30 March 2001 GST/HST Interpretation 35088 - Application of Section 285.1 of the Excise Tax Act

Dear XXXXX:

Thank you for your letter of February 1, 2001, concerning the application of the penalty under section 285.1 of the Excise Tax Act (the "ETA") to the day-to-day operations of your client.

Based on the information in your letter and our telephone conversation of March 19, 2001, it is our understanding that Taxco is in the business of identifying amounts, such as unclaimed input tax credits (ITCs) or rebates, for clients on a contingency basis. Under the terms of the contract between Taxco and its client, the scope of Taxco's review of the client's records may be limited, for example, to a particular division of the client. Any unclaimed GST/HST amounts that may be recovered by the client are identified in a Recoveries Report.

As a free service, Taxco also advises the client of any potential tax liabilities that may have been uncovered during its review. These potential liabilities are identified in an Exposures Report; however, the client may waive the presentation of this report. In such cases, the client would be informed verbally of any potential liabilities. Taxco does not offer a guarantee to uncover all or any potential tax liabilities. Under the terms of the contract, the client is under no obligation to provide assurances to Taxco that potential liabilities will be corrected.

At the end of the review, the Recoveries Report is presented and an invoice is issued by Taxco. Where the client has not waived the presentation of the Exposures Report, it is Taxco's business practice to issue this report a number of weeks after issuing the Recoveries Report. This procedure is followed to firmly establish the amount the client owes to Taxco under the terms of the contract.

In certain cases, Taxco will enter into a separate contract, on a fee per service basis, to quantify and document the amount of any potential liability. In these cases, all material exposures are noted in an Exposures Report and the client advised accordingly.

Interpretation Requested

Is Taxco liable under subsection 285.1(4) of the ETA if a client claims in its GST/HST return the recoveries identified and documented by Taxco and fails to report any outstanding GST/HST liabilities uncovered as a result of Taxco's review?

Interpretation Given

It is a question of fact whether a person is liable to a penalty under section 285.1 of the ETA. The Canada Customs and Revenue Agency (the "CCRA") will not issue an interpretation or ruling on whether a particular person is liable to a penalty in these circumstances. This is consistent with the CCRA's position with respect to whether a person is an agent, whether a person has exercised due diligence and a determination of the fair market value of property. For more information on the issuance of interpretations and rulings, please refer to section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

The CCRA's position with respect to the application of the penalty under section 285.1 of the ETA is currently under development and a draft Information Circular 01-1 was posted on the CCRA's website in February at www.ccra-adrc.gc.ca, under the "What's new" hyperlink.

The following information is extracted from that document to assist you in reviewing your client's particular circumstances.

Generally, subsection 285.1(4) of the ETA will apply to third parties such as tax return preparers and advisors who make false statements or counsel and assist others in making false statements. Where a false statement is made in a return, the third party would not be liable to a penalty under subsection 285.1(4) in respect of this particular false statement if it did not prepare the return nor provide any advice in respect of the return. However, if the third party prepared the return and knowingly did not report the outstanding liabilities (i.e., the third party made the false statement in the return on behalf of the person) or advised the person to not report the liabilities, the third party would be liable to a penalty under subsection 285.1(4). There are other circumstances where the third party may be liable, for example, where the third party would reasonably be expected to know but for circumstances amounting to culpable conduct that a statement is a false statement that could be used by or on behalf of the person for GST/HST purposes.

It should be noted that the false statement is not limited to returns. A false statement includes a statement that is misleading because of an omission from the statement regardless of any intention to deceive. The false statement may be in the form of an oral or documentary representation. For example, the statement may be included on election forms, correspondence, invoices, valuation reports, certifications, financial statements and their notes, contracts or selling documents.

A third party is not liable to a penalty under section 285.1 of the ETA if there is no false statement.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the CCRA with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2488.

Sincerely,

Marcel R. Boivin
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate