In these schemes, a GST registrant contracts with a third party for "services" and claims input tax credits for GST paid on the bills. But the services are not really provided or the supplier is not registered and the GST supposedly paid never reaches CRA (or Revenu Quebec). (For a recent and similar case, see Entreprises DRF Inc. c. La Reine, (2013 TCC, Angers).)
In this case, the grocery store, which had used the same employees for 20 years, contracted with a company that pretended to be an employment agency. The agency pretended to hire the grocery store's employees and contract their services back to the grocery store. The agency wasn't registered for GST and no GST ever reached CRA. And, perhaps more damaging for credibility, the agency made no profit on the service. (Para. 62.)
" Now, the evidence is very clear that [the agency] never supplied nor engaged any employee to the appellant. All the employees who worked for the grocery were hired by Mr. Neveu [the owner of the grocery] directly at Laverlochere, without ever going through [the agency]." [My translation from the French.]
This case offers an interesting reminder for Tax Court appeals: To help its case, the appellant gave the court copies of contracts between the grocery store employees and the employment agency. Justice Lamarre rejected the evidence, noting that the appellant never showed Revenu Quebec the contracts during the audit or even before the hearing. (Para. 61) The Tax Court rules require a taxpayer to disclose documents it intends to use or risk having the court refuse to allow them as evidence. (See rule 89 of the General Procedure rules. Though there isn't a similar rule for GST appeals, even without the rule, the Tax Court judges may not believe a document a party introduces late in the dispute process.)
The rules for claiming input tax credits (ITC) are strict. To claim an ITC, you must have receipts or invoices that show, among other things, that the service or goods supplier had a valid GST registration number. If the supplier is a fraud and the number proves false, CRA may deny you the input tax credits, as it has in many cases.
CRA has a webpage that allows you to check the registration status of your suppliers. If you have any doubt about a new supplier, check the GST/HST number it offers you on its invoices. Go to the CRA's GST/HST Registry.
See 2411-3250 Québec Inc. c. La Reine, (2013 TCC, Lamarre)