An important part of strategic planning for any company is managing indirect tax risk. Indirect taxes generate significant revenue for governments. For example, the Government of Canada collected $38.2 billion in goods and services (GST) taxes during the fiscal year 2018-2019. Governments often levy multiple forms of indirect tax on companies, and tax monitoring and compliance are increasingly complex and dynamic issues. Failure to correctly collect, document, and remit all necessary indirect taxes can result in costly fines, audits, and other legal action. If you need help with assessing and managing your Canadian company’s indirect tax risk, consider speaking with a knowledgeable tax lawyer at Jeremy Scott Law at (902) 403-7201 to understand how we may be able to assist with your indirect tax planning needs.
What Is Indirect Tax Risk?
Virtually every business has some level of indirect tax risk. Unlike direct taxes, which a taxpayer pays directly to the government, Indirect taxes are taxes that can be passed on to another entity. Just as a business would assess and monitor its legal or operational risk, indirect tax risk must also be fully examined and closely monitored.
Types Of Indirect Tax Risk
Canadian companies are potentially liable for several different types of indirect tax. Indirect tax liability depends on many factors, such as a company’s industry, market, and where they do business (geographically and in the online space). Below are some examples of indirect taxes that frequently apply in Canada.
The GST/HST and separate provincial taxes are Canada’s version of a value-added tax (VAT). The federal goods and services tax (GST) is five percent. Some provinces combine their provincial tax with the GST to form a single sales tax charge, called harmonized sales tax (HST). Other provinces charge their sales tax separately from the GST.
Tax On Imported Goods And Services
Businesses that import goods and services to Canada may be liable for paying duty or import taxes. Such taxes vary widely depending on the type of goods or services.
Insurance Premium Tax
Some Canadian companies may be liable for insurance premium taxes (IPT). IPT varies between provinces and can apply to products such as:
- Insurance policies
- Funded and unfunded benefit plans
- Reciprocal and inter-insurance exchanges
Who pays the tax can vary depending on the situation. Company decision-makers may want to consult with a tax lawyer to determine their IPT liability.
Excise And Duty Taxes
Canada charges excise or duty taxes on some goods manufactured within Canada (separate excise taxes or duties are charged when such goods are imported). Excise taxation is carried out under the authority of the Excise Tax Act and amendments, which can be viewed on the Canada Legal Information Institute’s website. The excise tax applies to the following goods manufactured within Canada:
- Fuel-inefficient vehicles
- Air conditioners designed to be used in automobiles
- Fuels, including gasoline, aviation fuel, and diesel fuel
Canada charges duty tax on certain goods, such as:
- Tobacco products
- Cannabis products
Environmental Or Energy Tax
Some Canadian companies may be subject to federal or provincial environmental or energy tax. These types of tax are often levied on:
- Waste management
- Mineral use
- Carbon emissions
A knowledgeable tax lawyer at Jeremy Scott Law may be able to assist in determining indirect tax liabilities based on factors such as location, industry, and volume.
Strategies for Managing Indirect Tax Risk
Canadian companies face many forms of indirect tax risk and must be vigilant and proactive in their approach to indirect tax management. Here are a few important strategies to manage indirect tax risk.
Awareness of Indirect Tax Obligations
One of the most important steps in ongoing indirect tax risk management is to gain an awareness of a company’s indirect tax obligations. Companies must be aware of the federal, provincial, and local taxes that could apply wherever they do business, both at home and abroad. Maintaining an understanding of where, when, why, and how indirect taxes are levied will work toward ensuring indirect tax compliance. Taxation rates and laws change frequently, so companies should closely monitor tax laws in applicable jurisdictions. If you are interested in how to ensure that you are meeting all of your indirect tax obligations, consider visiting with an experienced tax lawyer at Jeremy Scott Law to learn more about your legal rights and obligations.
Designing and Implementing Effective Indirect Tax Collection and Accounting Systems
Another vital step in managing indirect tax risk is to design and implement effective systems for computing, collecting, and remitting indirect tax monies. Indirect tax can potentially be collected at multiple stages of the product or service lifecycle, such as development, procurement, manufacturing, and delivery. Indirect taxes are also usually due at different rates and frequencies. Because of these issues, a simple “cash-in, cash-out” system for indirect tax management is often not enough. Companies should seek out solutions that are tailored to their size, market, and industry to ensure that they pay the correct amount to the correct tax authorities at the correct time.
Collecting Appropriate Indirect Tax Data
Managing indirect tax risk also means collecting the necessary data to support indirect taxes collected and remitted. Inadequate documentation can lead to missed or incorrect tax remittances, penalties, and adverse outcomes resulting from audits. Governments often require companies to submit transaction-level data to ensure that indirect taxes have been correctly collected and remitted. Failure to collect and store data regarding indirect tax can potentially cause significant legal, financial, and regulatory issues.
How An Experienced Tax Lawyer Can Help With Indirect Tax Risk
Effective management of indirect tax risk is a serious issue for all companies. At the same time, understanding and navigating these areas requires significant time, expertise, and resources that many companies do not have. A seasoned tax lawyer can ensure that business owners do not have to manage indirect tax risk on their own. A tax lawyer may be able to assist with many aspects of indirect tax risk management, such as:
- Ensuring taxes are being properly collected where required
- Reviewing accounting systems to ensure they properly record taxes payable and receivable
- Completing indirect tax returns
- Registering the company for applicable tax programs
- Assisting with tax audits
Many companies enjoy the peace of mind that comes with retaining a tax lawyer to assist with managing and fulfilling their indirect tax obligations. If your company needs assistance with indirect tax issues, consider speaking with a knowledgeable tax lawyer at Jeremy Scott Law at (902) 403-7201 to understand how we may be able to help with managing your indirect tax risk.
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