tel: (514) 878-5056 Email: [email protected] Email: [email protected] Email: [email protected]

Web : http://www.damicofamilywealthmanagementgroup.ca

March 11, 2015 Business Insurance Construction Taxation Real estate Insolvency Litigation Intellectual property Debt recovery

CRA AND RQ IN 2015: YOU CAN RUN BUT YOU CAN’T HIDE!

Presented by:

Étienne Gadbois, lawyer

Stephen Solomon, lawyer Your best partner

D’Amico Family Wealth Management Group | RBC Dominion Securities Inc. March 11, 2015 Table of Contents

1. Contextualization 2. Voluntary Disclosures 3. GST/QST Issues in 2015: 3.1. Real Estate: Joint Venture Election and Bare Trust Issues 3.2 Construction and Employment Agencies: False Invoicing (or is it?) 3.3 Wholesalers: Sale of Tobacco Products (and other products) to Natives 3.4 Corporate Transactions and Elections 3.5 Application of Serious Offences Provision 4. Where do we stand today? Business Insurance Construction Taxation Real estate Insolvency Litigation Intellectual property Debt recovery

1. Contextualization

Your best partner 1. Contextualization

4 1. Contextualization

“Here are my 5 tips, both in terms of substance and form, which whilst not a panacea for a successful teaching / learning experience, will hopefully be helpful to anyone teaching law. (1) Law is not in a vacuum, so try to contextualize: court cases, political, economic and social circumstances, media reports, are all useful to explain the law, and allowing students to personally relate to it. […]”

1 Rita de la Feria, Professor of tax law, Durham University

5 1. Contextualization

Over the last year:

• Impressive media coverage • The Canadian/Quebec governments are intensifying their battle against tax evasion (hiring more auditors in the hopes of obtaining more revenue). • And at the same time…

6 1. Contextualization

• The Quebec Ombudsman unveiled its 2013-2014 report on September 18, 2014. The Quebec Ombudsman prevents and corrects errors or injustices committed against any individual or group of individuals in connection with a Quebec government ministry or agency, or an establishment in the health and social services network. His or her actions are therefore neutral, independent, and impartial -all essential qualities in the performance of the Quebec Ombudsman’s duties. According to this report :

“The Quebec 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 not done business with tax delinquents guilty by association. […]

7 1. Contextualization

By requiring businesses to check whether subcontractors have fulfilled their tax obligations, Revenu Quebec imposes a task that is not prescribed by law and that is practically impossible for businesses that subcontract to carry out. […]

Revenu Quebec’s tendency to make businesses guilty by association can have heavy consequences for Quebec’s economy. Faced with outrageous assessments, businesses incur hefty costs for defending their case […]

Frequently, banks second-guess or even renege on their decision to provide financing, presaging genuine risk of bankruptcy and therefore business closures. […]

8 1. Contextualization

In the Quebec Ombudsman’s opinion, Revenu Quebec must diligently use the sweeping powers at its disposal by ensuring that it does not unduly jeopardize the operations and even the survival of these businesses.[…]

As soon as Revenu Quebec suspects that a business is part of a fake invoice scheme, special auditing methods are used. The Québec Ombudsman notes that these methods assume from the outset that the business is guilty, a way of thinking that completely violates several basic rights as well as the principles of procedural fairness.

In examining complaints during this past year, the Quebec Ombudsman once again determined that collection agents bypassed Revenu Quebec rules and directives in order to get results more quickly. Basic notions, such as the unseizability of certain amounts, were not heeded. In their haste to have payment agreements signed, agents did not take citizens’ ability to pay into account.” [Emphasis added]

9 1. Contextualization

« This is so accurate of what is going on to * and other clients/taxpayers. Our country/government is no longer being respectful of its citizens and the treatment of everyone like a criminal by CRA is inexcusable. One can only hope a revolt of some type will make this change ». Extract from an email sent by an accountant, CPA, CA, on September 23, 2014

10 1. Contextualization

Introduction of GST – Parliamentary Debates

• “So, who is in charge? Who listens to the people of Canada? [...] A serious problem for the people and for the government. What will happen if a massive tax revolt is triggered ? What will the government do when people finally say, "Enough is enough. We do not pay our taxes? What will he do? Unless the government and the Minister of Finance have enough credibility to put this tax in place, they will apply it at their own risks and perils and at the risks and perils of the order in Canada. " House of Commons Debates, 2nd session, 34th parliament, vol. VI, Dec 20-Feb 21, 1989-1990, p. 7599 (Opposition Party)

11 1. Contextualization

• Businesses are confused about their obligations regarding ITC/ITR claims. • In light (notably) of the harmonization with the GST/HST/QST, the law should be applied in a similar manner across Canada. • 96% of Canadian businesses are small and medium enterprises. • Registrants are becoming more aware of their rights and recent statistics show that they have been filing more notices of objection compared to last year.

12 Business Insurance Construction Taxation Real estate Insolvency Litigation Intellectual property Debt recovery

2. Voluntary Disclosures

Your best partner 2. Voluntary Disclosures

14 PURPOSE OF A VOLUNTARY DISCLOSURE

The purpose of a voluntary disclosure is to transparently disclose to the tax authorities the existence of foreign property and income, so that taxes can be paid on the funds brought back to Canada where it can be spent or invested without fear.

