Canada: Canada Revenue Agency Focuses On Staffing Agency (Employment) Audits – Tips From Canadian Tax Lawyers
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Canada Revenue Agency Focuses on Staffing Agencies
Recently, Revenue Canada stepped up its audits of employment agencies, an industry that is estimated to have defrauded the CRA of hundreds of millions of dollars in HST.
The problem (for the CRA) is that many agencies don’t actually provide their own staff, but rather rely on a network of contractors to provide employees. Sometimes there are multiple layers of contractors and those in the middle never see or deal directly with the actual employees. They just act like brokers.
Between each group of parties, there is HST payable and collectible, and in turn each party claims an input tax credit (“ITC”) for the HST paid.
In the end, in many of these channels, the last part of the channel gets the HST money and runs away with it, which resulted in countless hundreds of millions of HST dollars going away. have never reached the ARC. And when a staffing agency is somewhere in a chain where the last party hasn’t paid their HST, they can be assured of a HST tax audit.
Tax evasion is a crime that can lead to imprisonment
Participants from recruiting agencies who participated in “sham” programs such as the one described below have previously been charged with fraud and received prison terms.
In June 2020, two staffing agencies, Jane General Services Ltd, 2322944 Ontario Ltd and their shareholder Vanessa Jane Canlas pleaded guilty to four counts of Criminal Code fraud related to tax evasion and evasion. GST / HST on their corporate income tax returns. Ms Canlas also pleaded for one count of tax evasion on her personal tax returns. In September 2020, the Toronto Superior Court of Justice sentenced Ms. Canlas to two and a half years in prison and a fine of $ 833,238.
Tax evasion is a crime that can result in jail time and a criminal record. In recent years, the CRA has focused on staffing agencies (or employment agencies) particularly when it comes to input tax credits. From April 1, 2019 to March 31, 2020, 13 taxpayers were sent to prison for a total of 18.5 years with 32 convictions.
Here is a typical example of a recruitment agency simulation:
- A business owner who is registered for the GST hires a third-party employment agency to acquire temporary workers who are often undocumented. The employment agency then bills the owner of the business for the labor provided plus the GST / HST. When the business owner pays the bill, he claims input tax credits and the staffing agency is supposed to remit the amount to the CRA. However, the staffing agency disappears and never pays GST / HST. Most of the time, none of the staffing agency’s information is real and the CRA can’t even find it. Sometimes the scheme can involve several layers of subcontractors in the middle.
The CRA will usually check the business owner if the employment agency leaks
Unfortunately, when this kind of situation arises, the CRA will most likely undertake a thorough audit of the owner of the business who hired the placement agency to try and find any evidence that the owner knew or should have known that the The employment agency was a sham. . If the CRA believes it has found this kind of evidence, it will deny the business owner input tax credits related to the staffing agency service.
The CRA should exercise its investigative powers in accordance with charter rights
Although the CRA has a wide range of powers, including tax audit and criminal investigation powers, the Supreme Court of Canada, in R vs. Jarvis, 2002 SCC 73 ruled that a distinction must be made between the powers of verification and investigation prior to the transformation of a tax audit into a criminal tax investigation, and the rights of a taxpayer under the Canadian Charter of Rights and Freedoms must be protected.
The decision in BT Céramiques Inc., et al. v. Quebec Revenue Agency, 2020 QCCA 402 also sheds some light on the consequences when the boundaries between the power of audit and the power of investigation are blurred. In that case, BT
Ceramics Inc. (BT) was initially verified by the CRA and required to release further information and documents from her accountant who was under investigation for a separate tax avoidance scheme. However, the CRA then blurred the lines between its audit and investigative powers by using the evidence gathered during its audit to secure multiple search warrants against BT, and seized the files of his company and third parties. Since the information obtained through the search warrants was under the cover of an audit when it was in fact a criminal investigation, the Quebec Court of Appeal upheld the trial judge’s decision. that the evidence seized was illegal and acquitted BT.
Tax advice – contact an experienced Canadian tax lawyer to protect your rights
If you have received a letter referring to a “sham” transaction or a “carousel” system, proceed with extreme caution and seek immediate advice. When an honest business owner gets caught up in a staffing agency scam, the CRA may allow them to claim the input tax credits if they can prove they have been diligent. reasonable reasonable. However, since the CRA’s success rate for this type of situation is over 50% based on past cases, it is strongly recommended that a business owner immediately contact an experienced Canadian tax lawyer to establish. communication with the CRA. Our experienced tax lawyers will ensure that your charter rights are protected and ensure that the CRA will be held accountable if the line between audit power and criminal investigative power is crossed.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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