The CRA and Employment Agency Audits
Recently, the Canada Revenue Agency has created a group project auditing employment agencies located in Ontario, Canada. These audits typically encompass every year of operation for the employment agency. The CRA believes that these agencies have been apart of a group that has been claiming Input Tax Credits fraudulently. The CRA refers to this as a sham issue, which will be discussed below.
The CRA and the So Called Sham
A transaction is considered a “sham” for tax purposes where a transaction is conducted with an element of deceit as to create an illusion that leads the tax authorities away from the true nature of the transaction. A very common example of a sham is when there is collusion between parties that are intentionally creating the appearance that they are working at arms-length. Parties might do so to confer benefits upon themselves or related parties that avoid the imposition of additional tax. The CRA and the courts consider the participation in a sham to be tax abuse, and the CRA pursues suspected cases of tax abuse very diligently.
Employment Agencies and the Sham
In recent audits, the CRA has alleged that a group of labour-supply companies (employment agencies) are involved in a sham and have denied all their Input Tax Credits (ITCs). Customers would hire these labour companies (employment agencies) to provide cheap workers to fit their needs. If the task required lower skilled labour, the labour companies (employment agencies) would hire a subcontractor to provide the workers, and act as a middle-party. On their tax returns, the labour companies (employment agencies) would expense the cost of hiring the subcontractors and claim ITCs on their GST/HST returns.
The CRA alleges that this business structure is a sham. The CRA alleges the existence of a sham by claiming that the labour-supply companies (employment agencies) created the subcontractors themselves. The CRA believes that the subcontractors do not exist; that the labour supply companies (employment agencies) are providing their own workers to their customers, are cutting cheques to themselves but claiming they were to subcontractors, and are claiming to have hired subcontractors in order to write off ITCs.
Why Does the CRA think this is a Sham?
The CRA started investigating the existence of a sham when they were unable to contact any representatives of the subcontractors using the phone numbers and addresses on the invoices issued to the labour supply companies under audit. While the subcontractors have business numbers, GST numbers, and articles of incorporation, their tax-filing history was non-existent.
Basically, because the CRA was not getting the GST/HST collected by these subcontractors, they decided to audit the companies paying the subcontractors.
The CRA has now proceeded to deny hundreds of thousands of dollars, even millions, in ITCs of the numerous labour-supply companies (employment agencies) that they allege are involved in a sham. If you are a business owner and are accused of being involved in a sham by the CRA, contact our firm for a free consultation. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.