A voluntary disclosure can also be used to regulate other tax issues, for example, if a taxpayer realizes he failed to report an income or remit a tax in a previous year and does not want to risk getting caught and facing civil penalties of over 50%. TO DISCLOSE or NOT TO DISCLOSE –

THAT IS THE QUESTION! YESTERDAY’S LANDSCAPE OF SECRET BANKING (prior to 2010)

• Very few people got caught.

• No exchange of information between tax havens and Canadian government.

• Taxpayer had a choice to make: TO DISCLOSE or NOT TO DISCLOSE. 2010 – Everything began to change

Since 2010, several lists containing the names of Canadians with foreign bank accounts were sold by various sources to the government of Canada.

With this information, the Canadian government has agressively audited and penalized these taxpayers. In addition, the Canadian government has since instituted programs to help catch taxpayers with foreign holdings.

The OECD meeting held on October 28-29, 2014 dealt with the question of transparency and exchange of information for tax purposes. As a result of this conference, over 100 countries, including most tax havens have signed the agreement committing to automatically disclose banking information to the account holder’s country of residence. This free exchange of information will commence on January 1st, 2017 or 2018, depending on the country (see Schedule).

These countries are now working together to put an end to secret banking. Schedule Despite the approaching January 1st, 2017 deadline, the Canadian tax authorities may modify its voluntary disclosure program prior to said date.

Our voluntary disclosure program is extremely generous when compared to other countries like the U.S.A.

Canada may decide to make its program more onerous as the free exchange of information nears.

Meaning, the January 1st, 2017 deadline cannot be regarded as the time before which a taxpayer should file a voluntary disclosure. The time is now. TODAY’S LANDSCAPE OF SECRET BANKING

• Many more taxpayers getting caught:  Stolen client information from banks  Whistleblower hotlines  Information disclosed in another person’s voluntary disclosure • Countries are beginning to share information with Canada and others will begin shortly, i.e.:  Luxembourg  Switzerland  Jersey  Isle of Man  Israël  Bahamas, etc. TODAY’S LANDSCAPE OF SECRET BANKING

• Getting caught is a guarantee. • WHEN? Within the next 12 – 36 months. • Luxembourg, Switzerland, Israël and the Channel Islands have already forced Canadians to file voluntary disclosures as the banks have clearly stated that they will be handing over once ‘secret’ information to the Canadian government. • Recently, additional countries have undertaken to do the same i.e. the Bahamas. TODAY’S LANDSCAPE OF SECRET BANKING

The taxpayers who have been caught and penalized by the Canadian government have received tax assessments which range from 90 – 120% of the value of their foreign assets and may be subject to additional penal fines which could reach up to 200% of the taxes owed!

This means that these taxpayers have lost all of their foreign assets and still owe additional amounts, mainly due to penal fines, civil penalties and interest. PENALTIES

Canadians with foreign property and/or income are obliged to file a T-1135 « Foreign Income Verification Statement » with the Canada Revenue Agency every year. If a Canadian is caught with foreign property or income and has not filed T-1135 forms, a minimum civil penalty of $ 2,500 per year is automatically charged to the taxpayer and a tax audit will certainly follow. This penalty can go as high as 5% of the foreign account’s high balance in the last ten years. PENALTIES - continued

In addition, taxpayers, if caught, are also subject to a: • Late filing penalty of 10% • Gross negligence penalty of 50% The Canadian and Quebec governments may also criminally charge taxpayers who get caught. Penal fines ranging from 50 – 200% may also follow since the government may view such behavior as tax evasion. ADVANTAGES OF VOLUNTARY DISCLOSURES

• Avoidance of criminal charges and penal fines ranging from 50%- 200% • Avoidance of civil tax penalties (which represent a minimum of 60% of the taxes owed!) • Avoidance of T-1135 penalties (from $ 2,500 per year to 5% of the account’s holdings) • Significant concessions on interest with Revenu Québec and the Canada Revenue Agency • No tax on capital with the Canada Revenue Agency • Protection against an audit while participating in the voluntary disclosure program • Funds can be safely brought to Canada clear of all taxes • Peace of mind – lingering issue resolved MAIN POINTS

• Voluntary disclosures are initiated on an anonymous basis. • During the first 90 days, the taxpayer may withdraw the voluntary disclosure without the government knowing his or her identity. • Meaning, if a taxpayer is undecided, it is best to initiate a voluntary disclosure on an anonymous basis, knowing they may withdraw their voluntary disclosure application prior to disclosing their identity. CANADA REVENUE AGENCY VOLUNTARY DISCLOSURE POLICY

• Revenu Québec and the Canada Revenue Agency have different taxation policies regarding voluntary disclosures.

• The Canada Revenue Agency only taxes the income and capital gains earned in the foreign account over the past 10 years.

• The Canada Revenue Agency does not go back more than 10 years.

• The Canada Revenue Agency does not care whether the starting capital was taxed or not.

• However, the Canada Revenue Agency will tax unexplained deposits during the ten year period in question. REVENU QUÉBEC VOLUNTARY DISCLOSURE POLICY

• In comparison, Revenu Québec taxes the income and capital gains earned in the last six years (instead of ten).

• However, Revenu Québec also taxes the capital at the beginning of the six year period, unless it can be proven that it was already taxed or is non-taxable..

• Generally, Revenu Québec does not tax beyond six years.

• However, Revenu Québec will tax unexplained deposits made between years six and ten. TAX COST OF A VOLUNTARY DISCLOSURE

• The answer depends on several factors, including whether or not the initial capital was taxed or is non-taxable (i.e. inheritance).

