Some consumers have found that the cost to purchase a vehicle in Canada is almost 25% to 50% cheaper than making the same purchase in other countries. A few exporters know about Canada’s “gray market.” This point variance offers the perfect opportunity for Canadian automobile businesses to export their vehicles at a significant profit. However, the Canada Revenue Agency (CRA) has started scrutinizing these transactions, which has led to audits of several Canadian vehicle exporters. One specific reason for the increased scrutiny; the Canadian vehicle exporter could be an “agent” for a foreign “principal.” Exporting vehicles and the agency-principal relationship in Canada can be challenging to navigate with current regulations. If you need help understanding the various provincial laws and GST/HST, reach out to Jeremy Scott Law by calling 902-403-7201 today.
The Agent-Principal Relationship Explained
Vehicle retailers, including exporters are entitled to claim Input Tax Credits (ITCs) to recover the GST/HST incurred on the purchase of their inventory. Over the years, many businesses have illegitimately tried to claim tax credits from the Canadian government. As a result, the CRA must determine whether the exporter is a legitimate business or not. For Canadian vehicle exporters, operating as a legitimate business means the difference between being entitled to claim ITCs, which may also impact the profit or loss on a transaction.
There could be consequences if the CRA determines that a person is not in the business of buying and selling an inventory of vehicles but is instead acting in an agent-principal relationship. In that case, the business acts as an agent to serve the interests of an off-shore company known as the principal.
In this scenario the exporter would not be entitled to claim ITCs or any other credits from the Canadian government on the purchase price of the vehicles, meaning there would be no offset of HST for those vehicles exported from Canada to other countries. In basic terms, these limitations would likely negate most if not all of the profits earned by the exporter.
When a person acts as an exporter in a transaction, it is not always clear whether they are working on behalf of another person. For example, a person may be called an “agent,” but they could be facilitating the sale or purchase instead of working on someone else’s behalf. With that in mind, the CRA specifically analyzes the nature of the relationship between exporters and their buyers. Under these criteria, the CRA can determine whether the exporter operates a legitimate vehicle sales business or works as an agent for a foreign principal. If you want to learn about the implications of an agency-principal relationship, contact Jeremy Scott Law.
Determining the Qualities of Agents
Exporting vehicles and the agency-principal relationship in Canada is confusing for many individuals. According to the Canada Revenue Agency, three qualities can determine whether a person has acted on behalf of another person. They include:
Consent of Both the Agent and Principal
When a person acts as an agent in a transaction on behalf of a principal, that principal authorizes the agent to do something for their own purposes. When considering whether the individual is acting as an agent, there should be clear evidence that the agent has made the purchase for the foreign principal. In some cases, there may be an agreement between the two parties, but the absence of a contract is not enough to determine the relationship. Even if there is a written or oral agreement, the courts may decide whether the person acts as an agent for the principal. In some situations, the individual can make a transaction on a person’s behalf without the other knowing it.
Authority of the Agent to Affect the Legal Position of the Principal
Making a transaction on behalf of the agent allows them to have the ability to affect the principal’s legal position. In simple terms, the agent has the authority to enter into contracts with other parties on the principal’s behalf. With these relationships, it is clear that the principal authorized the agent to enter or act into contracts for any transaction made by the agent. By giving authority to bind into a contract, the principal has indicated their permission for the agent to act on their behalf. If the two parties do not mention authorization, the presence of other essential qualities of the agent-principal relationship may implicate it.
The Principal Has Control of the Agent’s Actions
The principal exercises control over the agent by acting as an agent in a transaction. Some evidence of that control includes requiring approval for certain expenses or providing reports to the principal. Often, the principal has more control over the agent than an independent contractor. While the agent works under the power granted by a principal, it may be changed or revoked at any time. The agent also has a duty to account for further actions to the principal.
With those qualities and follow-up questions, the CRA can conduct its analysis of whether the exporter and buyer have a relationship. If these relationship qualities are present, the CRA can exclude any claim to ITCs for the exporter. Keep in mind that those qualities are not the only determining factors. For example, other indicators are a hallmark of the agent-principal relationship, including:
- Limited assumption of risk for the exporter
- History of payment between the parties
- Explorer made alterations to the vehicle
- Accounting reports suggests agent-principal relationship
With that, the CRA determines whether the exporter is a legitimate vehicle export business. If not, they may be viewed as an agent of a foreign principal and lose access to those ITCs.
When a vehicle exporting business faces an audit, the CRA will conduct an in-depth analysis of the exporter. Missing deadlines or not providing information could mean losing all profits as a result of the audit.
Consider Visiting with an Experienced Tax Lawyer To Learn More
Exporting vehicles and the agent-principal relationship in Canada remain a complicated matter. If you face the prospect of an audit from the CRA or need help with other tax issues, you may want to speak with a professional. Jeremy Scott Law may be able to assist you with issues involving exporting vehicles and tax implications. Schedule an appointment by calling 902-403-7201 today.
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