Sales taxes, like the Goods and Services Tax and the Harmonized Sales Tax, are heavily relied upon by governments to generate revenue. As a result, business that survive an income tax or other audit often receive notice of a GST/HST tax audit. The Canada Revenue Agency (CRA) often uses risk assessment algorithms to audit businesses. At Jeremy Scott Law, we thoroughly review your case, identify your legal options, and make sure to answer all of your tax questions. Our experienced tax lawyers can work with CRA auditors to ensure that they follow their own rules and respect your rights throughout the process. Call us now at (902) 403-7201 to schedule your initial consultation and learn more about your legal rights if you have received a GST/HST audit after already being audited previously under a different tax regime.
The GST/HST Audit Process
The CRA may target a taxpayer for audit of their GST/HST returns for a variety of reasons. Some GST/HST audits focus on a single tax return. These audits are generally referred to as desk audits and are triggered by a return that has been filed seeking a net tax refund from the CRA. In contrast, full GST/HST audits span multiple periods and often cover two full fiscal years of the taxpayer, plus a ‘stub’ portion of the current year.
In either case, first contact is typically made by the CRA through a written request for information, or through a phone call indicating that a written request will be sent. Such a ‘Request for Information’ gives the taxpayer a chance to explain how they conduct business, outline how they determine which rate of GST/HST to apply and provide additional documents, such as invoices and general ledger reports to support their input tax credit claims. A prompt and accurate response to a CRA request is always an important first step.
In Canada, it is possible that the completion of an income tax audit could trigger a GST/HST audit by the CRA, in particular where the findings of the income tax audit do not align with previous GST/HST filings made by the taxpayer. It is important to remember that the GST/HST audit is being conducted separate and apart from the original income tax audit. Any relevant information provided to the income tax auditor will need to be once again provided to the GST/HST auditor.
Most CRA audits conclude with the issuance of a proposed statement of audit adjustments, to which the taxpayer is given 30 days to respond. It is crucial to take the time to review the proposed adjustments and provide a clear written response where a taxpayer feels the auditor may not have properly applied the GST/HST legislation. When the audit ends, the CRA sends a final determination, and the taxpayer has ninety days to appeal this decision.
It is vital that taxpayers receive, review and respond to all CRA correspondence in a timely manner. Missing a deadline, even by a day, can have dire consequences.
Areas of Common GST/HST ReAssessment
Perhaps surprisingly to some, there are common issues which frequently result in GST/HST reassessment. They include:
- Failing to properly collect GST/HST (or collecting tax at the wrong rate);
- Failing to properly apply GST/HST on transactions within a related group of companies;
- Claiming input tax credits where proper documentation has not been maintained;
- Claiming input tax credits on expenses which are subject to tax credit restrictions, such as meals and entertainment;
- Improperly reporting GST/HST on real property transactions.
- Failing to properly self assess GST/HST on importations; and
- Failing to properly allocate HST on expenses between commercial and exempt activities for purposes of claiming input tax credits.
Input Tax Credits
One of the key areas where GST/HST reassessments occur is the denial of input tax credits. Before claiming an ITC, a taxpayer must ensure they have all of the required information on hand. In addition, where a taxpayer is involved in partially taxable and partially non-taxable activities, they must ensure they are properly applying the ITC allocation rules found in the Excise Tax Act.
Collection of Tax
Another key area of reassessment relates to the collection of tax. Complex place of supply rules exist to determine when a supply is subject to 5% GST, 13%/15% HST. Failing to appreciate which rate of tax to charge can and often does, result in a tax reassessment.
Employee Benefits and GST/HST Audits
Reassessments resulting from GST/HST audits may also have nothing to do with goods or services sold. For example, there could be GST/HST implications as a result of employee benefits. Common benefits that could lead to GST/HST reassessments include:
- Company vehicle or aircraft use,
- Payments for trips, vacations, or dues,
- Rent subsidies, and
- Gifts that exceed $500.
Penalties and Interest in GST/HST Audits
Audits often result in balances owing to the CRA. Worse, the balances are typically overdue. The CRA charges interest, compounded daily, on all overdue balances. If as part of a GST/HST audit it is determined that a taxpayer has outstanding tax returns that were never filed, a failure to file penalty may also apply. This penalty starts at 1 percent per month and increases with each month that the return remains outstanding. Interest on unpaid GST/HST is compounded daily and is NOT allowed as a deduction for income tax purposes. Interest relief may be available under the Taxpayer Relief Program.
Contact an Experienced and Dedicated Canadian Tax Lawyer To Learn More
GST/HST audit rules are quite complex. If you have received a notice for a GST/HST audit after already being audited, consider visiting with a dedicated and compassionate lawyer to ensure your legal rights remain protected. For a confidential consultation with an experienced tax attorney in Nova Scotia, contact Jeremy Scott Law by calling (902) 403-7201