In a July 29, 2021 Tax Court of Canada case, a trucking company (the taxpayer) engaged the services of a number of drivers as independent contractors (ICs). The taxpayer provided the vehicles along with a fuel card (that would cover all fueling costs). However, since the contract stipulated that the ICs were responsible for the fuel, payouts to the ICs were reduced by 76 cents/km for fuel. These were referred to as chargebacks. CRA had assessed the taxpayer with HST of 13% on all of the chargebacks (amounting to over $118,000 over a 30-month period), arguing that they were taxable supplies (in Ontario).

Taxpayer loses – no fuel was received

Since the taxpayer never physically received the fuel, the taxpayer argued that it never actually provided a supply (or resupply) to the ICs. However, the Court determined that the taxpayer was considered the original recipient because the taxpayer was liable for the payment of the fuel card debts. The taxpayer then would have been considered to immediately resupply the fuel to the ICs in exchange for chargebacks reconciled at the completion of the delivery.

Further, the Court determined that the taxpayer was not acting as an agent for the ICs since it was in the taxpayer’s best interest to ensure that fuel could always be purchased seamlessly (i.e. without the possibility of interrupting the delivery due to an IC’s financial difficulty), and the independent contractor agreement was clear that the parties were separate and not acting in an agency arrangement.

Taxpayer wins – place of supply

CRA had assessed on the basis that the resupply of fuel to the ICs occurred at the taxpayer’s office in Ontario, the place from which the payments were made and reconciled. However, the Court found that the supply was actually provided in the place where the fuel was purchased and inserted. Since 69% of the fueling costs related to expenditures outside of Canada, the Court found that the same percentage of total chargebacks was not taxable supplies. The GST/HST to be charged on resupply was reduced by this amount.

The Court also noted that some of the fuel costs were also likely incurred within Canada but outside of Ontario, meaning that the GST/HST charged in some cases would likely vary from the 13% assessed.

Audit triggered by inaccurate bookkeeping

The fuel and maintenance chargebacks had been originally incorrectly coded in the accounting records as payments for “rental” of the taxpayer’s trucks to the ICs. As trucks supplied in Ontario by rental likely would have been subject to a full 13% HST charge, one can understand where CRA’s position may have originated. The clarification occurred at the notice of objection phase. Had the chargebacks been correctly coded from the beginning, some of the problems and dispute costs may have been avoided.

ACTION ITEM: The details of supply agreements to contractors should be reviewed to determine if GST/HST should be charged. Also, if uncertain how to code an item for bookkeeping purposes, seek guidance from an accounting professional as incorrect treatment may trigger an audit.

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