• In most cases, the initial capital is subject to taxation.

• In such circumstances, the tax cost of a voluntary disclosure can range from 20% - 38% including interest (for Quebec residents) depending on:  Taxpayer’s marginal tax rate  Composition of the portfolio  Presence of unexplained deposits  Significance of unrealized gains. • In situations whereby the starting capital was already taxed or consists of an inheritance or gift, the tax cost of a voluntary disclosure can go as low as 5% of the amounts held offshore.

• This is much more advantageous than the 48% income tax which should have been paid. COMPARISON OF VOLUNTARY DISCLOSURE VS. GETTING CAUGHT

Most importantly, it is more advantageous than getting caught, which can cost well over 100% of the value of the foreign property and income. MOVE FAST!

• If caught by the tax authorities, criminal charges and penal fines may be imposed for tax evasion.

• For all these reasons, a voluntary disclosure is very advantageous (no criminal charges, no penal fines, no civil penalties, reductions on interest, a 20%-38% cost and peace of mind).

• Must hurry – once exchange of information is close enough, the Canada Revenue Agency and Revenu Quebec will likely increase the cost by way of penalties or elimination of the interest rate reduction (as other countries have already done) or even eliminate the voluntary disclosure program because there will no longer be a reason to offer taxpayers a deal, as there will be nowhere to hide!

• In addition, the program, at any time, may be modified in order to increase the tax cost to more closely resemble other countries’ VD programs like the U.S.A. (average tax cost ranging from 65-75%). MOVE FAST!

• STRIKE WHILE THE IRON IS HOT!

• FREE voluntary disclosure consultation with De Grandpré Chait! Business Insurance Construction Taxation Real estate Insolvency Litigation Intellectual property Debt recovery

3. GST/QST Issues in 2015

Your best partner CRA and RQ: Can’t you be more efficient?

36 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• A joint venture (“JV”) is not permitted to register for GST/HST/QST as it is not considered to be a “person” in this regard. As such, it cannot obtain the required registration numbers, file returns and claim ITCs or ITRs. Rather, each member of a JV must individually comply with their GST/HST and QST obligations. • To overcome these administrative difficulties, section 273 of the ETA and section 346 of ARQST provide for an election under which, subject to certain conditions, a participant in a JV who is a GST//HST/QST registrant may be appointed as the “operator”. • Upon the election, the operator accounts for such tax collectible on taxable supplies that he has made on behalf of the JV’s other participants. The operator will also be able to request ITCs and ITRs in respect of, and on behalf of, these acquired taxable supplies.

37 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• Historically, tax advisors have been setting up bare trusts and nominee corporations whose only involvement with the JV is to hold title to real property that is the focus of the JV activity. • This was done largely to avoid creating unnecessary property transfer duties and taxes, but also to simplify the acquisition of supplies by the JV by having only one legal name appear on all documents instead of having every beneficial owner sign them.

38 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

Real Purchasers / « Beneficial Owners »

Joint Venture Election (GST-QST)

Nominee Corporation or Bare Trust is the «operator» of the Joint Venture

Real Property

3rd Parties

Tenants Suppliers 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• This issue of a bare trust or nominee company has led to the registration of the entity for GST/HST under the described activity of the JV. In fact, the entity will have no other connection to the JV, except to hold legal title to the real property for the beneficial owners. • The major purpose of the election from a government’s perspective is to have one party liable for the payment of all assessments resulting from incorrect reporting. With the bare trust or nominee corporation having basically no assets, the CRA would be forced to assess each participant individually, just as it would if there was no election in place. • This means that the false election does not serve any purpose from the government’s perspective and since these structures are not supported by the law, the CRA feels they must not be used.

40 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• In early 2013, RQ and the CRA sent more than a thousand letters pursuant to which they required the communication of information regarding nominee corporations or bare trusts reporting on behalf of JVs for GST/HST/QST purposes. • Hundreds of audit files have since been opened on the basis of the information obtained and Notices of Assessment were subsequently issued on the basis that the joint venture election was not meeting the necessary requirements.

41 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• At the 2013 CPA Commodity Tax Symposium, the CRA was asked if they were willing to take a more flexible approach to assessing JVs that qualified for the election under section 273 of the ETA, that allows the operator of a JV to report the net tax for all participants who sign the election, but where the operator was a bare trust or nominee corporation that did not meet the requirements of being an “operator”. • In early February 2014 and in the spirit of fairness, the CRA instructed its auditors, subject to certain conditions, not to assess for any GST/HST payable where an assessment could be issued because the bare trust or nominee company is not a participant to the election. This administrative tolerance expired on December 31, 2014. • In Québec, RQ confirmed that it would follow the position taken by the CRA.

42 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• The CRA issued the GST/HST Notice 284 which sets out the proper application of section 273 and explains the latitude that may be allowed in determining if a person has management or operational control. • The GST/HST Notice 284 makes it clear that simply holding title to property without having the ability to hire staff or perform any of the operator’s duties will not meet the requirements to permit that person to be an operator under this JV election.

43 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• According to the GST/HST Policy Statement P-106, the CRA is of the view that the term “participant” means: a) a person who, under a joint venture agreement evidenced in writing, makes an investment by contributing resources and takes a proportionate share of any revenue or incurs a proportionate share of the losses from the joint venture activities; or b) a person, without a financial interest, who is designated as the operator of the joint venture under an agreement in writing and is responsible for the managerial or operational control of the joint venture.

