Tax Controversy in GST/HST Audits and Disputes
The Goods and Services Tax (“GST”) and Harmonized Sales Tax (“HST”) systems play a central role in Canada indirect tax regime. While designed to be self assessing and relatively straightforward, it often becomes the source of complex disputes between businesses and the Canada Revenue Agency (“CRA”). A GST/HST tax controversy arises when the CRA challenges a taxpayer reporting, input tax credits (“ITCs”), or compliance with registration and remittance obligations.
For businesses, the financial impact of a GST/HST audit or reassessment can be significant, involving repayment of denied credits or unremitted tax, as well as interest and penalties. Understanding how these controversies arise, and how to respond strategically, is critical to protecting both compliance and cash flow.
How GST/HST Tax Controversies Arise
GST/HST operates as a value added tax. Businesses registered for GST/HST must collect the tax on taxable supplies and may claim input tax credits to recover GST/HST paid on business expenses. When documentation is incomplete, or transactions appear inconsistent with commercial reality, the CRA may question whether ITCs were properly claimed or whether all taxable supplies were correctly reported.
Common triggers for GST/HST tax controversy include
- CRA audits targeting specific industries such as construction, professional services, trucking, and real estate
- large or recurring ITC refund claims
- unusual fluctuations in reporting from period to period
- use of contractors or subcontractors with incomplete tax records, and
- misclassification of exempt or zero-rated supplies.
In many cases, CRA auditors take the position that a business has over claimed ITCs or under reported taxable supplies. The result is a reassessment demanding payment of tax, interest, and potentially penalties.
Common CRA Positions in GST/HST Disputes
CRA auditors often rely on recurring positions during GST/HST audits. Understanding these positions helps businesses prepare for, and respond to, a potential controversy.
- Denial of input tax credits
The most common source of GST/HST controversy is the denial of ITCs. The CRA frequently challenges whether claimed expenses are supported by valid documentation or relate to commercial activities. Auditors often deny ITCs for
- missing or incomplete invoices
- supplier invoices without GST/HST registration numbers
- expenses tied to non-business or personal use
- purchases from suppliers later deemed non-compliant or non-existent by the CRA, and
- claims related to capital assets used partly for personal purposes.
The CRA position is that the burden of proof rests with the taxpayer. Even if a transaction occurred, a lack of proper documentation can lead to denial of ITCs.
- Failure to remit collected tax
Businesses that collect GST/HST must remit it to the CRA on their periodic returns. Disputes arise where the CRA determines that tax was collected but not fully remitted, or where certain supplies were misclassified as exempt or zero rated.
For example, professional services provided to non-resident clients may be zero rated, but errors in classification or incomplete documentation can lead the CRA to reassess. Construction businesses also face frequent disputes over self supply rules for newly built or substantially renovated property.
- Registration and compliance issues
The CRA may reassess unregistered businesses that exceeded registration thresholds or engaged in taxable activities without collecting GST/HST. In such cases, the CRA can retroactively register the business and impose liability for uncollected tax, even if it was never charged to customers.
The CRA also reviews compliance within corporate groups and joint ventures, to ensure that GST/HST returns are filed correctly and consistently across related entities.
- ITCs on real property and mixed-use assets
Disputes often arise over ITCs claimed on real estate or capital property used for both commercial and personal purposes. The CRA may deny full ITCs where it believes a portion of the property is used for non-commercial purposes, such as a home office or personal vehicle.
- ITCs involving fraudulent or non-registered suppliers
The CRA frequently denies ITCs where the supplier is later found to be fictitious, inactive, or not registered for GST/HST. Even where the taxpayer acted in good faith, the CRA may take the position that ITCs cannot be claimed on tax that was never properly charged or remitted. These cases are particularly challenging, because the purchaser may be left without recourse after paying the tax in full.
Documentation Required to Defend Input Tax Credits
Defending ITCs in a GST/HST audit depends heavily on documentation. The Excise Tax Act sets strict requirements for substantiating ITCs, and missing details can invalidate claims regardless of whether the transaction itself was genuine.
To support ITC claims, businesses should maintain
- valid invoices showing the supplier legal name, GST/HST registration number, invoice date, and amount of tax charged
- proof of payment, such as cancelled cheques, bank statements, or receipts
- contracts and agreements confirming the business purpose of the expense
- general ledger entries showing how the expense relates to commercial activities, and
- GST/HST returns and supporting schedules for each reporting period.
Auditors may also request proof that the supplier actually existed and carried on business, particularly in files involving subcontractors or independent service providers. Proper record keeping is not only a compliance requirement, but also a strategic defence tool in any GST/HST tax controversy.
How to Respond to a GST/HST Audit or Reassessment
When the CRA begins an audit or issues a proposal letter, the taxpayer has a limited opportunity to respond before a reassessment is finalized. Effective response strategies include
- reviewing all invoices and supporting documentation for accuracy and completeness
- providing only relevant information, since over disclosure can expand the scope of the audit
- engaging legal counsel early to manage communications and ensure procedural fairness, and
- submitting additional evidence or explanations to correct factual misunderstandings.
If the CRA issues a reassessment and the taxpayer disagrees, the next step is to file a Notice of Objection within 90 days. This moves the file to the CRA Appeals Division for an independent review. Many GST/HST disputes are resolved at this administrative stage, without the need to proceed to the Tax Court of Canada.
Preventing Future GST/HST Tax Controversies
The most effective way to manage GST/HST risk is through proactive compliance. Businesses can reduce the likelihood of CRA disputes by
- implementing internal review procedures for GST/HST returns
- regularly verifying supplier registration numbers using the CRA GST/HST registry
- segregating commercial and personal expenses
- maintaining up to date accounting systems that track GST/HST on all transactions, and
- consulting tax professionals before entering into complex transactions such as corporate reorganizations or property transfers.
By keeping documentation organized and processes consistent, businesses can minimize exposure to future audits and reassessments.
How Rosen & Associates Helps Resolve GST/HST Tax Controversies
Rosen & Associates Tax Law provides representation for businesses facing GST/HST tax controversy issues. The firm has extensive experience navigating CRA audits, defending ITC claims, and negotiating settlements at both the administrative and litigation stages.
Rosen & Associates assists clients by
- reviewing CRA audit requests and limiting unnecessary disclosure
- preparing responses and documentation to support ITC claims
- filing Notices of Objection to challenge reassessments
- representing clients before the CRA Appeals Division and, where necessary, the Tax Court of Canada, and
- advising on GST/HST compliance procedures to help prevent future disputes.
The firm goal is to resolve GST/HST disputes efficiently, minimize financial exposure, and protect business operations from audit disruption.
Schedule a Free Consultation
If your business is under CRA audit or facing a reassessment involving denied GST/HST input tax credits, professional guidance is essential. Schedule a free consultation with Rosen & Associates Tax Law to discuss your case and explore strategies to resolve your GST/HST tax controversy.
Disclaimer: 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.
Bhavika Chadha