The following article appeared in the latest edition of the HLA Journal.
CRA “requirements” (a “Requirement”) are a form of garnishment for unpaid taxes, and they can be quite troublesome for a business, especially if its systems aren’t what they should be. Businesses are used to acting as tax collectors for the federal and provincial government, of course: businesses withhold and remit amounts from wages and they collect and remit sales taxes. A Requirement, however, applies whenever a business is liable to pay an amount to another person; it is an obligation to act as a tax collector that applies in a broader variet of circumstances, not just when wages are payable, or goods or services are sold.
What are Requirements?
Broadly speaking, the CRA can serve two types of Requirements on a business. An ordinary Requirement applies where the business/garnishee “is, or will be within one year, liable to make a payment to another person” who owes money under the Act (a “tax debtor”). The relevant subsection reads as follows:
Where the Minister has knowledge or suspects that a person is, or will be within one year, liable to make a payment to another person who is liable to make a payment under this Act (in this subsection and subsections 224(1.1) and 224(3) referred to as the “tax debtor”), the Minister may in writing require the person to pay forthwith, where the moneys are immediately payable, and in any other case as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor’s liability under this Act.
The foregoing subsection requires the garnishee to keep track of amounts that are payable or that will become payable during the currency of the Requirement and to remit the appropriate amount to the Receiver General. The “appropriate amount” is the portion of any amount payable to the tax debtor that is specified in the Requirement. The CRA will specify in a Requirement a maximum amount that must be remitted together with a percentage (which can be anything up to 100%) of any amount payable that must be sent to the CRA instead of the tax debtor.
An ordinary Requirement is applicable to amounts that are “immediately payable” and amounts “as and when [they] become payable.” Accordingly, an ordinary Requirement is not applicable merely when a garnishee pays amounts to a tax debtor. Rather, such a Requirement applies immediately after an amount becomes payable. The garnishee cannot avoid liability simply by not paying an amount to a debtor. For example, a garnishee and a tax debtor might seek to avoid liability under a Requirement by agreeing that an amount should not be paid until after a Requirement expires. From the garnishee’s perspective, the agreement accomplishes nothing if, legally, under the terms of the relevant contract, the amount was payable before the Requirement’s expiry. The garnishee will be liable for the amount anyway.
The wording of the subsection means that it could also be used to collect an amount from an individual tax debtor who deals not at arm’s length with a corporation where the individual has advanced amounts to the corporation. In 3087-8847 Quebec Inc. v. The Queen, 2007 TCC 302, the individual owned 50% of the issued shares of 3087-8847 Quebec Inc.; his son owned the other 50%. As a result, the individual was deemed not to deal at arm’s length with the corporation for the purposes of the Act. The CRA assessed the corporation for failing to comply with a Requirement that had been issued in respect of an amount owing by the corporation to the individual. The individual tried to argue that the so-called advance was in fact an investment in the share capital of the corporation, but the Court rejected that argument on the facts of the case. The individual then argued that the corporation was not liable to make a payment to him because he had not issued a demand for payment. The Court rejected this argument as well and found that the debt owing by the corporation was due as soon as a demand was made and that the Requirement itself acted as the demand. The Court, at ¶¶40-43, wrote as follows:
The situation in the present case is more akin to that in Hutterian Brethren Church of Smoky Lake et al. v. Provincial Treasurer of Alberta et al., 80 DTC 6228 (Alta. C.A.), a decision summarized as follows by the Federal Court of Appeal in Maritime [The Queen v. Maritime Life Assurance Co. (1999), [2000] 4 C.T.C. 98, [2000] D.T.C. 6402, 1999 CanLII 8986] at paragraph 5:
. . . it was decided that the subsection 224(1) requirement, in and of itself, effected a “request” such as rendered the financial institution “liable to make a payment” to the debtor taxpayer of the monies held by it under certificates of deposit. In that case the terms of the deposit agreements were such that the depositor was entitled to withdraw the monies “at any time” subject to a short period of delay in payment in the case of terms exceeding one year. That case, unlike the present one, was not concerned with a prohibition such as that contained in the endorsements attached to the policies . . .
[42] I am therefore of the view that the decision in Canada v. Bidner, [1984] F.C.J. No. 1114 (QL) (FCA), referred to by the respondent must be followed here. Indeed, the Federal Court of Appeal stated therein that:
. . . a debt payable on demand is one which is immediately due, and service of the garnishment in the case at bar operated as a demand. . . .[43] I therefore do not agree with the appellant when it argues that the demand shareholders’ loans were not payable at the time it was served with the requirements to pay. They were payable, and the appellant had an obligation to make the payment requested. The appellant was accordingly obliged to comply with the requirements to pay.