44 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• Where an operator does not contribute his own personal resources, he may still be qualified as a participant insofar as he holds a certain level of responsibility for the management or operations of the JV. • Unfortunately, and as a general rule, tax authorities view nominee corporations and bare trusts to be empty shells that are not active, apart from their ownership of assets on behalf of their beneficiary owners. • The definition reflected in P-106 was released on November 7, 1993 and has been available for almost the entire existence of the GST. As such, no one should be surprised by these requirements.

45 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• As of January 1, 2015, tax authorities will require that the operator of a JV who wishes to register and account for GST/HST, duly qualify as a "participant". Thus, if the operator/participant has not invested resources into the JV, he must have sufficient managerial or operational control of the JV. • For example, the CRA considers that the operator has the authority to manage the daily activities of the JV when he does not require the participation or the approval of other participants. This can be accomplished, notably, by hiring employees or subcontractors on behalf of the JV.

46 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• The notice also refers to the notion of having a party acting as an agent of the venturers, as opposed to the operator under 273. There is an election under 177(1.1) that allows an agent, in certain circumstances, to report and remit the GST/HST collectible in respect of the commercial activity of the principal, but under this provision, the agent has no right to claim ITCs the principal may be entitled to.

47 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

• Two (2) very important messages from the CRA: (1) the CRA is not giving its blessing to the incorrect reporting of a JV net tax by anyone who is not qualified as the operator, but rather is going to allow all parties to move forward properly without the risk of being assessed, and; (2) most importantly, the moratorium is for reporting periods ending before January 1, 2015.

48 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

Current Issues Involving RQ • 5% out of 800 current files involve nominee corporations in the field of real estate. • The moratorium indicates that a written JV agreement must exist. According to RQ, it appears that the words “joint venture” must be reflected in the agreements. The main issue seems to reside in the definition of JV: 1) The Civil Code of Québec is silent regarding the definition of a JV (coentreprise) 2) Does an undivided ownership qualify as a JV for GST/QST purposes? 3) Is a nominee without any other activity other than giving its name, carrying commercial activities for GST/QST? (See 2014 Association de planification fiscale et financière (“APFF”).) • The APFF, via an ad hoc committee, has required clarification from RQ regarding the above-mentioned issues. 49 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

Current Issues Involving RQ • In light of these issues, the sales tax community has shared the following results: • Some taxpayers were able to solve the issues according to the terms of the moratorium; • Some taxpayers were assessed on the basis that there was no JV agreement; • In a case where there was no agreement clearly showing a JV, RQ proposed to assess by applying the administrative tolerance of 2 years/4%. In this particular case, the client was located outside Québec, so the GST was administered by the CRA. Contrary to RQ, the CRA applied the moratorium and did not assess (and acted as if there was a valid JV). According to RQ, they were not bound by the CRA decisions. • In the context of the moratorium, and in order to give full effect to its intent, there is certainly hope that RQ will adopt less stringent rules regarding the required documentation that will allow the benefits of the moratorium.

50 3.1 Real Estate: Joint Venture Election and Bare Trust Issues

Thoughts: Registration is Key • One might expect that an entity operating with a valid GST/HST/QST number has been vetted by the CRA or RQ. • However, with the increase of automation in that process, I believe that there is an increase risk of having invalid or incorrect registrations. • We can avoid having JV operators that cannot legitimately register by increasing control at the time of registration.

51 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

• “It will strengthen our industries in a significant and direct way because of a central feature of the GST, the input tax credit will allow them to compete free of tax in markets abroad and put them on an equal footing with imports in our own market.”

House of Commons Debates, 2nd session, 34th parliament, vol. VI, Dec 20- Feb 21, 1989-1990, p. 7562 (Majority Party)

52 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

In general, we have seen three (3) types of situations:

1) Insufficient or incorrect information or prescribed documentation • Systematix Technology Consultants Inc. v. The Queen, 2006 TCC 277; Comtronic Computer Inc. v. The Queen, 2010 TCC 55; Les Entreprises DRF Inc. v. Minister of National Revenue, 2014 FCA 159 2) Fraud and absence of services • Modes Crystal Inc. v. The Queen, 2013 TCC 33; Amiante Spec Inc. v. The Queen, 2008 TCC 89; 2411-3250 Quebec Inc. v. The Queen, 2013 TCC 272; Syscomax Inc. v. The Queen, 2014 TCC 202; Les Pro-Poseurs Inc. v. The Queen, 2011 TCC 113; Construction S.Y.L. Tremblay Inc. v. The Queen, 2013 TCC 406 3) The supplies have been made, but the supplier is a fiscal delinquent • Joseph Ribkoff Inc. c. La Reine, 2003 TCC 397; Bijouterie Almar Inc. v. The Queen, 2010 TCC 618 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

REVENU QUÉBEC/ CANADA REVENUE AGENCY

NO GST / HST / ITC / ITR REMITTANCE QST $100,000 (?) GST / HST / REMITTANCE ITC / ITR QST $100,000 $100,000

DELINQUENT LEGITIMATE SUPPLIERS REGISTRANT SUPPLIERS

PAYMENT GST / HST / QST $100,000

54 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

• Recently, a great deal of media attention was paid to RQ's practices in this context after the CQ rendered its decision in Système intérieur GPBR inc .c. Agence du revenu du Québec, 2013 QCCQ 12689 (under appeal) (the" GPBR case"), in which it held that, failing collusion, a business could claim ITRs in spite of the fact that its suppliers were involved in a false invoicing scheme. • That decision was welcomed enthusiastically by Québec's tax and business communities. Indeed, it is vital that RQ's practices not interfere with the honest commercial practices of businesses acting in good faith, such as in decisions regarding subcontracting. • In Québec, many firms must resort to the services of employment agencies to fill their labour requirements, and demand is ever increasing. This is a significant contemporary commercial reality, and it is therefore comforting to note that the arguments raised against the stance taken by RQ have finally resonated favourably with the courts.

