As a business owner, no doubt you're aware of your obligation to charge the GST or HST on most goods or services sold in Canada. As a GST/HST registrant, your business can, however, claim an input tax credit (ITC) to recover the GST/HST paid on the purchases used in its commercial activities.
A case decided earlier this year involved a Toronto-based company called Computronic Computer Inc. Computronic is a computer parts wholesaler and assembler. From 2003 to 2005, included among Computronic's input tax credit claims was more than $500,000 in GST paid to five particular suppliers. The problem was that the registration numbers of these five suppliers -- as shown on the invoices -- were not actually those of the suppliers. Rather, they were validly issued numbers belonging to someone else in what appears to be, according to the judge, "a degree of what is commonly called identity theft."
The question before the Court was whether it is the Canadian purchaser (Computronic) or the Canadian government that should bear the risk of this identify theft perpetrated by the suppliers, who may have simply pocketed the GST and never remitted it. Under the GST rules, you can't claim an input tax credit unless you have obtained certain information from the supplier, which includes the name of the supplier and the registration number assigned to the supplier.
The judge in this case concluded that since Computronic did not have valid GST numbers for the five suppliers, it was simply precluded from claiming the $500,000 of input tax credits. The company faced penalties and arrears interest on the GST owing which was also upheld in court.
The judge, acknowledging the seeming cruelty of the law, said: "This strict approach can result in unfairness to a purchaser who pays the GST in good faith. It leaves Canadian businesses bearing the risk of fraud, identity theft, and wrongdoing and effectively requires them to put into place risk management practices in dealing with new and continuing suppliers to identify supplier information that may require further investigation. A result such as this may prove harsh and unfair but it is open to Parliament to legislate such a regime."
Until such time as Parliament sees fit to change the rules, this case serves as an important lesson to all business owners to be sure to verify the validity of all GST/ HST numbers of your suppliers, which can be done online at the Canada Revenue Agency's website.