Canadian businesses and suppliers are under a legal obligation to collect and remit taxes on all sales. But what happens if a supplier forgets or fails to do so? The Ontario Court of Appeal recently had to decide whether a supplier can sue a purchaser for unpaid taxes it had failed to collect at the time of the original sale.

The Facts

 The supplier had sold unrefined gold worth approximately $12.16 million to the purchaser between 2010 and 2012, pursuant to an oral agreement of purchase and sale. The supplier did not deliver invoices at the time of the various sales and at no point did the purchaser pay tax at the time of the transactions. Additionally, the supplier did not pay or remit any HST on the sales, despite the fact that the sale of the unrefined gold was a “taxable supply” within the meaning of the Excise Tax Act (“ETA”).

In 2015, the Canada Revenue Agency (“CRA”) audited the supplier’s HST returns for 2010 to 2012. As a result, the CRA issued HST reassessments to the supplier on its sale of unrefined gold to the purchaser requiring the payment of $1,573,903 in HST. The CRA used part of the supplier’s previous corporate tax payments to satisfy the tax obligation.

Subsequently, the supplier issued two invoices to the purchaser requiring payment of the $1,573,903 in HST. Included in each invoice was a notation stating the taxes had not previously been charged “in error”. The purchaser refused to pay.

As a result, the supplier commenced an action against the purchaser for reimbursement of the HST and moved for summary judgment. Summary judgment was granted against the purchaser for the full amount of the HST. The purchaser appealed.

The Issues

The purchaser raised one issue on appeal: that a proper interpretation of ss. 223(1) and 224 of the ETA required the supplier to provide the purchaser with written disclosure of the tax payable and, by issuing the tax invoices well after the transaction, the supplier could not make a claim against it. The supplier objected to the ground of appeal because it was not made before the motion judge and should not be considered by the appeal court.

The Appeal Decision 

The court first addressed the supplier’s objection to raising a new issue on appeal. While the general rule is that appellate courts will not entertain entirely new issues on appeal, it allowed for its consideration. The court reasoned that the issue was a pure question of law, not a question of fact, and the purchaser was permitted to file a supplementary factum and book of authoritieson the issue. Additionally, the facts concerning the issue were not in dispute. Finally, the court found that the supplierwould not be prejudiced if the court entertained the new issue.

The court then set out to decide the issue at hand: was the supplier barred from commencing an action against the purchaser because it had failed to comply with ss. 223(1) and 224 of ETA?

Section 223(1) of the ETA requires that disclosure of the HST be given to the recipient at the time of the supply. However, the court found that it is settled law that an invoice or receipt issued after the supply transaction can meet the statutory requirements, as set out in the case OCCO Developments Ltd v. McCauler. In addition, it is CRA policy that these disclosure requirements may be met after the fact, so long as there are no contractual or common law restrictions to prevent the issuance of amended or additional invoices. In the result, the court stated:

“Section 223(1) is silent on when a registrant must give disclosure of the tax payable to a recipient. The overwhelming weight of the jurisprudence, the CRA’s Policy Statement P-116, and the professional commentary have interpreted that statutory silence to mean that a registrant supplier can comply with the s. 223(1) disclosure obligations by delivering an invoice or receipt containing the prescribed information after the supply transaction.”

As a result, the court concluded that the two invoices issued by the supplier complied with s. 223(1) of the ETA and it had therefore satisfied the conditions in s. 224 to bring the action.

The appeal was dismissed.

Further Implications

This case can be taken as a reminder of the importance of charging the correct tax at the time of a transaction to avoid problems later on. However, it also explains the recourses available in situations where taxes were not initially charged due to error or omission.

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Contact Mark Feigenbaum to learn how he can assist you with your legal or tax matters and provide you with comfort in knowing that you are in highly experienced hands. Prior to forming his law firm, Mark worked in the cross-border tax department of an international Big 4 firm and held accounting management positions in a range of sectors in both Canada and the US. Mark combines this legal, tax, and business knowledge to provide thorough, multi-disciplinary advice and exceptional risk management for his clients. Mark offers services to clients in the U.S., Canada, and around the world. Contact Mark online, or at (905) 695-1269 or toll-free at (877) 275-4792 to book a meeting today.