The recipient's knowledge of fraud and its impact on the recovery of refunds and credits

Abstract

The indirect tax system in Canada is comprised of the Goods and Services Tax imposed at the federal level, including a Harmonized Sales Tax in some provinces and various other sales taxes in other provinces. However, like other value added tax (VAT) systems, Canada’s indirect taxes are based on a neutrality principle, meaning that the burden of such taxes should only be borne by the end consumers. As such, businesses acting as tax collectors for government authorities should not bear the burden associated with the collection of the tax from the final consumer. This principle has been recognised by the Supreme Court of Canada and is known, also in the European Union, as being critical to a properly functioning indirect tax system. As the governments’ agents, businesses are key partners for the proper operation of any VAT system. However, despite that consensus, Canada and countries of the European Union have, at times, disregarded such principle by placing the burden of the collection of the tax on the businesses acting as their agents and refusing to allow them to benefit from VAT refunds or denying input VAT credits in situations where a fraud may have been committed by one of their suppliers. For instance, in the province of Quebec, the tax authorities have been refusing the issuance of refunds or credits for tax paid in relation to acquired supplies of goods or services to corporations that acquired them from delinquent suppliers on the basis of an inherent duty of care even in cases where the business did not participate in any fraudulent scheme such as, for example, false invoicing. Understandably, in cases of collusion or participation in a fraudulent scheme implying the rendering of non-existent services or the fabrication of false invoices, one will not challenge the decision of the government authorities to disallow VAT refunds or input VAT credits. In fact, the Canadian courts have confirmed that a recipient should be denied any refund or credit in situations where there is proof of collusion in a fraudulent stratagem. Over the years, Canada has been dealing with various frauds particularly in the construction and manufacturing industries which erode the tax base. Most recently, especially in the province of Quebec, fraudulent schemes have been developing in the placement agency sector where registered corporations either failed to remit their taxes or outright fabricated false invoices. Rightly, the government has been very active in that field in order to stop the false invoicing phenomenon. However, recovering money from fraudulent individuals has been difficult, if not impossible, for the tax authorities.