In Comtronic Computer Inc. v. The Queen, the taxpayer who is appealing a GST reassessment is a wholesaler of computer parts with annual revenues of about $65 million. During the five-year period in question, it purchased approximately 15% of its parts inventories from five Canadian companies (the “Vendors”) which appeared to be connected to a single individual. Although the Vendors sent invoices bearing various tradenames and addresses, the taxpayer never suspected anything was amiss. However, following an audit, it was determined that the invoices issued by the Vendors contained GST registration numbers that, while validly issued, had been issued to persons other than the Vendors. As a result, the taxpayer’s claims for input tax credits (ITCs), for GST of approximately $500,000 paid to these suppliers, were denied. The taxpayer was also assessed a 6% penalty.
The taxpayer’s appeals to the Tax Court of Canada and the Federal Court of Appeal were denied on the basis that the legislative requirements for an ITC mandated the use of the GST registration number assigned to the particular supplier. The courts acknowledged that the result can be unfair to a business that pays the GST in good faith reliance on an invoice. However, the courts concluded that the legislative scheme dictated that the unsuspecting business, rather than the government, bears the risk of supplier identity theft and other wrongdoing in GST collection and remittance matters. The courts also stated that businesses must implement risk management systems when dealing with new and continuing suppliers, to identify supplier information that may require further investigation.
While the Court recognized that no online GST registration verification system existed at the time, it determined that there was an ability to verify registration numbers with the Canada Revenue Agency by telephone. The Court found that the taxpayer had not taken any positive steps to verify that the registration numbers provided by the Vendors were correct and denied it relief from the penalty on that basis.
I’ve hear no word yet on whether the taxpayer’s accountant has been attacked for any shortcomings in the advising of this client or in the detection of a material unrecorded liability.
A supplier’s GST registration may be verified at the following site: http://www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/gsthstrgstry/menu-eng.html. Be sure to keep a printed copy of the verification, and if a segregation of duties is possible, then have the printed verification checked by someone else.
