In a January 29, 2016 Tax Court of Canada case (SNF S.E.C. vs. H.M.Q., 2013-1207(GST)G), CRA had denied over $500,000 of ITCs, and assessed penalties and interest, in respect of GST and QST paid to twelve suppliers. Unknown to the taxpayer, the suppliers did not remit the tax.

The taxpayer, a scrap metal dealer, obtained evidence of prospective suppliers’ GST and QST registration prior to accepting them as suppliers.

reasonable procedures to verify suppliers are GST/HST registrants

Taxpayer wins – mostly
The taxpayer must use reasonable procedures to verify that suppliers are valid registrants, their registration numbers actually exist and are in the name of that person. The Court held that the taxpayer’s procedures (reviewing the suppliers’ registrations, stamped by Revenue Quebec) were generally sufficient to meet the documentation requirements (Excise Tax Act Subsection 169(4)). It was not relevant that some suppliers did not have scrapyards and/or vehicles to carry on scrap businesses, nor that payment was often made in cash, making it difficult to verify the suppliers’ revenues. The taxpayer could not be expected to query government officials to ensure that GST registrations were properly issued.

However, in respect of one supplier, the facts showed that the taxpayer had been sloppy to the point of gross negligence in accepting evidence of registration where it was clear that the registered supplier was not acting on their own account. Those ITCs were properly denied, and the related gross negligence penalty upheld.

verifying GST/HST registration has not been cancelled

As well, one purchase was made on the date the supplier’s registration was cancelled, so the supplier was not a registrant on that date, and the ITC was properly denied. However, the related gross negligence penalty was reversed, based on the due diligence undertaken in respect of the supplier previously.

Finally, the Court held that a rebate for GST/HST paid in error (Excise Tax Act Subsection 261(19)) does not apply where the error arises due to the taxpayer’s negligence, or because the payment is made to a non-registrant, including a supplier whose registration has been cancelled. The purpose of the rebate is not to allow the taxpayer to recover GST/HST from the Crown when the erroneous payment to the supplier results from taxpayer’s failure to exercise proper care and attention.