Canada Revenue Agency is directing Tax Audit attention to Staffing Agencies – A Canadian tax lawyer’s analysis
Toronto Employment Agency Owner was Sentenced for Tax Fraud
On September 30, 2020, the Canada Revenue Agency (the “CRA”) announced that two Employment Agencies, Jane General Services Ltd (JGSL) and 2322944 Ontario Ltd operating as Tri-Han Staffing Solution (TSS) and their shareholder, Vanessa Jane Canlas, received a fine of about $830,000 and a prison sentence of two and a half years. In June 2020, JGSL, TSS and Ms. Canlas pleaded guilty to four accounts of tax frauds related to tax evasion on their corporate tax returns. In addition, Ms. Canlas also pleaded guilty to one account of tax fraud on her individual tax return.
According to a CRA investigation, the two Employment Agencies and Ms. Canlas deliberately defrauded the Government of Canada of tax totalling up to 1.6 million. Ms. Canlas not only chose not to include all sales invoices in spreadsheets provided to her accounting for corporate tax returns filing, but also suppressed sales on the GST/HST returns for the two agencies.
Staffing Agencies are Getting More Tax Audit Attention from the CRA
The sentencing is not surprising as tax evasion is a crime under both the Criminal Code and the Income Tax Act, however, the CRA Tax Audit Division has paid more attention to businesses that use Employment Agencies over the past several years and recent experience indicates that the CRA might have an ongoing project to scrutinize Staffing Agencies. This is because prior CRA investigations have revealed that certain Employment Agencies were involved in a sham to help businesses falsely claim Input Tax Credits. The following example is a typical scenario:
Employer, a GST registrant, hires temporary labour workers through a 3rd-party Staffing Agency, StaffingCo. StaffingCo then charges Employer for the cost of the workers and GST/HST which allows Employer to claim Income Tax Credits for the GST/HST based on the invoices provided by StaffingCo. However, StaffingCo then absconds without remitting the GST/HST. Sometimes StaffingCo will hire a subcontractor to provide the labour and the subcontractor later disappears with the GST/HST that should have been remitted before the CRA could collect them.
Other common tax fraud issues with Staffing Agencies include using multiple bank accounts but only reporting revenues from some of them, and doing unreported cash transactions. The consequence is that the CRA will generally commence a tax audit of the business that hired the Staffing Agency as well as the staffing agency itself. The CRA will then try to gather evidence that the business owners either knew or should have known that the Staffing Agency was a sham and that often leads to a reassessment to deny the Input Tax Credits or the income tax expenses already claimed by the business. To tackle this issue, the CRA has also issued an increasing number of section 288 and 289 Requests for Information under the Excise Tax Act in recent years to seek compliance on taxpayers who failed to provide the requested information.
Therefore, it is critical for business owners to seek professional tax advice from an experienced Canadian tax lawyer to understand both their obligations to the CRA and protections available to them when served with such requests.
Voluntary Disclosure to the Rescue
Tax evasion is a crime and it could lead to serious financial and legal consequences including jail time as in this case Taxpayers who are convicted of tax evasion could face a fine of double the amount of taxes evaded and a jail term of up to 5 years. Fortunately, the Voluntary Disclosure Program (“VDP”), also known as tax amnesty, is designed for taxpayers to come forward with unreported income or any type of improper tax filings in exchange for relief from penalties, interest and criminal prosecution. There are currently two streams under the VDP, one is a limited relief program for tax non-compliance with an element of intentional conduct or for corporations with gross revenue exceeding $250 million dollars, and a general program for everything else.
A Voluntary Disclosure application must meet the following requirements in order to be accepted:
- It must be voluntary;
- The information provided must be complete;
- The disclosed information must be one year past due;
- The information provided must be related to a penalty;
- It must provide payment for the estimated taxes owing.
However, whether the CRA decides to accept your Voluntary Disclosure application depends on the specific circumstances of your case. Consulting with an experienced Canadian tax lawyer before submitting your application will maximize your chances of success.
Pro Tax Tips – Business Owners Should Seek Professional Tax Advice when Dealing with Staffing Agencies
Since the CRA is on a mission to tackle potential shams in the context of Staffing Agencies, it is highly recommended for business owners working with Employment Agencies to seek professional tax advice from a Canadian tax lawyer so that they can catch any early red flags and get the Input Tax Credits they deserve. If you have unreported income, contact our office to speak with an experienced Canadian tax lawyer about the VDP as you may have a chance to reduce potential penalties.
What does a Section 288 Request for Information mean?
Section 288 of the Excise Tax Act states that CRA officials are entitled to request taxpayer information to examine the books and records under review and the records and documents of any other person that relate to the tax liability of the person under review for any purpose relating to the administration or enforcement of the ITA, Part IX of the ETA and other relevant legislation.
I run a staffing agency -- should I be worried about the CRA directing audit attention to my business?
If you file the correct tax documents to the CRA, you should not worry about the CRA directing audit attention to staffing agencies. CRA took action when people started reporting certain employment agencies that are involved in helping businesses falsely claim Input Tax Credits.
My business currently works with a staffing agency -- in case the staffing agency is running a scam, will the CRA audit my business as well?
There's a possibility that your CRA will audit your business if you work with a staffing agency that's running a scam. With this, it's important that you connect to a tax professional that will guide you on what to do next just in case the CRA comes after you.