My client operates an employment agency that hired employees through XYZ Corporation (Subcontractor). The CRA rejected subcontractor invoices, claiming XYZ Corporation is unreachable, leading to disallowed input tax credits (ITCs).
Now what points should we raise with CRA for the reversal of their decision Given that payments were made from my client’s corporation bank account to XYZ Corp.
Kindly advise and if anyone else also have gone through this situation kindly share what was the outcome.
I have never had a situation like this with a client but I wanted to mention a few things I’ve heard from more senior accountants in small conversations that might help.
Obviously the best case scenario would be to find the tax legislation that would clearly state that your clients ITCs should be allowed. You can always try to phone the HST technical support line for assistance in locating that in the excise tax act.
Alternatively, you can try to research a tax court case that shows a judgement in favor of the taxpayer that had a similar situation as your client - a “precedent” that you could use to argue that the ITCs should be allowed.
If you can find a case that ruled in favor of the taxpayer you may considering presenting that case to the auditor. I’ve heard more senior accountants discussing this but don’t have any experience with a situation like that. I hope this helps. Sorry I couldn’t be of more assistance with actual solutions.
Is XYZ Corp a bona fide company with a valid HST account number? If yes and you have confirmation of same, I am not sure why the CRA would disallow as “unreachable”
Did the invoices include the company name, their HST number, the date of invoice, details of the services, etc? If yes, it should be sufficient. At times, the agents at the GST/HST trust examination department don’t have a clue on the specific industry that they are auditing. As a professional accountant/tax pro, it is your job to tell the agent that you are in the right. If they do not agree, you tell them to get the advise from their team leader. That saying, I’m not saying you cause an argument with them, you just need to prove to the auditor that you’re in the right by backing up with what the CRA have mentioned on their website or by using previous tax court rulings. Similar to what @healthymanccc had said. I’d probably recommend you do some research on the employment agency industry.
I’ve read a report from the auditor general where the CRA have said that they lose money on fraudulent GST/HST returns. In fact, just last month, the CRA had admitted that they had mistakenly given over $57 million in HST refund to an international criminal organization.
The point being, if you know that you are right and that you’re able to back up your claims, then go for it. Just make sure you bill the client for your time.
I agree with @GuyWhoPlaysGolf. You must bill for your time. I have worked on a client’s GST/HST audit before because they received a refund of over $5,000 (usually triggers the CRA).
The full refund was eventually released and all was good but it was still time consuming communicating with both the auditor and client - all that time was billed to the client. It’s the cost of doing business for the client.
Did the auditor actually provide an explanation of what “unreachable” means?
If the ordinary English version of this word is to be used (ie one can’t call them or go to a door) as long as the business is registered and CRA has not deregistered them…at the very worst, appeal.
But I disagree wholly with @GuyWhoPlaysGolf saying “not to cause an argument”. That is EXACTLY what you should do: ask for their superior and get a LEGAL reason why the amount is not acceptable as an ITC. I view it as my job is to batter the crap out of them when they’re wrong and walk up the line of decision makers until I reach someone who either can provide a proper reason, or convinces me that the only choice is to appeal.
There are VERY specific requirements for ITCs (some now relaxed) and if they can’t identify which of those reasons they are relying on…they are wrong.
Maybe I wasn’t as clear, if so I apologize. What I meant by “don’t cause an argument” is don’t talk out of your butt. Yes you need to figure out what were the exact reason for the denial, it’s right there on the taxpayer Bill of Right #4) “You have the right to a formal review and a subsequent appeal.”
However that saying, regardless of the end result, if the client is willing to foot my bill for the work that we’re doing on their audit, I’m all for it. It’s good for morale knowing that the client is confident in our firm. However if they don’t, why am I going to waste my time when it would be better spent doing something else. I know we talk about billing like everyday but this is something our profession continues to face problems. Determining how much you should bill your client especially on an audit matter can be difficult because who knows how long it will take to resolve, maybe weeks, months or even years.
Gotcha! Sometimes I’ll just take a crack for my own satisfaction, but yes…at the end of the day, there’s got to be a business justification for doing so.
I feel that you should explain to the client the fees that you will be billing before you start the audit support so there is a proper agreement.
Also, in all my dealings with the CRA I have maintained nothing but professionalism and the end result has always been great. So far in my experiences with the CRA I have always found them to be very reasonable.
Thanks for sharing this Tim! I’m sure it’ll help OP deduce the reason for the ITC denial. A question that I have is, what exact time frame does an auditor expect for a phone call? I know at times, auditors look up a company’s details on their Google/Facebook page. There is also the fact that some CRA agents call on a random number where they don’t even leave a voicemail. Maybe OP should have told the auditor that they or their client would attempt contact XYZ Corporation, then do a three way phone call with the auditor…