A couple of months ago, I received a call from a senior law partner at one of Toronto’s top law firms asking me if I could help out a client of theirs with a messy Canada Revenue Agency (CRA) tax problem because their firm was just too expensive for the couple.
Upon accepting the offer, I was told there was a balance owing to the CRA for GST/HST, and that the firm was essentially bankrupt, with no ability to pay. The business directors felt that they did not owe the CRA anything, and because they were essentially insolvent, they had stalled and delayed the CRA As much as they could.
Until the CRA advised them that they were going to proceed with the raising of a S.160, Non-Arms Length Deemed Trust assessment for a payroll debt and a S.325 Non-Arms Length Deemed Trust assessment for GST/HST.
This, however, was a huge problem because when raising a s.160/325 assessment, the CRA essentially takes the debt that the corporation has not paid, and transfers it to another corporations or person who benefitted through dealings with that corporations to the detriment of the CRA.
That 3rd party eventually turned out to be family…
It was all over $45,000 owing to the CRA.
While a solution sounds simple enough – confirm the balances owing to the CRA, then confirm the legitimacy of those debts, tie up some loose ends on the compliance side, and then make arrangements between the client and the CRA to resolve both matters.
One huge issue is that the client spoke to the CRA and the collector knows that the s.160/325 is a problem (but the collector doesn’t know why). In the collector’s eyes, she has the upper hand because the assessment touches a nerve with the client, but on the other hand, without knowing the nature of these concerns, the CRA are taught to think the worst, and thus are more eager to raise the assessment because they suspect the client is hiding something.
So I connected with the couple, got their side of the story, then met their accountant and got her side of the story. I took all of that information, and had a nice long chat with the Collector at the CRA.
Here is the CRA’s side;
The couple owned a business, which accumulated debt through the filing of GST/HST but never paying it. They also failed to file T2 returns.
The company had at one point in time sought financing and ended up pledging their inventory in return. When the business began to slow down, the lender took the assets, and sold them to pay back the money they had lent to the business.
There was a shortfall.
The CRA did not like this at all because they didn’t get paid.
With money owing to the CRA, the collector was prepared to use their Deemed Trust provision and raised a s.160/325 Non-Arms Length assessment against the lender for taking the inventory and disposing of it without paying the CRA.
The CRA were just waiting for the corporations director to file for bankruptcy before they actioned the s.160/325 because that would survive the bankruptcy and would result in the CRA getting paid on all fronts.
Having worked in the CRA’s collections department for almost 11-years, logic told me that a business which was legitimately struggling would not have significant amounts of GST/HST owing in its final years. They would not have had the financial resources to buy inventory to sell if the business was failing, rather, they would be selling off their inventory at a deep discount to recover the maximum amount possible.
Something did not seem right.
I called back the CRA Collections office who, quite frankly, was extremely unhappy about having to answer additional questions about the origin of the debts… Again.
I had asked her to go through the last 3-years worth of filed GST/HST returns and give me verbal figures for Total Sales, GST Collected, and Input Tax Credits.
The first year was fine.
The second year was fine.
The third year, she started, “Total Sales were $25,000”, “GST Collected was $1,500” and ITC’s were …
… she paused…
“No ITC’s, eh?” was my response.
“No. No ITC’s”, she said, completely puzzled.
“So I don’t expect there to be any ITC’s on any of the returns going forward, is that accurate?” I asked.
“No ITC’s on any of the returns going forward… That’s so unusual”, was her response.
We re-filed the last 6 GST/HST returns to include the ITC’s. The CRA quickly arranged for a desk audit of the refunds, and the client quickly provided the supporting documentation to support the majority of the ITC’s, and within 2-weeks, the audit was done, the returns accepted and sent for posting.
Upon posting, the revised returns knocked down the balance owing considerably. All of it. The payroll debt too.
As a result, the CRA cancelled the s.160/325 assessments turned their attention to the T2’s which we had completed and filed in the interim. The credit from the GST/HST is sitting on the CRA’s systems waiting for the T2’s to post in full.
That’s how inTAXicating Tax Services helps!
Knowing the ins and outs of the CRA’s collections department is a skill which very few possess. Thinking to ask the CRA for information related to the GST/HST filings and to ask the CRA to amend them even though they fell beyond the 4-year limitation period for allowing Input Tax Credits (ITC’s) is a request that many accountants will not make.
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