The Home Depot Canada’s commercial customers are the latest target of the Canada Revenue Agency’s (CRA) continuing priority audit of the underground economy in general and home improvement contractors in particular.
In July, using what is known as the “unnamed person requirement”(UPR) found in the Income Tax Act, the CRA obtained a Federal Court order compelling Home Depot to disclose the identities of the home renovation behemoth’s commercial customers and the total annual amount spent by each customer between January 1, 2013 and December 31, 2016, at its 182 Canadian stores.
According to documents seen by Financial Post, Home Depot informed its commercial credit cardholders of the Federal Court’s order in September.
“Contractors who are part of the cash economy and who have registered with Home Depot as commercial contractors should expect to be audited,” says David Rotfleisch, a tax lawyer at Rotfleisch & Samulovitch Professional Corporation in Toronto.
It makes sense, Rotfleisch says, for CRA to seek information from large retailers who supply contractors and renovators with the materials they need.
“It’s clever out-of-the-box thinking and a very sensible approach that deals with a huge problem in the economy,” Rotfleisch says.
Indeed, using a similar strategy, CRA has compiled lists of municipal building permits by way of seeking out unregistered building subcontractors. The review of 8,396 building permits yielded 2,751 unregistered building contractors.
According to a CRA report released in late 2018, underground activity in Canada totalled $51.6 billion in 2016, or 2.5 per cent of gross domestic product.
Residential construction (26.6 per cent), retail trade (13.5 per cent) and accommodation and food services (12.1 per cent) accounted for more than half of this.
“These industries have continued to be the main contributors to underground economic activity in Canada since 1992 — the first reference year of this study,” the report states.
The focus on the underground economy is not new.
It’s clever out-of-the-box thinking and a very sensible approach that deals with a huge problem in the economy
David Rotfleisch, tax lawyer, Rotfleisch & Samulovitch Professional Corporation
“It started about a decade ago, when CRA targeted eBay’s power sellers list,” says David Rotfleisch, founding partner at tax law boutique Rotfleisch & Samulovitch Professional Corporation in Toronto. “The target is typically the cash economy.”
Nor is the specific focus on what CRA calls “hardware services,” which seems to have first appeared in 2015, a new initiative.
Previous companies from which the CRA has sought information in this sector include Rona, one of Home Depot’s primary competitors; roofing company Roofmart Ontario; Canac-Marquis Grenier Ltée., a 23-store hardware chain in Quebec; 7577010, a 21-store hardware chain, also in Quebec; and Groupe BMR, which supplies building materials to more than 200 merchants in several Canadian provinces.
In CRA’s Home Depot court filings obtained by the Financial Post, the agency stated that seven per cent of an unidentified company’s customers had “not filed at least one tax return in recent years.”
On the whole, the Federal Court has been fairly liberal in exercising the broad discretion the Income Tax Act gives CRA to seek information.
“The jurisprudence clearly establishes that the CRA can get the type of information they sought from Home Depot so long as there is reasonable evidence that tax evasion is occurring,” Rotfleisch says.
Nor has CRA been hesitant to take advantage of its broad powers.
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“Many audit and collection programs within the Canada Revenue Agency (CRA) make use of unnamed persons requirements (UPRs),” the CRA stated in an email response to questions from Financial Post. “While the CRA does not maintain statistics on the number of UPRs requested and obtained each year, its usage has remained relatively consistent.”
Rotfleisch says he knows of only one case, involving Hydro-Québec in 2018, where the courts denied a similar information request — and did so despite Hydro-Québec’s failure to object to it.
Calling CRA’s application a “fishing expedition,” the Federal Court noted the application did not allow for any way to distinguish between “business customers” who were its alleged target and the rest of the utility’s 4.3 million customers. The court also noted the information requested was not relevant to verifying whether tax evasion had occurred.
Despite CRA’s success rate, obtaining third-party information can be a lengthy process.
The CRA started its application for Home Depot’s record in 2016, meaning that some three years went by before it obtained the order sought. The reason for the delay, according to information provided by the CRA in response to email questions from Financial Post, was that CRA and Home Depot agreed to put the application on hold while Rona, one of Home Depot’s main competitors, disputed a similar application from the tax authorities.
Rona’s objection was based on the fact that CRA obtained a copy of a form used to open a commercial credit account on the pretext that its officials were construction entrepreneurs. This was the form that CRA later used for preparing the request for information from Rona.
Despite describing CRA’s behaviour as something that “could have been reprehensible,” the trial judge granted the order requested.
Rona fought the case hard. It appealed to the Federal Court of Appeal, which denied the company’s appeal. Rona then sought leave to appeal from the Supreme Court of Canada, which refused to grant leave.
At that point, CRA court filings reveal Home Depot caved and informed the CRA that it would not challenge the application. Further examination of the court record shows the company did not cross-examine the CRA’s witnesses, nor did it file any material in opposition.
“Most companies don’t bother fighting these requests,” Rotfleisch says.
Still, despite waiting until Rona’s case was determined, Home Depot told media that it “not only disagreed with but pushed back on the CRA request for over three years.” The company would not provide further information in answer to specific questions from the Financial Post.
According to Rotfleisch, companies who see themselves at risk from the disclosure of third-party information should consider resorting to the CRA’s voluntary disclosure program to avoid prosecution or gross negligence penalties.