As with other value-added taxes, the GST/HST is an invoice-driven tax. Subsection 168(1)[1], for example, states that tax is generally payable on the earlier of when the consideration for the supply is paid and when it becomes due, the latter of which generally falls on the invoice date. However, in a well-reasoned decision the Tax Court of Canada (the “Court”) in CFI Funding Trust v. The Queen[2] (“CFI Funding Trust”) held that an invoice issued by the supplier is not necessary to claim an input tax credit (“ITC”) and to satisfy the requirements of subsection 169(4) of the Excise Tax Act (Canada) (the “ETA”)[3] and the Input Tax Credit Information (GST/HST) Regulations (collectively, the “ITC Support Rules”). Rather, in reaching its decision in CFI Funding Trust, the Court was satisfied by the fact that the registrant was able to provide all of the prescribed information required by the ITC Support Rules.

CFI’s Business

The Appellant (“CFI”) is in the business of securitizing automobile dealer leases. During the relevant period, CFI entered into several Master Concurrent Lease Agreements (“MCLAs”) with 15 different automobile dealers, who were also called “Lease Originators”. Under the arrangement, each Lease Originator first entered into a motor vehicle lease (the “Initial Lease”) with a customer and then, under the MCLA, the Lease Originator granted a concurrent lease (the “Concurrent Lease”) to CFI, which transferred to CFI the Lease Originator’s right of possession of the leased motor vehicle. In general terms, a concurrent lease effectively “interpose[s] a head lease arrangement and make[s] the existing lease a sub-lease”, as a result of which the concurrent lessee (in this case, CFI) receives the rent payable under the existing lease.[4]

In exchange for the rights CFI received as concurrent lessee, CFI paid a lump sum amount as “prepaid rent” to the Lease Originators, thereby financing the operations of the Lease Originators (who otherwise would have had to wait to collect the lease payments from the customers as the payments became due). The amount of prepaid rent was calculated to incorporate discounts to, among other things, reflect the present value of the future rent payments and the residual purchase price for the vehicles.

In order to obtain the financing (the prepaid rent), the Lease Originators sent a package of information to CFI, including a copy of the Initial Lease with the customer. The Initial Lease contained the name of the Lease Originator, the name of the customer (the lessee), and the Lease Originator’s GST/HST registration number. Each MCLA also referenced a series of schedules which included schedules of the leases and identified (i) the vehicles to be concurrently leased, (ii) the amounts on which the prepaid rent was calculated, and (iii) the dates when rents were payable.

Seeing as it was for the concurrent lease of tangible personal property, the prepaid rent was subject to GST/HST. On assessment, the CRA initially took the position that the supply between CFI and the Lease Originators was an exempt supply of a “financial service” and that no tax was payable on the prepaid rent, and disallowed CFI’s ITC claims on this basis. However, the CRA abandoned this position on objection and there was no dispute before the court that CFI carried on a commercial activity. This was undoubtedly the correct conclusion since it was the business of CFI to acquire property rights in vehicles to be concurrently leased to consumers, and there was no exemption listed in Schedule V that could apply to this activity.[5] However, on appeal before the Court the Crown continued to dispute whether CFI’s documentation satisfied the ITC Support Rules.

Claiming ITCs Before Paying GST/HST

An interesting element of the arrangement between the Lease Originators and CFI was that the parties agreed CFI would claim ITCs for GST/HST on the prepaid rent before paying the GST/HST payable amount to the Lease Originator. Although a supplier will generally seek to collect the tax that it must remit at the time of making the supply, there is no impropriety in CFI claiming ITCs before paying the associated tax.

As mentioned, GST/HST is generally payable on the earlier of when the consideration is paid and when it becomes due (subsection 168(1)). CFI paid the prepaid rent, at which time GST/HST became payable and CFI could claim an ITC under subsection 169(1) provided the other requirements (including the ITC Support Rules) were met. Consistent with the scheme of the ETA, any GST/HST collectible (even if not yet collected) increases the supplier’s net tax (subsection 225(1)), and it then falls to the supplier to remit the positive amount of net tax to the Receiver General (subsection 228(2)).

Meeting the ITC Support Rules

Under subsection 169(4), a registrant that wishes to claim ITCs is required to have “obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed”. The Input Tax Credit Information (GST/HST) Regulations (the “Regulations”) prescribe information for the purposes of subsection 169(4), and defines the term “supporting documentation” in which prescribed information is contained.

Under section 3 of the Regulations, prescribed information for a supply where the total amount paid or payable on the supporting documentation is $150[6] or more can include the:

• Name of the supplier;
• Supplier’s registration number;
• Date of the invoice or date when tax is paid or payable;
• Total amount paid or payable;
• Amount of tax paid or payable;
• Recipient’s name;
• Terms of payment; and
• Description of each supply.

