Are you curious about the application of GST/HST? In general terms, “agency” is a type of relationship where one person who is the principal uses another person who is the agent to perform certain tasks on his or her behalf. However, the term is not defined in the Income Tax Act (ITA).

In the context of GST/HST, the Canada Revenue Agency (CRA) takes the position that the existence of an agency relationship is determined based on facts and an application of principles of law. Accordingly, the application of GST/HST may vary based on whether such a relationship exists in a commercial transaction.

In GST/HST Policy Statement P-182R, a test is set out to determine whether an agency relationship exists based on the following factors:

– Consent of both the principal and the agent;

– Authority of the agent to affect the principal’s legal position; and

– The principal’s control of the agent’s actions.

The CRA also listed several other factors that may help determine the relationship such as whether an agent assumes any risk from a third party, whether the liability of a contract falls on the agent or the principal or certain indirect evidence such as accounting practice that demonstrates how a party perceives its role.

The Application of GST/HST and Disbursements

One particular situation regarding GST/HST where agency relationship matters are disbursements. For example, disbursements incurred by an agent will not be treated as an expense of a supplier and therefore do not become part of the supplier’s service fee.

If a supplier paid tax such as GST/HST directly, he or she cannot claim input tax credits (ITC) but should instead bill the total amount to the client without charging any GST/HST. The client, on the other hand, may claim ITC as if he or she had paid GST/HST directly.

The court’s decision in The Queen v Merchant Law Group helps clarify the GST/HST application in the context of legal disbursements. The Merchant Law Group (Merchant) is a law firm and was reassessed by the CRA for not collecting GST/HST on client disbursements for office expenses such as courier costs, travel expenses and witness fees, etc.

Canadian Tax Issues

However, Merchant argued that it was simply acting as an agent for its client and therefore should not collect GST/HST. After the Tax Court of Canada (TCC) sided with Merchant, the CRA’s counsel appealed to the Federal Court of Appeal (FCA). That court eventually reversed the decision.

The FCA examined facts and concluded that there was not enough evidence to establish an agency relationship that existed between the Merchant and its client. In particular, the FCA found that there was no evidence that Merchant’s client was bound by the contracts with any third-party suppliers.

In addition, the Law Society of Saskatchewan already sent a written letter that lawyers were advised to have their clients sign a written document. The contract should appoint them as their agents for the purpose of disbursements. Unfortunately, the Merchant failed to do that.

The Implication of the Parties’ Conduct

The recent decision by the TCC indicates that agency relationships may exist. It’s based on the implied conduct of the parties even without any written documentation. In Lohas Farm Inc. v The Queen, the taxpayer, Mr. Liu was advised by his client to purchase new iPhones in Canada.

He was then to export them to Hong Kong before the new models were released there.

Apple’s mandatory limitation says that each person could only purchase 2 iPhones per day.

Therefore, Mr. Liu hired his friends and acquaintances to purchase the new iPhones for him. He then reimbursed them for the cost plus a commission. Although he kept all the records for all transactions, the CRA denied his claim for ITC. This was done on the ground that there was no agency relationship.

The Application of GST/HST

The TCC judge reviewed case law and found that parties may be engaged in an agency relationship. This was done even without being aware of that provided their actions indicate that one party is acting as an agent on behalf of another.

The TCC then examined each component in the 3-part test. This test was set out in GST/HST Policy Statement P-182R and found all 3 conditions were satisfied.

First of all, Mr. Liu guaranteed that he would reimburse the buyers for every iPhone even if it was accidentally damaged. Secondly, although recruiting other people to purchase more iPhones was a violation of Apple Store’s policy, there was an indication that Apple never sought to void the transactions. Therefore, the buyers were granted authority to affect the principal’s position.

Thirdly, Mr. Liu gave instructions on when iPhones were needed. He later told his buyers to stop buying when iPhones’ demands were decreasing. This showed he controlled the agent’s actions.

Pro tax tips – Have a Written Agreement

Although the court ruled in favour of the taxpayer in the previous case, he could have avoided the legal cost if he had drafted an explicit written agreement that set out the agency relationship.

However, if your ITCs were denied by the CRA, you may still have a chance. This is because an agency relationship may exist based on implied actions.

Tax law is more complex than you might think. It’s important to speak to a law firm. There are many ways to deal with tax issues.

Call our office to speak with an experienced Canadian tax lawyer so we can help you evaluate your case.

Barrett Tax Law Phone: (416) 907-8429 ext. 220