55 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Case • The CQ concluded that regulatory provisions expressly provide that the name of an intermediary may appear on the invoice. Therefore, it dismissed RQ’s argument to the effect that only the names of the suppliers of services having actually performed the work for which ITRs were claimed could appear on the invoices. • The CQ confirmed the right to subcontract in Québec. • The CQ did not accept the claim from RQ to the effect that a taxpayer wishing to claim ITRs was subject to numerous additional obligations (which do not appear in the prescribed regulatory requirements), such as: confirm the legal existence of the subcontractors in the Quebec Enterprise Register (“QER”), verify the validity of their license issued by the Régie du bâtiment du Québec, or obtain data from the Commission de la construction du Québec and the Commission de la santé et de la sécurité du travail du Québec on the subcontractors’ workforce.

56 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Case • According to the CQ, taxpayers have a right to strictly rely on the statutory provisions in conducting their tax affairs, and it is not the courts’ role to create new rules in this area. Therefore, the courts must not impose requirements relating to ITR claims that are not provided for in the legislation or regulations. • The CQ is very critical towards RQ, for instance: 1) RQ can’t require that taxpayers act as policemen, with an obligation of result, while RQ itself struggles at tracking tax evaders, in spite of its vastly greater means and resources. 2) RQ fails to update GST-QST websites and the QER in respect of known or obvious evaders.

57 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Case

• Thus, absent collusion or fraud, GPBR was entitled to claim its ITRs because it satisfied the documentary requirements and the services billed for had been truly rendered. Its right to ITR had not been affected by the fact that some of its subcontractors subsequently turned out to be “suppliers of false invoices”. • Finally, the Court states that accusing a taxpayer of participating in a false invoicing scheme may have disastrous consequences for a business and its principal, and such accusations should accordingly not be made without valid and solid proof.

58 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Appeal (March 17, 2015) GPBR’s position in its Appeal Factum can be divided in the following four (4) main arguments:

1. The documentary requirements are met • The supplier name reflected on the invoice can be the name of the supplier or the intermediary or the name under which the supplier or the intermediary does business (sections 201R1 to 201R5 of the QST Regulation). • The courts are not authorized to add additional criteria to the ARQST or the QST Regulation.

59 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Appeal (March 17, 2015)

2) RQ cannot assess solely by association

• RQ must prove that GPBR was participating in a fraudulent scheme. This can be proven by the absence of services and by showing that a benefit was received by GPBR in consideration for its participation in the alleged fraudulent scheme. • If the services are real and the recipient is unaware of the scheme and did not benefit from it, there can be no “false invoicing scheme”. • Good faith was not a criterion created by the CQ. The first instance judge was just appreciative of the credible witnesses and evidence submitted to him.

60 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Appeal (March 17, 2015)

• It is RQ that must prove that GPBR participated in a scheme given the presumption of good faith in the Civil Code of Québec. • At the time of the reception and payment of the invoices by GPBR, the suppliers were not identified as “suppliers of false invoices” in the confidential registries of RQ, given that the delinquency, per se, had not yet occurred (i.e. the QST return was filed subsequently to the payment of the invoice by the recipient).

61 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Appeal (March 17, 2015)

3) The onus of a registrant wishing to claim ITRs is limited to the legislative requirements

• The onus for a registrant is limited to proving that services were rendered and the invoices comply with documentary requirements (sections 201R1 to 201R5 of the QST Regulation). If the onus is met, there is no discretion to not allow the ITR. • RQ cannot add additional criteria to refuse ITRs (such as good faith). • To refuse ITRs to GPBR on the basis of criteria not reflected in the ARQST is ultra vires.

62 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Appeal (March 17, 2015) • RQ is not permitted to refuse ITRs, and adding gross negligence penalties, based solely on “guidelines”. • The problem originates from RQ in that the “suppliers of false invoices” are registered to GST-QST and the QER. RQ, as a principal, is responsible towards third parties (such as GPBR) of the acts committed by its agents (i.e. suppliers of false invoices), and as of today, these businesses are still registered with the QER, which leads us to believe they are in full compliance with the law. • In addition, tax law applies to transactions irrespective of the legality of the transactions. There is no morality test or public policy to be applied.

63 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The GPBR Appeal (March 17, 2015)

4) The QCA should not intervene in the decision rendered by the CQ

• The CQ concluded that the services were real and the documentary requirements were met, and that GPBR did not participate in a scheme, nor did it receive any benefit therefrom. • The CQ has appreciated the evidence submitted by the parties and all arguments based on factual errors cannot succeed.

64 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The Kosma-Kare Case • Kosma-Kare Canada inc. is a company that manufactures first aid products and cosmetic cotton-wool products. Kosma also did business with various employment agencies to satisfy its labour requirements, a number of which were related to a certain Eric Chioda. • The employment agencies related to Eric Chioda had a history of involvement in false invoicing schemes. Thus, in a previous audit, RQ had advised it to be cautious in its transactions with Eric Chioda and to get the social insurance numbers and addresses of workers from any agencies related to him. Kosma never acted on RQ's recommendation.

