Input Tax Credit Documentary Requirements in a Paperless World

Do We See Them the Same Way?

When it comes to documentation required to support input tax credits (ITCs) for good and services tax (GST) and harmonized sales tax (HST), we have become used to seeing all the prescribed information to support the amount of tax paid on one document and thinking this to be the rule. It is a well-known fact that the GST/HST system permits registered recipients to recover the tax paid on their purchases in approved circumstances by claiming ITCs on their returns. However, while the required documentation that registrants must obtain to support their ITC claims will generally be found on the invoice issued by their supplier, this is not always the case.

Many suppliers will indicate their GST/HST registration number on invoices, but this is not a requirement, and there are situations where it may not be possible to provide all the prescribed information in one document because of how a particular business operates. In addition, as more businesses operate in a paperless environment, many organizations—and their auditors—are finding challenges in the way required supporting documentation is obtained and stored. This issue is highlighted in CFI Funding Trust v. The Queen,ⁱ a recent case in which the required supporting documentation, which was stored electronically, was not accepted by the Canada Revenue Agency (CRA) because it was not in the expected form. As a result, ITCs to the tune of $42 million claimed over a five-year period were denied.

Background

CFI Funding Trust (CFI), a trust established in Alberta, carried on a business of securitizing automobile dealer leases. CFI entered into substantially identical concurrent motor vehicle lease agreements, referred to as designated eligible leases, with fifteen dealers for motor vehicles that were leased to the dealer’s customers. The lease between the dealer and their customer is referred to as the initial lease. Essentially, the dealers transferred their rights of possession to the leased vehicles to CFI, with CFI required to prepay a portion of the concurrent leases to the dealers. With regards to the tax, CFI would offset the GST/HST paid for the leases with any GST/HST collected on administration fees charged to the dealers.

CFI used a third party, Corpfinance International Limited (“Corpfinance”), to provide administrative and management services in relation to its securitization activities, including maintaining accounts and records for all concurrent leases. Rather than the dealers preparing supporting documentation for the supplies under the concurrent leases, Corpfinance prepared various spreadsheets to be used by CFI as supporting documentation for claiming ITCs on the GST/HST applicable to the concurrent leases. In addition, the supplier’s (i.e., the dealer’s) GST/HST registration numbers were provided in the initial lease agreements, not the concurrent leases. Corpfinance saved all this information in an electronic format on behalf of CFI.

The Documentary Requirements

Specifically, paragraph 169(4)(a) of the Excise Tax Act (ETA) outlines the requirements for claiming ITCs as follows:

Once a taxpayer has obtained the necessary documentation, assuming the time limitations have not expired, ITCs may be claimed. The required documentation, as prescribed by the Input Tax Credit Information (GST/HST) Regulations (the “Regulations”), includes the following:

For all purchases:

• The name of the supplier to verify that GST/HST is being charged by a registrant;
• Invoice date to determine the period within which an ITC may be claimed; and
• Total amount payable to identify the level of documentation required.

For purchases more than $100 and less than $500, the requirements noted above and:

• The supplier’s GST/HST registration number to ensure tax was paid to a registrant; and
• The amount of tax paid in relation to the purchase, or an indication that the price is GST/HST-included and the rate at which it is included.

For purchases $500 or higher, all the above requirements and:

• A description of the property or service being supplied to ensure that ITCs are claimed on eligible expenses and to determine whether tax was properly charged on the supply;
• The name of the recipient to identify who is entitled to the ITC; and
• The terms of payment, which may affect the tax liability or its timing.

In addition to specifying the required documentation to support an ITC claim, the Regulations define “supporting documentation” to include:

Subsection 169(4) of the ETA provides that the registrant must obtain the prescribed information in a “form” that will allow the ITCs to be determined. As the Tax Court of Canada (TCC) would eventually find, “How that information is obtained does not matter. It may be obtained through oral or electronic communication. In addition, the information may be obtained by the recipient from […] other sources that contain the prescribed information.” Indeed, the definition of supporting documentation is quite broad.

At an annual GST/HST meeting with the Canadian Bar Association Commodity Tax section in March 2005, the CRA endorsed reverse invoicing with the following comment:

In order to claim an ITC, the documentary requirements in subsection 169(4) should normally be met… 

1. The CRA accepts that in certain circumstances, with the agreement of both parties, and where there is sufficient information to verify the accuracy of the documentation, the recipient may prepare the documentation. Provided the documentation complies with the documentary requirements and all other requirements for claiming an ITC are met, an ITC may be claimed.
   
