When it comes to taxes, and the collection and remittance thereof, very few companies and individuals can avoid wincing.
But for Brampton-based Maritime-Ontario Freight Lines, a well-known carrier engaged in the transportation of general freight and mail, after two years spent fighting the Canada Revenue Agency on the issue of GST remittance, wincing doesn’t even cover it.
Following a 2007 audit at Maritime- Ontario’s facilities, Canada Revenue Agency brought a case forward against the company, saying that Maritime-Ontario had failed to collect the goods and services tax (GST) from independent contractors who performed services for it in relation to the transportation of goods.
Two amounts were in question: $1,792,157 as net tax and $71,739 as a 4% penalty.
The case shed a lot of light on the issue of tax collection between trucking companies and owner/operators, and makes the need for effective and transparent contracts a salient issue.
During an appeal heard Dec. 15 and 16, 2008, and Feb. 5, 2009 in Toronto, the courts eventually ruled in favour of Maritime- Ontario, reducing the net tax owed (by the total amount), and vacating the $71,739 penalty. The company was also awarded costs, but the protracted battle took two years to conclude.
Maritime-Ontario president Doug Munro shared the details of the case with Motortruck Fleet Executive, saying the issues could be of great interest to companies who may have been similarly assessed.
“We’d never been audited before. I think they came in looking for GST issues. (The auditor) satisfied himself there was no dishonesty and then he went right to the fuel. He’d write down any other names of companies we were dealing with,” he said.
“We spent approximately $250,000 on legal fees to fight the case, and ultimately won, although we were forced to pay the assessment in the interim and will now be entitled to a refund plus our costs and interest,” he said.
“Also, with the harmonized sales tax of 13% that will be implemented in 2010, transactions in the manner we structured them to be tax effective will be needed more given owner/ operator and trucking company cash flow constraints,” said Munro.
Following a trilogy of cases involving trucking companies and GST remittance and claims issues, (Vanex Truck Service Ltd. v. The Queen, in 2001, Libra Transport (B. C.) Ltd. v. The Queen, in 2002, and Fedderly Transportation Ltd. v. The Queen, in 2000), it is possible that the Canada Revenue Agency had heightened concerns regarding the GST and the structure of trucking company contracts with owner/operators.
The Crown took the position in these cases that the amounts charged back to owner/operators were subject to GST, so that when the trucking companies remitted the amount, they were supposed to charge the owner/operators.
The Vanex case facts come closest to Maritime-Ontario’s, with the exception being that not only were the contractual terms different, but with Vanex, the contractors actually paid the GST to Vanex, and Vanex failed to remit it to the government.
CRA’s main arguments against Maritime- Ontario fell under the interline settlement rules in the Excise Tax Act, (Part 7, Schedule 6) which said that fuel was part of the interline settlement on goods or services. In 1990-91, Parliament recognized multiple ways of interaction -with interline settlement rules that the single system did not.
“When the GST came into effect in 1989/90, trucking companies said this would be a nightmare,” noted lawyer David Robertson, who argued Maritime-Ontario’s case before the courts.
“We argued that fuel was zero-rated. The CRA was trying to take a more narrow interpretation of it. They were looking at it not as one transaction, but as two. We saw it as one transaction with fuel as one of the component costs. The interline settlement provisions in the Act should have applied, as these were supportive of what we were doing,” said Munro.
“CRA was hell-bent to do it,” he added about the subsequent court battle. “It was just bureaucracy. In their mind, they were lumping it all into one category. In Vanex’s case, the government was actually out the GST. In our case, there was no tax lost. They took this as two transactions versus one.”
Back in 1990, Munro told Fleet Executive that Ernst and Young set up a billing structure for Maritime-Ontario that would handle the GST transactions in the following way: when a company paid GST on an invoice, Maritime-Ontario would bill customers the GST on the freight moved for them. Certain types of customers, i.e. interlines, were not billed. If they were owner/operators providing a service, they were exempt. When the end customer was billed, the GST was applicable.
During the court case, the argument was presented that the standard form agreement used to affect this result was “rather badly drafted,” with “a number of internal inconsistencies in the document and the nature of the relationship between Maritime-Ontario and the contractors not clearly set out.”
The intent was that the fuel purchased with credit cards be purchased by Maritime-Ontario on its own behalf and not on behalf of the contractors. The plan was that the contractors would not have to pay GST because they were not acquiring the fuel.
“When we’re buying things, we’re paying GST. If we collect five million, that’s $250,000 in GST we collect, and then we take the GST we paid out (our input credits) and we remit the net difference to the government. Any GST we pay out to bills and different accounts payable is collected. That’s how the system is designed. Any GST we pay, we ultimately get back,” said Munro.
But this was kind of the root of the problem that led to CRA’s issue, he added.
Because owner/operators are exempt and they don’t bill GST, “We designed the transaction with them so that the fuel component was part of the overall service, so we could either provide the fuel or they could. The owner/operators would have a revenue that they would receive from us, and they would have different expenses that would be netted off and they’d receive a cheque for the net amount.
“When the government audited us in 2007, they took the position on the fuel transaction that we were reselling fuel to the owner/ operators and should have charged them GST on the so-called fuel ‘purchases.’ We said we’re not reselling, it’s a calculation that deducts fuel from revenue. We took the position that no GST was payable and that the government wasn’t out any tax. They assessed us almost two million dollars in tax. We wouldn’t have had any way to make the owner/ operators pay it to us. Some smaller trucking companies may not have the wherewithal to fight something similar,” said Munro.