65 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The Kosma-Kare Case • Given these facts, Kosma could not claim that it was unaware of the illegal activities of the employment agencies related to Eric Chioda. It had to be aware, or at least had to have suspected, that the recruited labour consisted of workers who were paid under the table and that the employment agencies related to Eric Chioda were evading remitting source deductions, payroll taxes for social programs, as well as GST and QST. • The TCC was of the view that a business is not entitled to claim ITCs unless there is evidence of the information required under subsection 169(4) of the ETA and its ITCs arise from a transaction in which it participated in good faith. According to Justice Lamarre, because Kosma had turned a blind eye to the scheme for evading taxes owed to RQ, Kosma was not entitled to claim any ITCs.

66 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The FCA Decision • The Federal Court of Appeal upheld the decision of the TCC, but concluded in favor of the taxpayer regarding the penalties.

67 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The Salaison Case • Salaison is a family business founded in 1967 that specializes in pork products. Although the company has 75 full-time employees, there are periods when it must have access to a sizeable pool of surplus labour. To fill this need, and given that its own direct recruitment attempts were unsuccessful, it was compelled to resort to employment agencies. • Thus, on an agreed time and date, workers showed up at the Salaison plant. The company did not record their social insurance numbers or their names and addresses. On a daily basis, the employment agencies transmitted the workers' time sheets by e-mail or by fax, followed by an invoice. Payments were made by cheque and in a few rare instances, were cashed in cheque-cashing centers. Before retaining a particular agency's services, Salaison verified the agency's GST registration number with the tax authorities. • For the sole agency that did not have a valid registration number, Salaison paid no GST on the agency's invoices and claimed no related ITCs.

68 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The Salaison Case • Following a tax audit conducted by RQ, it was apparent that the employment agencies with whom Salaison did business during the period in dispute were tax offenders. Seeing that it could not recover the sums due by those agencies, RQ assessed Salaison specifically on the ground that it was not entitled to claim ITCs. • In RQ's opinion, while admitting that the services were performed, RQ insisted that they were not rendered by the employment agencies but by other subcontractors whose names should have been indicated on the invoices instead of the agencies concerned.

69 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The Salaison Case According to the TCC:

• Industry standards were respected: Salaison acted in a normal, appropriate, and prudent manner in its commercial activities and in conformity with industry practice. No evidence suggested that Salaison had not acted in good faith. • Services were validly rendered: RQ acknowledged at the outset that the work described on the invoices was performed, but not by the agencies that prepared and submitted the invoices to Salaison. The TCC said that paragraph 3(a) of the GST Regulations allows the business name of the supplier or its intermediary to appear on the invoice; thus, the subcontractor that performed the work did not need to be the person who invoiced it.

70 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

According to the TCC: • A company is not liable for its supplier's tax fraud: Barring collusion, no ETA rule allows a taxpayer to be assessed for a delinquent subcontractor's tax dues. Evidence showed that Salaison had not benefited in any way from the agencies' non-compliance and that Salaison was a properly structured business with impeccable credibility. Furthermore, the evidence was to the effect that it had always acted in good faith in its contractual relationships.

71 3.2 Construction and Employment Agencies: False Invoicing (or is it?) According to the TCC:

• Taxpayers cannot be seconded into carrying out the tax authorities' responsibilities: A taxpayer is not obliged to verify its suppliers' compliance. RQ argued that in addition to verifying the validity of the agencies' GST registration numbers and contacting their officers and directors, the taxpayer should have:

• verified their legal existence with the QER

• visited the agencies' head offices to ensure that commercial activities were genuinely carried out; exchanged contractual documents with all the agencies

• asked all agency employees who came to work for proof of identity and social insurance numbers

• obtained letters of compliance from the CSST to ensure that the hours worked by the agency employees were duly declared

• ascertained whether the agencies had vehicles registered with the Société de l’assurance automobile du Québec

• analyzed the backs of checks to determine whether they were cashed in check-cashing outlets

• verified the numerical sequence of invoices issued by any single agency; analyzed the invoiced price differences to distinguish the agencies with questionable practices

• scrutinized the handwriting on invoices to detect any differences among invoices from a 72 single agency 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

According to the TCC:

• As a principal, Revenu Québec must comply with the Civil Code: The TCC ruled that RQ imposed obligations on its taxpayer agents/mandataries that seemed contrary to the Civil Code of Québec. Generally, in a gratuitous mandate, the principal/mandatary must facilitate the agent's work—its business operation and not the collection of taxes for the government—especially if, as per the facts in Salaison, the principal has all the necessary resources. There is a general presumption of good faith, which was supported by the facts, and the tax authorities cannot act on mere speculation that an agent acted in bad faith.

73 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

The FCA Decision

• The FCA upheld the decision of the TCC.

74 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Yesterday’s Concerns Since the recipient of a taxable supply has no obligation to verify the authorization given to a person (or in the case of a trade name getting an account, a non-person), once they have substantiated that a GST/HST registration number matches the name given by the supplier, and barring cases of collusion or fraud, who must protect the revenue to be derived from the GST system? It is the CRA (and RQ for suppliers registered in that province) who must ensure that the authorization is given only to legitimate parties.

