The GST system works by having businesses collect GST (or QST and HST) from their customers. The businesses are supposed to remit the tax collected to CRA (RQ) but they may deduct amounts they pay their suppliers (input tax credits) to reduce the amount remitted.
Businesses do not pay GST to their employees and so amounts paid to employees do not reduce the GST remittable. Over many years, Revenu Quebec (RQ) has found that some businesses in Quebec have conspired with third parties to make up invoices for amounts paid to the businesses’ employees or the third parties simply offer employee services at a discount, pretending to charge GST (but not remitting it) and splitting the savings with the business. The third parties bill for the employees’ services and charge GST and QST on the amount billed. But the business pays only the employee expenses and not the GST or QST. The third party often disappears without sending the collectible GST and QST to RQ. Meanwhile, the business owners use these “invoices of convenience” to claim input tax credits that reduce the amount sent to RQ or, in some cases, to produce a net tax refund. RQ claimed that this was such a case.
As in many of these cases, the third party takes the business’ payments to a cheque cashing service, so that the principals never need to set up a business account. To help make the scheme work, commonly the third party has registered for GST/QST, so that technically the business payer can claim that the invoices meet all the requirements of the Input Tax Credit Information (GST/HST) Regulations, SOR/91-45. On occasion the principals use business names and GST registration numbers belonging to others. In those cases, the third parties can cash the cheques through a cashing service without having to use the real registrant’s bank account since the conniving business payer will not dispute payment on the cheque.
Here, the Court didn’t believe that the supposed suppliers (who were registered) had really done work for the appellant. RQ could show that the suppliers took part in such GST frauds in the garment industry and the Court didn’t believe that the appellant (a strawberry farmer) had taken proper steps to make sure that the supposed “suppliers” were real businesses. (The farmer had dealt with individuals for years who had supplied it with temporary farm workers. But in the years under appeal, these individuals started to use various other companies to deliver their bills. The individuals then took the appellant’s cheques to cash them at a cheque cashing service.)
Though the appellant argued it had taken sufficient care to make sure the suppliers were who they said they were, the Court didn’t believe them but, anyway, Tax Court judge Paris confirmed once again that it isn’t enough to take reasonable care. The GST registrant is an insurer for Revenu Quebec and CRA. If the supplier isn’t real, you can’t get ITCs.
“[58] The appellant argued also that it had proved reasonable diligence regarding the changes of corporations by its sub-contractors and that it should not be held responsible if their activities are revealed to be fraudulent. Nevertheless, the case law instructs clearly that, even in the absence of proof of knowledge, of connivance or of collusion between the recipient of the services and the supplier of the invoices of convenience, if the name and registration number on the bill are not those of a real supplier, the recipient does not have the right to ITCs.” [My translation.]
Nevertheless, Justice Paris refused to uphold gross negligence penalties:
“[63] First, the Respondent has not shown that the appellant participated in the scheme of false invoices in this case. No element of proof leads me to believe that the appellant obtained an advantage flowing from the false invoices.”
See also Kosma-Kare Canada Inc. c. La Reine, (2014 CCI Lamarre).