Getting your Tax Refund

Under various provisions of the Income Tax Act, you may be entitled to a refund of some or all of the taxes you have paid. However, getting a tax refund from the Canada Revenue Agency (the CRA) is often not an easy task and without proper support and assistance from a professional tax advisor, your chances of getting a refund or getting the amount you are fully entitled to, may be affected.

A tax refund can be significantly affected and delayed due to a number of circumstances, including the status of an ongoing CRA audit as was the situation in the Express Gold Refining Ltd. v. CRA.

Being in the business of buying scrap gold and other precious metals for refining and further resale, Express Gold Refining paid the Goods and Services Tax or Harmonized Sales Tax (GST/HST) on its purchases and it was generally entitled to claim Input Tax Credits (ITCs) for the tax it has paid for these purchases. Claiming a GST/HST tax refund was a routine part of its business operations.

However, when Express Gold Refining applied for a tax refund at a time when the CRA was conducting an audit on its activities, it was advised by the CRA that the refund would be delayed until the audit was completed. Having claimed and received tax refunds in the past, Express Gold Refining argued that under provisions of the Excise Tax Act, the CRA must pay the tax refund “with all due dispatch” and that it failed to do so. The issue in the case arose from the fact that “all due dispatch” is not defined in the Excise Tax Act.

While Express Gold Refining believed that the CRA should “pay first, audit later”, the court established that the timing of a refund was for the CRA to decide. Moreover, the court held that due to the business nature of Express Gold Refining, which involved a significant number of transactions with various third parties, the time taken by the CRA to conduct the audit was within the meaning of “all due dispatch” and therefore it was not unreasonable for the CRA to delay the refund of taxes until the audit was completed.

As a result, the claim of Express Gold Refining to “pay first, audit later” was refused and the court ruled that the CRA was entitled to first complete its audit before paying a refund. Moreover, the meaning of “all due dispatch” was established to be “largely a factual determination” depending on a number of different circumstances.

If you believe you have overpaid your taxes or that you might be entitled to a refund of any taxes you have paid, contact us for advice and assistance. One of our experienced tax advisors will be able to assist you.

Taxpayer’s burden of proof

Under provisions of the Income Tax Act, a taxpayer may be entitled to deduct certain amounts from taxable income, including the amount of charitable gifts. However, in order to benefit from such deductions the taxpayer will need to demonstrate certain information related to such gifts. Without professional assistance from a qualified tax advisor, you may significantly compromise your entitlement to such deductions.

Claiming a tax deduction may be a complex matter and preparing and presenting proper evidence to support the deduction is not always straightforward as illustrated by the recent case of Morrison v. Canada.

The Morrison case involved two taxpayers who participated in a charity program. The taxpayers each contributed certain amounts of cash to the program and in return for their participation in the program, claimed to have received the right to distribute various pharmaceuticals through another charity in a value in excess of the amounts the taxpayers contributed in cash. The taxpayers received charitable tax receipts reflecting the value of the pharmaceuticals distributed which was more than 300% of the initial cash contributions made by the taxpayers.

Both taxpayers claimed that they were entitled to a tax deduction equal to the amounts of the “pharmaceutical value” provided in the relevant charitable tax receipts. However, in its decision, the Tax Court found that the taxpayers did not provide any evidence showing the real value of the pharmaceuticals concerned and the receipts in question were merely “worthless pieces of paper”.

One of the key points reflected upon by the Court in its decision was the issue of who had the onus of proving whether the amount claimed as the donation was actually in fact donated by the taxpayer.

The significance of which party had the onus of proof (was the onus on the taxpayer or was it on the Canada Revenue Agency) was due to the limited evidence available in respect of the donation. In the Morrison case, the taxpayer was unable to explain to the court how the charitable program worked nor was the taxpayer able to provide adequate evidence showing ever having ownership of the donated pharmaceuticals.

The Court held that a person relying upon or referring to certain facts must be assumed to know such facts better than the CRA and therefore it should be the taxpayer's responsibility to prove the same.

In the Morrison decision, the Court held that the taxpayer was entitled to the deduction in the amounts of the actual cash contributions only and not the higher value of the pharmaceuticals claimed to have been purchased with the contribution.

