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CRA hunts Home Depot’s commercial contractor customers

Don Wall
CRA hunts Home Depot’s commercial contractor customers
SHUTTERSTOCK

Contractors who have bought construction material from Home Depot and have not reported income to the Canada Revenue Agency (CRA) can expect to be quizzed or audited by the CRA soon if they have not already been contacted.

The CRA obtained an “unnamed person requirement” from Federal Court in July that compelled Home Depot to turn over files from its commercial customers detailing amounts spent at its stores across Canada between Jan. 1, 2013 and Dec. 31, 2016.

Tax lawyer David Rotfleisch says the sweep will no doubt snare all large and medium-sized contractors who are Home Depot customers and who have not declared income or paid provincial sales tax or HST.

He advises those participants in the underground economy to come forward swiftly to make a voluntary disclosure to avoid paying potential huge penalties or jail time.

“Do a voluntary disclosure immediately and get onto the system,” said Rotfleisch, who was contacted by Home Depot himself as a holder of a commercial account.

Home Depot reportedly contacted its commercial customers in September with news of the CRA action.

“Once you are into the audits you are into pain.”

The point of a voluntary disclosure is to bring tax evaders onside of the tax system, Rotfleisch explained.

“If you have not filed tax returns or you have not declared income or you have overclaimed expenses or you have unreported offshore assets, all of these things, if have been participating in the construction sector in the underground economy in the past 15 years and you want to come clean before they fine you and make an example of you and throw you in jail, a voluntary disclosure is the way to go,” he said.

According to a CRA report released last year, the underground activity in Canada totalled $51.6 billion in 2016, or 2.5 per cent of gross domestic product. Residential construction was the sector with the most offenders, at 26.6 per cent, with retail trade next at 13.5 per cent.

 

Anyone with a moderate amount of unreported income, $50,000 or $100,000, is likely to get audited,

— David Rotfleisch

Rotfleisch & Samulovitch

 

Between April 1, 2015 and March 31, 2018, the CRA conducted over 17,000 income tax and GST/HST audits related to the underground economy and identified over $4 billion in unreported income, the agency reported. This resulted in additional taxes assessed of more than $1 billion, including over $200 million in penalties.

Rotfleisch, who practises with the Toronto firm Rotfleisch & Samulovitch, said the documents received from Home Depot will be cross-referenced with the CRA’s own tax records or possibly with records of building permits obtained from municipal building departments.

“What they are likely to do is data mining,” he said.

He gave an example of the CRA process.

“If the top guy bought $3 million worth of material from Home Depot, they will look at his tax return and see what his reported business income was.

“If you have not reported $10 million in gross sales and one million of net income or $500,000 of net income, you are going to get audited, because there is a discrepancy there.”

The Income Tax Act allows the CRA to impose penalties in cases where a taxpayer knew or ought to have known that their income was underreported. The penalty in these cases is an additional 50 per cent of the tax owed on unreported income.

There may also be criminal prosecution with fines ranging between 50 per cent and 200 per cent of the taxes evaded or a jail sentence of up to five years.

Penalties contained in the Excise Tax Act for HST/PST avoidance are similar.

Sometimes clients contact Rotfleisch after they have already received notice of an audit.

At that point, they are generally not going to be able to do a voluntary disclosure and avoid punishment, he said, although in some cases an audit might be limited in scope and that can be dealt with and then a voluntary disclosure of other illegal activities could be undertaken. That is fact-dependent, Rotfleisch said.

When a client comes to him with notice of an audit, he first asks for all documents available.

“We get their accountants in or a new accountant involved depending on how bad their books are,” Rotfleisch said. “There are different strategies to deal with the auditor.

“All we can do at that point is manage the audit, try to mitigate the impact and try to prevent criminal charges and see if a voluntary disclosure is possible down the road.”

Previous construction supply firms targeted by the CRA using the unnamed person requirement have included Rona, Roofmart and Groupe BMR.

The CRA has assembled an Underground Economy Advisory Committee that includes the Canadian Home Builders’ Association, the Chartered Professional Accountants of Canada, the Convenience Industry Council of Canada, Merit Canada and the Merit Contractors Association of Saskatchewan.

Rotfleisch said smaller contractors may avoid scrutiny.

“It is important to send a message to the industry that they are cracking down on this but the very small players are likely not to get hit,” he said. “Anyone with a moderate amount of unreported income, $50,000 or $100,000, is likely to get audited.”

 

Follow Don Wall on Twitter @DonWall_DCN.

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