The indirect tax on goods and services provided in Canada can creep up, and if your company is making errors with your tax, even minor ones, they can end up costing you a significant amount of money.
Hoffmann & Associates (BHA) are tax accountants that help medium and large corporations minimize the Canadian indirect tax they pay on an ongoing, consistent, and supported basis. They love the stories in an organization that, when put together, become the business.
In this second article of the ‘Untangling the Tax Web’ series, we will discuss common mistakes made by organizations, which pay Canadian Indirect Taxes unnecessarily, and how you can avoid the same pitfalls.
Let’s start at the beginning
The indirect tax on goods and services provided in Canada can creep up on an entity purchasing under an international Master Services Agreement. It is not uncommon to have master agreements to provide goods and services that cover the expectations, conditions, and pricing across an entire corporate group. Typically, these agreements are negotiated between corporate head offices and will apply to all entities in the corporate group.
An example of this type of agreement might be advertising or maintenance services. As the agreements are meant to ensure consistency across all entities, they may not be country-specific. The budget for these agreements may be held outside Canada in whichever country the agreement was created and signed. Practically, it is likely that the payment for any goods and services performed in Canada under the agreement will also be made outside of Canada.
What happens next?
The goods and services themselves will likely attract Canadian GST/HST, at a minimum, to the extent that they are provided in Canada. As the Canadian entity is only one of the corporate entities that may be a party to the contract, it makes sense that the agreement is not structured with the Canadian indirect tax implications in mind.
Any errors for tax not collected or paid for services provided under one of these types of agreements could, understandably, be overlooked on the basis that it would be considered minor in the scheme of things. So, while a corporation may be aware that indirect tax could be embedded in the system, nothing is done to structure the transaction to mitigate the Canadian Indirect tax because this tax loss is minor and a reasonable price to pay for the sake of a consistent agreement.
Here comes the problem…
The problem is that when an entity has several of these types of arrangements, each carries its own indirect tax loss. Therefore these amounts can add up to significant indirect tax costs in the system that, even in the best-case scenario, cannot be recovered.
In the worst-case scenario, these amounts raise the risk of a non-resident entity becoming part of the Canadian tax web and register to collect, remit, and otherwise administer Canadian indirect taxes for all the transactions that may have a place of supply in Canada.
For example, suppose a corporation located in the U.S. (USCorp), not registered for Canadian Indirect Tax purposes but with a subsidiary in Canada (CanSub), entered into a master agreement for the provision of relocation throughout North America. There is one central billing for the services – sent to USCorp. Under the terms of the agreement, the relocation services company will invoice USCorp on an itemized basis.
If the services are provided in respect of a Canadian employee in Canada, the relocation company would likely incur GST/HST. USCorp would pay these costs with no ability to recover the indirect tax.
Real-time reporting will show tax leaks
On its own, no one would be particularly concerned about this tax loss. At BHA, we have had to accept that a corporation may look at this as a gnat in the scheme of things because there are far more important issues that a company has to worry about. After all, the world doesn’t revolve around tax. However, BHA’s world does revolve around indirect tax, and, increasingly, they are moving to a wholly digitized system of recording transactions.
In the not too distant future, governments will be looking at real-time reporting. It is important to know where tax is leaking profits from a corporation. The idea of Canadian indirect tax being minor can be pervasive in an organization.
For example, if the tax loss from the structure of the relocation agreement is $10,000 per year, you could say that is minor in the context of a single agreement. However, if there are master agreements that cover all indirect expenses, such as marketing, advertising, administrative services, payroll services, and others, each with a Canadian Indirect Tax component that has not been separately addressed. The risk of taxes being embedded and affecting profits can grow from $10,000 of unnecessary tax to hundreds of thousands of dollars, which would seriously affect company profits.
How you can avoid this
This series of unfortunate events can be avoided to a large extent. Processes should always be in place to deal with the Canadian indirect taxes on master agreements. Unless a non-resident corporation is, or would like to be, registered for Canadian indirect tax purposes, the agreement should spell out how the services and fees related to Canadian transactions should be dealt with.
In addition to this, if the non-resident parent company and the Canadian subsidiary put the appropriate processes in place to have Canadian related expenses paid by the Canadian company, the risk of having Canadian indirect taxes lost or embedded without recovery is reduced or eliminated completely.
Both these processes ensure that Canadian indirect taxes tackled appropriately and that organizations avoid incurring unnecessary costs that directly affect the bottom line.
Contact the experts at Barbara Hoffmann and Associates T to ensure your minor tax errors don’t cost your company thousands of dollars.