   The supplier is also required to have sufficient documentation to enable the CRA to determine the supplier’s liabilities and obligations for GST/HST. 

1. The ITC documentary requirements would also be satisfied where there is no dispute between the parties to the transaction and the recipient obtains the missing information either by telephone or in writing and then transcribes the missing information on to the document provided by the supplier. If the missing information is provided in writing, the recipient should also retain that document. 
2. The ITC information requirements may be found in more than one document as long as together the documents meet all of the prescribed requirements. ⁱⁱ [Emphasis added.]

The CRA’s comments concerning the ITC documentary requirements and reverse invoicing are worth considering when analyzing if a taxpayer has met the documentary requirements in support of an ITC claim.

Analysis

When the CRA first questioned CFI about its ITC claims during an audit, it considered the supply from the dealers to CFI to be an exempt financial service and denied the ITCs, asserting that no GST/HST was payable in relation to the prepaid rents under the concurrent leases. CFI objected to the resulting assessment on the basis that the transactions under the concurrent leases were taxable supplies and, as a result, it was entitled to claim ITCs for the tax paid on the lease payments made to the dealers. The CRA’s Appeals Division ultimately accepted that the supplies in question were taxable, opening up entitlement to the ITCs. However, the assessment was upheld on the basis that CFI’s documentation for the ITC claims was insufficient and did not satisfy all the conditions under subsection 169(4) of the ETA. The Minister conceded that the GST/HST paid to Corpfinance in relation to the administrative services provided was eligible for ITCs, making the sole issue in dispute whether the evidence showed that CFI satisfied the documentary requirements mandated under subsection 169(4) of the ETA and the Regulations.

The Minister took the position that CFI failed to meet the ITC documentary requirements, referencing paragraph (h) of the supporting documentation definition in the Regulations, which reads “any other document validly issued or signed by a registrant […],” and asserting that the supporting documents presented by CFI must either originate from or be signed by the dealers. CFI’s documentary evidence was, in part, comprised of various spreadsheets prepared by its administrative agent, Corpfinance, rather than the dealers. CFI countered that the definition relied on by the Minister only requires that a document be issued or signed by a registered supplier when it does not fit within the preamble to that definition or fall within one of the document types listed in paragraphs (a) to (g) (e.g., an invoice, receipt, or contract).

CFI further argued that the prescribed information maintained in a digital form on the recipient’s server qualifies as valid supporting documentation under paragraph (g). Interestingly, on this point, the TCC distinguished CFI’s situation from that of other taxpayers in jurisprudence relied on by the Minister [which did not deal with the interpretation of paragraph (g)] and found that “Information on a server is not a document that can be signed or authorized by a supplier. Rather, it represents information obtained by the recipient and stored on a server to allow this information to be consulted by the CRA on an audit of an ITC claim.”

The TCC also referred to the CRA’s public comments on reverse invoicing noted above, where the CRA took the position that the prescribed information as set out in the Regulations may be found in more than one document. In particular, Justice Hogan commented that the CRA uses these published interpretations to inform taxpayers about the law and promote compliance, noting that it is not good practice for the CRA to contradict its own published positions simply because it might be convenient in a particular case. 

Conclusion

After weighing all the arguments, the TCC found that the Regulations do not set out a general requirement for all supporting documentation to be issued or signed by a registered supplier. This requirement is only applicable where the document type does not fit into any of paragraphs (a) to (g) or fall within the meaning of “form” as set out in the preamble to the definition. Furthermore, it would be inappropriate to add more meaning to the words used in the legislation where the provisions are clearly stated. Ultimately, Justice Hogan concluded that information stored in a registrant’s computer server qualifies as supporting documentation for ITC purposes, and CFI’s appeal was allowed. The TCC also noted that, because the definition of supporting documentation uses the term “includes” before listing the acceptable forms of documentation, it would be a mistake to apply the list in a restrictive manner.

Given the decision in this case, it is safe to say that, where a business obtains the necessary information and stores it electronically in its records prior to making an ITC claim, it will satisfy the documentary requirements. This outcome provides additional clarity, for both taxpayers and the CRA, concerning ITC documentation and its forms, where it can be stored, and the fact that it may be found in more than one document.

Loi Dos Santos
Tax Advisor, Client Support Services
loi.dossantos@ryan.com

ⁱ CFI Funding Trust v. The Queen, 2022 TCC 60 (CanLII).

ⁱⁱ David Sherman, “169(4) Input Tax Credits - Required Documentation,” Taxnet Pro (online) (last modified April 30, 2022).