Many employers in Canada hire staffing agencies, which are often referred to as temporary labour agencies, in order to get cheap temporary help at their company. Recently, the Canada Revenue Agency (CRA) has ramped up tax audits of staffing agencies and business that contract these agencies. The national GST/HST project on staffing agencies has revealed many types of fraud related to income tax and GST/HST Some of the most commonly reported issues with temporary labour agencies in Canada include hiring people off the books, failing to report bank accounts, paying workers “under the table,” along with other violations. At Jeremy Scott Law, our experienced lawyers help clients prepare for tax audits and represent them during the audit process to ensure that they make informed decisions and avoid or minimize tax evasion and other penalties imposed by the CRA. Contact our legal team today at 902-403-7201 to learn more information about tax audits conducted by the CRA.
National GST/HST Project on Staffing Agencies
Tax audits conducted by the CRA revealed that staffing agencies across Canada engage in fraudulent schemes to claim Input Tax Credits under the GST/HST (Goods and Services Tax and Harmonized Sales Tax). Many staffing agencies can even face criminal charges for improperly deducting their expenses. The nationwide investigation showed that staffing agencies defraud the CRA for thousands or even millions of Canadian dollars in unremitted GST/HST. According to the Government of Canada, Canadian law requires taxpayers to remit the GST/HST for any invoices included in their return, even if they have not yet been paid.
In recent years, the CRA has been issuing requests for information, also referred to as RFIs, to investigate potential tax fraud involving staffing agencies across the country. There are a number of problems with those RFIs, which is why entities investigated by the CRA may need to consider seeking legal counsel to understand their obligations and ways to deal with the CRA to avoid or minimize penalties and business risks. In particular, the CRA has identified two common types of tax fraud related to staffing agencies: sham transactions and schemes involving “invoices of accommodation.”
Types of Transactions Targeted by the CRA
As part of its investigations targeting staffing agencies, the CRA is primarily focused on the transactions between staffing agencies and their clients as well as staffing agencies and their subcontractors. As part of its national GST/HST project on staffing agencies, the CRA has revealed many instances of tax fraud. One of the most widespread issues revealed by the CRA is that many temporary labour agencies issue false invoices with the intent to deceive the CRA. In many cases, those false invoices used by staffing agencies look legitimate at first sight. However, when a suspicious transaction draws an extra look from the CRA, it often uncovers tax fraud.
When conducting its investigations, the CRA looks for incorrect information in invoices issued by staffing agencies or examines any suspicious circumstances surrounding transactions. When instances of tax fraud are uncovered, the CRA denies Input Tax Credits and expenses claimed by the parties. In addition, the CRA may seek criminal prosecution for tax fraud. At Jeremy Scott Law, our legal team helps clients navigate the tax audit process. Individuals and entities across Canada contact our experienced lawyers to prepare for a tax audit or represent their best interests during the challenging and often complicated process.
Sham Transactions Identified by the CRA
As its name implies, a sham transaction is a transaction that involves elements of deceit. In tax audits, “sham transactions” refer to transactions made to mislead or deceive tax authorities. A common type of sham transaction identified by the CRA is a staffing agency directing their own workers to clients and then paying itself and illegally claiming Input Tax Credits and expenses to get tax refunds. According to the official website of the Government of Canada, the expenses or purchases must be reasonable in cost, nature, and quality to claim Input Tax Credits.
In these sham transactions, the subcontractor may become a GST/HST registrant in order to get a GST/HST registration number. Then, the subcontractor will put the registration number on false invoices.
Invoices of Accommodation Schemes
Often, staffing agencies face criminal prosecution for participating in what is called “invoices of accommodation” schemes. In these schemes, one party issues a false invoice to the accommodated person or entity for services that were not rendered. While the invoice may appear legitimate upon first inspection, in reality, the money paid from the purchaser to the supplier is returned back to the purchaser even though the services listed in the invoice were not provided. Often, staffing agencies who take advantage of the invoices of accommodation schemes become GST/HST registrants and issue invoices for providing temporary labourers. Then, the business uses the false invoice to deduct expenses and claim Input Tax Credits. This is a clear example of tax fraud that may result in criminal penalties. When a business is being investigated by the CRA for its alleged connection to the invoices of accommodation scheme, it may need to seek legal counsel to understand its obligations and the best course of action.
Voluntary Disclosure When Facing Tax Evasion Charges
Tax evasion is a serious crime in Canada that can result in significant penalties, including possible jail time and hefty fines. Often, people convicted of tax evasion are ordered to pay a fine of anywhere between half to double the amount of taxes evaded. However, there may be a way to minimize or avoid criminal charges for tax evasion. This way is known as the Voluntary Disclosure Program in Canada. The program is designed to allow taxpayers who evade taxes or fail to fulfill their other tax obligations to voluntarily rectify their situation. A taxpayer seeking relief from penalties under the Voluntary Disclosure Program must meet the following requirements:
- The provided information is completed and accurate
- The disclosure is made voluntarily (in other words, the CRA must have no knowledge about the taxpayer’s tax evasion)
- The disclosed information is at least one-year over-due
When a taxpayer does not know whether or not they are eligible to participate in the Voluntary Disclosure Program to avoid tax evasion charges, they should consider obtaining a consultation with an experienced attorney.
Contact an Experienced Tax Lawyer Today
At Jeremy Scott Law, our experienced tax lawyers assist clients with all types of tax-related matters, including tax audits conducted by the CRA. We are aware of the national GST/HST project on staffing agencies, and can work with business owners if they are investigated for alleged instances of tax fraud. Consider visiting with us today at 902-403-7201 to learn more about your legal rights and options.
If you found this information valuable, I encourage you to check out my other blog posts.
The Disclaimer:
Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face. I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.