Munro’s concern, and the company’s in general, was not to exacerbate a cash flow problem for the owner/operators.
“These owner/operators are having a hard time and what (CRA) is saying is, trucking companies should invoice GST on fuel consumed, but owner/operators don’t collect GST for their services, so when they want us to charge them GST on fuel that would be a cash flow loss to them. Owner/operators, on the other hand, are usually on a quarterly or annual remittance to the government. So the problem is they have to put in the input credits they have and wait for the money to come back, and they’re out the cash flow,” he added.
David Robertson, Maritime-Ontario’s legal counsel for the case, had also argued the Vanex case and so came to know both sides of the issue.
“With Vanex and Fedderley, GST became a recoverable tax, meaning that if you’ve issued fuel cards to all your owner/operators, which Vanex and Fedderley had done, the trucking companies would get the statements on a monthly basis from the fuel companies, with fuel plus GST charges. What was happening was the trucking company was claiming the GST as an input tax credit.
“What then happened was the trucking company then turned around in the Vanex and Fed
derley cases, totalled up the fuel used by owner/operators in the trucks, and in determining the amount payable to the owner/operators, they were deducting the cost of the fuel inclusive of the GST. Essentially for GST purposes, we refer to this as a double-dip,” said Robertson.
They got a receipt from the cardlock that printed out how much tax was charged, and so in that case, the government took the position that for GST purposes the fuel and any chargebacks by the company to the owner/operators is subject to GST as a “separate supply.”
“In Maritime Ontario’s circumstances, the big difference was that they were paying the fuel companies, claiming back the GST, but determining the amount payable to the owner/operators on a monthly basis. That, practically speaking, made a big difference to the court. You didn’t have the trucking company double-dipping. The court did eventually agree that this was a single transaction of fee paid based on formula,” said Robertson.
Another key difference between Vanex and Maritime-Ontario was that in order for the owner/operator to claim tax back, there are some specific requirements in the legislation.
You need a statement that has the supplier’s GST number, you need to know the amount of GST the supplier has charged, and the invoice has to have not only the supplier’s name, but the purchaser’s. In the Vanex and Fedderley cases, they had the printout from the cardlocks, they had the amount of GST, and the fuel supplier’s GST number.
In Maritime-Ontario’s case, the printouts from the cardlocks didn’t have that information, so what was on the printouts was the card number, the fuel company and the amount/type of fuel dispensed. It had no financial info.
“We were able to point out that the owner/operators did not have the documentation necessary therefore to claim the input tax credits. What came out in trial -though we had tried to settle this in advance – was that the auditor said that he had tried to contact 10 of the owner/ operators, could only get a small number of those, and that one of the owner/operators was claiming the fuel. When we asked, did you reassess that owner/operator when he said he didn’t have the information, the auditor said no,” added Peterson.
“It was frustrating in the sense that we went to the CRA and said Maritime-Ontario is coming to the court with clean hands. We offered that if they vacated the $1.7 million assessment, we’d conform to the administrative policy to treat the fuel as something that should be treated as taxable supply. We asked that they walk away from the assessment because they were not out of the money. They basically rejected that because the easiest thing for the bureaucrat to do is say no,” said Robertson.
He said the ruling will create some confusion in the trucking industry, because it gives Maritime-Ontario a significant advantage to companies that are charging GST, and this will become more complicated when the HST comes into effect.
“With the HST, it just becomes that much more of a complicated issue. For the driver, cash is king. You’ve got financing costs and the more cash in pocket, the better off you are. With the introduction of HST, you will have added 13% to those deductions in determining your paycheck every four weeks. If the owner/operator is seeing tax being deducted as part of what they’re paying, it’s in their best interest to file more frequently,” noted Robertson.
While Maritime-Ontario has not changed anything with its contractor relationships, said Munro, “Under the proposed HST, we’ll have to bill a lot more of our customers, and we’ll have to bill 13% instead of 5%, and this will be more troublesome. We’ll have to pay the GST sooner than we can collect it. In our owner/operators’ cases, a lot of trucking companies are structured where they bill the owner/operators GST or HST on fuel because of what the government’s been doing.”
Ultimately, stressed Robertson, the GST should only be cash flow for everyone involved.
“It becomes so complex when you have to go line item by line item in an owner/operator’s statement or see if this or that is subject to GST. My view of the (interline settlement) legislation was that it was designed to get out of the detail and focus in on the payment to the owner/operators. In my view, the legislation is clear and that’s the result. But CRA’s policy is the exact opposite of that, and they say that all of those factors were subject to GST,” he said.
His advice to trucking companies that want to get into the position Maritime-Ontario is in is to carefully craft their contract so that for GST purposes, it’s viewed as a single supply of freight transport services from the owner/operator to the freight transportation company, in exchange for the net amount calculated based on a formula rather than two separate transactions of “provision of driving services” and “trucking companies selling fuel and supplies to the owner/operators.”
“My recommendation to the trucking associations is, we now have four decisions and four separate results from the courts on this issue, all of them turning on different interpretations of contracts. You need a really good contract reviewed from a GST perspective. You had better make sure that when you’re deducting amounts make sure they are net of GST, not including the GST. In other words, you can’t double-dip.”