Quebec appeal court imposes duty to investigate on business seeking input tax credits

Less than a year after the Federal Court of Appeal held that a supplier’s delinquent fiscal conduct is irrelevant to an input tax credit claim, the Quebec Court of Appeal has muddied the legal waters with a controversial decision that affirmed that Quebec business are expected as part of an effort to impede tax evasion to conduct due diligence on suppliers in order to be able to obtain input tax credits.

In a highly-awaited ruling that startled tax professionals, the appeal court held that business are required to do more than simply confirm the validity of a supplier’s GST/HST registration number and confirm that invoices conform to the current legislation and regulations to qualify for input tax credit (ITC) claims. Business have the added duty to authenticate invoices used to claim ITCs originate from the person that actually performed the service, held the appeal court.

“This is a very important ruling for the business and tax world because in a way it can change the way businesses operate in Quebec,” remarked Alexandre Dufresne, a tax lawyer and managing partner of Spiegel Sohmer in Montreal. “It’s unfortunate but you hear more and more people saying I am going to bring my operations in other jurisdictions because the administrative burden is just too heavy in Quebec. It’s reached that point.”

In a contentious stance that appears at odds with case law from the Canada Federal Court of Appeal after it upheld a ruling by the Tax Court of Canada in December 2014, the Quebec appeal court affirms that the so-called duty to investigate suppliers implicitly arises from the requirements of the Act respecting the Quebec sales tax and the Regulation respecting the Quebec sales tax regarding the admissibility of input tax credit (ITC) claims.

“The regulatory provisions are designed specifically to prevent invoices of accommodation, whether they are fraudulent or not,” said Justice Jean-François Ēmond in a unanimous 15-page ruling in Agence de revenu du Québec v. Système intérieur GPBR inc. 2015 QCCA. “The regulatory requirements seek to protect the public treasury against all violations, whether they are characterized as fraudulent or not.”

But Montreal tax lawyer Paul Ryan believes that it’s a stretch for the Quebec appeal court to hold that the regulations were established to prevent fraud. “The regulations were established to provide supporting documents that business must provide to obtain ITCs,” remarked Ryan, a Montreal tax litigator with Ravinsky Ryan Lemoine LLP. “If the legislator had wanted to adopt something specifically aimed at fraud, it would have adopted it in the law itself and not through regulations.” Another well-known Montreal tax lawyer asserts that the ruling “lacks legislative authority” because the Quebec appeal court failed to provide a “principle or statutory interpretation” to reach its conclusion that the duty to investigate suppliers implicitly emanates from both the Act and its regulations.

The appeal court ruling bolsters the stance that Revenue Quebec has taken over the past few years as part of its fight against tax evasion, particularly regarding invoices of accommodation — the issuance of invoices where no service was rendered or supplies traded. In a position that has long perplexed tax professionals, the provincial tax authority has maintained that business claiming ITCs must investigate the integrity of its suppliers and ensure that the suppliers of goods or services it dealt with are not tax delinquents. As part of its aggressive policy, it has steadfastly refused to refund ITCs if it deemed that a business did not conduct proper due diligence on its suppliers.

But tax professionals assert that the appeal court has provided little guidance over the extent to which business are expected to perform due diligence on suppliers. Under the regulations, business seeking ITCs are expected to provide the name of the supplier, the registration number assigned to the supplier, the address of the supplier, the date of the invoice, the total amount paid or payable for the supply or supplies, and a description of the supplies. Now thanks to the GPBR ruling, business are also expected to ensure that invoices used to claim ITCs originate from the person that actually performed the service. “How is business going to fulfill its duty to investigate imposed by the Quebec Court of Appeal if they don’t know what their duties are,” asked rhetorically Caroline Desrosiers, a Montreal tax lawyer who unsuccessfully plead the case. Some tax professionals wonder whether business will now have to call public bodies such as the workers’ compensation board to ensure that their suppliers are legitimate or even go so far as to take pictures of the supplier’s head office.

By the appeal court’s own admission, in a separate ruling that was issued on the same day regarding a similar matter by a different three-judge panel, the duty to investigate is a feat that will be challenging for business to fulfill without the assistance of the provincial fiscal authority. Revenue Quebec, “a public service, has an obligation to put in place an efficient and easily accessible system” to ensure that taxpayers have the necessary information when they are claiming tax credits such as ITCs, said Quebec appeal court Justice Yves-Marie Morisette in 2774577 Canada inc. v. Agence du revenu du Québec 2015 QCCA 1398.

Making matters even more confusing is the Federal Court of Appeal’s decision in Salaison Lévesque. The FCA judgment essentially reaffirms the well-established principle that in tax matters, whether or not a business is lawful or unlawful, legal or illegal, declared or undeclared, has no bearing on how tax legislation is applied. A business therefore should not be held liable for tax fraud committed by its supplier nor should a business do anything beyond fulfilling the requirements of the Excise Tax Act.

“In light of the Quebec Court of Appeal rulings in GPBR and 2774577 and the FCA’s ruling in Salaison Lévesque, there now exists an incredible amount of confusion for taxpayers right now,” said Montreal tax expert Brigitte Alepin, CPA, CA. “How are small and medium-sized businesses expected to make sense of the situation?”

Desrosiers concurs. That’s why she will be filing a leave for application to appeal before the nation’s highest court. As was the case before the Quebec Court of Appeal, she will be taking on the case pro bono, along with the Montreal law firm De Grandpré Chait in conjunction most likely other tax professionals. “Taxpayers should be crossing their fingers and hope that the Supreme Court of Canada will hear the case,” said Desrosiers. “No matter the outcome of the ruling by the SCC, they need to provide guidance to business. At this moment, it’s impossible to provide guidance to clients with criteria that are so vague.”

In the meantime, a measure to skirt around the issue might be for business to request a refunded tax paid by error, suggested Ryan. But that is only a temporary stop-gap measure, countered the Montreal tax lawyer who requested anonymity. Business have only two years to request a refunded tax paid by error, and Revenue Quebec often conduct audits on business seeking evidence of invoices of accommodation going back much further back than two years. Indeed, there is no time limit imposed on the provincial fiscal authority to conduct investigations on invoices of accommodation. Besides, “I’m not sure that Revenue Quebec are going to accept to pay a tax paid in error, even though it is a valid argument,” said the Montreal tax lawyer.

Others yet have suggested that in order to prevent Revenue Quebec from chasing honest businesses years later for unremitted taxes by suppliers to write two separate cheques to sub-contractors – one for services rendered, and another payable both to the sub-contractor and Revenue Quebec for the taxes. But then again, not everyone is convinced that this is a workable solution as it adds yet more administrative work for businesses. “You can do that to avoid issues but I don’t know how practical that is for the business world, “said Dufresne, who is hoping that Revenue Quebec “will come up with a solution that works from a legal perspective and is practical for business” before the matter heads to the SCC.

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