GST Tax Problems are Serious, and CRA reaps some serious money in GST audits

Businesses are required by law to verify that a supplier’s GST number is valid.

It may be unfair to a business that pays the GST and in good faith relies on an invoice. However, the courts conclude that the legislative scheme dictates that the unsuspecting business, rather than the government, bears the risk of supplier identity theft and other wrong doings in GST collection and remittance matters.

The courts also stated that businesses must implement risk management systems when dealing with new and continuing suppliers, to verify supplier information is accurate and complete.

Receipts are required to have the name of the supplier, the GST number and an identifiable list by item of what was provided.

It does not count to simply have a supplier GST number that was valid; it has to be current at the time in question. If a receipt does not have a GST Registrant’s number on it, you are required to obtain it for your records.

The directors are fully liable for the GST, and any subsequent penalties, fines and interest.

The director due diligence defense only applies if all GST numbers have had a reasonable attempt to verify that the number was correct.

The due diligence defense requires that the error be reasonable, namely, an error which a reasonable person would have made in the same circumstances. The due diligence defense, which requires a reasonable but erroneous belief in a situation of fact, is thus a higher standard than that of good faith, which only requires an honest, but equally erroneous, belief.

A person relying on a reasonable mistake of fact must meet a twofold test: subjective and objective. It will not be sufficient to say that a reasonable person would have made the same mistake in the circumstances. The person must first establish that he or she was mistaken as to the factual situation: that is the subjective test. Clearly, the defense fails if there is no evidence that the person relying on it was in fact misled and that this mistake led to the act committed. He or she must then establish that the mistake was reasonable in the circumstances: that is the objective test.

As soon as the defense of due diligence accepted for strict liability offences is raised, the question arises of whether the defense of error of law could also be relied on to avoid imposition of a penalty. That question does not arise only in connection with strict liability offences, although with the growth in regulations and the multiplication of statutory offences the field of strict liability has proven to be the most fertile for the emergence of this defense.

While the Courts recognize that no online GST registration verification system existed until recently, however there was an ability to verify registration numbers with the Canada Revenue Agency by telephone, so the argument that there was no way to verify numbers in the past won’t stand.

A supplier’s GST registration may now be verified at the following site:

I would think… that the small invoices a company pays might survive an argument that it would be too onerous a task to justify the verification of all GST numbers… I can only guess at a threshold, but if I did guess, I would imagine that invoices under a hundred dollars from a random supplier may survive the argument. However technically under the laws and regulations, “ALL” GST registration numbers have to be verified for a business to claim the input tax credit (ITC).

The accountants who prepared the tax returns is also vulnerable to third party penalties of 50% unless they did due diligence in the matter as well. Further to the 50% civil penalty there is a risk of needing to pay the GST, the penalties and the interest as well.

Being that the above issue has been before the Federal Court of Appeal, Judges are bound to enforce these laws and regulations, so don’t think that this is an issue of fairness. It is an issue of law and business better get prepared to defend their ITC’s and not just their ABC’s.

So what does this all mean? What it means that you better make sure that your bookkeeping is audit ready. Making sure that you have the GST registration number in place is just one of the many areas a CRA auditor looks for in his search for tax booty.

And most of all remember that if you are a Director of a Corporation, you personally are on the line when it comes to collecting GST.

GST Audits are serious business, so if you think you may need help, please give us a quick overview and we will get right back to you.

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