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Indirect Tax Audit Alert - Five Issues You Should Know About 

Canadian Tax Adviser

 

October 15, 2013

 

David Schlesinger
Toronto, Indirect Tax

 

The CRA and provincial tax authorities appear to be increasing their indirect tax audit activities, including "desk audits". To help you prepare for your next tax audit, we have summarized a few indirect tax compliance issues that tax authorities commonly focus on during their audits. You may want to review these items for your business based on your own facts and circumstances to help limit costly errors and make the most of your opportunities to claim input tax credits and tax rebates:

  • Get the right name on the invoice to claim ITCs
  • Are holding companies entitled to ITCs?
  • Sales to non-resident companies are not always GST/HST-free
  • Sales across Canada: Do GST, HST, QST or PST apply?
  • Over-remitted tax or unclaimed ITCs must be corrected on time.

 

Get the right name on the invoice to claim ITCs
Companies must meet certain documentation requirements in order to claim eligible input tax credits (GST/HST). Among these requirements, each invoice of $150 or more must be issued to the right company with the right company's name on it or the name of its duly authorized agent or representative. Because many companies within a related group work with the same suppliers or centralize their purchases, some of your invoices could easily be addressed to the wrong company or have your business name misspelled. Documentation requirements, particularly the requirement relating to the name of the purchaser, continue to be a tax audit issue. Similar rules apply for QST purposes.

 

Other documentation requirements apply and should also be reviewed.

 

Are holding companies entitled to ITCs?
A holding company may be entitled to claim input tax credits (ITCs) on some expenses under certain specific rules, depending on its facts and circumstances. Other similar companies may not be entitled to claim any input tax credits for GST/HST paid on expenses. It appears that CRA is looking at some holding companies and their input tax credit eligibility. Holding companies may pay GST/HST on various expenses including expenses relating to raising capital and a corporate reorganization. Generally, holding companies that only have investments with no other activities are not eligible to claim input tax credits. However, holding companies that have investments in certain corporations or that have paid GST/HST on certain takeover fees may be eligible to claim input tax credits under certain circumstances.

 

You should note that the law imposes stringent conditions on holding companies' ability to claim input tax credits and the tax authorities appear to be taking a very restricted interpretation of these conditions.

 

Whether any of your holding companies qualify as a financial institution could also affect the holding company's eligibility to claim input tax credits and the manner in which input tax credits are calculated.

 

You may want to review your holding companies' structures, expenses paid by these companies as well as the purposes of these expenses to determine whether they qualify to claim input tax credits.

 

Sales to non-resident companies are not always GST/HST free
A taxable sale made in Canada is generally subject to GST or HST. However, some taxable sales made in Canada to non-residents may be zero-rated. Suppliers (i.e., vendors) of zero-rated supplies to non-residents are generally required to maintain sufficient documentation to support their zero-rated sales.

 

You should review your transactions with non-residents to determine whether you have the proper documentation, as required by the law or administrative policy, to support the non-residents status of your clients, the export of the goods and to support any other zero-rated provisions.

 

Sales across Canada: Do the GST, HST, QST or PST apply?
Businesses that are registered for GST purposes are also registered for HST purposes. Special registration requirements apply for QST and PST purposes. If your business provides goods and services across Canada by way of sales, leases or other types of transactions, you must determine whether these transactions attract GST or HST and also whether QST or PST applies. The rules to determine which taxes apply generally depend on a number of various criteria including the nature of the supply, the delivery terms or contracting locations while others are based on other specific rules in the law. Errors can easily multiply with the volume of sales and assessed taxes can be unrecoverable from the original purchasers, for example, a SKU error for a retailer.

 

Businesses across Canada have had to cope with many indirect tax changes over the last few years, making compliance more complicated. Developments in 2013 include further changes to the QST, the elimination of B.C. HST, the new B.C. PST, and the new P.E.I. HST. You should carefully review the transitional rules and other rules relating to the many recent indirect tax changes to determine whether your business has applied them correctly. Many indirect tax changes relate to periods that are still open for audit by the tax authorities.

 

Over-remitted tax or unclaimed ITCs must be corrected on time
Your business is subject to strict deadlines for claiming rebates for over-remitted taxes or unclaimed credits. If you miss a rebate or credit claim deadline, your claim will generally not be paid. However, unclaimed credits or rebates may be available as offsets during a tax audit in some circumstances. Your business, like many others, may have overpaid taxes or not claimed credits due to a number of reasons. A review of your operations on a regular basis may allow you to identify eligible missed credits or rebate claims within the appropriate deadlines. Businesses may apply for a remission order where a deadline was missed but these orders are granted at the CRA's discretion under very limited circumstances.

 

We can help
We can help you review these compliances issues to determine whether you should take steps to address any questions or concerns before you face your next tax audit. For more information, please contact your KPMG adviser or David Schlesinger at (416) 777-3833.

 

 

 

 

 

Information is current to October 15, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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