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.”

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Quebec tax authorities chastised for expecting business to act as “tax police”

The Tax Court of Canada, in yet another legal blow to Quebec’s tax authorities, chastised Revenue Quebec for expecting business to act as a “taxation police” after it withheld input tax credits from a meat processing company because it ostensibly had not been diligent in its dealings with its suppliers.

The precedent-setting ruling, the third to harshly castigate the Quebec taxman in recent months, found that nothing in the Excise Tax Act (ETA) allows tax authorities to hold a company liable for the tax delinquencies of its suppliers. In uncharacteristically blunt language, Justice Alain Tardif noted that it would be unreasonable to expect business to perform complete background checks on all its suppliers, especially since legislation grants tax authorities large powers to investigate and demand information.

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