Audit versus Investigation

One of the issues that may concern taxpayers when dealing with the Canada Revenue Agency (the CRA) is the difference between tax audit and tax investigation, and more importantly, what are your rights under such circumstances. Further, it may be difficult to distinguish between an audit and investigation which why professional assistance from a qualified tax advisor is highly recommended when dealing with the CRA.

Being audited is not the worst encounter you may have with the CRA. During an audit, the CRA will review your internal documents (contracts, invoices etc.) and possibly conduct interviews with people who may have information about your personal or business affairs to clarify issues arising from your tax returns. However, if serious issues are discovered by the CRA before or during an audit, such as misrepresentation, fraud or tax evasion, then you may find yourself the subject of a CRA investigation. 

An important decision, R v. Jarvis, provided some clarity and additional protection to taxpayers during the CRA audit process. In the Jarvis case the CRA, based on a tip, commenced an audit of a taxpayer who failed to report a sale of a certain piece of art in his tax return.

At issue in the Jarvis case was that the CRA official represented the interview to the taxpayer as an audit and the taxpayer answered the questions and provided relevant financial records in the course of what he understood was an audit. However, the auditor intentionally concealed from the taxpayer certain important information about the status of the audit and transferred the CRA files and information obtained through the course of the audit to the Special Investigations Section of the CRA. The CRA Special Investigations Section, upon receipt of the information from the auditor, sought and obtained a search warrant and the audit became an investigation whereupon the taxpayer was charged with tax evasion.

The Court in Jarvis found that due to the fact that the auditor “failed to caution the taxpayer” about the audit status, she violated his “life, liberty and security” rights as provided by the Canadian Charter of Rights and Freedoms. As a result, the information gathered by the auditor in order to obtain the search warrant was disregarded and the search warrant voided since it violated the taxpayer’s Charter right to be protected “against unreasonable search or seizure”.

If you have and concern or doubt as to whether you are or may be under investigation by the CRA or whether a CRA audit is actually an investigation, contact CTH for a referral in confidence to a professional team and seek professional advice before you respond.

Claiming damages against the CRA

Where a taxpayer believes they have been treated unfairly or improperly, they may be entitled to claim damages against the CRA.

In Le Restaurant Le Relais de Saint-Jean Inc. v. the CRA, the CRA had sought additional taxes, as well as interest and penalties due to alleged unreported additional income. During the course of an audit the CRA discovered that the taxpayer had not keep proper records of all sales. The auditor decided to apply an indirect audit method in order to establish what the CRA asserted was the actual sales figures.

The auditor instructed the taxpayer to keep a proper record of all the sales for a period of five months and sort them by date, so that she could apply a sampling method to extrapolate the sale amount for the audit period for tax purposes. The taxpayer refused to comply with the auditor's request, which made it impossible for her to reconcile the certain bills with tax register tapes.

Using an adjustment formula the CRA auditor determined that the taxpayer’s sales were greater than what was reported by the taxpayer. The taxpayer argued that calculations made by the CRA did not reflect reality and that there were errors in the auditor's calculations since the auditor did not understand the intricacies related to the taxpayer's restaurant operations. Nonetheless, instead of clarifying any possible uncertainty, the auditor continued her audit and made assumptions and conclusions based on her formula.

The Court held that the taxpayer had operated his restaurant for only a short period of time and since his use of a different method to record sales was “not a good reason to cause him to incur astronomical costs”, not all assumptions made by the auditor under were valid. Furthermore, the Court noted that advising the taxpayer on a better way to track its expenses would have been a wiser and cheaper option.

The court found in favour of the taxpayer and dismissed the CRA's claim for the additional taxes, penalties and interest. The taxpayer then sought to claim damages from the CRA in connection with the audit.

However, notwithstanding that the court held in favour of the taxpayer in respect of taxes, penalties and interest, it held that the taxpayer's claim for damages was not satisfied. The court held the principal from previous cases that the CRA's application of a wrong audit method is not, in and of itself, enough to cause or permit a claim by a taxpayer for damages against the CRA. There must be an element of bad faith or gross negligence by or on behalf of tax officials for any such claims to be valid.

We strongly recommend you make and keep accurate and detailed notes of your dealings with auditors and agents of the CRA and that, as much as is reasonably possible, you provide information and documents to the CRA in writing. Confirm the nature of all requests made by the CRA by asking them to send you the requests in writing. If you have questions or concerns about an audit by the CRA, contact a tax advisor or contact Canada Tax Help for assistance before responding.