The Crown took the position that CFI did not have the “supporting documentation” mandated under subsection 169(4) because CFI’s documentation was based on various spreadsheets prepared by CFI’s administrative agent, and moreover the documentation did not originate from nor was signed by a Lease Originator. Both CFI and the Court noted that the Crown’s position contradicted previous public statements by the CRA that there was no requirement that supporting information for an ITC claim be in a specific kind of document or format.[7] The CRA has also publicly endorsed reverse invoicing (whereby the purchaser issues the invoice rather than the normal arrangement under which the supplier issues the invoice).[8]

Critically, the Court held that the enumerated forms of documents in the definition of “supporting documentation” was not exhaustive as they were preceded by the word “includes”.[9] Moreover, it was easy for the Court to conclude that it would not be possible for the supplier to authorize or sign the documentation identified by paragraph (g) in the definition, “any record contained in a computerized or electronic retrieval or data storage system”,[10] so these could not be required elements of supporting documentation.

The Court agreed with CFI that subsection 169(4) of the ETA simply provides that the registrant must have obtained the prescribed information in a form that will allow the registrant to determine the amount of its ITCs. One wonders if the Court could have gone so far as to find subsection 169(4) does not authorize the Minister to prescribe the form of documentation, as the only prescriptions referred to under subsection 169(4) are for prescribed information and not prescribed documentation (even the heading of subsection 169(4) refers to “Required documentation” and not “Prescribed documentation”). The Court does not make such a statement, but the Court is clear that how the prescribed information is collected does not matter. The Court held that the information may be obtained through oral or electronic communication or through “foundational” documents or other sources.[11]

Seeing as CFI obtained all of the prescribed information before claiming the ITCs, the Court allowed the appeal.

CRA Might Not Recover the Tax

The Court commented that the CRA may face difficulty in collecting the GST/HST that was payable on the prepaid rent, as the CRA had previously determined that each Concurrent Lease was an exempt supply. The Lease Originators appear to have relied on the CRA’s incorrect determination in this regard, and did not collect nor remit the GST/HST at the time. The CRA never assessed the Originators for not collecting GST/HST in respect of the payments by CFI under the MCLAs. The Court refused to fault CFI for the fact that the limitation period during which the CRA could attempt to collect the GST/HST from the Lease Originators had likely passed, particularly given the “many tools” available to the CRA.[12] It is difficult to find fault in the Court’s reasoning, particularly since CFI had “[f]rom the outset” insisted upon its position, which position is clearly correct at law.[13]

The Crown has not appealed to the Federal Court of Appeal.

Key Takeaways

The Court’s acceptance that a registrant’s electronic records can satisfy the prescribed information under the ITC Support Rules is an encouraging development, given evolving business practice as the economy continues to digitize. In introducing Part IX of the ETA, it was the Ministry of Finance’s intention that the GST/HST be a modern value-added tax designed to raise revenues in a manner consistent with and friendly to a growing economy and a competitive Canadian market,[14] and one would hope that the Court interprets the ETA in a manner consistent with that intention. In the authors’ view, in addition to correctly interpreting the legislation, the Court’s decision buttresses the view that the ETA is consistent with Canada’s acceptance that GST/HST compliance should not turn on arcane requirements as to the form of documents. So long as the prescribed information has been obtained and is in a form that enables the amount of the input tax credit to be determined, the law should not seek to raise documentary form as a barrier to claiming ITCs. It is legal form, and generally not administrative form, that should occupy the attention of tax law.[15]

While it may be less onerous to only prepare and retain electronic records of prescribed information, it remains best practice in most instances for businesses to obtain such information on an invoice from the supplier for the purpose of claiming any available ITCs. A supplier’s invoice is often an efficient means of generating evidence, since invoices issued by a supplier are compelling on audit and make it easy for the CRA to understand and believe that the other requirements for claiming the ITC have been met. The Court’s ruling in CFI Funding Trust is welcome news for those situations where it may not be possible or practicable to follow such practices and procedures.

[1] All references to legislation are to the Excise Tax Act, RSC 1985, c. E-15. unless otherwise stated.

[2]CFI Funding Trust v The Queen, 2022 TCC 60.

[3]Input Tax Credit Information (GST/HST) Regulations, SOR/91-45.

[4] See Bass, Neil. Asset Securitization: A Sales Tax Perspective, Symposium Papers (CPA Canada Commodity Tax) 1998.

[5] See the definitions of “taxable supply” and “commercial activity” in subsection 123(1).

[6] Less information is required for supplies where the amount paid or payable is less. On April 19, 2021 draft regulations were announced that, if implemented, would reduce the compliance burden for small ITC claims by increasing these thresholds.

[7]CFI Funding Trust, supra note 2 at para 43, where the court refers to the May 2004 Roundtable with the Institute of Chartered Accountants of Alberta.

[8]Ibid at para 44, where the court refers to the CRA’s annual GST/HST meeting with the Canadian Bar Association Commodity Tax section in March 2005.

[9]Ibid at para 37.

[10]Ibid at para 34.

[11]Supra, note 2 at para 41.

[12] For example, the CRA is permitted to (and does) assess different taxpayers on inconsistent bases, e.g., the CRA could likely have assessed the Lease Originators on a protective basis simultaneously to its initial (and incorrect) assessment of CFI to deny the ITCs. It appears the CRA did not exercise this power.

[13]Supra, note 2 at paras 69-70.

[14] See e.g., The White Paper: Tax Reform 1987, Department of Finance Canada, June 18, 1987.

[15] See e.g., Shell Canada Ltd v R, [1999] 3 SCR 622 at para 39.