PURCHASER-PRODUCED INPUT TAX CREDIT DOCUMENTATION: IS IT ACCEPTABLE?
One of the fundamental aspects of a value added tax (VAT), such as Canada’s Goods and Services Tax (GST) is the ability of a business to recover any GST (or the Harmonized Sales Tax (HST) in the HST provinces) incurred in the course of a commercial activity.
The legislative authority to claim input tax credits (ITCs) to recover any GST/HST paid is found in section 169 of the Excise Tax Act (ETA).
DOCUMENTARY REQUIREMENTS TO SUPPORT ITC CLAIMS
Prior to claiming an ITC, a number of technical requirements must be met. One such requirement is set out in paragraph 169(4)(a) of the ETA, which states that a registrant may NOT claim an ITC UNLESS before filing the return in which the credit is claimed the registrant has:
“obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed.”
In other words, before an ITC can be claimed, the documentary requirements set out in the regulations made pursuant to this section must be met.
The Input Tax Credit Information (GST/HST) Regulations outline the information that must be obtained before claiming an ITC, such as the name of the supplier (or the name under which the supplier does business) along with the supplier’s GST/HST number.
The regulations also reference the form in which the required information is contained and include:
- an invoice
- a receipt
- a credit card receipt
- a debit note
- a book or ledger of account
- a written contract or agreement
- any record contained in a computerized or electronic retrieval or data storage system
- any other document validly issued or signed by a registrant in respect of a supply made by the registrant in respect of which there is tax paid or payable
AUDITING OF ITC CLAIMS
During routine audits, the Canada Revenue Agency (CRA) scrutinizes ITC claims to ensure they are valid. In addition to ensuring that the expenses have been incurred in the course of commercial activity, the CRA also ensures that the documentary requirements have been met prior to the taxpayer claiming the ITC.
Historically, the CRA generally took the position that the ITC Documentary Regulations required that the documentation be issued (or signed) by the supplier. However, the CRA did acknowledge that, at least in some limited instances, the purchaser could prepare the documentation necessary to support the ITC claim. The concept of purchaser-produced documentation was referred to as ‘reverse invoicing.’
In a recent court case, CFI Funding Trust v. The Queen, TCC 60,  G.S.T.C. 40 (Tax Court of Canada), one of the central issues to be decided was whether or not the regulations required that all supporting documentation be ‘issued or signed’ by the supplier, or alternatively if purchaser produced documentation may be acceptable.
CFI Funding Trust (CFI) was in the somewhat complicated business of securitizing automobile dealer leases. Without going into the details of the automobile financing business, it should be noted that the CRA accepted that CFI was involved in commercial activity and therefore entitled to claim input tax credits where all legislative requirements were met. As a result, the issue before the Tax Court was simply whether or not CFI met the documentary requirements outlined above in instances where CFI prepared the supporting information.
The facts in the CFI case were relatively straightforward. A number of automobile dealerships entered into vehicle leases with their customers. Once the initial leases were created, the dealership would then enter into a ‘Head Lease’ for the same vehicle with CFI. Effectively this meant the vehicles at issue were leased from the dealership to CFI and then subleased by CFI to the customers. CFI paid GST on the Head Lease payments and claimed ITCs to recover this tax. While the dealerships provided a range of information to CFI, including the original leases, their operating names, and the dealership’s GST numbers, the ITCs claimed by CFI were ultimately quantified based on the spreadsheets prepared by CFI. The supporting documentation was clearly not prepared or signed by the original supplier.
Under audit, and during the Tax Court proceedings, the CRA took the position that since the documentation was not prepared or signed by the dealerships, CFI did not obtain the necessary supporting documentation as required by the regulations. Since the CRA was of the view that the documentary requirements were not met, the ITCs claimed by CFI with respect to the Head Lease payments were denied.
CFI, on the other hand, was of the view that neither the ETA nor the Input Tax Credit Information Regulations required that the documentation be prepared or signed by the original supplier.
The Tax Court found in favour of CFI. In ruling that the documentation prepared by CFI met the technical requirements of the Act and Regulations, the Court stated at paragraph 48:
Considering all of the above, I conclude that the Regulations do not set out a general requirement for the supporting documentation to be issued or signed by the supplier. The definition of “supporting documentation” only requires the document to be issued or signed by the supplier where the documentation does not fit within one of the document types outlined in paragraphs (a) to (g) or fall within the meaning of “form” as set out in the preamble to the definition. To place this requirement on all supporting documentation would read words into the Regulations where the words of the definition are otherwise precise and unequivocal.
Although practically speaking, it may be a best practice to claim input tax credits based on documentation prepared by a vendor, the CFI ruling confirms that supporting documentation does not need to be produced exclusively by the vendor. There can be instances where the purchaser is able to compile the relevant information in a physical (or electronic) format suitable to meet the requirements of the ETA.
Taxpayers relying on internally produced documentation when claiming ITCs may still face challenges under audit. It is not clear how broad the impact of the CFI decision will be on CRA administrative policy. Where taxpayers are relying on internally produced documentation to support ITC claims, they should be prepared to discuss the CFI Funding Trust case with their auditor where warranted.
As a final comment, it is worth noting that ITC Information Regulations do require that the information be on hand prior to ITCs being claimed. Where taxpayers intend to claim ITCs based on internally produced documents, it would be prudent to ensure those documents have been prepared in advance of the claims being made.
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