75 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Yesterday’s Concerns • GST/QST Administration by RQ: Statistics show that more than 50% of the cases relating to GST are pleaded in Montreal. (For instance, the GPBR, Kosma-Kare and Salaison cases all originate from Quebec). • The CRA and RQ practices appear not entirely harmonized, even though the GST/HST and the QST have been considered to be “twin sisters” (2774577 Canada Inc. v. Québec (Agence du revenu du Québec), 2013 QCCQ 1803). • In 2014, RQ announced that it wished to recover 3.8 billion dollars in its fight against tax evasion. This is 1.2 billion dollars more than in 2011. • To that effect, RQ has hired 1,085 auditors since 2011. • And…what about employee reward systems?

76 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Today’s Reality and Reflections

• The Kosma-Kare and Salaison judgments were decided in general TCC proceedings and hence, have the status of precedent under Tax Court of Canada Rules (General Procedure).

• Until final judgments are rendered, it is recommended that out-of-court settlements should not be signed.

77 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Today’s Reality and Reflections

• The argument related to the tax paid in error pursuant to section 261 of the ETA has not been pleaded to date. This argument is congruous with 221(1), 224.1 (only the Crown can sue a person for having collected an amount of tax) and 278(2) (the purchaser does not have to pay tax to RQ if he pays it to the supplier) • According to section 221 ETA, the registrant is acting as an agent of the Crown only when it makes a taxable supply, and not when he pays GST to a supplier. Therefore, there is no agency relationship when the purchaser pays GST or collects ITCs, but only when the vendor collects and remits GST

78 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Today’s Reality and Reflections • It is our view that subsection 334(2) of the ETA (which does not appear to have been pleaded in recent cases) that provides that the purchaser of supplies is deemed to not have paid the tax if it is not received by the Receiver General should not have the intended purpose of obtaining the payment of the tax a second time from a purchaser taxpayer who has already paid it (see paragraph 22 in the Airport Auto Limited case). • The TCC is referring to specific provisions of the Civil Code of Québec regarding the mandate, as it applies between the business (the agent/the mandatary) and RQ (the principal/the mandator), notably section 2805 which states that “good faith is always presumed, unless the law expressly requires that it be proved”. Basically, the TCC states that RQ’s approach to impose a duty to investigate on businesses is contrary to the Civil Code of Québec.

79 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Today’s Reality and Reflections • RQ should not impose any duty to investigate on a business where there has been no fraud or collusion. Whatever evidence is presented will therefore have crucial significance. The following measures in the recent Québec budget announced on February 20, 2014, as well as subsequent RQ news, support the position that the duty to investigate should not be imposed on a business and militate in favour of putting an end to that requirement: a) Intensification of verification of applications to register as a QST collector: This measure allows RQ to inspect and audit a business to ensure that it is carrying on genuine economic activities, specifically by verifying the identity of shareholders and directors and by ensuring that the firm has the capacity to carry out the work; b) RQ has stated that it would cooperate with the Commission de la construction du Québec, the Régie du bâtiment du Québec, and the Commission de la santé et de la sécurité du travail in fighting tax evasion; and c) Implementation of requiring RQ attestation for employment agencies: In 2015, it will be mandatory for employment agencies to obtain a RQ attestation for contracts of $25,000 or more. The client will be required to obtain and verify the attestation with RQ and, as of 2015, it will be required, on a regular basis, to indicate all payments made to employment agencies. In light of such measures imposed by RQ, it would be difficult to reasonably claim and argue that a business acting in good faith still has a duty to investigate — rather, this obligation lies upon RQ.

80 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Today’s Reality and Reflections • The concept of “good faith” should not be taken into consideration in the course of an analysis as to whether or not a registrant is entitled to claim its ITCs and ITRs • This criterion is not indicated in the ETA/ARQST or in the related regulations. The ETA only refers to the principle of “good faith” in one place, which is at paragraph 285.1(6). Therefore, if this should have been a criterion for ITCs purposes, it would have been expressed that way. • The principle of the rule of law must be respected: • The Salaison Case reminds us that interpretation bulletins solely reflect the administrative positions of RQ and is not the law. • The TCC noted that it is required to apply the provisions of the ETA as per their adoption by Parliament, and not as per the interpretation they are given by public servants. See Deschamps v. The Queen, 2014 TCC 181 (Bédard J.) (Informal Procedure). • The ETA and the ARQST must be interpreted as they are drafted.

81 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Court of Justice of the European Union, June 21, 2012, Judgment in Joined Cases C-80/11 and C-142/11 (Mahagében ktf and Péter David cases)

• The deduction of VAT cannot be refused, in principle, because of irregularities committed by the issuer of the invoice. However, the deduction must be refused if the taxable person knew, or ought to have known, that the transaction relied on as a basis for the right to deduct (ITC) was connected with fraud. • C-80/11: During the inspection at the premises of the supplier, the Hungarian tax authority established that the quantity of acacia logs held by the supplier, according to the accounting data, at the time of the sales made to the taxpayer has been insufficient to fulfil the orders invoiced by the taxpayer. Therefore, the taxpayer’s right to deduct VAT was refused. The tax authority also criticized the taxpayer on the ground that it had failed to satisfy itself as to the status of its commercial partner and had failed to check whether that partner had complied with its statutory obligations in respect of VAT.

