Canada Revenue Agency ("CRA") audits have targeted Canadian sales to foreign entities. As a result, Canadian entities are denied GST/HST Input Tax Credits ("ITC") based on an assumed agency relationship with the foreign "principal."
Pursuant to subsection 169(1) of the Excise Tax Act, RSC 1985, c E-15 ("ETA"), GST/HST incurred in the provision of supplies (or services) can be refunded through ITCs. So, for example, if a Canadian Entity (CanCo) purchases products in Canada that it then ships to a foreign entity (ForCo) for re-sale, based on certain circumstances, CanCo can claim a refund of the GST/HST incurred.
However, CRA's pattern has been to audit these arrangements and assume that CanCo is acting as an agent for ForCo. Because CanCo is considered an agent of ForCo it is deemed to be purchasing the products on ForCo's behalf and therefore cannot claim the ITCs. Neither can ForCo of course. For entities with significant purchases and sales this can result in considerable losses in contrast to substantial audit recoveries for CRA.
According to the CRA GST/HST Policy Statement P-182R ("P-182R"), "a person is an agent with respect to a particular transaction if that person is an agent based on a determination of fact and an application of principles of law..." Unfortunately, a detailed application of law and analysis of fact is unlikely to occur at the audit stage. Therefore, many taxpayers will be required to start the appeals process and object to the Notice(s) of Reassessment denying the ITCs by filing a Notice of Objection.
P-182R comprises an overview of CRA's position on agent-principal relationships in the context of GST/HST. According to P-182R, the essential qualities of agency include:
- Consent of Both Parties...
- Authority of the Person to Affect the Other Party's Legal
Position
- Has the other party given the person the authority to affect that other party's legal position, e.g., by written agreement or power of attorney?
- Can the person bind the other party in a contractual agreement with a third party?
- Is the person authorized to pay an amount that was the legal liability of the other party?
- Can the authority of the person to affect the other party's legal position be inferred from the conduct of the parties?
- The Other Party's Control of the Person's Actions...
Therefore, it is important that the proper written agreements and procedures are in place to avoid an agent-principal characterization. Also, even though CRA has begun an audit it is not too late to put in place what they claim is missing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
