Be Careful When Relying on the Canada Revenue Agency

You want to know in advance how a transaction will be taxed, so you ask the CRA. Or perhaps the CRA reviews your business and there is a dispute, but you reach a written settlement. Unfortunately, that is not always the end of the story.

In one recent case the taxpayer sold agricultural netting products (used to cover crops to protect them from birds and the like). They were uncertain as to whether GST/HST applied to the sales – it does not apply to fish nets, but the legislation was silent with respect to agricultural netting. The taxpayer contacted the CRA head office and was advised that the agricultural netting fell within the same exemption as fish nets, and GST did not apply on the sale (zero-rated in GST terminology). In fact the taxpayer inquired repeatedly in order to be sure of the point, since the consequences of not charging GST when it is due can be severe. However, when the auditor came calling, the CRA took a different view and said it was taxable. The Court agreed that since agricultural netting products were not specifically referred to in the legislation, they fell under the general rule of taxability. The taxpayer was liable for all of the GST they should have collected, but did not, in reliance on the CRA advice they had received.

But surely you say, the taxpayer could rely on the CRA advice and would only be liable on a go forward basis. That would be logical, and that would be fair, but that would also be wrong. As the Court said, the Court’s “only jurisdiction is to apply and interpret the Act as written”. As the Court has previously said about oral or written statement of law from the CRA, “… they will not generally bind the Crown, nor can estoppel generally apply against the Crown as regard to positions of law”.

In another recent court decision, the Quebec Superior Court considered the position of two taxpayers who had been audited by the CRA and had signed a written settlement agreement with the CRA. The agreement provided that if the two taxpayers undertook certain actions, there would be “no adjustment to taxable income” for specified taxation years. The taxpayers undertook the actions contemplated by the settlement with the CRA, and then the CRA went ahead and assessed them anyway, directly contrary to the agreement. The CRA took the position that the agreement was invalid on the basis that its employees did not have jurisdiction to enter into such an agreement. (In the end, the Quebec court declined to hear the case, saying it was better left to the Tax Court of Canada.)