CADA/TADA claim victory on finance income assessments

By Jackson Hayes

A protracted battle with Canada Revenue Agency regarding dealerships audited and assessed for unpaid HST/GST on finance income has finally wrapped in the dealers’ favour.

The Canadian Automobile Dealers’ Association and the Trillium Automobile Dealers’ Association announced CRA’s Appeals Division confirmed both conditional sales and financing contracts are deemed HST/GST exempt.

It went on to note all assessments will be vacated on both conditional sale and financing contracts and dealers who were forced to pay are being reimbursed fully.

“It’s been a long road to get here, but at this point, it’s a complete win,” explained Colin Smith, partner at Thorsteinssons LLP, which represented the TADA and CADA in this dispute.

According to a letter from CADA chief Rick Gauthier sent to members in early February, CADA began this effort in early 2012 after becoming aware of numerous audits throughout the country in which CRA contended HST/GST applied to fees received by dealerships from financial institutions.

CADA said it had worked with both legal and accounting experts to fight on behalf of dealers and consult with CRA officials.

Smith said it was important to note CRA has not rewritten policy statements but rather clarified how the new car dealers’ “factual circumstances” fit into existing rules.

“CRA does have policy statements specifically addressing car dealers, unfortunately, those policy statements don’t really address the way things happen. They provide examples… but neither reflects what is going on in the market. Now we have a well thought-out process and a conclusion that it does not apply.”

He notes that he worked on roughly 50 reassessments in Ontario and had another five to 10 active audits that likely would have resulted in reassessments.

Amounts dealerships were forced to pay varied significantly and were tied to how much financing fee revenue the store generated.

Smith said penalties ran from tens of thousands to hundreds of thousands dollars. He called the switch unusual but not unprecedented.

“In order to get to a resolve where we’re able to change the CRA’s view on a position they had taken, it does require a certain and significant amount of effort in order to have the proper people who have the experience within the CRA take the time to look at it, and work with them so they can see it from the perspective that’s in the client’s best interests.”

Gauthier wrote in his letter that CRA has advised it maintains its view that income derived from the sale of insurance products remains taxable under the Excise Tax Act.

Given that, Thorsteinssons continues to work on behalf of the associations to clarify the issue with CRA.

“The issue is that insurance contracts differ materially from the financing contracts. We have to go through and determine how law and analysis already established applies to these specific contracts,” Smith added.

He noted the latter dispute shouldn’t take as long as the finance income issue.

“I’d expect resolution by the end of the summer if not sometime before.”