82 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

• C-142/11: The taxpayer carried out, under a works contract and through subcontractors, a variety of construction works. He wished to deduct the VAT which he had already paid to the subcontractors. The Hungarian tax authority, however, refused to allow him to deduct that tax because of the improper acts of those subcontractors. • ECJ: the Court points out that, where there are indications pointing to irregularities or fraud, a trader could be obliged to make enquiries about another trader in order to ascertain the latter’s trustworthiness. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise his right to deduct VAT to satisfy himself that there were no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction. • It is for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud and to impose penalties on the taxable person who has committed them. Consequently, those authorities cannot transfer their own investigative tasks to taxable persons and refuse the latter the right to deduct if they do not carry out those tasks. 83 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Today’s Reality and Reflections • Media pressure • Lobbyist activities • Lawsuits against RQ and CRA (Groupe Enico and Leroux cases) • However, if lawyer fees are not protected, lawyers will be reluctant to represent taxpayers. • The TCC also noted that it is required to apply the provisions of the ETA as per their adoption by Parliament, and not as per the interpretation they are given by public servants. In such a case, the appellant’s only recourse would have been to attempt legal action against RQ representatives who gave him erroneous information, if indeed he deems that they incited him to make wrongful decisions. See Deschamps v. The Queen, 2014 TCC 181 (Bédard J.) (Informal Procedure). • Crowdfunding (as in the GPBR case) • Taxpayer Charter of Rights

84 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Tomorrow’s Options and Hopes

• The abuses of RQ noticed by the Quebec Ombudsman should lead to a change of attitude from RQ; • Favorable decisions from appeal courts; • Increase control of the registration process: • Requesting security upon registration for repeated fiscal delinquent could be an option but it must be reflected in the ETA and the ARQST; • Increase in the criminal/penal measures against a delinquent fiscal supplier (new and “bigger” offices at RQ!): • The easy solution, namely targeting businesses acting in good faith, is a misguided one and can only undermine the Canadian economy, when 96% of businesses are small to medium enterprises.

85 3.2 Construction and Employment Agencies: False Invoicing (or is it?)

Tomorrow’s Options and Hopes

• If we want a different legislative test, we must amend the law: • For example, in France, the legislation has been modified as of January 1, 2014, in order to adopt a “self-assessment” provision in the building sector. This new provision will require the supplier to self-assess and remit the tax to the tax authority when it hires a subcontractor. Previously, it was the subcontractor who was invoicing and collecting the VAT. This measure will avoid the possible non-remittance of the VAT by the subcontractors to the French tax authority.

86 3.3 Wholesalers: Sale of Tobacco Products (and other products) to Natives

CRA is auditing Canadian wholesalers selling tobacco products to Natives: “It is the Agency’s findings that X’s sales of tobacco products should not have been declared as relieved [even if they are fully compliant with the Agency’s published policies regarding the documentary requirements]. […] The Agency makes the assumption that Indians are rational consumers. […] It is the Agency’s position that X knew or ought to have known the cigarettes that they sold to on-reserve customers would be substantially or entirely consumed by non-Indians.” • Policy is applied inconsistently across Canada by CRA. • CRA is adopting the « duty of investigation » explained in the false invoicing context to this particular situation. • CRA, as RQ, is not applying the wording of the law.

87 3.4 Corporate Transactions and Elections

Section 156 of the ETA (for the GST) and sections 331 and following under the Act Respecting the Quebec Sales Tax (for the QST), which provides the election for nil consideration on charges within a closely related group, was amended in 2014. The amendments took effect on January 1, 2015. The most significant amendment is that the election form must now be filed with the CRA or RQ. The deadline for filing the form for pre-2015 elections, which have to be re-done on the new form, is December 31, 2015. If the election is not filed, RQ can assess for the unremitted tax. In most cases the cost of an assessment can be reduced to 4% of the tax by charging and remitting the tax, having the payor claim an ITC/ITR and asking RQ for a wash-transaction relief, but it is far better to avoid the problem up-front. • Reflections and Concerns

88 3.5 Application of Serious Offences Provision

New powers were given to the CRA to disclose information about serious criminal activity to police organizations (subsection 295(5.04) of the ETA).

• Reflection and Concerns 1) Role and responsabilities of the CRA. 2) What are the potential impacts of the misuses of this provision (from the CRA’s and the taxpayer’s own perspectives)? 3) When is the line crossed between a civil audit and an investigation? To this date, the CRA has not exercised its authority (CBA/CRA GST/HST Round Table).

• What are the implications in the context of:

1) Privacy Law 2) Voluntary Disclosure (i.e. if a person makes a VD that includes information about having engaged in serious criminal activity, under what circumstances will the CRA disclose this information 89 to the police or other law enforcement agencies?) Business Insurance Construction Taxation Real estate Insolvency Litigation Intellectual property Debt recovery

4. Where do we stand today?

Your best partner 4. The Taxman is Watching!

91 4. Where do we stand today?

What have we learned :

• Contextualization is important. • Registration is key. • Evidence submitted will be crucial. • Read and apply the legislation, and only the legislation.

92 4. Where do we stand today?

Where we hope to stand tomorrow • A better balance between bolstering the economy and fighting tax evasion. • More penal/criminal measures against a delinquent supplier. • Better control of the registration process. • Better access of the information for registrants wishing to identify delinquent suppliers. • An adherence by tax authorities to the principle of the rule of law. • In cases of abuse of the legislation, the tax authorities should rely on the existing legislation, such as the GAAR provision.

93 Thank you!

Étienne Gadbois, lawyer 514.878.3249 [email protected]

Stephen Solomon, lawyer 514.878.3213 [email protected]