The CRA is also entitled to serve a Requirement on lenders in certain circumstances. Subsection 224(1.1) reads as follows:
Without limiting the generality of subsection 224(1), where the Minister has knowledge or suspects that within 90 days
(a) a bank, credit union, trust company or other similar person (in this section referred to as the “institution”) will lend or advance moneys to, or make a payment on behalf of, or make a payment in respect of a negotiable instrument issued by, a tax debtor who is indebted to the institution and who has granted security in respect of the indebtedness, or
(b) a person, other than an institution, will lend or advance moneys to, or make a payment on behalf of, a tax debtor who the Minister knows or suspects
(i) is employed by, or is engaged in providing services or property to, that person or was or will be, within 90 days, so employed or engaged, or
(ii) where that person is a corporation, is not dealing at arm’s length with that person,
the Minister may in writing require the institution or person, as the case may be, to pay in whole or in part to the Receiver General on account of the tax debtor’s liability under this Act the moneys that would otherwise be so lent, advanced or paid and any moneys so paid to the Receiver General shall be deemed to have been lent, advanced or paid, as the case may be, to the tax debtor.
Subsection 224(1.1) in effect permits the CRA to make the collection of a tax debt the garnishee’s problem. The CRA can step in between the borrower and lender to intercept the funds to be advanced. The lender must then figure out how to recover the amount from the borrower (the amount remitted to the CRA is treated as if it had been advanced to the borrower/tax debtor).
The good news is that most businesses need worry only about paragraph 224(1.1)(b) as set out above. That is, they need be concerned about advances only if they are advancing funds to service providers or persons not dealing at arm’s length with the business if the business is a corporation. Paragraph 224(1.1)(b) was probably enacted to prevent “ordinary” taxpayers from playing shell games with the CRA, and the application of the paragraph is restricted accordingly.
Consequences of a Failure to Comply
What happens if a garnishee fails to comply with a Requirement? In the case of an ordinary Requirement, the garnishee is liable to pay to the CRA an amount equal to the amount set out in the Requirement. If the Requirement applies to an advance, the garnishee is liable for the lesser of the amount set out in the Requirement and the amount actually advanced or loaned to the tax debtor.
The CRA can serve a Requirement on a garnishee and then, if the garnishee fails to comply with the Requirements, assess the garnishee for the amount that should have been remitted. The assessment becomes a liability of the garnishee. The CRA is entitled to assess the garnishee “at any time” in respect of a failure to comply with a Requirement. That is, the CRA can assess a garnishee many years after a purported failure to comply, well beyond the usual three- or four-year limitation period applicable to ordinary tax assessments. To escape liability under such an assessment, the garnishee must file a notice of objection with the CRA (and, potentially, a notice of appeal to the Tax Court) and prove that the Requirement did not create a liability for the garnishee.
Note that a garnishee cannot avoid liability to the CRA by showing that the garnishee acted with due diligence. In Encan Construction Ltd v. The Queen, 2007 TCC 579, the appellant sent a cheque to a tax debtor one day after receiving a requirement from the CRA in respect of the debtor. The CRA assessed the appellant for failing to pay the amount to the CRA. The appellant tried to argue that it did not know about the requirement when it made the payment and that it had not received any warning that the requirement was coming. The Tax Court dismissed the appeal after noting that the conditions of the subsection had been met: the appellant had paid an amount to the tax debtor after the Requirement had been received. Whether the appellant had exercised due diligence or had received a notice from the CRA that the Requirement would be sent was irrelevant. As a result, the appellant enjoyed the privilege of paying the tax debtor’s tax debt (or a part of it) to the fisc.
Conclusion
Requirements represent yet another far-reaching collection tool for the CRA. What does a client need to do to avoid liability for failing to comply with a Requirement? First, the client’s employees must be trained to watch out for a Requirement in the mail and to bring them to the attention of senior management and accounts payable immediately. Next, the client may wish to obtain professional advice about the precise scope of the Requirement especially given that the wording of the actual Requirements themselves is generally pretty opaque. Is an amount payable under a contract actually payable? Is a tax debtor providing services to the client such that paragraph 224(1.1)(b) might apply? Do the client and the tax debtor deal not at arm’s length for the purposes of the Act? What is the exact amount that must be remitted to the Receiver General? These and other questions about a Requirement need to be answered to ensure that the client will not be liable for someone else’s tax debt.
